The Little Book that Builds Wealth - The Knockout Formula for Finding Great Investment by Pat Dorsey

“In this concise summary of The Little Book that Builds Wealth, you will discover my essential takeaways organized chronologically, designed to save time and serve as a convenient reference for future use. When relevant, I include a personal note to express my opinion or key take-away from the text, adding a personalized touch to the summary. To dive deeper into the complete book, I have provided an affiliate link to Amazon, where you can effortlessly purchase it for global delivery.” – Jeroen Snoeks.

How “The Little Book that Builds Wealth” Broadened My Perspective

Until reading this book, I habitually subtracted Goodwill and Intangibles from Book Value to determine whether a company is currently undervalued. However, going forward, I plan to give more consideration to the evaluation of a company’s intangibles. This shift in focus prompts a reconsideration of my stock selection criteria to ensure it aligns better with a more comprehensive understanding of a company’s intrinsic value. Perhaps, I too, need to focus more on long-term returns on capital…

Unexpectedly, one valuable insight I gained from reading this book is encapsulated in chapter 14, which delves into Pat Dorsey’s guidance on when to sell. I share the perspective that deciding when to sell a stock can be more challenging than the decision to buy, making his advice particularly beneficial.

In addition, I will follow up on Pat Dorsey’s advice to read quarterly shareholder letters of exceptional money managers.

In the following sections, I’ve detailed my key takeaways from each chapter in the same order they appear in the book. This structure should make it easier for you to cross-reference any particular chapter if you decide to delve deeper into the subject matter.

Front Flap

How can you accurately identify companies that are great today and likely to remain great for many years to come? The answer to this question lies in competitive advantages, or economic moats.

Personal note: I’m eager to discover if this book unveils the secrets to identifying companies with enduring economic moats and time-tested strategies for successful, long-term investments – I can’t wait to find out.

Books in the Little Book Big Profits series include:

The Little Book That Beats the Market by Joel Greenblatt
The Little Book of Value Investing by Christopher Browne
The Little Book of Common Sense Investing by John C. Bogle
The Little Book That makes You Rich by Louis Navellier
The Little Book That Build Wealth by Pat Dorsey, i.e., what this book summary is all about.

Personal note: I have added The Little Book That makes You Rich by Louis Navellier to my Upcoming Reading List.

Foreword

We believe investors should focus their long-term investments on companies with wide economic moats. These companies can earn excess returns for extended periods – above-average gains that should be recognized over time in share prices.

Morningstar identified the most common attributes of moats, such as high switching costs and economies of scale, and provided a full analysis of these attributes.

Two main factors determine Morningstar’s ratings:

a stock’s discount form their estimated fair value (based on the discounted cash flow model);
the size of a company’s moat (assigned as Wide, Narrow or None).

The larger the discount to fair value and the larger the moat, the higher the Morningstar stock rating.

Personal note: As I’m not a big fan of the Discounted Cash Flow (DCF) model, especially when calculated by someone other than myself, as it’s based on the assumptions of an individual, my focus for this book is mainly to understand Morningstar’s evaluation techniques of moats.

According to Joe Mansueto, the founder, chairman, and CEO of Morningstar, this book will teach us how to identify companies with moats and provide tools for determining how much a stock is worth, so we should keep reading.

Introduction – The Game Plan

The 4-step game plan you need to follow to simply buy wonderful companies at reasonable prices, and let those companies compound cash over a long period of time:

Identify businesses that can generate above-average profits for many years.
Wait until the shares of those businesses trade for less than their intrinsic value, and then buy.
Hold these shares until either the business deteriorates, the shares become overvalued, or you find a better investment. This holding period should be measured in years, not months.
Repeat as necessary.

Personal note: I recommend creating a personal watchlist for companies that meet the criteria of the first point, so you know which companies to analyze during the next financial crisis.

In general, returns on capital are what Morningstar calls “mean-reverting”. In other words, companies with high returns see them dwindle as competition moves in, and companies with low returns see them improve as either they move into new lines of business or their competitors leave the playing field.

Ask yourself a deceptively simple question about the companies in which you plan to invest: “What prevents a smart, well-financed competitor from moving in on this company’s turf?” If you can conclude that the company’s high returns on capital are protected by (wide) economic moats, you only need to ensure that you buy those shares at reasonable prices.

Chapter One – Economic Moats – What’s an Economic Moat, and How Will It Help You Pick Great Stocks?

