This post covers the book review of “The Little Book That Builds Wealth” written by Pat Dorsey. Pat Dorsey is the Director of Equity Research at Morningstar. He has been instrumental in the development of Morningstar’s economic moat ratings. He is also the author of the renowned book, “The Five Rules of Successful Stock Investing”.
This book is all about uncovering economic moats in companies. According to the book, all moats can be divided into four categories and they are: intangible assets, switching costs, network effect and cost advantage. It explains each of this moat using real-life examples. If you find a company with solid returns on capital and with one of the four characteristics, you’ve likely found a company with a moat. This book makes discovering a company’s economic moat more like science than art.
Also contained in this book is a discussion on what are not economic moats. Great products, great size, great execution and great management do not create long-term competitive advantage unlike believed by many. I highly recommend this book to anyone who wants to learn more about uncovering economic moats easily.
Look at the video below by Pat Dorsey espousing the four categories of economic moats: