The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Little Books. Big Profits) [Hardcover]

Pat Dorsey (Author)

Book Description

Series: Little Books. Big Profits | Publication Date: March 3, 2008

In The Little Book That Builds Wealth, author Pat Dorsey—the Director of Equity Research for leading independent investment research provider Morningstar, Inc.—reveals why competitive advantages, or economic moats, are such strong indicators of great long-term investments and examines four of their most common sources: intangible assets, cost advantages, customer-switching costs, and network economics. Along the way, he skillfully outlines this proven approach and reveals how you can effectively apply it to your own investment endeavors.

Editorial Reviews

Review

"A detailed exploration of Warren Buffet's "wide economic moat" concept - how to find companies with a true in-built competitive advantage." (Financial Times, Tues 26th February)

"Pat Dorsey...discusses in an easy to read style why economic moats are such great indicators of long term performance." (Pensions World, October 2008)

From the Inside Flap

To make money in today's dynamic market environment, you need to invest in companies that will perform in the face of sustained competitive pressure. But how can you accurately identify companies that are great today and likely to remain great for many years to come?

The answer to this question lies in competitive advantages, or economic moats. Just as moats were dug around medieval castles to keep the opposition at bay, economic moats protect the high returns on capital enjoyed by the world's best companies. If you can identify companies that have moats, and you can purchase their shares at reasonable prices, you'll begin to build a portfolio of solid businesses that will improve your odds of doing well in the stock market.

In The Little Book That Builds Wealth, author Pat Dorsey—the Director of Equity Research for leading independent investment research provider Morningstar, Inc.—outlines this proven approach and reveals how you can effectively apply it to your own investments. Step by step, Dorsey discusses why economic moats are such strong indicators of great long-term investments and examines four of their most common sources: intangible assets, cost advantages, customer-switching costs, and network economics. After establishing a firm understanding of moats, Dorsey shows you how to recognize moats that are eroding, the key role that industry structure plays in creating competitive advantage, and how management can create (as well as destroy) moats.

Along the way, Dorsey provides an informative overview of valuation—because even a wide-moat company will be a poor investment if you pay too much for its shares—and illustrates the issues addressed through case studies that apply competitive analysis to some well-known companies.

Although the moat concept is not a new one—it was made famous by Warren Buffett—the modern-day investor can benefit from what it has to offer. With The Little Book That Builds Wealth as your guide, you'll quickly discover why moats should be an integral part of your analytical investment toolkit and learn how to leverage this approach to build a portfolio of high-performance stocks.

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Product Details

• Hardcover: 126 pages
• Publisher: Wiley; 1 edition (March 3, 2008)
• Language: English
• ISBN-10: 047022651X
• ISBN-13: 978-0470226513
• Product Dimensions: 7.2 x 5.3 x 0.9 inches
• Shipping Weight: 8.8 ounces (View shipping rates and policies)
• Average Customer Review: 4.5 out of 5 stars  See all reviews (15 customer reviews)
• Amazon Best Sellers Rank: #103,696 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

96 of 100 people found the following review helpful:

4.0 out of 5 stars "A little learning is a dangerous thing.", April 6, 2008

By 

Maverick (United States) - See all my reviews

This review is from: The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Little Books. Big Profits) (Hardcover)

Becoming an investor who can quite regularly beat a broad based index (e.g. S&P 500) is near impossible. Just ask two of the most famous investors ever: John Bogle of Vanguard (who wrote his own "Little Book" warning investors to stay away from anything but low cost index funds) and Warren Buffett (of Berkshire Hathaway who also recommends index funds for the average investor). They point out that numerous studies show professional money managers (mutual funds) fail to beat the index funds they set out to beat time and time again--and trying to find the few mutual funds that will beat the index is close to a fool's errand. And when regular folks try to pick individual stocks, the results are even worse. Unfortunately, there is one problem with index fund investing: it's boring. Very boring. Moreover, we, for better or worse (worse in the case of investing in capital markets), don't like to be "average" and index fund investing by definition will only yield "average" results.

So investors try very hard to be more than average. And they start by buying books like this one.

