How do you pick stocks? If you want to buy stocks of great companies that you want to own for the long term, you need information. Where to get it? One good source of information is Morningstar. We discuss why Morningstar is different and unlike most research houses on Wall Street.
How My Uncle Researched Stocks
My uncle bought individual stocks. He would buy stocks, take possession of the stock certificates and put them in his draw. Yes, stock investing in that day was largely paper based – very few computers!
The research tools he used were SEC reports from companies such as the Annual Reports or Quarterly reports. In his day, there was no internet so he would get a copy from the library or the company itself. One other great source of investment research that he used was Value Line, a similar service which focused on fundamental research.
Finding great companies to research was not that hard – picking stocks is harder. It’s not unlike today, there are the “usual suspects”. Newspapers would print out stock quotes of the 100 largest companies and provide stock prices. Yes, there was a time when journalists would cover stocks in the daily newspaper. It’s been lost to history.
What Wall Street Tells You
If you listen to Wall Street and follow their advice, you will get something along the lines of the following research report. This is an investment report I downloaded from Charles Schwab for the company Visa ($V).
Notice anything about this report? It’s all about how well they think the stock will do. How volatile the stock price is. This kind of report is not unusual because stocks can be traded, right? Even the best companies go through periods of stagnation or underperformance. If a stock is not going to perform well over the next 6 months, you don’t want to own it, right?
Wrong.
Where is the information about what the company does, the quality of the business, and its competitive advantages? It’s missing. I am not picking on Schwab investment research, because you will find that most of the other research houses offer the same approach and information.
What Morningstar Tells You About Visa
Now, let’s download the same report about Visa from Morningstar, this is the information that was in their report.
The header or lead from their report provides basic stock information with business specifics: moat, capital allocation and an uncertainty rating.
Moat is a measure of how strong their business in the marketplace relative to competitors. This concept has been attributed to famed investor Peter Lynch – who was an investment manager at Fidelity in the 1970s. This is what Morningstar says about Visa’s moat:
Visa traces its roots to the issuance of the first Bank of America cards in the late 1950s. As credit cards grew, partnerships between credit card issuers became necessary, and Visa as a brand was formed in 1976. In the decades since, Visa has been one of the largest beneficiaries of the shift toward electronic payments. In fiscal 2021, the company processed over $10 trillion in purchase transactions. Visa has almost 16,000 financial institution partners, 3.4 billion Visa cards in circulation, and over 50 million merchants accepting Visa. According to the Nilson Report, Visa holds over 50% market share (by purchase volume) in the U.S., Europe, Latin America, and the Middle East/Africa. Visa also processes roughly twice as many transactions as its closest competitor, Mastercard. Simply put, Visa’s position in the world of electronic payments is unparalleled. We don’t believe that building a new network with a comparable size and reach is realistic over any foreseeable time line, and view Visa’s position in the current global electronic payment infrastructure as essentially unassailable.
After reading this report, this sounds like a company I not only would want to own, but never sell. The report does have some information on valuation. If you want to buy it would might make sense to buy it when it is undervalued. This is what Morningstar says about valuation:
They believe is it overvalued today, whereas in 2022/2023 it was considered undervalued.
Wall Street Myths to Break
If you want to make money investing in stocks over the long term, we suggest you take my uncle’s advice and don’t listen to what most of Wall Street is telling you. If I read this Morningstar report on Visa ($V), I would own Visa and never sell it. In fact, in full disclosure, I do own Visa and have never sold any of it.
If you have owned Visa, Wall Street might tell you these myths that you should follow:
- If a stock position becomes too large and concentrated, sell some of it.
- There is always a price when you should sell, stocks can go too high.
- Stocks are risky, take profits when you have them. Look to buy something else.
- Diversify you holdings, to lower the risk of loss.
There is some truth to these statements for low quality companies/stocks that people trade, but for a company like Visa, I would never do any of these things. Hold it forever.
This is where fundamental research comes in, to identify companies that you might want to own for the long term.
If you buy high quality companies with economic advantages, the risks to owning are more about economic cycles and market sentiment, than they are about business quality. If you can hold great companies across economic cycles, you will have broken the Wall Street spell that tells you to sell when stocks might retreat.
Long Term Investing Is About Cycles…
Wall Street is focused on investing and trading stocks during a single economic cycle. The way to break away from this thinking is to approach your investing to a long term point of view – across economic cycles. Let’s look at the S&P500 across economic cycles.
The red lines indicate recessions. Recessions are an investors friend because they give you opportunities to invest at lower prices. The mistake people make investing during recessions is to believe that markets and companies stay stagnate and don’t adjust.
In fact recessions are great opportunities for companies to get their house in order, make better investments and discard poor investments. This is why you will see that markets always recover, because companies don’t simply stop improving their business – in fact they accelerate it during recessions.
Let Morningstar Pick Stocks
Using Morningstar investment reports can help you find great companies and also have some insight on if they are attractive to buy today. If you want help creating lists of stocks and finding the best opportunities, they can also help you with that as well.
Morningstar has extensive information and research for individuals, institutions and wealth managers. If you are an individual investor they have a wealth of information on all aspects of public investment markets. The main site for individual investors is here.
I have used Morningstar research newsletters to pick individual stocks. It’s an extension of their basic securities research to provide specific guidance in asset classes. Investing in individual stocks is not for everybody, we recommend that you don’t do this and buy funds. If you want to try individual stock investing Morningstar has guidance in individual stock investing – newsletters.
The main newsletter website is here. A sample of the newsletters are shown below.
How To Access Morningstar Research
Morningstar research for individual can be accessed in different ways. These are the main ways to get access to the research.
- Morningstar Newsletters, mentioned previously.
- Morningstar Investor, the main research hub for individual.
- At your broker, e.g., Morningstar research report information is available at Charles Schwab, Ally with your membership, among other brokers.