Pat Dorsey

Identifying the structural advantages that protect businesses from competition.

Who He Is

Pat Dorsey is the founder of Dorsey Asset Management and former director of equity research at Morningstar. He developed Morningstar's economic moat framework, which rates companies on the durability of their competitive advantages. His book "The Little Book That Builds Wealth" made moat analysis accessible to individual investors.

Dorsey combines academic rigor with practical application. His work at Morningstar influenced how millions of investors think about competitive advantage. At Dorsey Asset Management, he applies these concepts to concentrated portfolio management.

He is known for clear, structured thinking about what makes businesses durable. Rather than chasing trends, he focuses on identifying structural advantages that persist across market cycles.

Core Investment Philosophy

Dorsey's central concept is the economic moat—a sustainable competitive advantage that allows a business to earn excess returns over time. Without a moat, competition erodes profits. With one, businesses can reinvest at attractive rates for years.

He identifies four primary sources of moats: switching costs, network effects, intangible assets (brands, patents, regulatory licenses), and cost advantages. These structural factors create durable competitive positions.

He emphasizes that moats are about structure, not management. Great managers cannot create moats where none exist. Poor managers can temporarily squander moats that do. The business structure matters most.

Valuation discipline complements moat analysis. A wonderful business at an excessive price may not generate attractive returns. Dorsey seeks moaty businesses at reasonable valuations.

Patterns He Focuses On

• Switching Costs — When customers face significant costs (financial, time, learning) to switch to competitors, they tend to stay. Enterprise software, financial services, and medical devices often exhibit switching costs.
• Network Effects — Products become more valuable as more people use them. Social networks, payment systems, and marketplaces benefit from network effects that competitors struggle to replicate.
• Intangible Assets — Brands, patents, and regulatory licenses protect profits. Strong brands command premium pricing; patents exclude competition; licenses limit new entrants.
• Cost Advantages — Lower cost structures from scale, process, or location enable sustained profitability. Cost leaders can undercut competitors while maintaining margins.
• Moat Trends — Dorsey looks for moats that are widening or narrowing over time. A widening moat suggests improving competitive position; a narrowing moat indicates vulnerability.
• Return on Invested Capital — High and stable ROIC indicates moat presence. Businesses earning excess returns over long periods likely have structural advantages.

Example Companies

Wide Moat Examples — Dorsey's framework identifies companies like Microsoft (switching costs, network effects), Visa (network effects, scale), and regulatory-protected utilities as wide moat businesses.

No Moat Examples — Airlines, commodity producers, and highly competitive retailers typically lack moats. Competition drives profits to minimal levels over time.

Moat Source Analysis — Understanding why a company has a moat matters as much as recognizing that it exists. Different moat sources have different durability characteristics.

Limitations and Criticisms

Moat analysis is qualitative and subject to interpretation. Reasonable analysts can disagree about whether a company has a moat and how wide it is.

Moats can erode unexpectedly. Technology disruption, regulatory change, and competitive innovation can undermine advantages that seemed durable.

Focusing on moats may cause investors to overpay for quality. Wide moat companies are well-known and often trade at premium valuations.

The framework may underweight management importance. While structure matters most, exceptional or terrible management can significantly impact outcomes.

What Modern Investors Can Learn

• Look for moats — Sustainable competitive advantages drive long-term returns. Businesses without moats face relentless margin pressure.
• Identify moat sources — Understand why a company has a moat. Different sources have different durability and different implications.
• Watch for moat trends — Moats widen and narrow over time. Recognize when competitive position is improving or deteriorating.
• Focus on structure — Business structure matters more than current management. Great structures enable even average managers to succeed.
• Maintain valuation discipline — Even wide moat businesses can be overpriced. Returns depend on what you pay as well as what you get.