Pat Dorsey Returns – The Moat Portfolio – [Invest Like the Best, EP.77]

My guest this week, back for a second conversation, is Pat Dorsey. Pat ran equity research at Morningstar before leaving to start his own asset management company: Dorsey Asset Management. His areas of deep interest are competitive advantage and capital allocation. He believes that capital allocation should be in service of competitive advantage and invests in a concentrated portfolio that he and his team feel embody these ideas.

If you have not already, I strongly recommend listening to our first conversation, which is a sort of crash course on moats. In this conversation, we cover different ground. We spend much more time on individual stocks like Facebook, Google, and Chegg, using them as examples to explore Pat’s investment philosophy and strategy.

Across a few conversations with Pat, I can tell he is in love with this stuff, and I always enjoy talking to investors like him who so passionately pursue and edge. Please enjoy round two with Pat Dorsey.

Links Referenced

Pat Dorsey’s first appearance on the podcast

HQ – Live Trivia Game Show

Books Referenced

World After Capital

Principles: Life and Work

 

Show Notes

2:15 – (First Question) – Pat’s methods for valuing a business

 

4:17 – Is this process done after they would first identify potential targets for investment

 

5:11 – Pat’s take on how the market classifies stocks as growth vs value

 

6:40 – Qualitative insights and why the market can’t price them very accurately

 

9:57 – The business model behind zero marginal cost distribution business model

 

12:00 – Network effects and the potential downside to them down the road

 

13:54 – Valuing Facebook as a business heavily reliant on network effects

 

16:45 – What would have to change for Pat’s position on Facebook to radically change

 

18:58 – Most important lessons that a smaller/private business could learn from Facebook or Google’s business models

 

19:48 – Where is Amazon in Pat’s portfolio

 

20:27 – Primary research and the value that is derived from it

 

22:06 – An example of where primary research led to a big surprise about a company

 

24:05 – The value of travel in this business, starting with recent travel to India

 

26:05 – Why are they targeting India and Japan

 

27:24 – How does he think about the risk of investing in foreign markets

 

29:52 – His thinking on relative vs absolute market share

 

31:26 – Exploring the SaaS business model

 

34:35 – The application of moats and pricing power with SaaS businesses

34:36 – Pat Dorsey’s first appearance on the podcast

 

36:17 – Understanding how to evaluate a SaaS or subscription-based business (Lifetime Value of the Customer vs Acquisition Cost)

 

40:07 – Other models that Pat explores and how to screen for them

 

41:37 – How does he parse the difference between attention and demand

 

43:19 – How would Pat monetize something like HQ – Live Trivia Game Show that has aggregated massive amount of attention

 

45:19 – How does Pat react to the idea that attention is scarce and human capital is so crucial

45:14 – World After Capital

 

47:04 – How does Pat evaluate human capital in a business

 

48:09 – Experience in starting an asset management business

 

50:20 – What are the levers that are biggest value drivers in the asset management business

 

53:57 – Pat’s view on the strength of the relationship between risk and return

 

57:06 – The most risk Pat has taken in the face of uncertainty

 

59:23 – Favorite recent learning resource

59:43 – Principles: Life and Work