Course 401:
The Morningstar Rating for Stocks
In this course
1 Introduction
2 What Is Fair Value?
3 How We Assign Stars
4 Final Points

In the Middle Ages, monks debated whether there was such a thing as a "just price," or an inherently correct price of a product--be it candles, wool, or a leg of lamb. Centuries later, Karl Marx and other economists argued that every product has an intrinsic value equal to the labor that went into making it. Such theories of natural, or just, prices have long since been discarded, except in one area: investing.

The theories actually make a great deal of sense when it comes to buying stocks. In fact, it’s the basis of the Morningstar Rating for stocks. In developing our stock rating, Morningstar mimicked the approach taken by a choice set of investors when they value stocks, investors of no less caliber than Warren Buffett of Berkshire Hathaway BRK.B, the managers of Clipper Fund CFIMX, and the leaders of Tweedy, Browne, among others. They all use fair value (the investing equivalent of the just price) to find attractive stocks. When a stock trades for less than its fair value, they pounce.

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