This is where Dorsey comes in. He borrows Warren Buffett's now famous concept of 'moats', which is just another term for a structural competitive advantage of a business, and shows his readers how to find them, evaluate them, and then use them to make a profit by investing in individual stocks. Dorsey's game plan is straightforward: find a great business with a moat and buy it only you can get it for less than it's intrinsically worth. The book is well-organized, uses plain-written language and is easily understandable; Dorsey's categories of different moats are well thought out and he provides multiple examples in each moat category.

Here's my problem with this book: Dorsey has you believe that if you can master the concept of moats then you, little you, should spend some time trying to "beat the market." To do this right, however, requires more time than almost any investor (even those who are retired or fanatical) has. First, you have to find a great business with a moat (not as easy as it sounds and it entails both qualitative and quantitative analysis). Then you have to value it (also not easy). Then you have to figure out how much of your portfolio to invest in that company (this step Dorsey conspicuously leaves out which is critical and often overlooked - I would recommend the Kelly Formula outlined in the book "Fortune's Formula"). Then you have to stay up-to-date with the corporation (and its competitors) by reading news stories, press releases, and quarterly reports. Finally you have to watch the stock price: if the stock goes down a lot but the moat and intrinsic value hasn't shrunk, you should buy more of the stock (this is hard for most investors to do) and if the price goes up and the moat or intrinsic value hasn't grown as fast as the stock price, you should sell some of the stock. Get any of these steps wrong along the way and you are sunk. Oh, and you will likely be following multiple companies in your portfolio. Are we still having fun?

As you can now start to tell, applying this "little book" will take a lot of your time. Of course, you could beat the market, but chances are you will make a few mistakes that could cost you a lot of money. My recommendation is to use the book instead in two counterintuitive ways. First, use it to understand what make a great business "great" and if you are thinking about opening your own business, figure out how you can create a moat for it, no matter how small. Second, if you are working in corporate America use the concept of moats to make your company better.

But if you use the book for what and who it is intended for, be forewarned.

47 of 52 people found the following review helpful:

4.0 out of 5 stars All about moats, February 24, 2008

By 

Sreeram Ramakrishnan (Lynnfield, MA) - See all my reviews
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This review is from: The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Little Books. Big Profits) (Hardcover)

This is a remarkably pithy discussion on what constitutes a "real" moat - competitive advantage that is sustainable. Regular readers/subscribers(like myself)of Morningstar products are already familiar with Morningstar's views on the importance of picking companies with moats for long term investing. This book essentially distills all such discussions into a very quick guide on "how to find good investments that can build wealth?". The use of excellent examples and a very down-to-earth (typical of the Little book series) discussion style makes this book an easy and useful read. Prospective readers need to be warned on two aspects - unlike the other books in the series (value investing, growth investing, etc.) this book doesn't have a specific "formula" but more a discipline on stock selection. (to borrow a cliche'd expression, the book aims to provide a method to fish than a fish itself). Secondly, regular Morningstar readers will be hard pressed to find anything new in these discussions in this book. For them, The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market may be more useful. For readers just being introduced to Morningstar and its approach, both books are solid additions to a patient investor's library. You can round out that collection with The Ultimate Dividend Playbook: Income, Insight and Independence for Today's Investor.

Overall, an easy read that gives very worthwhile discussion on identifying companies with sustainable advantage (and how to identify traps in perceiving incorrectly the existence of such an advantage).

43 of 49 people found the following review helpful:

2.0 out of 5 stars The "little" book, March 27, 2008

By 

G. L. Simms - See all my reviews
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This review is from: The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments (Little Books. Big Profits) (Hardcover)

This is the abbreviated version of Mr. Dorsey's earlier book "The Five Rules for Successful Stock Investing."

I was very impressed with the first work and keep it in the investing library to refer to from time to time.

This book is really a condensed version of that book. It's what to read if you don't want to invest the time to read the bigger book.

There are many good points in the book, but you'd be better served by reading the bigger book.

I bought this book because i was so impressedwith his first book, and still am, but there was nothing new here.

I want to emphasize Mr. Dorsey has a lot of good advice in either book. He's done a great service in publishing them, just choose one. Or perhaps read the little book first and then the bigger book.