The Little Book that Builds Wealth | Pat Dorsey | Talks at Google

What does it mean for a company to have a moat? What are the key drivers to valuation? Pat Dorsey will use examples to shed light on these, and more questions.

About the Book:
Capitalism works. That’s why most businesses with high returns on capital attract competition that forces down profitability over time. However, a small minority of companies are able to defy the laws of economic gravity by creating competitive advantages, or “economic moats” that insulate them from competition and allow them to maintain high returns on capital. After spending fifteen years analyzing thousands of companies, Pat has identified a handful of structural characteristics that create competitive advantage. He will discuss these characteristics, how management teams can create and destroy competitive advantage, and how he applies competitive analysis in managing institutional capital at Dorsey Asset Management.

About the author:
Pat is the founder of Dorsey Asset Management, which manages concentrated global portfolios for institutional investors. Prior to starting Dorsey Asset, Pat was Director of Research for Sanibel Captiva Trust, an independent trust company with approximately $1 billion in assets under management serving high net worth clients.

From 2000 to 2011, Pat was Director of Equity Research for Morningstar, where he led the growth of Morningstar’s equity research group from 10 to over 100 analysts. Pat developed Morningstar’s economic moat ratings, as well as the methodology behind Morningstar's framework for analyzing competitive advantage. Pat is also the author of two books — The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth — and has been quoted in publications such as the Wall Street Journal, Fortune, the New York Times, and BusinessWeek.

Pat holds a Master’s degree in Political Science from Northwestern University and a bachelor’s degree in government from Wesleyan University. He is a CFA charterholder.

[susannnico]

Thanks for this amazing information !! If you don't find a means of multiplying money, you will wake up one day to realize that the money you thought you had, has finished. Investment is key, I pray that anyone who reads this will be successful in life

[Tapas]

Video Summary: The little book that builds wealth: Pat Dorsey

Concept of economic moats.
Capitalists seek highest returns possible.
If you are smart you will not invest in airlines.
High returns of capital decreases as competition increases.
Few beats the odds, defy economic gravity.
They created structural economic Moats, to insulate themselves from competition.
Competition destroys excess returns. ( In NVIDIA and AMD, moat swaps back and forth).

Moat is structural and sustainable qualities that are inherent to the business.Not hot products, Not a cool tech, Not the biggest market share.
Small cap is often a home for Moat.
Moats manifest themselves in the pricing power of the commodity. A company that cannot raise prices does not have economic moat. If Company is dropping price of commodity, know their moat is eroding, early sign of erosion. Brand that lower search costs have high moats. Eg Coca Cola, Hines Ketchup.
High Moat/Value= Changes consumer behavior by increasing willingness to pay or lower search costs.


If a Brand does not make you change your behavior it does not have moat. A brand that increases your willingness to pay has high moat. Patents are subjected to expiration, challenge and piracy, is real monopoly. One drug driving all your economic value, if patent is challenged company goes to dust. So one patent biotech company (like AMRN) is risky. Have a portfolio of patents Qualcom, Arm holdings. Licenses approvals: License to do something that not many ppl can do : Eg Landfill/gravel pit license/Casino license/Aircraft parts FAA certified (most aircraft parts are sold source one manufacture that makes them, 40% margin after markets.)

Widening the Moat: Brands are valuable if they deliver consistent aspirational experience. Consistency lowers search costs and drives loyalty. Dont change and give people are reason to switch. New Coke, the Schlitz mistake (changes the taste the beer). If people buying this why change.  
Aspiration increases willingness to pay. So create scarcity and exclusivity. Tiffany's store layout 9They hit volume and high price). You would think stuff that drives 40% of your sales will be in front. In Tiffany store in Front is the expensive stuff that does not sell. Real selling cheap stuff is at the back.

