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The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments

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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-switch 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.

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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-switch 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.

30 review for The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments

  1. 5 out of 5

    Michael Cestas

    This book surprised me. While aimed at a lay audience, it covers moats in surprising detail. First it explains what moats are not (and what things are commonly mistaken for moats). Then it categorizes moats into several types and sub-types. It also discusses how moats erode and how to find moats. In each section, I found a number of insights and useful comments, most of which are copied below (apologies for poor formatting / editing): MISTAKEN MOATS In my experience, the most common “mistaken moa This book surprised me. While aimed at a lay audience, it covers moats in surprising detail. First it explains what moats are not (and what things are commonly mistaken for moats). Then it categorizes moats into several types and sub-types. It also discusses how moats erode and how to find moats. In each section, I found a number of insights and useful comments, most of which are copied below (apologies for poor formatting / editing): MISTAKEN MOATS In my experience, the most common “mistaken moats” are great products, strong market share, great execution, and great management. These four traps can lure you into thinking that a company has a moat when the odds are good that it actually doesn’t. TYPES OF MOATS Intangible assets As economic moats, they all function in essentially the same way—by establishing a unique position in the marketplace. Any company with one of these advantages has a mini-monopoly, allowing it to extract a lot of value from its customers. Brands One of the most common mistakes investors make concerning brands is assuming that a well-known brand endows its owner with a competitive advantage. A brand creates an economic moat only if it increases the consumer’s willingness to pay or increases customer captivity. Brands cost money to build and sustain, and if that investment doesn’t generate a return via some pricing power or repeat business, then it’s not creating a competitive advantage. Ask whether the company is able to charge a premium relative to similar competing products. If not, the brand may not be worth very much. the ability to brand a true commodity product is relatively rare—most brands are attached to differentiated products The big danger in a brand-based economic moat is that if the brand loses its luster, the company will no longer be able to charge a premium price. Patents patents have a finite life Legal maneuvering can sometimes extend the life of a patented Product Patents are also not irrevocable be wary of any firm that relies on a small number of patented products for its profits, as any challenge to those patents will severely harm the company and will probably be very hard to predict. The only time patents constitute a truly sustainable competitive advantage is when the firm has a demonstrated track record of innovation that you’re confident can continue, as well as a wide variety of patented products. (Think of 3M) Regulatory licenses regulatory licenses that make it tough—or impossible—for competitors to enter a market. Typically, this advantage is most potent when a company needs regulatory approval to operate in a market but is not subject to economic oversight with regard to how it prices its products. a company that can price like a monopoly without being regulated like one (The bond-rating industry) sometimes a collection of smaller, hard-to-get approvals can dig an equally wide moat Switching costs You find switching costs when the benefit of changing from Company A’s product to Company B’s product is smaller than the cost of doing so. companies that benefit from switching costs can be hard to find because you need to put yourself in the customer’s shoes to really understand the balance between costs and benefits. And, like any competitive advantage, switching costs can strengthen or weaken with time. one broad category of switching costs, which you might think of as companies that benefit from tight integration into their clients’ businesses. it becomes part and parcel of their daily operations, and untangling it from their business to start afresh would be costly, and possibly risky as well. This type of competitive advantage isn’t limited to just service and software companies. Precision Castparts that sells high-tech, superstrong metal components used in jet aircraft engines and power-plant turbines. Think for a minute about the low tolerance for failure in these kinds of products. engineers actually work together with customers when they design new products. Look at the cost/benefit balance. The only benefit of switching to a new supplier would likely be monetary, as long as the current supplier keeps up its quality standards. Customers would need to find a supplier of similar reliability if they wanted to save money by switching. The explicit cost is meaningful—the new company would need to spend time getting to know the new products as intimately as it knows the existing ones—but the real cost in this case is risk. Given the incredibly low tolerance for failure, it doesn’t make sense to try to shave the production cost if it increases the risk of product failure. It would take only one high-profile failure to seriously damage the company’s reputation, which would definitely hurt future sales. switching costs show up in all kinds of industries. Switching costs can be effective when explicit cost of switching is low if most people perceive the benefits of switching as uncertain. very hard many for consumer-oriented firms, such as