We had the pleasure of speaking with Pat Dorsey on the topic of moats recently. Pat is President of Sanibel Captiva Investment Advisers, where he leads the investment team and helps guide capital allocation. Pat was previously Director of Equity Research at Morningstar for over ten years, where he was responsible for the direction of Morningstar, Inc. (NASDAQ:MORN)’s equity research effort.
Pat Dorsey led the development of Morningstar, Inc. (NASDAQ:MORN)’s economic moat ratings as well as the methodology behind Morningstar’s framework for competitive analysis. Pat is the author of The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth. We’re pleased to share the below excerpt from the conversation. The full interview with Pat Dorsey is available in The Manual of Ideas Members Area.
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Pat Dorsey on How CEOs Can Widen Their Company’s Moat
Says Pat Dorsey:
“It really depends on what kind of moat you’re trying to build. If I had to think about a few themes, one would be that you tend to see commoditization is correlated with management impact. If you’re the manager of a retailer, an insurance company, a commodity company, a miner, or a bank, you can have a huge impact on whether your business is great or good. If you’re managing a business that already has a wide moat, you’re more of a caretaker. Your job is to not screw up. Your job is not to roll out New Coke. Your job is to keep the business going the way it is. But waking up every morning — this goes back to what have you done to widen the moat — whatever your moat is should constantly inform every business decision that you make.
We began this conversation with Wal-Mart Stores, Inc. (NYSE:WMT). Think about five to seven years ago when Wal-Mart started to try and compete with Target Corporation (NYSE:TGT) in fashion. Did it work? Not really because you don’t go to Wal-Mart for hot clothes; you go there for cheap club prices. They got off-strategy; they forgot the reason why their customers shopped there, and then they kind of retooled and that laser focus on low prices is what matters to them.
Think about LVMH Moet Hennessy Louis Vuitton SA (EPA:MC) and their focus on exclusivity. They’ll actually destroy unsold bags. They’ll take a $2,000 bag and just shred it to keep that scarcity out there.