Disclosure: This article is written for entertainment purposes only and should not be construed as financial or any other type of professional advice.
Morningstar may be best known for its star ratings of mutual funds, which you’ll often see mentioned in fund advertisements. But the company also offers market commentary, investment research, and financial education, including stock investing education.
In my quest to learn more and find resources to share, I decided to check out its educational offerings. I started with the free Stocks Curriculum accessible from Morningstar.com’s Investing Classroom page. Here’s what I found:
The stock investing course teaches the basics along with more advanced techniques for evaluating the financial condition of companies for prospective purchases. You’ll gain an understanding of the power of compound interest and why stock investing is attractive, discover where to find financial statements and how to analyze them, and learn how to determine company valuations using the discounted cash flow (DCF) method.
It is designed for beginners and those interested in investing for the long term based on underlying business fundamentals. Though the presentation is dated, the lessons are easy to navigate and the lingo is easy to understand. Certain concepts are repeated and expounded upon but that should help deepen your understanding.
At times, the investing preferences of the Morningstar team are intertwined with raw information, making it difficult to separate editorial viewpoints from facts. To an extent, the course serves as both a selling tool (points earned on quizzes can be redeemed for a temporary pass to Morningstar’s premium service) and as a guide to using its services. Still, the course offers value to new investors and those wishing to use analytical skills in vetting potential stock purchases.
Pros and Cons
There are reasons to like the stock investing curriculum and a few reasons to be cautious. Here is a short list of pros and cons:
Pro: Easy to consume
The stock investing course is divided into five main sections with various levels (100, 200, 300, 400, and 500) corresponding (roughly) with difficulty. Each level is further broken down into categories with individual lessons. Reading the lessons in each category takes about 15 to 30 minutes; absorbing the information can take about the same time, possibly more if you are not accustomed to analyzing financial information. Each category contains a quiz, which allows you to test your understanding and gain additional insights into the lessons.
Certain sections are more complex and time-consuming than others; for example, sections dealing with financial ratios or discounted cash flow may require more thought and time to complete. Nevertheless, the presentation and breakdown of information make the lessons easy to consume. You might read them all on a rainy day or take in one category per day over a month or so.
The information contained in the lessons is concise yet thorough. Comparable to lengthier beginner investing books, the lessons cover much of what you need to know to start stock investing (with the exception of some practical information relating to establishing a brokerage account, funding the account, etc.).
You’ll learn stock investing lingo and basic stock investing principles. Whether you adhere strictly to Morningstar’s tenets or not, you’ll have a solid foundation upon which to build investing knowledge and skill.
The curriculum breaks down complex ideas that are useful to understand and apply to the stock selection and purchasing process. For example, you’ll find step-by-step instructions on using discounted cash flow as a valuation tool in lessons 403 and 404, along with information on this technique’s limitations.
Another example involves the explanation of the difference between shares outstanding vs. diluted shares outstanding. The 301 lesson spells out that the diluted figure includes shares that could be converted to common stock (such as stock options given to employees) and explains how that can dilute (or reduce) the value of a shareholder’s stake in a company.
Con: Contradictory advice
I found some of the advice to be contradictory. For example, early lessons state that the management of a company is not all that important: the economic viability of its business model trumps the wisdom and innovation of its leadership according to Morningstar. Later lessons emphasize the role of management and the need for trustworthy executives who put shareholders’ interests first, not their own.
Con: Outdated and misleading information
Certain examples seem to be dated. For example, in the discussion and quiz about taxes on capital gains and dividends, the authors mention that tax benefits are scheduled to expire in 2011. No mention is made of current legislation.
Another section that I took issue with is the reference to the P/E (Stock Price/Earnings) ratio. According to Morningstar, “Generally speaking, the higher the P/E ratio, the more investors are willing to pay for a dollar’s worth of a company’s earnings.” I believe that the P/E ratio does reflect investors’ willingness to pay more but it’s because investors are willing to pay more (and thus, drive up the price) that the P/E ratio is higher, not the other way around.
Investopedia offers this explanation: “In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E.” (And, therefore, they are willing pay more.) These glitches make me believe that while the course is useful, it’s not a flawless guide that’s been edited and updated regularly.
Con: Too Closely Aligned with Morningstar Services
It makes sense that the stock curriculum is aligned with the style of investment research offered by Morningstar. But the reader/learner should understand that the information being presented is biased toward the company’s analytical tools (this is made clear in some sections but isn’t as obvious in others).
One area in particular to note is the discussion of economic moats. There seems to be an emphasis on identifying the moat through qualitative analysis. But the connection of the moat with its economic benefit (the reason it’s called an economic moat and not simply a moat) is covered separately in a section on calculating Return on Invested Capital (ROIC).
As an aside and mention of my own personal bias, I’m still learning about economic moats. I totally get the qualitative part; for example, airlines have a high barrier to entry (a type of moat). But this barrier to entry (presumably, it’s difficult to purchase aircraft, meet regulatory approvals, and hire crews) hasn’t been uniformly beneficial to the economic fortunes of airlines and their shareholders. By definition, an economic moat
should does enable a company to generate high profits on a long-term basis. Don’t identify a moat qualitatively and then hope it delivers economic advantage; instead, find a company with an economic advantage (perhaps by calculating its ROIC) and then identify the source of its economic moat.
My take is that the emphasis on economic moats is due to Morningstar’s desire to differentiate itself based on its unique system of moat ratings for its stock analysis service (wide, narrow, and none). (Read more here.)
What I loved
The section on great investors is well worth the price of admission (which is free by the way). You’ll find excellent summaries of the philosophies of investors like Benjamin Graham, Peter Lynch, and Warren Buffett. Whether you intend to follow the examples of these investors or not, understanding their influence on investing news and commentary is priceless.
Stock investing education at Morningstar is free and worth the time investment to complete, particularly for beginner investors. Beware that certain aspects of the course may be more useful than others, depending on your investment approach. Nevertheless, you’ll learn basic terms and concepts that will help you to understand stock market commentary and analysis.