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How Management Affects Moats

Management doesn't make a moat, but Morningstar's Pat Dorsey looks at how executive decisions can help or hurt a firm's long-term competitive advantages.

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Pat Dorsey: Hi. I'm Pat Dorsey, director of equity research at Morningstar. For those of you who might be familiar with Morningstar's equity research approach, you know that we focus a lot on what we call economic moats or structural competitive advantages, attributes of a firm that enable it to generate higher returns on capital for years into the future even in the face of concerted competition.

We look for things like switching costs, brands, network effect, and so forth. But one point we've always made rather strongly is that management in and of itself is not a moat. Just having smart folks running a company does not endow it with structural competitive advantages. And that, all else equal, you're probably better off with owning a wonderful business run by mediocre folks than a really mediocre business run by really smart folks. Airlines perhaps being the most common example there that even if you are run by a real genius like David Neeleman at JetBlue, well, at the end of the day you are still just owning an airline.

Pat Dorsey does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.