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.

A great source for stock research

I’d like to make a quick pitch for a new book I bought this weekend: Morningstar Stocks 500.

First off, I do not follow this guide brainlessly. I find it to be a great way to look at potential investments. It doesn’t cover every investment (only 500, hence the name). Their valuation method is not flawless, but neither is mine. Some of their recommendations and analyses are weak, but overall it’s not too bad.

So, why do I like it? I think it’s a great verification source. I like to use it to scan valuations of companies and to read their take on each business and management. Even when I disagree with them, it’s pretty easy to understand why their take is what it is.

I also think their approach is spot on. First, they look at the economics of a business, its moat. Second, they look at management, what kind of stewards are they for shareholders. Third, they look at valuation, how much is a business worth. This is the same basic approach I use, too, and so I like to read others who take that same approach.

How should this tool be used? Personally, I use it after I’ve already done an evaluation of a potential investment. After I’ve learned about the business, its competitive advantages, its management, its financial reporting, and formed a thorough opinion of all these things myself, I like to look at Morningstar’s take on the business and compare it to mine. Either I get a warm fuzzy because they did things similarly to me, or I can see how they evaluated things differently and I can question my position.

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.