Pat Dorsey - Buying Companies With Economic Moats

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest this week is Pat Dorsey, who is the long time Director of Research at Morningstar, where he specialized in what we call economic motes, sources of sustained competitive advantage that allow a few companies to deliver huge returns over time. Several years ago, he left Morningstar to form his own asset management firm, Dorsey Asset Management, and build a portfolio of companies with wide motes like those he studied at Morningstar. And while motes are critical, equally important is how companies allocate the capital generated or made possible by the existence of the moat. A special thank you to Brian Bares, who introduced me to Pat, and also to Will Thorndike, an earlier guest on the show. In the vast majority of the conversations you hear, I'm meeting the guest for the first time. I mention this to encourage you to connect me with anyone whose story or way of looking at the world might resonate. Always feel free to contact me with ideas.
Pat and I begin our discussion with the key differences between the sell side and the buy side, and then discuss all aspects of motes and capital allocation. Please enjoy our conversation.
Pat, well, I thought a fun place to start would be the transition from the sell side to the buy side. I'm always intrigued by people that cross that threshold, and so I'd love to hear what was the most surprising and or difficult thing during that transition phase.

**Pat Dorsey** (2:38)
So there's two big differences in going from the sell side, which I promised not to take on bridge at, given that we were an independent firm and not commission-based Morningstar, but that's all right. I mean, we're selling equity research.
On that side of the street, you're paid to say yes.
On the buy side, you're paid to say no. That's the simplest answer I can give, because if you're selling research, everybody wants an idea. Everybody wants an idea, what you got, what you got, what you got, what you got. On the buy side, you're paid to not lose money. You're paid to do a small number of smart things, which means you have to say no to a lot of stuff. I think the second big difference is that on the sell side, there is no sizing. Everything is binary. I like it, I don't like it. It's a buy, it's a sell. But it's much harder on the buy side because it's a, is it a 5% position buy, is it a 10% position buy? Is it a buy all 5% now? Is it a buy half and wait?
It's a much more nuanced process than just do I like it or not.

**Patrick O'Shaughnessy** (3:40)
We're going to spend most of our time talking about your process for evaluating businesses, which was rooted in your research on the sell side. So you developed Morningstars or led the development of Morningstars, Moat Ranking or I don't know if there's a specific name, but effectively a look at how defensible an economic moat is for stocks around the world.
And so the framework that we'll follow today is first to talk about what the hell a moat is. Everyone talks about moats, but it's kind of hard to dimensionalize or understand what that means. And then two, capital allocation and sort of how the market misprices moats. So we'll begin with moats themselves, a term popularized, I think, by Buffett. I'll let you begin by just describing what that might mean, and then we'll get into how to identify different kinds of moats and what they might mean.