Saturday, May 12, 2012

The Little Book That Builds Wealth: Chapter 8

Morningstar's equity research director authored this book on identifying companies with competitive advantages. Dorsey separates competitive advantages into four categories, providing a framework for understanding how wide a moat a company really has. The book is full of examples of companies Dorsey believes have moats, and the reasons why their moats are likely to last - or not!

Moats don't last forever. NYSE specialists, Kodak, and newspaper companies all had moats at one time, but no longer do. This chapter is about how to get an early read on a weakening competitive advantage.

The author gives a number of examples of companies that lost their moat, describing why this occurred and therefore what early warning signs investors should look out for. This includes technological change, the concentration of a customer base (e.g. consumer product companies faced with consolidating and therefore large retailers), and growth into areas where a company does not have a competitive advantage.

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