Moat Investing Nuances – Pat Dorsey

**Pat Dorsey** (0:00)
Switching costs can cut both ways, because if you have high customer switching costs, then probably your competitors do too. It's hard to get people to switch. You have trouble growing in the high switching cost industries a lot of times. Network effects are often held up as the end-all, be-all of Moats. But network effects can degrade. People leave the network, the value of the community diminishes, the distinction between radial networks, like Western Union or nodal networks. It's complicated.
That's honestly one of the fun things about it is that over time, everything in investing develop pattern recognition. The great traders that you read about in Money Masters, they develop pattern recognition. I've seen this macro story before and here's how it usually plays out. So I'm going to make this bet. Analyzing competitive advantage is the same thing. The more companies you look at, the more likely you are to say, okay, I think there's something here. Then you try to think through why is it a government approval, is it a switching cost, is it scale economies? There's some foundational attribute that enables the company to withstand competition, defy the laws of economic gravity, sustain high returns on capital in a competitive world where both in theory and empirically, most companies don't do that. Most companies do revert over time to cost capital.

**Ted Seides** (1:23)
I'm Ted Seides, and this is Capital Allocators.
My guest on today's show is Pat Dorsey, the founder of Dorsey Asset Management, a $1.7 billion global public equity manager focused on companies with competitive advantages and long investment runways. Pat created Morningstar's Moat Research framework and led its equity research efforts for a dozen years before launching his firm in 2014
Our conversation covers the nuances of investing in businesses with wide moats across quantitative analysis, switching costs, network effects, brands, management, alignment, capital allocation, and reinvestment runways. We then turn to Pat's application of moat analysis to his investing, including concentration, global scope, position sizing, decision making, and lessons learned.
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