Introduction

The Little Book that Builds Wealth is about how to find a company with great economic moats. It condenses the experience of the author in identifying great companies to invest in. Its aim is to help us to find wonderful businesses with long term potential.

Author

Pat Dorsey is the founder of his eponymous firm, Dorsey Asset Management. He was the Director of Equity Research for Morningstar from 2000 to 2011 and developed Morningstar’s economic moat ratings. He worked with Sanibel Captiva Trust after leaving Morningstar. Other than the investment field, he also has a book about fly-fishing.

Content

The Little Book that Builds Wealth has a foreword by Joe Mansueto, the founder of Morningstar. There are 14 chapters, with an introduction and a conclusion. The first 10 chapters are about economic moats, their allures, sources and false moats. The remaining chapters are about the application of the knowledge. There are some case studies and valuation tools. Finally, the author also gives advice on when to sell. Every chapter is followed by a summary where the author presents the main ideas of that particular chapter.

Review

This investment book is easy to read and the flow of the author’s argument is easy to follow. I think this is the hallmark of the Little Book series.

The economic moats that the author talks about are competitive advantage that arise from intangible assets, customer switching costs, the network effect and cost advantages. In the book, he shows us how to identify these moats and give us some examples.

I find the chapters where he discusses the valuation of companies very useful. Though the chapters are short, they show us how the author values a company. There are a few ratios that the author uses for valuation and some examples are provided.

Chapter 14: When to Sell is a really important chapter. In this chapter, the author shares with us his thoughts on the occasions of selling a stock. For example, sell if the original reason for buying is no longer valid. This part is great because more often than not, an investor does not know when to sell.

Lastly, the author thinks that to be a successful investor, we should read widely. Other than the major business press and annual reports of companies, the books about and by successful managers can also help our investing journey. Besides that, quarterly shareholder letters by solid money managers are useful too. He also recommends books about decision-making process in investment to identify the flaws in our own thought process.

Quotes

1. The best analysis in the world can be rendered moot by unforeseen changes in the competitive landscape.
2. The single most important thing to remember about moats is that they are structural characteristics of a business that are likely to persist for a number of years, and that would be very hard for a competitor to replicate.
3. A big part of successful investing is stacking the odds in your favour.
4. The trick is to always stay focused on the future performance of the business, not the past performance of the shares.
5. Over long stretches of time, there are just two things that push a stock up or down: The investment return, driven by earnings growth and dividends, and the speculative return, driven by changes in the price-earnings (P/E) ratio.

Rating

Interested in The Little Book that Builds Wealth?

You may get the book from Kinokuniya Malaysia through the link below*.

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*Disclosure: The above link is Involve Asia affiliate link. Thus, I may earn a small commission when you purchase the book through this link.

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