Who is Pat Dorsey?

Pat Dorsey is the founder of Dorsey Asset Management and is perhaps best known for his influential work on defining competitive advantages.

Prior to launching his investment fund in 2013, Dorsey served as the Director of Equity Research at Morningstar for more than a decade.

His talks, letters, and books are all centered around competitive advantages and the key elements of a business that allow it to generate outsized returns over an extended period of time.

Dorsey's 4 Moat Categories:

Pat Dorsey has spent more than two decades analyzing global businesses and identifying the shared characteristics that help the best ones tick.

Throughout this analysis, Dorsey has distilled the various competitive advantages into four separate categories.

Here's a look at each:

1.) Intangible Assets

An intangible asset is a non-physical asset that helps power a company’s business. Dorsey defines intangible assets as either brand value, regulatory licensing, or patents.

Example: One company that clearly demonstrates the power of a strong brand is Hermès. Hermès is an ultra high-end retailer that is best known for its iconic Birkin Handbags. While the bags themselves are designed and crafted with more care than their mass-produced counterparts, that's not why they sell for more than $10,000 a piece. It's the message that the Hermès brand portrays. Since Birkin bags are so expensive and often hard to buy, carrying one around demonstrates wealth in a way that other brands cannot.

2.) Switching Costs

Switching costs exist when it would cost more for a user to switch to a new service instead of sticking with an existing one. But “costs” in this case does not always refer to money.

From Dorsey’s book The 5 Rules for Successful Stock Investing: “Remember, a switching cost does not have to be monetary – in fact, it rarely is. Much more frequently, what deters customers from dropping a product or service in favor of a competing product or service is time.”

Example: Medical device firms like Stryker have high switching costs which ensure customer retention. Since surgeons are trained on how to implant Stryker products like artificial knees or hips, they tend to develop preference for Stryker products as it’s time-consuming to learn the implementation process for other brands.

3.) Network Effects

Dorsey defines a network effect as a product or service that increases in value as its number of users expands. Generally speaking, as long as engagement on the service continues to grow the network effect can be maintained.

Example: The most obvious example is Meta, or formerly Facebook. Not only is Meta home to more than 3 billion daily active users across its family of apps, but those users generate content every day which continuously attract the next potential users. It’s perhaps no surprise then that Meta has been Dorsey’s largest holding for more than 8 years.

4.) Cost Advantages

Cost advantages, also commonly referred to as economies of scale, exist when a company has created a cheaper way to deliver a product or service that can’t be replicated easily.

Example: In this case, Costco would be an obvious example. Thanks to Costco’s size, they’re able to command lower prices on a per-unit basis from suppliers, which they continuously pass through to customers. In exchange, they’re able to offer a high-margin membership program so that customers can continue to access those low every day prices.

What stocks does Pat Dorsey currently own?

FinChat.io tracks the holdings of many of the world's best investors, including Pat Dorsey.

As of Dorsey Asset Management's latest quarterly filing, here were their complete holdings.