1. Adapatation in brand based companyAppeal to taste of crowd: Jack Daniels in Russia Ad: Old rugged guy happy Bday Mr Daniels! In China the ad says: Confidence is not what comes from your mouth but what is perceived by other people's eyes.
2. Switching costs: Does the cost of switching to a competing product or service outweighs the benefits. Integrate with customer's business. Upfront costs of implementations-> payback from renewals. (Silverlake, Oracle, Sim corp)
Sell Ongoing service relationship (Rolls Royce, One, Schindler)
3. Provide a product with high benefit/cost ratio.
Eg Fastanel, Ecolab, Novozyme, Fuchs petrolab

The network effect: Provide a service the increases in value as number of users increase.Aggregate demand bw fragmented parties Edenred, Henry Schein, XPO logistics
Non linearity of nodes Vs connections: Visa, MasterCard, FB
Radio Vs Interactive networks: A series of channels that are not used radio (Western Union), vs interconnected nodes, latter is advantageous.

Cost advantages: Managerial skill needed is inversely proportional to quality of business.
process based cost advantages: Invent a cheaper way to deliver a product, tend to work well but get copied eventually. Eg any non patentable idea, replicated by competitors. Eg Southwest doe snot have the cheapest seat per mile, other people copied it.
Scale: When you spread your fixed cost over large base that tends to be much more robust. Relative size matters more than the absolute size. Eg UPS, Aggreko, Stericycle.
DHL lost a billion dollars trying to compete with UPS and Fedex in ground business because they could not scale up.

Niche: establish minimum efficient scale.

What about management: 
\WB says: Good jockeys will do well on good horses but not on broken down nags. Pat wins this race. Horse wins the race, even a good jockey on a goat will lose the race. Worse the business, better a manager needed. Good business, even bad managers will shine. Great business a genius is not needed,

Eg Ryan Air: is great Moat . Ryan air scale advantage to die for. MSFT will do fine even with stupid manager.
Moody put profits before
integrity, screwed investors, still eked 40% profit due to good Moats.

An airline will never have lower cost than when they opened for business. Planes get older, employees get senior. Eg of Good jockey on Moat.

Trust matters more online on offline. AMZN/Costco has done well on that regard.

Good managers are looking to widen company's moat. AMZN focus on customer experience, Costco focus on using scale to lower costs.

Bad managers invest money outside company's moat lowering overall ROIC. Aka Setting fire to huge piles of cash. Eg Cisco moving into customer market.

Garmin had GPS and avionics. So business and regional jets have Garmin in there. GPS is going from product too handset.So lets jump into handset apps. When a business jumps outside of its moat that is due to weakness not strength, trying to maintain growth like Cisco. Innovation comes from strength, not from "copy cat" ing.

Danger is when business cannot relax to change. Eg Starbucks, MSFT, Cisco Home Depot. Like a 50 yr old trying to date 20 yr old, just inappropriate. Better way to make money is not to open many stores, slow opening, increasing ticket size at existing stores.
Owner owed is good for managers but not infallible.

South African retailers do well due to small market, they do well.
Minimum efficient scale: Some corporations who well if they don't expand. so continue with their profits.
Cultural difference in preferences will create moat, While in Rome do what roman want.

Valuing Moats: Value of Moat depends on reinvesting opportunities.
Ability to reinvest tons of cash at a high incremental ROIC = valuable Moat . Fastenal Curro XPO
If a firm has limited value to reinvest, the moat adds little to intrinsic value. Mc Cormick (one spice market in US). MSFT Oracle

Moats are not limited to superstable companies that your grand kids will own.
Moaty business that pay cash are good. Moaty business that can reinvest cash are awesome.

Overestimating Moat : you pay for value creation that never materializes
Underestimating Moat: you have large opportunity cost.
Motorola; Created razor, a hardware where investors overestimated( No proprietary software) the cost of Moat and got hosed.

Most investors spend lots of time on margin of safety, and too little on opportunity cost. Thumb sucking on Walmart (Bought several million shares in 1995): Not buying enough when company it was I infancy cost Berkshire 8 BN in mature years. You suffer opportunity cost when you underestimate Moat, don't worry for margin of safety. Moats matter for long run.

