The document discusses identifying economic moats in companies as a strategy for long-term investing. It defines an economic moat as a competitive advantage that allows a company to generate above-average returns. The four main types of moats are intangible assets, network effects, cost advantages, and efficient scale. The document provides examples of companies that have strong moats and cautions that moats can erode over time. It recommends evaluating long-term return on capital and pricing metrics like P/E and P/S ratios to identify attractively priced companies with durable moats.

1. The Little Book That Builds
Wealth
By Pat Dorsey

2. The Game Plan 1.Identify Business
(Generates above average
profit for many years)
2.Business less than Intrinsic
Value
(Then BUY)
3. HOLD (In years) Shares till
the Business Deteriorates or
Share become Overvalued
or Find better Investments
4.Repeat

3. Economic Moats
What’s an Economic Moat, & How will it help you pick a great
Stock?
1.Buying a Share of Stock
2.Value of Business
3.Business profitably generate cash
4.Return on Capital best way to judge
profitability
5.Protection from Competition

4. Mistaken Moats
“Don’t be fooled by these Illusory competitive Advantages”
Common Canard “Bet on the Jokey, Not on the Horses”
1.Moats are structured characteristics inherent to a business
2.Great products, great size, great execution & management do not create
long-term competitive advantage
3.Four Structure of competitive advantage are
• Intangible Assets
• Hard to give up by customers, gives firm pricing power
• Network Economics
4.Cost Advantages – Stemming from process location and scale or access to
unique asset.

5. Intangible Assets
• Intangible assets are those that don’t have physical
form but do produce value.
• For example, a brand strong enough that people will
pay a premium price for it. Tiffany’s, Sony
• The company is consistently able to charge premium
prices and customers are willing to pay it
• Patents and regulations are also good moats, but the
most valuable ones are those that are composed of lots
of small patents and regulations, not a few big ones

6. Switching Costs
• There is a large intangible switching cost
for abandoning products and services, and
I dislike to pay that cost
• Can charge a high Price
• Businesses have moats along these lines –
banks, software vendors, and so on.

7. The Network Effect
• Any company that has an already-running
distribution network for their product, like
Anheuser-Busch, has this type of moat
• Pre-existing distribution network can be a huge
moat
• It is this reason why it is almost impossible for
another large-scale beverage company to
independently become as large as Coca-Cola or
Pepsi – they can’t afford the costs of
distribution. A similar logic occurs with
internet companies – they use the internet as
their network and reduce brick and mortar costs
that way.

8. Cost Advantages
• Cost advantages come in the form of better
locations, better access to resources, and better
processes
• These allow a company to cut costs in ways that
their competitors cannot

9. The Size Advantage
• Larger companies simply have a natural advantage over
smaller ones.
• They can execute their plans on scales much larger than
the smaller companies and because of their size find
efficiencies and discounts unavailable to smaller groups
• They can use their size as leverage, promising plenty of
business to suppliers in exchange for exclusivity
• They can also find efficiencies in processes that smaller
companies can’t, like having a person devoted to one
tiny nuance of the production while other companies
must multitask their workers.
• Thus, large companies often have an inherent moat,
albeit one that can be superceded by other companies
over time

10. Eroding Moats
• Moats can erode over time
• One of the biggest factors in moat erosion is
technological change.
• When a new technology arrives on the scene,
particularly one that has the potential to change
that market significantly, there’s usually a big
opportunity for a competitor to severely erode
the moat of another company.
• Similarly, when a company with a moat begins
to make bad decisions, they cause their own
moat to erode

11. Finding Moats
• There is no true sure-fire way to find a moat.
• You have to investigate the business, see how they
operate, and then see if they have anything that
might be construed as a true moat.
• Some industries have many companies with moats;
others have basically none.
• Your only true recipe for success is learning how a
company really operates, and that takes some
research.

12. The Big Boss
• Many investment strategies put a lot of
importance on the leadership of a company.
However, Dorsey makes it quite clear that moats
and leadership have little to do with each other.
• A great leader is not a moat, and a truly great
leader cannot usually create a moat, either. On
the other hand, even a merely average CEO will
not erode an existing moat.
• Thus, if you’re looking at competitive advantage
as a reason to invest, don’t spend much time
worrying about the CEO – worry about the
business itself.

13. Where the Rubber Meets the Road
• There is one strong way of finding companies that
might potentially have a moat, although it’s not a
sure indicator: long-term return on capital.
• Dig into online research tools like Yahoo! Finance
and take a look at a company’s return on capital,
especially compared to competitors.
• Is it substantially higher than the competitors? If
so, that company may in fact have a moat, and it’s
worth your time to start digging into information
about the company to see if you can identify their
moat.

14. What’s a Moat Worth?
• This chapter is basically an argument for value
investing.
• In other words, a company with a great moat can
still be overvalued.
• Rather than offering an exact recipe for the value
of a moat, Dorsey instead suggests looking for
companies that are reasonable values to begin with
(using factors like a low P/E ratio) and then
identifying from among those which ones have
moats.

15. Tools for Valuation
• Dorsey recommends looking at the price-to-
sales ratio as well as the price-to-book ratio.
• The P/S is particularly useful for companies that
are temporarily unprofitable, while P/B is great
for companies that offer services, particularly
financial service firms.
• P/E (price-to-earnings) is a good general
indicator, but make sure that you study this one
over the long term in order to minimize the
fluctuations in the economy.

16. When to Sell ?
• Moat-based investing isn’t for people who don’t want to
put in the time to do some homework
• Basically, if you buy a company’s stock, you should have
a specific reason for doing so
• When that reason changes or goes away, that’s the time to
sell
• Better yet, that specific reason should have nothing
whatsoever to do with what other people are doing in
terms of buying and selling – if your reason for investing
still exists, you shouldn’t sell it just because the herd is
panicking because of a down market.