I had the privellege of interviewing Pat Dorsey in late February . Pat was very busy switching jobs (his bio is below) and he was only able to go through the transcription a few days ago. Below is a brief excerpt followed by a link to the full interview on Guru Focus.
Pat Dorsey is the Vice Chairman and Director of Research & Strategy at the Sanibel Captiva Trust Company, an independent trust company serving high net worth clients, based in Sanibel, Florida. Before joining SanCap, Pat was Director of Equity Research at Morningstar for over ten years, where he was responsible for the overall direction of Morningstar’s equity research, as well as for communicating Morningstar’s ideas to the media and clients. He led the development of Morningstar’s economic moat ratings as well as the methodology behind Morningstar’s framework for competitive analysis. Pat is the author of two books––The Five Rules for Successful Stock Investing : Morningstar’s Guide to Building Wealth and Winning in the Marketand The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments––and has been quoted in publications such as The Wall Street Journal, Fortune, The New York Times, and BusinessWeek. Pat holds a master’s degree in political science from Northwestern University and a bachelor’s degree in government from Wesleyan University. He is a CFA charterholder.
What is important for investors to realize is NOT a moat?
The biggest misconception that most people have is that they think bigger is better, and also that managers are supermen. A lot of people confuse size, whether being a larger business or having a large market share, with having a strong competitive position, and I would like to point out the strong counterexamples of General Motors and Compaq. It’s a good example of businesses that were bigger but not necessarily better. And also people often think that managers can do anything. That if you have a great manager, that matters a lot more than a business’ competitive advantage.
It’s like the old saying of betting on the jockey and not on the horse. And, while betting on the jockey makes a lot of sense, it only works if all the horses are thoroughbreds. Not all businesses are thoroughbreds. Some businesses are structurally built to generate higher returns on capital in a better way than others. The manager of an airline will never generate high returns on capital, no matter what a genius the person is, it simply won’t happen due to the structure of the business. And I think that sometimes investors get starry eyed over great CEOs to their peril.
My favorite example is David Neeleman, of Jet Blue. Phenomenal entrepreneur, created the only business to ever get bought by Southwest, which made him sign a ten year non-compete. He went to Canada, started West Jet, the non-compete expired and he comes back to the U.S. and starts Jet Blue. Amazing story. But Jet Blue’s cost structure was never going to be lower than the day that they went public because planes don’t get newer — they get older. Baggage handlers and pilots don’t get less seniority they get more, and they want more money. At the end of the day it’s a commodity industry. So betting on the jockey rather than the horse makes sense if all the horses are the same, but at the end of the day, Pat Dorsey on a thoroughbred can probably beat a professional jockey on a goat. Some businesses are goats and some are thoroughbreds.
The full interview can be found at the following link-http://www.gurufocus.com/news/133638/interview-with-pat-dorsey