The Five Rules for Successful Stock Investing

Dorsey, then head of equity research at Morningstar, wrote a practical guide to analysing companies for individual investors. The five rules are: do your homework, find companies with economic moats, have a margin of safety, hold for the long term, and know when to sell.

The substantive content is the moat framework, which Morningstar built into its ratings and which Dorsey developed further in a later book. He identifies the sources of durable competitive advantage as intangible assets including brands, patents and regulatory licences; switching costs; the network effect; and cost advantages from process, location, scale or unique assets. He is explicit that good products, market share, operational efficiency and good management are not moats, because none of them prevents a competitor from doing the same thing.

The book also covers financial statement analysis for non-specialists, the specific ratios that indicate moat strength including return on invested capital and free cash flow conversion, valuation using several methods, and accounting warning signs.

The second half provides sector-by-sector analysis covering health care, consumer services, business services, banks, asset management, software, hardware, media, telecoms, consumer goods, industrials, energy and utilities, with the specific metrics and risks for each. That sector material is unusual in a book at this level and is genuinely useful.

The book is from 2004 and the sector chapters are dated, particularly on technology and media. The moat framework is the durable contribution and is stated more clearly here than in most sources.

Founder and Chief Investment Officer, Dorsey Asset Management; formerly Director of Equity Research and Director of Equity Strategy at Morningstar

He built Morningstar's economic-moat framework and wrote the two books that made moat analysis usable by ordinary investors.

Dorsey Asset Management, Morningstar