retailers, restaurants, packaged-goods companies to create moats around their businesses. That’s because low switching costs are the main weakness of these kinds of companies. You can walk from one clothing store to another, or choose a different brand of toothpaste at the grocery store, with almost no effort whatsoever. Some can do it through economies of scale and some can create moats by building strong brands—but in general, consumer-oriented firms often suffer from low switching costs. Switching costs can be tough to identify because you often need to have a thorough understanding of a customer’s experience—which can be hard if you’re not the customer. But this type of economic moat can be very powerful and long-lasting Switching costs come in many flavors—tight integration with a customer’s business, monetary costs, and retraining costs, to name just a few. Network effects (a special type of switching cost) the value of their product or service increases with the number of users Network based businesses tend to create natural monopolies and oligopolies. “Of networks, there will be few.”- Brian Arthur the very nature of the network effect means that there won’t be a very large number of businesses that benefit from it, given the propensity of networks to consolidate around the leader. the network effect is much more common among businesses based on information or knowledge transfer than among businesses based on physical capital. This is the case because information is what economists call a “nonrival” good. Most goods can be used by only one person at a time (rival goods). Note this is not exclusively the case. network-based businesses are usually pretty durable. A competing firm would need to replicate the network—or at least come close—before users would see more value in the new network and switch away from the existing one. in a fast-growing market with consumer preferences that are still being formed around a new type of service the network effect can be subject to successful attack. for a company to benefit from the network effect, it needs to operate a closed network, and when formerly closed networks open up, the network effect can dissipate in a hurry. It’s a good question to ask whenever you’re evaluating a company that might benefit from network economics: How might that network open up to other participants? This is a common effect of network-based businesses: The benefit of having a larger network is nonlinear, which means that the economic value of the network increases at a faster rate than its absolute size. There is probably an element of critical mass present here, too (to determine the point at which the network becomes valuable). There may also be an element of ‘escape velocity’, in that one or more emerging networks compete and may even both be at critical mass (that is, useful) but when one reaches a certain relative size it becomes dominant (think facebook, nexopia, myspace). the value of a network to its users is more closely tied to the number of connections than it is to the number of nodes, but the value-to-connection relationship likely slows down as the number of connections becomes extremely large. Cost Advantages Cost advantages can sometimes be durable, but they can also disappear very quickly, so as an investor you need to be able to determine whether a company’s cost advantage is replicable by a competitor. cost advantages matter most in industries where price is a large portion of the customer’s purchase criteria. these industries are usually characterized as commodity industries, that’s not strictly true. A useful way to pick out industries in which cost advantages are likely to be a big factor is to imagine whether there are easily available substitutes—products or services that serve the same function for the buyer, even if they are differentiated. Cost advantages can stem from four sources: cheaper processes, better locations, unique assets, and greater scale. Process advantages in theory they shouldn’t exist for long enough to constitute much of a competitive advantage, because competitors should copy them. This generally does happen eventually, but it can take a lot longer than one might expect. Copy processes can require significant or compete overhauls of business plans. Difficult to do period, and compounded by organizational inertia. Another reason is that new processes may be advantageous, but a first-mover may actually gain an enduring advantage if they gain scale and prevent followers from being able to adopt their process (that is prevent competitors from copying the business model that uses the process by exploiting scale advantages). process-based cost advantages can create a temporary moat if incumbents are unlikely to replicate them immediately, and if new entrants either can’t copy the process or doing so is likely to destroy the industry’s economics. A moat that is built on lazy or stumbling competitors is not a terribly strong one. So, process-based moats are worth watching closely, because the cost advantage often slips away as competitors either copy the low-cost process or invent one of their own. Location Advantages This type of cost advantage is more durable than one based on process because locations are much harder to duplicate. This advantage occurs most frequently in commodity products that are heavy and cheap—the ratio of value to weight is low—and that are consumed close to where they’re produced. They create mini-monopolies in their immediate vicinity. Unique assets or superior access to resources A type of cost advantage that is generally limited to commodity producers is access to a unique, world-class asset. Cost advantages can be extremely powerful sources of competitive advantage, but some are more likely to last a long time than others. Process-based advantages usually bear close watching, because even if they do last for some period of time, it’s often because of some temporary limitation on competitors’ ability to copy that process. Once that limitation disappears, the