The Little Book That Builds Wealth by Pat Dorsey

I often describe myself as perfectly “ambibrainstrous,” in that I switch back and forth between my right and left brain the way that ambidextrous people do between their right and left hands.  I have an MBA in management and an MFA in creative writing, so instead of switching forks like my manual skilled kin, I vary my reading material.

First, I apologize for the length of time between my last book review and this one.  I’ve been busy giving interviews, guest blogging, attending book signings and promoting my new novel – SUGAR TOWER – relentlessly.  I have a two week journey to Australia ahead of me so expect a catch-up on book reviews as well as my enormously popular travel bloglets, back by demand.  For those of you who missed the bloglets from Bali and Singapore, I am posting a few favorites retrieved from the archives as a taste of what’s to come.  Check back here frequently for observations from Down Under.

Back to Pat Dorsey’s The Little Book That Builds Wealth.  This “little” book is small in word count only because the ideas it espouses are large.  Pat Dorsey is the Director of Equity Research for Morningstar, Inc. – the leading firm in independent research.  Since they don’t manage money, I trust them a lot more than analysts whose firms do.  The book is wonderfully written and extremely clear.  What I like best about it is that it doesn’t tout formulas or sure-fire investment techniques but speaks to the heart of what all marketing experts know is the key to success: competitive advantage.

When I started reading about Morningstar’s philosophy of “moats,” which they credit Warren Buffet as having invented, I was a bit skeptical.  It seemed simplistic to analogize the corporation to a castle and its success protection to a “moat.”  But what determines the existence and size of a company’s moat – namely such stuff as a trusted brand, patents, regulatory licenses, high switching costs, pricing power, network economics, and cost advantages related to process, scale, and location – makes total sense to me.  I always wondered while I was in business school what was the use of discounting future cash flows to determine current value unless you had a crystal ball.  Future cash flows, at least to me, seemed as unpredictable as the next tsunami…but I crunched my numbers anyway because doing my homework correlated well to a future good grade.

Equally eye-opening was the book’s disavowal of certain indicators that I (as in Investor) always deemed critical, such as “great products, strong market share, great execution, great management” and, to a certain extent, a company’s P/E ratio, analysts’ reports and economic statistics.  Dorsey calls these “traps,” and I urge you to read this book to find out why.

The Little Book That Builds Wealth gives dozens of case histories and real life examples that are enthralling and elucidating.  The author also throws in a few quotes from great thinkers, including the economist John Maynard Keynes, “When the facts change, I change my mind” and the bank robber Willie Sutton who when asked why he robbed banks said because: “That’s where the money is.”

The two most important things I learned from this book are: 1) The average stock on the S&P fluctuates from its high to its low price 40% in any given year, so selling on volatility is like divorcing just because you have a fight; and, 2a) I’m not the only one who finds it hard to know when to sell so 2b) Dorsey’s hints on what to ask yourself before you sell were particularly instructive: “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?”

I highly recommend this book to anyone who is interested in money, or his lack thereof, and just can’t bring himself to employ the methods of Willie Sutton.