Thursday, May 01, 2008

Book Review - The Little Book That Builds Wealth

The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments.

I generally love short investment books. Too often, it seems to me, an author takes a couple of basic ideas - and rather than give concise, germane, explanations and examples - instead stretches the book out to be one or two hundred pages longer than necessary.

Thankfully, that isn't the case here with this great little book.

The author is Pat Dorsey who is the Director of Equity Research for investment research provider Morningstar. Mr. Dorsey takes Warren Buffett's popularized "economic moat" term and show you how you can analyze businesses to see whether they possess such an advantage.

After screening for an above average return (both return on assets [ROA] and return on equity [ROE]), you can begin to consider whether your potential investment target has a long-term business advantage - an economic moat. Mr. Dorsey explains the four most common sources of moats: intangible assets, cost advantages, customer-switching costs, and network economics.

In clear and concise language, he explains these moats and gives examples. Later chapters give you some valuation basics to ensure that you aren't acquiring your target at too high a price - something that is always deadly to superior investment returns. Finally, he also suggests when to sell an investment.

I believe that this book deserves a place on any long-term investor's bookshelf, and highly recommend it. I would like to thank Mr. Peter Knox of Wiley for providing me with a review copy.

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