Little Book of Wealth

In the beginning of the book, Pat Dorsey explains right off the bat what game plan you

need to follow and how to implement this strategy right away. Simply invest in wonderful

companies at a reasonable price, and let them generate cash over a long period of time. The

strategy involves: finding businesses that generate above average profits for many years, wait

until the shares of those businesses trade for less than their intrinsic value than buy, hold these

shares until business deteriorates or until a better investment comes along, finally repeat. It

is important to find businesses that crank out high profits over the long haul, these are the

companies that can generate high returns on its capital for many years and will compound wealth

at a very low price. Return on capital is the best way to judge a company's profitability, it

shows how they take others money and make a return on it.

When looking at companies who have been successful for a long time and have

withstood their competitors must have something that other companies don't, this is their

competitive advantage. Dorsey refers to companies' competitive advantage as economic moats,

just like moats in medieval castles were used to keep the opposition away, economic moats work

the same way. There is something these companies' posses that keep competitors from beating

them in the market. As an investor moats increase the value of companies, plus they do a

number of other things as well.

Moats decrease the chances of losing a ton on your investment as to companies that don't

who suffer sharp decreases when they are hit. Moats are more likely to reliably increase their

intrinsic value over time. Companies have greater resilience because firms can fall back on their

name on a structural competitive advantage. They are more likely to re cover from temporary

troubles. Moats are structural characteristics inherent to a business, and the truth is some

businesses are better than others.

Dorsey goes on to explain how there are a lot of common illusions that people mistake for

positive moats but really are booby traps. Managers and CEOS can be illusions that some

investors believe will boost companies, yes in the short run they may but not over many years

which is key to building wealth. Great products, great size, great business plan execution, and

great management do not create long-term competitive advantages. There are nice to have in the

short run, but they are not enough. The four sources of structural competitive advantages are:

intangible assets, switching costs, network economics, and cost advantages.

Investing in companies with Intangible assets consists of brands, patents, and regulatory licenses

that act as moats by establishing a unique position in the marketplace for companies. Brands

can create durable competitive advantages but the popularity of the brand matters less than

whether it affects consumer's behavior. If consumers will pay more for a product due to

its brand regularly, this is a strong moat. Patents create legal protection to businesses from

competitors trying to sell the businesses product, although there are bumps to watch. Patents

have a finite life; once a patent expires the competition is quick to jump on the patent. Patents

are not irrevocable and can be challenged and lawyers will fight for a more profitable patent.

Companies to look at with patents constitute a truly sustainable competitive advantage when

the firm has demonstrated a track record of innovation as well as a wide variety of patented

Lastly with intangible assets is the area of regulatory licenses and regulations, these make

it tough to impossible for competitors to enter a market. The advantage is most potent when a

company needs regulatory approval to operate in a market but is not subject to economic

oversight with how they price their products. Firms that are ran like monopolies without being

regulated like one, these are economic moats. Investing with companies who have to go through

many mini-approvals are safer investments, landfills and quarries for example, they go through

tons of mini regulations. Firms with one large regulation can have overnight downfalls.

Switch costs are another competitive advantage. This is when companies make it tough

for their customers to use a competitor's product or service, one way, shape, or form there is a

cost associated. If customers are less likely to switch, a company can charge more, which helps

maintain high returns on capital. Dorsey uses a great example in the book with how many

people switch banks, think about