moat can get a lot narrower very quickly. Location-based cost advantages and low costs based on ownership of some unique asset are much, more durable and easier to hang one’s analytical hat on. Companies with location advantages often create mini-monopolies, and world-class natural resource deposits are by definition pretty hard to replicate. Scale (a special type of cost advantage) When you’re thinking about cost advantages that stem from scale, remember one thing: The absolute size of a company matters much less than its size relative to rivals. Very broadly speaking, the higher the level of fixed costs relative to variable costs, the more consolidated an industry tends to be, because the benefits of size are greater. We can break down scale-based cost advantages into three categories: distribution, manufacturing, and niche markets. manufacturing scale tends to get most of the attention, but the cost advantages stemming from large distribution networks or dominance of a niche market are just as powerful—and, in an increasingly service-oriented economy, they are more common as well. Distribution scale Large distribution networks can be the source of tremendous competitive advantages, and you can easily see why when you think about the economics of moving stuff from point A to point B. Although building and operating the delivery network is an expensive proposition for a base level of service, the incremental profit on each item that the truck fleet delivers is enormous. once the fixed costs are covered, delivering an extra item that is on a delivery route is extremely profitable because the variable cost of making an extra stop is almost nothing. imagine that you need to try to compete with a company that has an established distribution network. It has likely covered its fixed costs and is making large incremental profits as it delivers more stuff, while you’ll need to take on large losses for a time until (if) you gain enough scale to become profitable. Many businesses with delivery networks can dig this type of economic moat. Large distribution networks are extremely hard to replicate, and are often the source of very wide economic moats. Manufacturing scale The closer the factory is to 100 percent capacity, the more profitable it is, and the larger the factory, the easier it is to spread fixed costs over larger volume of production. Also, the larger the factory, the easier it is to specialize by individual tasks or to mechanize production. the prevalence of this type of cost advantage has diminished somewhat in the recent past as enormous low-cost pools of labor in China and Eastern Europe have become integrated into the global economy, causing some manufacturing to shift away from Europe and North America. Manufacturing scale needn’t be limited to owning a larger production facility than the competition. As long as costs can be spread over a sales base, this advantage exists: e.g. over subscribers or gamers. Niche market scale Even if a company is not big in an absolute sense, being relatively larger than the competition in a specific market segment can confer huge advantages. companies can build near-monopolies in markets that are only large enough to support one company profitably, because it makes no economic sense for a new entrant to spend the capital necessary to enter the market. this type of competitive advantage is often found in smaller manufacturing firms, it’s not limited to the industrial world. Small markets don’t attract giants. ERODING MOATS The best analysis in the world can be rendered moot by unforeseen changes in the competitive landscape. Although change can be an opportunity, it can also severely erode once-wide economic moats. critical to continually monitor the competitive position of the companies in which you have invested, and watch for signs that the moat may be eroding. There are two sides to this threat. The first is the risk that a company that sells technology and it loses out in the furious race to stay on the cutting edge. Being technologically supplanted by a competitor is simply a fact of life for most technology companies, because they typically win business by having a product that is better/faster/cheaper than their peers’ products. “In the long run, everything is a toaster.” Technological disruption is a more unexpected—and severe—threat when it affects non-tech companies, because these companies can look like they have very strong competitive advantages before a technological shift permanently hurts their economics. the kind of technological disruption that structurally damages the economics of an entire industry is relatively rare One thing to remember is that disruptive technologies can hurt the moats of businesses that are enabled by technology even more than businesses that sell technology shifts in the structure of industries can also cause lasting damage to companies’ competitive advantages. One common change to watch out for is consolidation of a once-fragmented group of customers. Changes in the industry landscape needn’t be local. The entry of low-cost workforces elsewhere into the global labor pool has permanently damaged the economics of many manufacturing businesses. In some cases, the labor differential is so large that companies that may have once benefited from a location-based moat have seen that competitive advantage disappear, as the cost savings from low-cost labor is large enough to offset high transportation costs. One final change to watch out for is the entry of an irrational competitor into an industry. Some kinds of growth can cause moats to erode. the single most common self-inflicted wound to competitive advantage occurs when a company pursues growth in areas where it has no moat. A company can fill in its own moat by investing heavily in areas in which it has no competitive advantage. If a company that has regularly been able to raise prices starts getting pushback from customers, you’re getting a strong signal that the company’s competitive advantage may have weakened.

