Invest Like The Best
Episode 51 Buying Companies With Economic Moats
Invest Like The Best

Episode 51: Buying Companies With Economic Moats

Buying Companies With Economic Moats

Pat was the longtime director of equity research at Morningstar and is the founder of Dorsey Asset Management. We cover all aspects of economic moats, the power of brands, and how Pat identifies the best investment opportunities.

This episode is brought to you by:

CFA Institute. CFA Institute the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world.

[00:02:23] – Transition from the sell-side to the buy-side and the biggest surprise

[00:03:40] – What is a moat?

[00:05:16] – What part of the stock market universe has a moat

[00:06:57] – Pat’s framework for identifying a moat, starting with intangibles

[00:08:32] – The power of brands

[00:09:44] – What chance does an upstart have to come in and usurp a well-established brand

[00:12:24] – Switching costs as part of the framework for identifying a moat

[00:14:55] – The third component of identifying a moat, network effects, and what businesses should do to effectively build one

[00:17:29] – Last component, cost advantages/economies of scale

[00:19:29] – How do you analyze these four components in an investing framework that can be built into an actual strategy

[00:21:13] – How does Pat think about this from a mispricing standpoint 

[00:23:37] – How does Pat incorporate the current price of a company in consideration for future returns when pricing a moat

[00:25:39] – How should a company with a moat operate to protect that characteristic, especially when it comes to their capital allocation

[00:26:51] – Which characteristic of a moat does Pat find most intriguing

[00:30:35] – What makes for good and smart capital allocation

[00:35:58] – What is Pat’s process for identifying the best investment opportunities

[00:38:38] – What are good economics when looking at a company

[00:41:03] – If Pat could take any business, but have to swap leadership, what would he choose

[00:44:13] – Back to his process of finding investment opportunities 

[00:46:05] – Kindest thing anyone has ever done for Pat

Buying Companies With Economic Moats

Introduction

Patrick
My guest this week is Pat Dorsey who is the longtime director of research at Morningstar where he specialized in what we call economic moats, sources of sustained competitive advantage that allow a few companies to deliver huge returns over time. Several years ago he left Morningstar to form his own asset management firm, Dorsey Asset Management, and build a portfolio of companies with wide moats like those he studied at Morningstar.

And while moats are critical, equally important is how companies allocate the capital generated, or made possible, by the existence of the moat.

In the vast majority of the conversations you hear I'm meeting the guest for the first time. I mention this to encourage you to connect me with anyone whose story or way of looking at the world might resonate. Always feel free to contact me with ideas.

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