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.
The Little Book That Builds Wealth
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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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114 of 119 people found the following review helpful
By Maverick
Format: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.
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.
49 of 54 people found the following review helpful
Format: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).
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).
4 of 4 people found the following review helpful
By Julie Jason
Format:Hardcover
Think of a strong brand.
Take Tiffany's, explains Dorsey. Remove a Tiffany diamond from the blue box, and it looks no different than one sold by Blue Nile, he explains. Yet, Tiffany's is able to charge more than competitors.
Or take Bayer aspirin, says Dorsey. Bayer can charge almost two times as much as generic aspirin, making it a power brand.
If a company can charge more for the same product just by selling it under a brand, it's likely that you have a wide economic moat and a stock that is worth considering.
These are simple, straightforward lessons any reader can benefit from.
Take Tiffany's, explains Dorsey. Remove a Tiffany diamond from the blue box, and it looks no different than one sold by Blue Nile, he explains. Yet, Tiffany's is able to charge more than competitors.
Or take Bayer aspirin, says Dorsey. Bayer can charge almost two times as much as generic aspirin, making it a power brand.
If a company can charge more for the same product just by selling it under a brand, it's likely that you have a wide economic moat and a stock that is worth considering.
These are simple, straightforward lessons any reader can benefit from.
Most Recent Customer Reviews
5.0 out of 5 stars
Nice addition to value investing
Most of us do make mistakes in our investment decisions. We want big returns on investment with as little time as possible for research and we are over-confident we can achieve... Read more
Published 5 months ago by Ilia Vinogradov
5.0 out of 5 stars
Great Little Book
This is a very well written and easily read book on investing principles practiced by Buffett and Munger. It was a pleasure to read.
Published 8 months ago by Sergei
1.0 out of 5 stars
Old News
Some of Dorsey's statements:
"To be a truly good investor, you need to read widely."
"There's no substitute for learning about investing from people who have... Read more
"To be a truly good investor, you need to read widely."
"There's no substitute for learning about investing from people who have... Read more
Published 10 months ago by Dave
5.0 out of 5 stars
Great Insights !!
This book has wonderful ideas all way through !! Read it, study it, apply it and you will be a better investor.
Published on February 5, 2011 by nosfej35
5.0 out of 5 stars
Wide applause for wide moats
I often describe myself as perfectly "ambibrainstrous," in that I switch back and forth between my right and left brain the way that ambidextrous people do between their right and... Read more
Published on November 10, 2010 by Jessica Dee Rohm
4.0 out of 5 stars
A sensible approach to picking stocks
How do you pick stocks? Do you pay attention to earnings? Chart patterns? Growth potential? Your Uncle Morty? Read more
Published on November 2, 2009 by Rolf Dobelli
5.0 out of 5 stars
Moat is King
Warren Buffett coined the term moat which represents a competitive advantage that a company can possess over its competitors. Read more
Published on August 12, 2009 by Mariusz Skonieczny
5.0 out of 5 stars
To the point
A book that fulfilled my expectations. Put the quality in front of the numbers and gave me specific methodology to look through companies choosing those that are more important to... Read more
Published on June 27, 2009 by Diderot
5.0 out of 5 stars
The Knockout Formula for Finding Great Investments
If Michael Porter's "Competitive Advantage" can be seen as the first book that conclusively illustrates "managerial" competitive advantage, Pat Dorsey's "The Little Book That... Read more
Published on February 5, 2009 by Jusuf Hariman
5.0 out of 5 stars
A Big Book That Contributes Volumes to the Investment Universe
Pat Dorsey's Little Book That Builds Wealth really is a big book that contributes volumes to the investment universe. Read more
Published on May 24, 2008 by Robert Miles
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