  2. 5 out of 5

    Vishnu Agarwal

    Good book....It explains in great details about the kind of business one should own i.e., business with large and durable moats...Business with large moats can only generate very high Return on Capitals....The author identifies the four major categories which covers a large part of businesses having moats... 1. Intangibles - Brands, Patents (Pharma), Regulatory Licenses (Ratings) 2. Switching Costs - Banks/ Financials, IT Software Companies, Money managers 3. Networking effect - One platform used b Good book....It explains in great details about the kind of business one should own i.e., business with large and durable moats...Business with large moats can only generate very high Return on Capitals....The author identifies the four major categories which covers a large part of businesses having moats... 1. Intangibles - Brands, Patents (Pharma), Regulatory Licenses (Ratings) 2. Switching Costs - Banks/ Financials, IT Software Companies, Money managers 3. Networking effect - One platform used by many people like Internet Companies (eBay, Microsoft), Exchanges (NSE, NASDAQ etc), TV Stations 4. Cost Advantages - Process Adv, Location Adv, Unique Assets, Size Adv. Overall it was fun reading this book. Thanks

  3. 5 out of 5

    David Ruiz

    I think that this is a very informational and intellectual book that covers the basics of people who want to be successful plus wealthy. I enjoyed the book quite a lot due to the information it provided about different types of techniques the successful investors like Warren Buffet use. I found it to be a guide for those who want to become rich and make money. Stocks, Investments, and financial literacy are something this little book covers the most. Over all a good book that I highly recommend I think that this is a very informational and intellectual book that covers the basics of people who want to be successful plus wealthy. I enjoyed the book quite a lot due to the information it provided about different types of techniques the successful investors like Warren Buffet use. I found it to be a guide for those who want to become rich and make money. Stocks, Investments, and financial literacy are something this little book covers the most. Over all a good book that I highly recommend to those who want to be wealthy and make lots of money.

  4. 5 out of 5

    Mohamed Fasil

    Fantastic book for learning about moats. This books clearly explains what the moat is and how they are build around business. Pat Dorsey has neatly written in a simple to understand manner and I could read it very fast and re-read many times. Some of the key points I take from this are 1. Switching cost 2. Network effects 3. Brand value 4. ROIC with Above all

  5. 5 out of 5

    Hariharan Ragunathan

    Being a fan of Value investing made popular by Graham , Buffet & Munger. This book really talks about what does a Moat means and how to identify for companies. This does not tell you how to value but to see how to see the competitive advantages of company using a simple framework.

  6. 4 out of 5

    Michele

    Fantastic book that breaks down four different types of competitive advantage and why that is so important for finding good investments. Read it in an afternoon. Definitely one I will come back and reference.

  7. 5 out of 5

    Sim

    Excellent book on moat however readers and beginners not familiar with the US market will have a hard time following the examples. Does not cover instrinsic value.

  8. 5 out of 5

    Vikas Agarwal

    A simple to be read in couple of days. It pointed out a different way of valuing company. Its was good book and if you read it then surely you i will get couple of good things from this.

  9. 5 out of 5

    David

    Very impressive. Contains insight that are timeless.

  10. 4 out of 5

    Karthik Chinni

    The book covers a lot about identifying moats and some of the easy ways to identify them. must read... Price less for new value investors.

