130 of 137 people found the following review helpful
on April 6, 2008
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.
51 of 57 people found the following review helpful
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).
3 of 3 people found the following review helpful
on November 10, 2010
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 left hands. I have an MBA in management and an MFA in creative writing, so instead of switching forks like my manual skilled kin, I vary my reading material. While I write fiction, SUGAR TOWER, MAKE ME AN OFFER and THE SECRET LIFE OF SANDRINA M., I read everything.
Back to Pat Dorsey's The Little Book That Builds Wealth. This "little" book is small in word count only because the ideas it espouses are large. Pat Dorsey is the Director of Equity Research for Morningstar, Inc. - the leading firm in independent research. Since they don't manage money, I trust them a lot more than analysts whose firms do. The book is wonderfully written and extremely clear. What I like best about it is that it doesn't tout formulas or sure-fire investment techniques but speaks to the heart of what all marketing experts know is the key to success: competitive advantage.
When I started reading about Morningstar's philosophy of "moats," which they credit Warren Buffet as having invented, I was a bit skeptical. It seemed simplistic to analogize the corporation to a castle and its success protection to a "moat." But what determines the existence and size of a company's moat - namely such stuff as a trusted brand, patents, regulatory licenses, high switching costs, pricing power, network economics, and cost advantages related to process, scale, and location - makes total sense to me. I always wondered while I was in business school what was the use of discounting future cash flows to determine current value unless you had a crystal ball. Future cash flows, at least to me, seemed as unpredictable as the next tsunami...but I crunched my numbers anyway because doing my homework correlated well to a future good job.
Equally eye-opening was the book's disavowal of certain indicators that I (as in Investor) always deemed critical, such as "great products, strong market share, great execution, great management" and, to a certain extent, a company's P/E ratio, analysts' reports and economic statistics. Dorsey calls these "traps," and I urge you to read this book to find out why.
The Little Book That Builds Wealth gives dozens of case histories and real life examples that are enthralling and elucidating. The author also throws in a few quotes from great thinkers, including the economist John Maynard Keynes, "When the facts change, I change my mind" and the bank robber Willie Sutton who when asked why he robbed banks said because: "That's where the money is."
The two most important things I learned from this book are: 1) The average stock on the S&P fluctuates from its high to its low price 40% in any given year, so selling on volatility is like divorcing just because you have a fight; and, 2a) I'm not the only one who finds it hard to know when to sell so 2b) Dorsey's hints on what to ask yourself before you sell were particularly instructive: "Did I make a mistake?" "Has the company changed for the worse?" "Is there a better place for my money?" "Has the stock become too large a portion of my portfolio?"
I highly recommend this book to anyone who is interested in money, or his lack thereof, and just can't bring himself to employ the methods of Willie Sutton.
3 of 3 people found the following review helpful
on April 14, 2014
I'm skeptical of the author's opinions. For example, Dorsey seems to underestimate the value of the quality of management. It's hard to tell exactly how important Dorsey thinks management is, but he really gives the reader the impression that the talent of the CEO doesn't matter that much. My humble opinion couldn't be any more different than his. Think of Steve Jobs for example. According to Jim Cramer, management is the number one criteria to evaluate a company by because management determines all other criteria an investor may use. Carl Icahn says that 95% of managers are inept. I agree with Icahn, and I have worked for enough (high-tech) firms to have a valid opinion. Many investors have little experience working in industry to get a feel for the inner workings of industry, those that have, like myself, have an advantage. Another thing... why are CEO's paid so much if they are not that important to a companies success?!
It's when the author said that Autodesk has an economic moat that I had some evidence to be skeptical of the author's opinions. I believe that, within one decade, Autodesk was replaced by Pro-engineer which was in turn replaced by SolidWorks in popularity. Some moat.
10 of 13 people found the following review helpful
The "Little Book" series is turning out to be both educational and must have for the investor's book shelf. Though the others are noteworthy on their own, one could argue that this 5th installment in the series is the best to date.
The four (4) items above are what the book's main theme is about and one of the better books presently out there outlining what a moat is and which puts it all in perspective with real concrete examples, or maybe the only book that does! In addition, in Chapter 2 we learn up front what is often confused as a moat but which is not, like great products, or a strong market share, plus others. Just because a company has a great product, one should not conclude that it is a great company with a competitive advantage as that would be a mistake.
Other good chapters like Chapter 8 help determine if your moat is eroding, or Chapter 12 on what a moat is worth. Also included are valuation discussions which are good, but have been covered by Benjamin Graham or the 2nd series installment in The Little Book of Value Investing by Christopher Browne. Irrespective, good reading throughout.
As Adam Smith pointed out the importance of the division of labor and that the widening of the markets encourage technological innovation, in the ever progressing investment and business world of creative destruction, one must have a comparative advantage to survive and prosper for long periods of time. Also like Warren Buffett and Charlie Munger transitioned from investing in "cigar butts" to paying up for value to take advantage of the longer lasting power of this comparative advantage, this book goes into more details of what makes up and constitutes that advantage in what most now commonly call "moat", as in, "to protect the castle."
All in, a worthy addition to any serious investor's book shelf and a big thanks to Pat and to the supporting Morningstar team. Well done!