For most people, it’s common sense to pay more for something that is more durable. Items that will last longer are typically able to command higher prices, because the higher up-front cost will be offset by a few more years of use.

High returns on capital will always be competed away eventually, and for most companies – and their investors – the regression is fast and painful. Moats give us a framework for separating the here-today-and-gone-tomorrow stocks from the companies with real sticking power.

Companies with moats are more likely to reliably increase their intrinsic value over time, so if you wind up buying their shares at a valuation that (in hindsight) is somewhat high, the growth in intrinsic value will protect your investment returns.

If you analyze a company’s moat prior to it becoming cheap – that is, before the headlines change from glowing to groaning – you’ll have more insight into whether the firm’s troubles are temporary or terminal.

If you can see moats where others don’t, you’ll pay bargain prices for the great companies of tomorrow. If you can recognize non-moat businesses that are being priced in the market as if they are durable competitive advantages, you’ll avoid stocks with the potential to damage your portfolio.

The Bottom Line

Buying a share of a stock means that you own a tiny – okay really tiny – piece of the business.
The value of a business is equal to all the cash it will generate in the future.
A business that can profitable generate cash for a long time is worth more today than a business that may be profitable only for a short time.
Return on capital is the best way to judge a company’s profitability. It measures how good a company is at taking investors’ money and generating a return on it.
Economic moats can protect companies from competition, helping them earn more money for a long time, and therefore making them more valuable to an investor.

Chapter Two – Mistaken Moats – Don’t Be Fooled by These Illusory Competitive Advantages

The single most important thing to remember about moats is that they are structural characteristics of a business that are likely to persist for a number of years, and that would be very hard for a competitor to replicate.

Moats depend less on managerial brilliance than they do on what cards the company holds in the first place.

Some businesses are structurally just better positioned than others.

In Pat Dorsey’s experience, the most common “mistaken moats” are great products, strong market share, great execution, and great management.

Unless a company has an economic moat protecting it’s business, competition will soon arrive on its doorstep and eat away at its profits.

The question to ask is not whether a firm has a high market share, but rather how the firm achieved that share, which will give you insight into how defensible that dominant position will be.

Here’s The List to Look For Regarding Reliable Signs of Economic Moats

A company can have intangible assets, like brands, patents, or regulatory license’s that allow it to sell products or services that can’t be matched by competitors.
The products or services a company sells may be hard for customers to give up, which creates customer switching costs that give the firm pricing power.
Some lucky companies benefit from network economics, which is a very powerful type of economic moat that can lock out competitors for a long time.
Finally, some companies have cost advantages, stemming from process, location, scale, or access to a unique asset, which allow them to offer goods or services at a lower cost than competitors.

The Bottom Line

Moats are structural characteristics inherent to a business, and the cold hard truth is that some businesses are just simply better than others.
Great products, great size, great execution, and great management do not create long-term competitive advantages. They’re nice to have, but they’re not enough.
The four sources of structural competitive advantage are intangible assets, customer switching costs, the network effect, and cost advantages. If you can find a company with solid returns on capital and one of these characteristics, you’ve likely found a company with a moat.

Chapter Three – Intangible Assets – You Can’t Pull Them Off A Shelf, But They Sure Are Valuable

As economic moats, brand, patents and regulatory licenses, all establish a mini-monopoly, allowing a company to extract a lot of extra value from its customers.

A brand creates an economic moat only if it increases the consumer’s willingness to pay or increases customer captivity. After all, brands cost money to build and sustain, and if that investment doesn’t generate a return via some pricing power or repeat business, then it’s not creating a competitive advantage.

Patents are also not irrevocable – they can be challenged, and the more profitable the patent is, the more lawyers will be trying to come up with ways to attack it. Look out for companies who have a demonstrated track record of innovation that you’re confident can continue, as well as a wide variety of patented products.

A regulatory license is most potent when a company needs regulatory approval to operate in a market but is not subject to economic oversight with regard to how it prices its products.

The key in assessing intangible assets is thinking about how much value they can create for a company, and how long they are likely to last.

The Bottom Line

Popular brands aren’t always profitable brands. If a brand doesn’t entice customers to pay more, it may not create a competitive advantage.
Patents are wonderful to have, but patent lawyers are not poor. Legal challenges are the biggest risk to a patent moat.
Regulations can limit operations – isn’t it great when the government does something nice for you? The best kind of regulatory moat is one created by a number of small-scale rules, rather than one big rule that could be changed.