  11. 4 out of 5

    pavana Kumar Varanasi

    Very very good book that talks about competitive advantage of various industries. It is not the routine value investing stuff. Its about finding great companies (more of fisher than graham)

  12. 4 out of 5

    Bala Aramvalarthaan

    Recommended by Prof. Sanjay

  13. 5 out of 5

    Daniel Gewehr

    A very easy-to-read book about moat and competitive advantages.

  14. 4 out of 5

    Jb

    Small easy book on business-moats.

  15. 4 out of 5

    V R

    Very resourceful and must read for all investment professionals.

  16. 4 out of 5

    Đạt Tiêu

    Little book yet very informative about economic moats. Some summary: A. why moats? -> overcome competition -> durable competitive advantages B. Moat traps - Great products/services - Great market share - Good execution - Good management -> Not a moat 1. Intangible assets: - Brands: -> how businesses build brands? brands sustain a long time? -> any special about that brand? -> brands give businesses pricing power? - Patents: -> how many patents? have new patents regularly? -> any special Little book yet very informative about economic moats. Some summary: A. why moats? -> overcome competition -> durable competitive advantages B. Moat traps - Great products/services - Great market share - Good execution - Good management -> Not a moat 1. Intangible assets: - Brands: -> how businesses build brands? brands sustain a long time? -> any special about that brand? -> brands give businesses pricing power? - Patents: -> how many patents? have new patents regularly? -> any special patents that are hard to copy? -> businesses overcome legal challenges over patents? - Regulatory licences: -> businesses have authority approvals on something that's hard to get? 2. Consumer switching cost -> businesses have large customer base. -> does it cost customer something costly enough (not specificly in money term) to keep them switch for another supplier? 3. Network effect (special switching cost) -> businesses working as intermediaries or brokers, connecting people together for some kind of services -> have a large customer base so far -> be one of the firsts to enter the field -> have advantages to build up a large network in the beginning 4. Cost advantages - Cheaper processes: -> low material cost, low labor cost, more efficient assembling - Better location: -> geographical monopoly due to location -> be near more demands -> easier to access the supply or to distribute products/services - Unique assets - Greater scale: -> distribution scale: -> require big fixed cost -> eliminate small and medium competitors -> manufacturing scale: -> require big fixed cost -> eliminate small and medium competitors -> market niche: specific market, -> not large enough(low customer base) for many suppliers + -> cost resources to understand better C. Re-assess moats in cases: -> the affect of technology advance on businesses -> businesses extensions, growth -> changes in industry structure, new competitors entering, customer base fragment D. Find moats: - Some industries have more moats than others - Moats are absolute, not relative - Some moats are wide, some narrow - Moats are more important than a star CEO -> Check past records, use ROE, ROA, ROIC. See if those numbers are strong and consistent -> If yes, find out the reasons: any moat involved? If yes, how strong it is? E. Evaluate moats - A company value worths all future cash that the it can generates -> Free cash flow FCF (owner's earing) = Net Income from operating activities (Sales - Operating Expense) - Capital Expenditure - 4 factors affect any business and need to considerate when value a business: -> risk of materializing future cash flow: how likely it will come true -> growth of future cash flow: how big it can be -> return on captial: how much needs to invest -> economic moats: how long business can generate that cash flow F. Tools for valuation - Intrinsic value: many models -> Discounted cash flow - Price multiples: -> Price-2-Sales (P/S): different in each industry -> Price-2-BookValue (P/B): be careful with goodwill (should be subtracted from book value), intangible assets (hard to value), take into account other economic moats as book value -> Price-2-Earnings (P/E) compare with other companies, the whole market or other benchmark like bond interest take into account other financial stats like ROE, profit margins to see P/E is acceptable do your own P/E calculation -> Price-2-Free-CashFlow: true picture about business health, less noise than earnings take into account depreciation (because cash flow excludes it) -> P/E-2-Growth(5 year EPS growth) PEG take into account the affect of the 4 factors when comparing 2 companies PEG, not just PEG alone - Yield -> Cash return = (Free cash flow + net interest expense)/(Enterprise value) Enterprise value = Market Cap + Long-term debt - Current asset (Cash) -> Compare with some benchmarks to see if acceptable G. when to sell - when you realize you make a mistake -> try to overcome and cut loss - when the business is getting worse -> some criteria that make you buy its stocks in the first place are going worse - when find some place much better to invest in -> take into account switching cost - when some stocks take a big part of your portfolio -> consider risk tolerance -> diversify to minimize risks H. Final words: - Expand mental database of companies -> practice to see patterns, themes, make comparisons - Seek successful investors tips and advice

