The author of this book, Pat Dorsey, was Morningstar’s Director of Equity Research for 11 years and developed its economic moat ratings during his tenure. He now owns an investment advisory firm.
Layout of The Little Book that Builds Wealth
This book has 14 chapters, with an introduction at the beginning and a conclusion at the end.
The first 10 chapters are more about theories: the economic moats, how to identify them, how to differentiate the false moats, what are really important and what are not.
From Chapter 11 onwards, we will see how the theories are put into practice. The author gives us some examples in real life situation. In Chapter 13, there are some tools for valuation of stock. Chapter 14 talks about the timing to sell.
Highlights
The term “economic moat” is popularized by Warren Buffett and I have encountered this term quite often. But what constitute these moats? According to the author, economic moats arise from intangible assets, customer switching costs, the network effect and cost advantages.
The author also cautions about the existence of four “mistaken moats” which are great products, strong market share, great execution and great management. These are not true competitive advantages in the author’s view.
The pros and cons of each valuation tool mentioned by the author such as price-to-sales ratio and price-to-book ratio are discussed in detail in Chapter 13.
When should we sell a stock? Before we sell, there are four questions to be answered: Is the original reason of buying no longer valid? Have the fundamentals of the business deteriorated permanently? Is there a better alternative? Has the stock become too large a portion of the portfolio? If the answer is yes to any of the questions, maybe it is time to sell the stock.
Conclusion
Before reading this book, I have some vague understanding of the economic moats. After reading this book, I feel like I have more knowledge about moats but I would not say that I have become an expert. Even the author admitted that he made mistakes too. To make money in the stock market, we just need to make sure our hits are more than the misses.
I shall end this review with a few quotes from the book.
“Far better to have a conceptual anchor to help you evaluate stocks and build a rational portfolio.”
“High returns on capital will always be competed away eventually, and for most companies – and their investors – the regression is fast and painful.”
“The best analysis in the world can be rendered moot by unforeseen changes in the competitive landscape.”
“It’s easier to create competitive advantage in some industries than it is in others. Life is not fair.”
“A big part of successful investing is stacking the odds in your favour.”
“The trick is to always stay focused on the future performance of the business, not the past performance of the shares.”
“To be a truly good investor, you need to read widely.”
Recommended book
If you are interested in The Little Book that Builds Wealth, you may get the book from Kinokuniya Malaysia through the link below*.
*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.