Chapter Four – Switching Costs – Sticky Customers Aren’t Messy, They’re Golden

Moving your bank account is a royal pain, so they take advantage of their customers’ reluctance to leave by giving them a bit less interest and charge them somewhat higher fees than they would if moving a bank account were as easy as driving from one filling station to another.

You find switching costs when the benefit of changing from Company A’s products to Company B’s products is smaller than the cost of doing so.

Like any competitive advantage, switching costs can strengthen or weaken over time.

In general, consumer-oriented firms often suffer from low switching costs, making it difficult to create moats.

Switching costs can be tough to identify because you often need to have a thorough understanding of a customer’s experience – which can be hard if you’re not the customer.

The Bottom Line

Companies that make it tough for customers to use a competitors’ product or service create switching costs. If customers are less likely to switch, a company can charge more, which helps maintain high returns on capital.
Switching costs come in many flavors – tight integration with a customer’s business, monetary costs, and retraining costs, to name just a few.
Your bank makes a lot of money from switching costs.

Chapter Five – The Network Effect – So Powerful, It Gets a Chapter to Itself

Although it is arguably a type of switching costs, the network effect is such a unique and potentially powerful economic moat that it deserves a chapter all its own.

Businesses that benefit from the network effect see the value of their product or service increase with the number of users.

If the value of a good or service increases with the number of people using it, then the most valuable network-based products will be the ones that attract the most users, creating a virtuous circle that squeezes out smaller networks and increases the size of the dominant networks. Therefor, network-based businesses tend to create natural monopolies and oligopolies.

You’re most likely to find the network effect in businesses based in sharing information (Microsoft), or connecting users together (AMEX), rather than in businesses that deal in rival (physical) goods.

For a company to benefit from the network effect, it needs to operate a closed network, and when formerly closed networks open up, the network effect can dissipate in a hurry.

The Bottom Line

A company benefits from the network effect when the value of its product or service increases with the number of users. Credit cards, online auctions, and some financial services are good examples.
The network effect is an extremely powerful type of competitive advantage, and it is most often found in businesses based on sharing information or connecting users together. You don’t see it much in businesses that deal in physical goods.

Chapter Six – Cost Advantages – Get Smart, Get Close, or Be Unique

Companies can also dig moats around their business by having sustainable lower costs than the competition. As an investor, you need to be able to determine whether a company’s cost advantage is replicable by a competitor to determine if the cost advantage is durable.

In a globalized economy, using the lowest-cost inputs available is the only way to stay in business for companies operating in price-sensitive industries, as cost advantages matter most in industries where price is a large portion of the customer’s purchase criteria. To pick out industries in which cost advantages are likely to be a big factor is to imagine whether there are easily available substitutes.

Cost advantages can stem from four sources:

Cheaper processes;
Better locations;
Unique assets;
Greater scale (see Chapter Seven).

1. Cheaper Processes

If a company figures out a way to deliver a product or service at a lower cost, the logical step for its competitors would be to quickly copy that process so they can match the leader’s cost structure. However, this can take a lot longer than one might expect. Nevertheless, process-based moats are worth watching closely, because the cost advantage often slips away as competitors either copy the low-cost process or invent one of their own.

2. Better Location

This type of cost advantage is more durable than one based on process because locations are much harder to duplicate. This advantage occurs most frequently in commodity products that are heavy and cheap – the ratio of value to weight is low – and that are consumed close to where they’re produced. Companies with location advantages often create mini-monopolies.

3. Unique Asset

This type of cost advantage is also generally limited to commodity producers, owning a resource deposit with lower extraction costs than any other comparable resource producer. World-class natural resource deposits are by definition pretty hard to replicate.

The Bottom Line

Cost advantages matter most in industries where price is a big part of the customer’s purchase decision. Thinking about whether a product or service has an easily available substitute will steer you to industries in which cost advantages can create moats.
Cheaper processes, better locations, and unique resources can all create cost advantages – but keep a close eye on process-based advantages. What one company can invent, another can copy.

Chapter Seven – The Size Advantage – Bigger Can Be Better, If You Know What You’re Doing

When is bigger really better?

The absolute size of a company matters much less than its size relative to rivals.

Very broadly speaking, the higher the level of fixed costs relative to variable costs, the more consolidated an industry tends to be, because the benefits of size are greater. It’s no surprise that there are only few national package delivery companies or automobile manufacturers – but there are thousands of small real-estate agencies and accounting agencies.

We can break down scale-based cost advantages into three categories:

Distribution;
Manufacturing;
Niche markets.