3 of 3 people found the following review helpful
on May 24, 2008
Pat Dorsey's Little Book That Builds Wealth really is a big book that contributes volumes to the investment universe. Overlaying Pat's explanation of the different types of moats on Warren Buffett's portfolio helps the professional and the private investor understand the very important investment moat principles. Coke is a brand or intangible asset moat. Wells Fargo is a switching cost moat. American Express is a network effect moat. And although no longer publicly traded and now a wholly owned subsidiary of Berkshire Hathaway, GEICO is a cost advantage moat. This little book is a must read for every participant of the stock market."
-- Robert P. Miles, author The Warren Buffett CEO
5 of 6 people found the following review helpful
on June 27, 2009
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.
1 of 1 people found the following review helpful
on February 6, 2014
The Little Book That Builds Wealth teaches an investment strategy that focuses on long-term investments in companies with enduring competitive advantages. Packed with examples of real companies, this book teaches the reader how to invest wisely rather than speculate.
Companies have competitive advantages, or “economic moats,” which enable them to create steady shareholder value. Find one or more of these moats, and you’ve found a company that could be a good long-term investment.
Economics moats come in four basic forms:
1) Intangible Assets
Think enduring brands, patents, and regulatory licenses. All are difficult for competitors to replicate.
2) High Switching Costs
When it is difficult for customers to switch from one company to another. For example, consider the hassle it takes to switch banks—that makes for a “sticky” customer.
3) Huge Networks
When the value of a product or service grows with the number of customers. Microsoft is a great example: “Lots of people use Word, Office, and Windows because, well,--lots of people use Word, Office and Windows.”
4) Cost Advantages
Sustainable lower input costs than competitors. A great example is companies in central locations. Compared to companies that are further away from potential customers, their shipping costs are lower, and likely always will be.
There are also some common false economic moats. Don’t be fooled by these!
1) Great Products – these are easily copied by the competition.
2) High Market Share – Market leadership can shift quickly in highly competitive industries.
3) Efficient Operations – also easily copied.
4) A Great Leadership Team – Studies show management simply doesn’t have much of an effect on a company’s performance. As Dorsey says, “The best engineer in the world can’t build a 10-story sandcastle. The raw materials just aren’t there.”
First, keep your eyes peeled. In your daily life, take notice of companies that may have economic moats. Listen to the news, read magazines, and look into companies that look interesting. Check the companies’ balance sheets, and look for evidence of moats in high profits and high returns on investments.
Once you find a company that has one or more economic moats, then you watch it until you think it is undervalued at its current price. Then you pounce!
But wait! How do you know when it is undervalued? (Good question!) That topic is a little beyond the scope of this review, but Dorsey offers a few easy steps to follow to get a feel for when a company is selling for less than what it’s probably worth. His strategy stresses that you don’t have to know the future. He gives some simple tools for evaluating the investment return of a stock (the earnings growth or dividends of that stock), and speculative growth (driven by expectations of other investors moving the stock price up or down.) It’s not the entire financial picture of a company, but it’s a very useful starting point and probably sufficient for most new investors.
If you’re toying with the idea of investing in individual stocks, this is a great book to start with. Individual stock investing is thrilling and scary, and a great blueprint when you start out can make a world of difference. I myself used this book when my husband and I first started buying stocks, and it gave me a handy framework to apply to each company we were considering.
I also love that Dorsey is so honest about how most people find companies—when he shows examples of looking for moats, he starts with five companies that he observed through real life or happened to hear mentioned on the news or in money magazines.
1 of 1 people found the following review helpful
on February 5, 2009
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 Builds Wealth" can be seen as the first book that conclusively illustrates "investing" competitive advantage (I do not regard Warren Buffett's annual reports as a book). Many people invest by reacting, "My brother-in-law recommended it" or "I read about it in Money". It's also easy to get distracted by daily price gyrations and pundits who pontificate about short term market swings. Far better to have a conceptual anchor to help you evaluate stocks and build a rational portfolio. That's when investing competitive advantage, what Warren Buffett calls economic moats are invaluable. This book primarily deals with businesses that can generate above-average profit for many years, despite intense and constant competitive threats. Return on capital is the best benchmark of a company's profitability. It measures how effectively a company uses all of its assets - people, factories, investments - to make money for shareholders. Companies with strong competitive advantage can regularly post return on capital at 20+ percent, which is a rate of return very few money managers can achieve over long periods of time. This book provides a sensible framework for identifying companies that can sustain high return on capital. It tells the reader how to look for durable competitive advantage in choosing equities. The 4 sources of competitive advantage are: (1). Intangible assets; (2). Switching costs; (3). Network effects and (4). Cost advantage. These 4 sources of competitive advantage are elaborated throughout the book. Digest this book and you will develop a solid foundation for making smart investing decisions.
1 of 1 people found the following review helpful
How do you pick stocks? Do you pay attention to earnings? Chart patterns? Growth potential? Your Uncle Morty? Instead of all that, use the same basic system that investment guru Warren Buffett perfected: Look for solid profitable companies that own a piece of the market, buy their stock and hold it a long time. Morningstar, the investment research company, uses the same approach to analyze and rate stock values. Its director of equity research, Pat Dorsey, explains its stock analysis system in this small volume. The stock selection system calls for seeking companies with protected unique advantages, called "economic moats." What sounds straightforward in theory may not be as easy in practice: Finding a structurally protected stock today is not necessarily a simple stroll across the drawbridge. Still, getAbstract finds Dorsey's presentation succinct and readable, and recommends it to investors who are not yet familiar with value investing and similar approaches.