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The Little Book That Builds Wealth
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The Little Book That Builds Wealth

The Knockout Formula for Finding Great Investments (Little Book Big Profits)

Pat Dorsey
Wiley, 2008
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Editorial Rating

6

Recommendation

How do you pick stocks? Do you pay attention to earnings? Chart patterns? Growth potential? Your Uncle Morty? Instead of all that, use the same basic system that investment guru Warren Buffett perfected: Look for solid profitable companies that own a piece of the market, buy their stock and hold it a long time. Morningstar, the investment research company, uses the same approach to analyze and rate stock values. Its director of equity research, Pat Dorsey, explains its stock analysis system in this small volume. The stock selection system calls for seeking companies with protected unique advantages, called “economic moats.” What sounds straightforward in theory may not be as easy in practice: Finding a structurally protected stock today is not necessarily a simple stroll across the drawbridge. Still, getAbstract finds Dorsey’s presentation succinct and readable, and recommends it to investors who are not yet familiar with value investing and similar approaches.

Summary

The Best Investment Strategy

Investors can choose among multiple stock market strategies, but many of them are flawed. The best tactic is straightforward: Buy great companies at good prices and hold their equities over the long term. This approach works well for investment guru Warren Buffett. To make it work for you, follow a “game plan” with four sensible steps:

  1. “Identify” – Find firms that are most likely to be profitable year after year. These companies offer the greatest long-term potential.
  2. “Wait” – Don’t buy these stocks until their prices fall below their intrinsic value.
  3. “Hold” – Do not get rid of these stocks unless: 1) The company “deteriorates”; 2) The stocks begin to sell for more than they are worth; or 3) Better investments present themselves. Otherwise, plan to sit on them patiently for years.
  4. “Repeat” – Follow these same steps for all of your investments.

Look for High and Sustainable Profits

In your investment planning, focus on the most profitable businesses, the ones that offer the greatest...

About the Author

Pat Dorsey, CFA, is Director of Equity Research at Morningstar. He helped develop the company’s stock rating system.

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