1. Distribution

Once the fixed costs are covered, delivering an extra item is extremely profitable because the variable cost of making an extra delivery is almost nothing. Large distribution networks are extremely hard to replicate, and are often the source of very wide economic moats (UPS, Coca-Cola).

2. Manufacturing

The classic example of these cost advantages is a factory with an assembly line. The closer the factory is to 100 percent capacity, the more profitable it is, and the larger the factory, the easier it is to spread costs like rent and utilities over a larger volume of production. Also, the larger the factory, the easier it is to specialize by individual tasks or to mechanize production.

3. Niche Markets

Companies can build near-monopolies in markets that are only large enough to support one company profitably, because it makes no economic sense for a new entrant to spend the capital necessary to enter the market.

The Bottom Line

Being a big fish in a small pond is much better than being a bigger fish in a bigger pond. Focus on the fish-to-pond ratio, not the absolute size of the fish.
Delivering fish more cheaply than anyone else can be pretty profitable. So can delivering other stuff.
Scale economies have nothing to do with the skin on a fish, but they can create durable competitive advantages.

Chapter Eight – Eroding Moats – I’ve Lost My Advantage and I Can’t Get Up

It is critical to continually monitor the competitive position of the companies in which you have invested, and watch for signs that their moats may be eroding. If you can get an early read on a weakening competitive advantage, you can greatly improve your odds of preserving your gains in a successful investment – or cutting your losses on an unsuccessful one.

“Prediction is very difficult, especially if it’s about the future.” – Niels Bohr

The Bottom Line

Technological change can destroy competitive advantages, but this is a bigger worry for companies that are enabled by technology than it is for companies that sell technologies, because the effects can be more unexpected.
If a company’s customer base becomes more concentrated, or if a competitor has goals other than making money, the moat may be in danger.
Growth is not always good. It’s better for a company to make lots of money doing what it is good at, and give the excess back to shareholders, than it is to throw the excess profits at a questionable line of business with no moat. Microsoft could get away with it, but most companies can’t.

Chapter Nine – Finding Moats – It’s a Jungle Out There

Some industries are brutally competitive and have awful economics, and creating a competitive advantage requires the managerial equivalent of a Nobel prize. As an investor, you can choose in which industry to invest …

Moats increase the value of companies by helping them stay profitable for a longer period of time. To measure a company’s profitability, Morningstar looks at how much profit a company is generating relative to the amount of money invested in the business.

Three most common ways to measure return on capital:

Return on assets (ROA) measures how much income a company generates per dollar of assets;
Return on equity (ROE) measures profits per dollar of shareholders’ capital;
Return on invested capital (ROIC) measures the return on all capital invested in the firm, regardless of whether it is equity or debt.

The Bottom Line

It’s easier to create a competitive advantage in some industries than it is in others. Life is not fair.
Moats are absolute, not relative. The fourth-best company in a structurally attractive industry may very well have a wider moat than the best company in a brutally competitive industry.

Chapter Ten – The Big Boss – Management Matters Less Than You Think

Long-term competitive advantages are rooted in the structural business characteristics that Pat Dorsey laid out in Chapters 3 to 7, and managers have only a limited amount of ability to affect them. This is not because most managers are incompetent, but rather because some industries are less competitive than others; the cold, had truth is that some CEOs just have an easier job maintaining high returns on capital.

It’s very rare for managerial decisions to have a bigger impact on a company’s long-run competitive advantages than the company’s structural characteristics.

“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.” – Warren Buffet

Think about it this way: Which is easier to change, the industry a company is in or its managers?

The Bottom Line

Bet on the horse, not the jockey. Management matters, but far less than moats.
Investing is all about odds, and a wide-moat company managed by an average CEO will give you better odds of long-run success than a no-moat company managed by a superstar.

Chapter Eleven – Where the Rubber Meets the Road – Five Examples of Competitive Analysis

In this chapter, Pat Dorsey looks at the economic moats of the following five companies: Deere & Company, Martha Stewart, Arch Coal, Fastenal Company and Pier 1 Imports vs. Hot Topic.

Exhibit 11.1 shows the three step process Pat Dorsey is using to determine whether a company has an economic moat.

Thinking carefully about the strength of the company’s competitive advantage, and how it will (or won’t) be able to keep the competition at bay, is a critical next step.

How will you know when the wonderful businesses are trading at attractive prices is the subject of the next two chapters.

