Book recommendation: The Little Book That Builds Wealth

I have a book recommendation to make: The Little Book That Builds Wealth by Pat Dorsey.

Dorsey has helped Morningstar (known for their mutual fund research) develop their individual stock research team over the last several years.

This book is not a quick and easy guide to investing, but a book focused on one of the most important aspects of investing: understanding a company’s sustainable competitive advantages.

You see, long term investment research is best done when it focuses on 3 areas: business economics, management and valuation.

This book analyzes a sub-component of business economics, competitive advantage.

Warren Buffett once said that the best businesses are like a castle with a big moat around it. The moat is a company’s sustainable competitive advantages. And, that is what Dorsey writes about in the book.

This is probably one of the most if not the most important thing to look at and understand about a business, but it’s frequently overlooked because it’s not strictly quantifiable. You can’t go look up Intel’s sustainable competitive advantages on Yahoo! Finance and come back with the answer: 3.

Competitive advantages are not quantifiable, but they are vitally important.

The book is well written and an easy read. He give a lot of good examples and the writing style is relaxed and humorous.

The book makes clear what gives a company a large moat and allows them to keep it. He highlights what are not moats, like management (although I don’t entirely agree with him on that point), and how to tell when moats are sustainable.

Dorsey does a great job of spelling out what provides moats, like intangible assets (think patents like pharmaceuticals), switching costs (think software like Oracle), the network effect (think eBay), cost advantages (think Dell), and size advantage (think Wal-Mart).

Dorsey provides a very readable guide of what to look for and why.

Although this is a framework I’ve been using for years to look at companies, I must admit that Dorsey provided excellent food for thought that will keep my noodle spinning as I look at companies in the future.

A worthwhile read for the layman to the expert, in my opinion.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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