Moat is not priced in always. Great companies build Moat as they grow. Most investors own securities fro short term and Moats matter in long run. Most Investors sum current state of world lasts longer than it usually does.
Most investors focus on short term changes in price not long term changes in moat .
Avg MF hold 1 year and makes 100%, some hold only for 3 months.

Quantitaive data is well price in market,
Qualitative data is not well priced in market: Understanding structural character of business . switching costs, customer behaviors, why companies raised prices is not well priced.

Great Quote from BiLL Miller: All the info is in past, but al the value is in future.

[Pammulli_]

Some economists have projected that both the U.S. and parts of Europe could slip into a recession for a portion of 2023. A global recession, defined as a contraction in annual global per capita income, is more rare because China and emerging markets often grow faster than more developed economies. Essentially the world economy is considered to be in recession if economic growth falls behind population growth.

[presley]

The most important thing that should be on everyone mind currently should be to invest in different sources of income that doesn't depend on the government. Especially with the current economic crisis around the word. This is still a good time to invest in various stocks, Gold, silver and digital currencies.

[jamesm.]

Mr. Dorsey is an excellent speaker and the advice he gives is sound. It seems to me that a "moat" as he describes it is really just a metaphor for a business's sustainable competitive advantage. It's remarkable how many investors fail to remember this fundamental principle from Econ 101 and get caught up in the irrationality of the market. This is even more important now that globalization has brought unprecedented competition to many types of businesses. Take away message: Seek moats; avoid goats.

[JL-qfhq]

There are so many nuggets in this talk… I like the way he analyzes and frames the market and competitive companies.

[waltersberna]

genial - EXCELENTE APORTE estoy leyendo el libro de Pat " Las cinco reglas para invertir en acciones con exito " y encontrar este vídeo es alucinante para complementar y reforzar los conceptos - GRACIAS

[Fakefake]

Summary: 1. Companies without moats will have deteriorating profits due to competition 2. The categories of moats are intangible assets (brands, patents, licenses/approvals), switching cost, cost advantage 3. A moat is more important than management 4. Valuations increase with moats since they allows for reinvesting at high rates of returns

[thecapone]

Wow. This is seriously good stuff.. I would take a class by him. Only some 15 minutes in and he's got a lot of great material.

[TheTrueMggt]

Hey! ... Schindler is Swiss, not German!
Well now we've both learnt something from each other ;) Thanks for the talk and thanks for making it accessible to the public!

[hansinternett]

best investment talk i've seen/heard so far with many examples of great companies, very much appreciated, thanks a lot.

[stevefillion]

a moat is just new term for barrier of entry

[haipengli]

It is interesting that people wanna see his track record to believe his words. It helps if he shows, but the advice he provided in the video is of no less value if he doesn't. Use your own judgement.

[mony]

Building sustainable businesses by having a "moat" by Pat Dorsey

[RazorDeaTH]

you don't need the speaker investment track record.
this is a problem to 'numbers people' because they believe in statistics too much.
track record (statistic) won't necessarily be repeated by simply do the same thing.
if what the speaker said makes 'business sense', then you can adopt it. or not, if you have better idea or better other references.
if you can't judge whether it's makes sense or not, read or listen more from other references. then think about what's that actually will work.

[ArjabalasubramanyamChanti]

Congratulations 🎉 Google world 🌎 happy blessings shalom amen 🙏

[kencornia]

Very nice analysis of a moat, moreover how to recognize a moat per value investing in a niche business market to ensure business earnings sustainability for optimal future returns on investment capital.

[TheSolidsnake]

Pat Dorsey talked about finding great companies which is easier than it looks, and he has done this for decades and Tobias Calistle talks is telling you to do dumpster diving and is way harder than you know. Plus I can't understand what he said.

[npandaraboy]

After this video came out in 2015, Turmeric is selling a lot more and in many forms in the last several years. Its consumption is growing.
Microsoft after 2015, found plenty of growth.
Identifying moats is great. Moats are quite temporary too.

[Afoto]

But the sony brand reduces searching cost, right?