By Pat Dorsey
If you subscribe to the Morningstar stock database, you'll notice that one of their rating criteria is a company's Economic Moat. In this book, Pat Dorsey, CFA, and director of stock analysis at Morningstar, goes in-depth on this topic.
The book opens with a game plan. Four steps are laid out to making money in stocks:
- Identify businesses that can generate above-average profits for many years.
- Wait until the shares of those businesses trade for less than their intrinsic value, and then buy.
- Hold those shares until the business deteriorates, the shares become overvalued, or you find a better investment.
- Repeat as necessary.
The Little Book That Builds Wealth is mostly about that first step — what Warren Buffet calls a company's "competitive advantage." Dorsey calls it "economic moat."
Throughout the book we learn what the moat is, how to tell a true moat from a false moat, what makes a moat a big one, how a company's moat can get filled in (think Kodak), and how to find companies with the best moats.
The books rounds out with short chapters on game plan step No. 2 (some ratio analysis and a discussion on why management doesn't matter much), and No. 3 (when to sell a stock).
Overall, I found the book a gentle read, and it did bring up some interesting points and examples. For an individual investor, it is useful in that it gets them thinking what makes a company valuable in the long-term, rather than what indicators might find a stock that's about to take off in the next quarter or two. For more seasoned stock analysts, this book has little to offer.
Gary Silverman owns a fee-only financial planning firm in Wichita Falls, Texas. He is the editor of the financial newsletter Personal Money Planning, and writes the newspaper columns "Your Money" and "Biz2Biz."