  17. 4 out of 5

    InvestingByTheBooks.com

    Warren Buffett has four main principles for investing in businesses. They need to be within his circle of competence, run by good management, have good long-term prospects and be available at a fair price. The little book that creates wealth gives the investor some well needed filters for how to think about good long-term prospects. In order to achieve high returns over the long term the business needs to have some type of competitive advantage or in Buffet terms, moat. A book that is most often Warren Buffett has four main principles for investing in businesses. They need to be within his circle of competence, run by good management, have good long-term prospects and be available at a fair price. The little book that creates wealth gives the investor some well needed filters for how to think about good long-term prospects. In order to achieve high returns over the long term the business needs to have some type of competitive advantage or in Buffet terms, moat. A book that is most often recommended for readers who want to understand the concept of a moat is Michael Porter’s book Competitive Advantage. However, this is a book for corporate managers. Dorsey wanted to write a book for investors and it doesn't disappoint. Pat Dorsey has had a long career at Morningstar where he was Director of Equity Research and where he was one of the main contributors to the firm’s economic moat ratings. Morningstar follows businesses and rank them in terms of the strength of the moat and an ETF has even been created to track these businesses. For a long-term investor that wants to create wealth without having to continuously find new investment opportunities the business then needs to have some kind of moat. Munger refers to this as "sit on your ass investing" in his usual witty way. Businesses that are undervalued for the short term may give the investor gains but the challenge is that these gains need to be re-invested, causing the need for continuously making good stock picks. It takes time to find good investments, meaning that it's important to benefit from the opportunities that come up. Having a large analyst team makes it possible to analyze a broad set of companies leading to a higher chance of finding continuously good opportunities. This might be harder for the individual investor. Dorsey divides moats into four categories: intangibles (brand, patents, licenses), switching costs, network effects and economies of scale. The moat can either be strong, wide moat, or weak, narrow moat. It's rather self-explanatory that a business can't be prosperous over the long term without having some kind of advantage against the competitors. A business may have a patent that shuts out the competition for a set period of time or it may have a brand that enables the business to set a price that is above the cost of production. Some businesses have historically had a high degree of customer retention meaning that the switching costs are high. A typical example of a business with high switching costs are banks. An example of a business with high network effects is Facebook where existing users benefit from having more users on the platform. Interestingly, Dorsey explained during a presentation that it's not always a benefit for a company to have all or many types of moats; a really wide moat in any of the categories may well be better. The book is focused on the US in terms of the majority of businesses examples that is brought up and especially in terms of how to think about taxation which disturbs the flow a bit for a non-US investor. A topic in the book where value investors often have different opinions is about moat versus management. Dorsey is of the view that moat is more important and uses the quote from Buffett: "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact". I tend to agree with this as there are so many examples of great managers working in tough industries without being able to create sustainable high returns on capital. However, I would also like to emphasize that an excellent manager may well create a corporate culture that could work as a moat in certain instances and through this achieve extraordinary results in highly competitive industries. For investors who want to understand the concept of moats this book is a great start. It's short but packed with insights and I have already started to benefit from the book in terms of how I think about barriers to enter an industry. I didn't pick that up the first time I read Porter's Competitive Advantages which is why I have to give a lot of credit to Pat Dorsey for helping me to grasp this important concept better. If the concept of moats isn’t part of your set of mental models yet, then begin with reading this book.

