The Little Book That Builds Wealth

Dorsey ran equity research at Morningstar and built the framework the firm uses to rate economic moats. The book explains what a durable competitive advantage is, what it is not, and how to identify one from public information.

He identifies four genuine sources. Intangible assets include brands that permit a price premium, patents with remaining life and defensible claims, and regulatory licences that restrict entry. Switching costs make it expensive or disruptive for a customer to move to a competitor, which he treats as the most underrated source. The network effect makes a service more valuable as more people use it, which he identifies as the most powerful and the rarest. Cost advantages come from process, location, scale or unique assets, and he distinguishes those that persist from those competitors can replicate.

His list of false moats is equally useful. Great products, high market share, operational efficiency and good management are all things he argues can be copied or lost, and none of them constitutes a moat despite being what most investors point to. His practical test is return on invested capital sustained above the cost of capital over long periods, which is the observable consequence of a moat, combined with an identification of which of the four sources produces it.

The book is short and written for non-professionals. The examples are from before 2008 and several companies described as having moats have since lost them. The four categories and the false moat list are the framework Morningstar still uses and remain the most compact statement of the subject.

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