Porter's framework makes scouring an industry for great investment ideas much easier. Understanding an industry helps us find the great businesses with economic moats that will withstand the inevitable economic, competitive, and random other challenges that often cripple weaker businesses.
Once we have a collection of great businesses from which to choose, finding those that meet our criteria and deliver above-average returns on invested capital over the long term becomes even easier. (We will discuss returns on invested capital more in Lesson 305.)
Generally speaking, we believe investors should steer clear of companies that have no moat (those with a Morningstar moat rating of "none") because they have very few, if any, competitive advantages and can't keep rivals from eating away at their profits. (Lots of these companies don't even have any profits.) For example, we don't think Delta Air Lines DAL, SUPERVALU SVU, and Goodyear Tire & Rubber GT have moats around their respective businesses. More than likely, we wouldn't want to hold a no-moat company for the long haul, so we probably wouldn't buy stock in one of these firms to begin with.
Some people are shrewd enough to buy no-moat stocks on a dip, hold them for a short term, and make a profit. As long-term investors this isn't a game we like to play. We think the rewards are far better, and the risks much lower, for those who spend a little effort to find strong companies to hold for a long time.
Types of Narrow Moats >>