Saturday, May 19, 2012

The Little Book That Builds Wealth: Chapter 10

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!

It's important to distinguish between companies that derive strong returns because of their managements and those that do so because of they have economics moats. When it comes to companies with economic moats, managements don't matter as much as you may think. Competitive advantages are rooted in structural characteristics that can't be altered much in the near-term.

The author quotes Buffett: "When management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Dorsey's advice is clear: bet on the horse, not the jockey. A wide-moat company managed by a mediocre manager will generate better returns on average than a no-moat company managed by a superstar.

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