Pat Dorsey's recent article on the performance of Morningstar's star rating system, and some of the changes in both the analysts and the type of coverage, show me something that is both disturbing and unnnecessary.

It was a noble attempt at self-criticism, don't get me wrong. It was just wrong-headed.

The star rating system on the equities side is really nothing more than a perception of deep enough value to make a commitment to a particular stock. 

To lump them into an aggregate and trying to create an ANNUAL performance number out of it is a little bit like handicapping baseball batters' batting averages by how they're recovering from their injuries.  

Companies generally have to fall into a particular level of disfavor, or dysfunction, to have their share price impacted enough to make the grade of a five-star rating.

For us value vultures, that is good. 

We also know that if we wanted advice on the timing of the week, the month or really even the year, we would be getting it from Standard & Poors, or any of a half a dozen movement pickers out there that help the lemmings go screaming from one side of the deck of the financial ship to the other.

As I have recommended before, you must be the calm one who doesn't panic when the deck isn't tilting in your favor. Look at your best analysis, and make your pick, then stick with it over time.  If you can't see a future for the company to make you significant money in a 3-5 year window, then you shouldn't have been in it in the first place. 12 months or less is just too unstable of an investment window, and throws you back into the sea with the rest of the lemmings knocked off the investment boat by the recent high winds of adversity.

So if the five-star indicator is really just a timing on your research, Morningstar is setting itself up for hyperextended results, up and down, by using it as a bellwether indicator.

The market during the "up" year had a huge number of companies that did some fast healing in a fast-moving market.  The performance of stocks in the five star rankings of the last two years have been good. Many have done exceedingly well.  Those that haven't owe a great deal of their performance woes to market headwinds.

In a world where the shorter hyenas have been controlling both specific stock attacks and the overall performance of the market some companies are going to become both victims of the moment and the victims of fear in the marketplace.

Let's take a few for instances of how this works.

As Pat points out, P.F. Changs (PFCG) has had a good run in spite of the economy. The stock recieved its unfair ding, and has climbed out of it.  On the other hand, Ruth's Chris (RUTH), another five star pick, which was trading at 22 and sunk to the mid-single digits on the same lemming panic attack, is still in the dog house as the poster child of feared performance problems, even though, by the estimation of most Ruth's managers with whom I've spoken, the ding in their business from the economic jitters has not been significant or even noticed in a lot of the affluent markets to which they largely cater.

Both are great companies. I own both.  Am I particularly worried that RUTH hasn't had a quick bounce?  No. Why because, as Pat should have also reminded you, the time window of a Value Vulture should not be set to a year.  This is Pat's mistake in his piece. Allow me to demonstrate why a five star stock, even in a good market, requires a longer window of time than 12 months:

McDonalds (MCD) sat in the dumper, flat for nearly three years after the mad cow scares, purely because they were the most visible purveyor of meat in the market. They never had a mad cow, ever.

So their stock sat in the Wall Street waste bin in spite of the fact that they were opening up units in China to lines around the block, because the myopic analysts (Sorry Pat) kept looking largely for the mad cows in Montana and not the burgers in Beijing. 

Then one of the investment house big drips finally saw the light, got a better understanding of expanding into growing-affluent markets where one in 60 MILLION people is being served, realized that McD ranches don't have a mad cow amongst them, and fired off the report that set the lemmings running up the stock from 18 to 65+

If you had bought Mickey Ds during its flat period, another five star rated stock at the time, over three years, you would not have made a ton. If you had held it for 5 from an $18 purchase, though, and sold it at say 65 you would have made a 361% return overall BEFORE dividends in one of the iron-clad companies in the food business. That's a 72% return per year, which just kicks the snot out of the Dow or the S&P.

So I hope that Pat feels better about putting his performance anxiety out on the table. What troubles me is that there has been a large shift and purge of analysts because the Morningstar people seem to think that running with the fashion trend of the moment, the doom-and-gloom report written by the "serious" analyst with the five pound hair shirt on will somehow keep their peers on the Street and Jim Cramer (idiot) from calling them names.

The beauty of Morningstar is that it is so wonderfully value-oriented, and provides exceptional counter-current advice to the serious investor for whom long means a whole lot longer than 12 months.

If you remain patient, and do your homework as well as the Morningstar people do theirs, there are significant upsides to the vast majority of stocks that you will pick.

Five star, in and of itself, is not an indicator that you should buy a company. It's just an indication of the fairness of its price.  Of the quality stocks in five star territory, it is a great market timer to push the trigger IN CONJUNCTION WITH ALL OF THE OTHER RESEARCH AND VARIABLES that you put into picking a stock.

I wish that Pat had told you that. I will reach far fewer people than he does with my little blog here. 

I also wish that they would stick with the courage of their convictions, and have the intestinal fortitude that should accompany such sound and long range advice.  When I see them back-pedal off of prior recommendations by switching analysts to justify the "sobering" changes in the coverage, that is the weak will of people who fear their Wall Street peers and the fashion of the moment rather than the rock-solid commentary of people with vision over time.

To all Morningstar analysts: True value investors have made a great deal of money from your sound advice. Stay the course, for your sake and ours.