HOW TO FIND MULTIBAGGER SHARES

THAT BUILDS WEALTH-PAT DORSEY

Summary of the Book so that it can be applied in the Indian Context by the Retail Investors.

About the Author

Pat is the founder of Dorsey Asset Management. Prior to starting Dorsey Asset, Pat was Director of Research for Sanibel Captiva Trust, an independent trust company serving high net worth clients. He is author of many famous books for the Stock Market.

About the Book

Author reveals why competitive advantages, or economic moats, are such strong indicators of great long-term investments and examines four of their most common sources: intangible assets, cost advantages, customer-switching costs, and network economics. Along the way, he skillfully outlines this proven approach and reveals how you can effectively apply it to your own investment endeavors.

20 Key Learning from The Book

key term used in the below mentioned summary is MOAT so lets understand first MOAT -The term economic moat, popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.

1.It is very difficult for retailers and restaurants to create moats around their businesses.

2. Costs matter a lot to automakers because price is a big component of the buyer’s decision.

3.Process-based benefits usually bear close watching, because even if they do last for some period of time, it’s often because of some temporary limitation on competitors’ ability to copy that process. Once that limitation disappears, the moat can get a lot narrower very quickly. Location-based cost advantages and low costs based on ownership of some unique asset are much more durable and easier to hang one’s analytical hat on. Companies with location advantages often create mini-monopolies, and world-class natural resource deposits are by definition pretty hard to replicate.

4.Cheaper processes, better locations, and unique resources can all create cost benefit—but keep a close eye on process-based advantages. What one company can invent; another can copy.

5.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 full size of the fish.

6.Delivering stuff in less price than anyone else can be pretty profitable.

7. In technology, software companies tend to have an simple time creating moats than hardware companies.

8.Moats are difficult to find in the insurance industry.

9. 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-term success than a no-moat company managed by a superstar.

10.To see if a company has an economic moat, first check its historical data 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.

11. The four most important factors that affect the worth of any company are how much cash it will generate , 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 competitors at bay (economic moat).

12. A company who get the 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 exchanges are good examples.

13. In financial services sector, asset managers have switching costs that are somewhat analogous to those of banks. Money that flows into a mutual fund or wealth-management account tends to stay there—we call these sticky assets—and that money generates fees for many years.

14. Popular brands aren’t always profitable brands. If a brand doesn’t entice consumers to pay more than what they are paying currently for similar product to other brands , it may not create a competitive advantage. Patents are wonderful to have, but legal challenges are the biggest risk to a patent moat.

15.If a company can charge more for the same product than its coequal just by selling it under a brand, that brand very likely constitutes a formidable economic moat.

16.A brand creates an economic moat only if it increases the consumer’s willingness to pay or increases customer bondage.

17.The four sources of structural competitive influence 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.

18. A company can have intangible assets, like brands, patents, or regulatory licenses that allow it to sell products or services that can’t be matched by its peers.

19. Being more efficient than your peers is a good strategy, but it’s not a sustainable competitive advantage unless it is based on some proprietary process that can’t be easily copied.

20. Identify businesses that can generate above-average profits for many years. Wait until the shares of those businesses trade for less than their fair value, and then buy. Hold those 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.

Penned by

Team Money Buzz India