The Bottom Line

To see if a company has an economic moat, first check its historical track record of generating returns on capital. Strong returns indicate that the company may have a moat, while poor returns point to a lack of competitive advantage – unless the company’s business has changed substantially.
If historical returns on capital are strong, ask yourself how the company will maintain them. Apply the tools of competitive analysis from Chapters 3 to 7, and try to identify a moat. If you can’t identify a specific reason why returns on capital will stay strong, the company likely does not have a moat.
If you can identify a moat, think about how strong it is and how long it will last. Some moats last for decades, while others are less durable.

Chapter Twelve – What’s a Moat Worth – Even the Best Company Will Hurt Your Portfolio If You Pay Too Much for It

All you need to know is that the current price is lower than the most likely value of the business.

A stock is worth the present value of all the cash it will generate in the future.

The most important concepts that underpin the valuation of any company:

The likelihood that the estimated future cash flows will actually materialize (risk);
How large the estimated future cash flows will be (growth);
How much investment will be needed to keep the business ticking along (return on capital);
How long the business can generate excess profits (economic moat).

There are three types of tools for valuing companies: price multiples, yields and intrinsic values. For information about price multiples and yields, see next chapter. Pat Dorsey believes intrinsic values are too complicated for this book as they are based on the discounted cashflow model.

Personal note: I never use the discounted cashflow method myself as there are just too many unknown variables in this valuation method. Although many stock analyst will claim it’s an educated guess, to me, it’s more like gambling. Therefor, I also don’t agree with the statement that a company’s value is equal to all the cash it will generate in the future. To me, it comes down to taking an educated guess that the current price is lower than the most likely value of the business. This book certainly helps to improve making this educated guess.

The Bottom Line

A company’s value is equal to all the cash it will generate in the future. That’s it.
The four most important factors that affect the valuation of any company are how much cash it will generate (growth), the certainty attached to those estimated cash flows (risk), the amount of investment needed to run the business (return on capital), and the amount of time the company can keep the competitors at bay (economic moat).
Buying stocks with low valuations helps insulate you from the market’s whims, because it ties your future investment returns more tightly to the financial performance of the company.

Chapter Thirteen – Tools for Valuation – How to Find Stocks on Sale

Pat Dorsey’s price multiple valuation types:

The price-to-sales (P/S) ratio is particularly useful for analyzing cyclical companies or companies that are having some kind of trouble that sends earnings temporarily into the red. The P/S ratio is most useful for companies that have room for a lot of improvement in margins.
The price-to-book (P/B) ratio is extremely useful for analyzing financial services companies. However, an abnormally low P/B value can indicate the company made some bad loans that will need to be written off.
The price-to-earnings (P/E) ratio is useful because earnings are a decent proxy for value-creating cash flow. However, always look at how earnings are calculated, as they can vary from one company to another, even in the same industry. You should better come up with your own estimate of future earnings by looking at the past reported financial statements as your basis for a P/E.
The price-to-cashflow (P/CF) ratio, Pat Dorsey’s favorite ratio, is useful because cash flow tends to be a bit steadier than earnings.

Yield based valuation metrics are great because we can compare them directly to an objective benchmark – bond yields.

If we turn the P/E on its head and divide earnings per share by a stock’s price, we get an earnings yield. For example, a stock with a P/E of 20 (20/1), would have an earnings yield of 5 percent (1/20), and a stock with a P/E of 15 (15/1) would have an earnings yield of 6.7 percent (1/15). With 10-year Treasury bonds trading for about 4.5 percent in mid-2007, those both look like reasonable attractive rates of return relative to bonds.

Cash return tells us how much free cash flow a company is generating relative to the cost of buying the whole company, including its debt burden.

Formula for Calculating Cash Return

Free Cash Flow ((cash flow from operations minus capital expenditures) + (interest expense minus interest income))
Enterprise Value (company’s market capitalization + long-term debt – cash)

The Following Five Tips Will Give You Better Odds of Success Than Most Investors

Always remember the four drivers of valuation: risk, return on capital, competitive advantage and growth. All else being equal, you should pay less for riskier stocks, more for companies with high returns on capital, more for companies with strong competitive advantages, and more for companies with higher growth prospects. Bear in mind that these drivers compound each other.
Use multiple tools. If one ratio or metric indicates that the company is cheap, apply another as well.
Be patient. Wonderful businesses do not trade at great prices very often. Have a watch list of wonderful businesses that you would love to own at the right price, wait for that price, and then pounce. Not making money beats losing money any day of the week.
Be tough. You’ll have to buy when everybody else is selling.
Be yourself. You will make better investment decisions based on your own hard-won knowledge about a company than you will decisions based on any pundit’s tips.

