[Book Review] The Five Rules of Successful Stock Investing by Pat Dorsey

About the author;

Pat Dorsey is currently the founder of Dorsey Asset Management but when he wrote this book in 2004, he was the Director of Equity Research at Morningstar and specialized in identifying economic moats/competitive advantages of public listed companies.

Book Review;

The book as the name suggests is about rules that can aid an investor to be successful at stock investing. Specifically, it talks about five rules that are:

- Doing your homework

- Finding companies with economic moats

- Having a margin of safety

- Holding for the long term

- Knowing when to sell

Now, anybody reading these five rules will comment ‘THIS IS OBVIOUS!’

However, what I appreciated about the book is how Pat Dorsey a) Used simple language to demystify financial concepts b) Went into details BUT not too much to overwhelm the reader c) Dedicated individual chapters to understand different areas of the market d) Brought it all together by analyzing couple of companies to show how it is done

Given Pat Dorsey’s expertise around analyzing economic moats, it is not surprising I found the chapters dedicated to economic moats the most insightful. He starts with the most basic question while analyzing any company’s moat i.e. WHY? Why competitors cannot steal away the company’s customers? Why competitors cannot charge lower prices? Why do customers periodically accept the price increases? Then he goes on to explaining how do companies generally create moats. The basic five ways he mentions are:

- Real product differentiation through technology/features/services

- Perceived product differentiation through brand and reputation

- Being a low cost producer

- Having high customer switching costs

- High barriers to entry

Apart from economic moats, the chapter on avoiding Financial Fakery helps an investor to understand the basic companies to avoid. Again, the seminal book on this topic is Financial Shenanigans by Howard Schilit but the six flags that Dorsey identifies in this book will help any investor weed out at least 65% of the fakesters.

The book has aged well despite written in 2004 that shows how the basics of investing do not change. Consider this book as your Investing 101 and it will be well worth your time.