The Little Book That Builds Wealth

The Little Book That Builds Wealth - by Pat Dorsey #

Date Read: 2019-10-28 #

Notes #

4 Kinds of Moats

  • intangible assets
  • customer switching costs
  • network effect
  • cost advantages

Mistaken moats

  • great products
  • strong market share
  • great execution
  • great management

Be aware of short term hype in these cases.

Businesses can’t change the circumstances they are in. Bet on the horse, not on the jockey.

Intangible Assets - brands, patents, regulatory licenses

Brand - only if it increases customer’s willingness to pay. Nothing to do with being well known. e.g. Tiffany vs Sony

Can help consumers to narrow search, but may not be profitable, e.g. Mercedes.

Brand luster can be lost.

Patents - need a lot and need track record of creating patents, else patents have finite life and are always challenged and need defending. e.g. 3M

Regulatory Licenses - license needed but no limit on the price that can be charged. e.g. Pharma vs Utilities. e.g. Moodys. e.g. slot machine company WMS. e.g. Strayer Education, Apollo Group. Not-In-My-Backyard. e.g. Waste Materials, Vulcan Materials

Switching costs

  • Banks
  • Intuit
  • Oracle
  • Fiserv
  • State Street Corporation
  • Precision Castparts
  • Adobe
  • Waters Corporation

Network Effect - the more people use, the more valuable it is. Businesses based on information or knowledge transfer than physical capital. e.g. Amex, Microsoft, Futures Exchanges (the Merc and NYMEX where contracts are locked in to the exchange), eBay (where there are buyers and sellers and reputation), Western Union (where they most likely will be able to serve you on both ends), When formerly closed networks open up, the advantage can quickly disappear.


Process based advantages can be easily copied, be aware. Competitors could be unwilling to compete because of cannibalizing their existing business lines.

Location - monopoly in heavy and cheap commodity. Access to a deposit with low extraction costs.

Scale - industries with high fixed costs. Large distribution network, manufacturing in some cases, big fish in small pond

Large Distribution Networks

UPS, Stericycle, Sysco, Fastenal, Coke, Pepsi, Diageo, Graco, Blackboard

Eroding moats

  • Firms that are enabled by tech.
  • Consolidation of once-fragmented group of customers.
  • Actions of irrational competitor.
  • Pursuing growth in no-moat business.

Use ROE, ROA, ROIC as yardstick.


  • likelihood estimated future cash flows materialize (risk)
  • how large those cash flows will be (growth)
  • how much investment to keep business going (return on capital)
  • how long the business can generate excess profits (moat)

PE, PS, Yield, DCF.

Write down why you bought the stock