It is important to keep educate yourself. Stephen Covey calls it Sharpen the saw. To do this, I follow seminars and/or webinars, read books and blog posts from fellow DGI’s. This to gain new insights and of course learn something new. And because reading is FUN!
I read a lot of books, all kind of books. From biographies, management books to of course financial books. I really enjoy reading. This joy I hope to give to my kids! Reading books opens up a whole new life and you enrich yourself with new knowledge. What a great gift!
In my 2017 goals I wrote that I would read at least two books every quarter. And I will share my new knowledge with you, my readers. I will do this to keep the snowball of knowledge rolling.
Here is the eighth book review for Polliesdividend.
The little book that builds – By Pat Dorsey
As a dividend growth investor (DGI) my goal is to grow my passive income stream by means of dividend investing. One way of doing this is to let my Vrijheid Fonds grow; by doing that I’ll increase my wealth. You all know that I love the “little book” –series and I heard some great things about the author, Pat Dorsey. So I jump in the book and devoured it 😉
Pat Dorsey is the director of equity research at Morningstar. In his book the focus is on moats (competitive advantage). Today I give you my review on the book by Pat Dorsey – The little book that builds wealth.
Even the Best Company Will Hurt Your Portfolio If You Pay Too Much for It
In the beginning of this book the concept of a moat is defined. If you know who Warren Buffett is, I assume that you have been introduced to the notion of moats. But for those who don’t, a moat is defined as a significant competitive advantage that one company has over another. The example McDonalds is used in the book. In 2002 they caught a lot of bad press (poor service and slipping food quality) and because of a strong international brand and huge costumer loyalty they did not go belly up. These moats gave the company time to fix their problems and rebound.
In his book Dorsey outlines the four different types of moats:
- Intangible assets
- Costumer switching costs
- Network effect
- Cost advantages
An Intangibles asset is an asset that is not physical in nature. Examples of an intangible asset are corporate intellectual property or government permits. An example of an Intangible asset moat company is Johnson&Johnson (JNJ). You need permits and all sorts of government approvals to sell medicine.
Costumer switching costs, or rather high costumer switching costs, make it tough (and/or expensive) for costumers to switch to an other company or competitor. Examples of this kind of moat companies are financial services companies. People are very hesitant to switch to an other company because they do not want to pull out with a loss, and it is a huge annoyance to switch something like checking accounts.
A networking effect company will increase its monopoly by gaining more costumers and thereby enlarge its moat. eBay is an example of a networking effect company. The buyers are on eBay because the sellers are there, and vice versa
Cost advantages moat companies are companies that have lower costs. This moat matters most in industries where price is the most important factor. Walmart (WMT) is a textbook example of a low-cost producer because its large size allows it to negotiate favorable item costs.
Thinking about moats can protect your investment capital in a number of ways
Nearly as useful as the discussion of what constitutes a moat is the explanation of what DOES NOT constitutes a moat. How many times have you seen a company recommended because of a great new product or a successful manager that is hired to turn the company around? These are not durable moats
This book is all about one principle – determining a company’s economic moat. This is an important concept, as a moat protects a company’s profits from competition and allows the company to earn exceptional returns on capital over long periods of time.
I recommend this book to all DGI’s and everyone how wants to learn about moats and wealth building. The different kinds of moats are described in surprising detail. It categorizes moats into several types and explains what moats are not (and what things are commonly mistaken for moats). It also discusses how moats erode and how to find moats.
And as a little gift it shows the reader how Morningstar goes about defining moats.
In my humble opinion the book is time well spend!!
Invest. Don’t speculate
Okay, what do I take away from this book after I digested it?
- It is an easy and nice to read book
- You can read the book in about two hours.
- What a moat is, and the different kind of moats are explained in a simple way
- Explains in great details about the kind of business you should own
- It’s the best thing on moats I’ve read
To be a truly good investor, you need to read widely
The Pollie-rating for this book is:
Have you read this book? What do you think of this book?