  18. 5 out of 5

    Robin

    After finally finishing The Little Book that Builds Wealth, I have concluded that I will never be a stock market investor. I simply don’t have enough interest to devote the time outside of mutual funds. However, if you have any interest in economics and investing in stocks, this book will help you, whether or not you decide to follow through. Dorsey gives a few guidelines for finding companies that have strong “moats,” or economic reserves that help the company thrive regardless of the economic After finally finishing The Little Book that Builds Wealth, I have concluded that I will never be a stock market investor. I simply don’t have enough interest to devote the time outside of mutual funds. However, if you have any interest in economics and investing in stocks, this book will help you, whether or not you decide to follow through. Dorsey gives a few guidelines for finding companies that have strong “moats,” or economic reserves that help the company thrive regardless of the economic climate. It’s about choosing strong companies that are likely to remain strong, and not choosing companies based upon hype, advertising claims, or popular opinion. Many of the most solid companies are not glamorous—Dorsey makes this point with aggregate and trash-collecting companies. Conversely, there is a wide variation among the sexier choices like high tech companies. The best companies have these competitive advantages: intangible assets (for which a consumer will pay more, for example a name like BMW), customer-switching costs (for example banks, which consumers rarely switch), network effect (for example exclusive collaboration with a reliable shipping company), and cost advantages (for example an aggregate company located close to a quarry). The following are often thought to be competitive advantages, but are only marginally helpful: great products, great size, great execution, and great management. There is a lot of information packed into this small book, delivered in short chapters, each with a helpful summary at the end. A chapter on tools of valuation gives specific numbers to consider. It’s not just P/E, but multiple tools that the smart investor needs to know. Also, the investor is advised to consistently read the financial journals. There is also a very interesting chapter on knowing when to sell. Like most of this book, this chapter runs counter to popular opinion. All readers who are considering investing in the stock market will benefit from reading The Little Book that Builds Wealth. Although I wish you good luck in your investments, this book will make luck irrelevant and unnecessary, giving a solid foundation to your investment strategy and choices.

  19. 4 out of 5

    Zhang Tao

    This book is surprisingly good (should not judge a book by its cover or title in this case). It covers only 1 thing: moats (a.k.a competitive advantages) in a company and I think this is one of the best, if not THE best book on this subject. The author went in-depth talking about different kinds of moats, especially highlighted things are easily mistaken for moats (better product, higher market share, or better internal processes etc). The true moats are very rare and for most companies, you eith This book is surprisingly good (should not judge a book by its cover or title in this case). It covers only 1 thing: moats (a.k.a competitive advantages) in a company and I think this is one of the best, if not THE best book on this subject. The author went in-depth talking about different kinds of moats, especially highlighted things are easily mistaken for moats (better product, higher market share, or better internal processes etc). The true moats are very rare and for most companies, you either have it or do not have it. Or put it simply, some business is just better than others. The other thing he made it very clear is, people normally give the management team/CEO too much credit if things go well, or too much criticism when business goes south because people tend to ignore how strong/weak the business is, comparing to competition, or how much moats the business has. I also find this book easy to read and the insight/points very practical, I believe this is due to the fact the author was from Morningstar, the research company.

  20. 5 out of 5

    Zahedul

    This book succinctly summarizes the underlying principles of investing in financial assets e.g. company stocks, for the long-run. The author uses the concept of economic moat as a thought experiment, to differentiate between companies with strong competitive advantages with others. Companies with strong economic moats have high competitive advantages, which cannot be easily nullified/replicated by competitors or new entrants. Factors like customer stickiness, brand image, natural monopoly and pr This book succinctly summarizes the underlying principles of investing in financial assets e.g. company stocks, for the long-run. The author uses the concept of economic moat as a thought experiment, to differentiate between companies with strong competitive advantages with others. Companies with strong economic moats have high competitive advantages, which cannot be easily nullified/replicated by competitors or new entrants. Factors like customer stickiness, brand image, natural monopoly and production cost advantages, among others, can provide thick economic moats, which may result in higher profitability and cash inflow. This would be an interesting read for those planning to make long term investments in the stock market.