The Bottom Line

The price-to-sales ratio is most useful for companies that are temporarily unprofitable or are posting lower profit margins than they could. If a company with the potential for better margins has a very low price-to-sales ratio, you might have a cheap stock in your sights.
The price-to-book ratio is most useful for financial services firms, because the book value of these companies more closely reflects the actual tangible value of their business. Be wary of extremely low price-to-book ratios, because they can indicate that the book value may be questionable.
Always be aware of which “E” is being used for a P/E ratio, because forecasts don’t always come true. The best “E” to use is your own: Look at how the company has performed in good times and bad, think about whether the future will be a lot better or worse than the past, and come up with your own estimate of how much the company could earn in an average year.
Ratios of price to cash flow can help you spot companies that spit out lots of cash relative to earnings. It is best for companies that get cash up front, but it can overstate profitability for companies with lots of hard assets that depreciate and will need to be replaced someday.
Yield-based valuations are useful because you can compare the results directly with alternative investments, like bonds.

Chapter Fourteen – When to Sell – Smart Selling Means Better Returns

Ask yourself these questions the next time you think about selling, and if you can’t answer yes to one or more, don’t sell.

Did I make a mistake?
Has the company changed for the worse?
Is there a better place for my money?
Has the stock become too large a portion of my portfolio?

The most painful reason to sell is that you were simply wrong when you first analyzed the company. No matter what the mistake was, cut your losses and move on.

Reasons To Sell

Each time you buy a stock, write down why you bought it and roughly what you expect to happen with the company’s financial results. Then, if the company takes a turn for the worse, pull out your piece of paper and see whether your reasons for buying the stock still make sense. If they do, hold on or buy more. But if they don’t, selling is your best option – regardless of whether you’ve made or lost money on the shares.
If a company’s fundamentals deteriorate substantially and don’t look like they’re going to rebound soon, sell your position. “When the facts change, I change my mind.” – John Maynard Keynes
Selling a modestly undervalued stock to fund the purchase of a ridiculously mouth-watering opportunity is perfectly logical – and a darn good idea.
If a stock has far surpassed what you think it is worth and your expected return from now on is actually negative, then selling it makes sense even if you don’t have any other good investment ideas at the time.

The Bottom Line

If you have made a mistake analyzing the company, and your original reason for buying is no longer valid, selling is likely to be your best option.
It would be great if solid companies never changed, but that’s rarely the case. If the fundamentals of a company change permanently – not temporarily – for the worse, you may want to sell.
The best investors are always looking for the best places for their money. Selling a modestly undervalued stock to fund the purchase of a supercheap stock is a smart strategy. So is selling an overvalued stock and parking the proceeds in cash if there aren’t any attractively priced stocks at the time.
Selling a stock when it becomes a huge part of your portfolio can make sense, depending on your risk tolerance.

Conclusion – More than Numbers

Companies can create competitive advantages in a wide variety of ways, and seeing what separates the great from the merely good is an endlessly fascinating intellectual exercise.

Companies with strong competitive advantages can regularly post returns on capital of 20+ percent, which is a rate of return that very few money managers can achieve over long periods of time.

To be a truly good investor, you need to read widely. The more companies you are familiar with, the easier it will be to make comparisons, find patterns, and see themes that strengthen or weaken competitive advantages.

Quarterly shareholder letters written by solid money managers about their portfolios are some of the most underused investment resources on the planet.

Personal note: I have never specifically focused on the quarterly letters, but I believe this is a valuable tip. I also believe the holdings in the GURU and ALFA ETFs will be a good place to start finding exceptional money managers.

Pat Dorsey recommends the following books about how people make investment decisions:

Why Smart People Make Big Money Mistakes – and How to Correct Them by Gary Belsky and Thomas Gilovich
The Halo Effect by Phil Rosenzweig
Your Money and Your Brain by Jason Zweig

Personal note: I’ve just ordered Why Smart People Make Big Money Mistakes – and How to Correct Them and Your Money and Your Brain, so they are added to my Upcoming Reading List.

Reading the original book instead of a summary offers a comprehensive understanding, emotional connection, appreciation of the author’s writing style, direct support for the author, and the chance to discover hidden gems. Enhance your reading experience by purchasing the book through my affiliate link: Get the Book on Amazon.

Follow me on X, the platform I exclusively use to announce new content and updates for My Portfolio.