  21. 4 out of 5

    Srinivas D

    Very easy to read . The concept of moats explained in a very lucid way , summarizes what to look for in a company and identify the types of moats . What is new came to know about the concept of wide and narrow moats . Lays down what doesn’t constitute moats like scale, efficient management , great products or market share . The key ratios to use and what ratios are applicable to a each industry are well explained . Very short and relevant stories bring out the concepts in a manner can understood Very easy to read . The concept of moats explained in a very lucid way , summarizes what to look for in a company and identify the types of moats . What is new came to know about the concept of wide and narrow moats . Lays down what doesn’t constitute moats like scale, efficient management , great products or market share . The key ratios to use and what ratios are applicable to a each industry are well explained . Very short and relevant stories bring out the concepts in a manner can understood easily . This book is a value for money

  22. 5 out of 5

    Liam Polkinghorne

    Concise summary of the sources of competitive advantage: (1) intangible assets (brands, patents, licenses), (2) high switching costs, (3) network effects, (4) cost advantages (scale in distribution, manufacturing or niche markets), location advantages, unique assets, process advantages). Valuation is largely based on (1) how large cash flows will be (growth), (2) the likelihood that those cash flows materialise (risk), (3) how much investment is needed (return on capital), (4) how long the busin Concise summary of the sources of competitive advantage: (1) intangible assets (brands, patents, licenses), (2) high switching costs, (3) network effects, (4) cost advantages (scale in distribution, manufacturing or niche markets), location advantages, unique assets, process advantages). Valuation is largely based on (1) how large cash flows will be (growth), (2) the likelihood that those cash flows materialise (risk), (3) how much investment is needed (return on capital), (4) how long the business can generate excess profits (moat).

  23. 5 out of 5

    Scycer

    A very interesting book to listen to. It has introduced and given me a deeper view on how to analyse moats around a business and what business moats are actually moats and not posing as one. However I recommend picking up the physical copy to reference the points mentioned here. This is a book you will keep revisiting while building your wealth creation strategy. Better designed for folks who are entering this mindset and for folks refining your strategy. It is a simple and quick inputs. It is d A very interesting book to listen to. It has introduced and given me a deeper view on how to analyse moats around a business and what business moats are actually moats and not posing as one. However I recommend picking up the physical copy to reference the points mentioned here. This is a book you will keep revisiting while building your wealth creation strategy. Better designed for folks who are entering this mindset and for folks refining your strategy. It is a simple and quick inputs. It is definitely worth your time.

  24. 5 out of 5

    Ganesh V

    This book is one of the best books I have ever read on stock valuation. The language is simple and easy to understand. The author has provided sufficient examples to illustrate the principles which makes the reading more seamless. Though the content is a little dated, the principles are true even today. I would definitely recommend this book as one of the must-reads for anyone starting up on their investment journey.

  25. 4 out of 5

    Anri

    This was an interesting book - short, but with one main message: There are companies out there, with certain lasting advantages. These advantages can be regulatory, network, location, patent, brand-based, etc, but we'll call them companies with a moat - companies with a means to fend off competition economically. You should invest in these companies when you recognize them as being undervalued. That's basically it! I didn't completely understand the valuation parts though.

  26. 5 out of 5

    Tong Huang

    Awesome little book about "Moats", fun to read and packed with ideas! "Great products, great size, great execution, and great management do not create long-term competitive advantages. They are nice to have, but they are not enough. The four sources of structural competitive advantage are intangible assets, customer switching costs, the network effect, and cost advantages."

  27. 4 out of 5

    VIFL

    If you have already read Pat Dorsey's The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market, then there's no need to read this book.

  28. 4 out of 5

    Achint Kumar

    This book is mostly about the " Moat" a word,made famous by legendary investor Warren Buffet.This book is useful for those who want to learn about the moat like what is moat,what is not,how to identify the moat and some discussion about the variables to select stock.

  29. 4 out of 5

    DILEEP Abraham

    A book that describes the whole process in of safe investment practice with a great emphasis on moat investment. Written in a lucid language, it helps to understand some of the most relevant topics of investment process.

  30. 4 out of 5

    Tianhang Hu

    Very insightful, though not very technical because it's meant to be something presented to the public. That's why I gave it 4 instead of 5, but it could also be the reason why someone gives it a 5 instead of a 4.

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