Pat Dorsey of Dorsey Asset Managment did a interview with Barron's recently. Mr. Dorsey discussed his career at Morningstar and how the experience helped him as an investment manager. He does on to discuss his investment philosphy of seeking out franchised companies with large moats that can compound its value over time at an above average return. Mr. Dorsey said that he looks globally for investments since there are more opporunities abroad than in the U.S. He runs a focused fund with only 13 positions.Ă‚
Interview With Barron's
Barron's Question: How did your experience at Morningstar influence your approach when it came to creating your own investment firm?
Pat Dorsey: I was fortunate to amass this huge mental database of fund managers while I was at Morningstar. You can see what works, what doesn’t work, who treats investors well, who doesn’t, who’s “all hat and no cattle,” as the Texans say. I’ve seen enough asset-management firms succeed and fail that I have a decent idea, not just from an investment perspective but also from a structural perspective, of what works for clients and what’s likely to get them in trouble.
Barron's Question: What have you done to avoid trouble?
Pat Dorsey: First, we’re focused on a single strategy, and that’s all we’ll ever have. As a money manager, you need to do what you’re good at, whether the market wants that or not. We’re never going to launch a bond fund. People should fire me if I do. We make long-only investments in stocks. We mainly run separate accounts, and we charge a flat fee. I like separate accounts because they give investors transparency about what they own, and they prevent the investment vehicle from becoming a black box. Also, we have no locks, no gates, none of this crap. I’m far more comfortable with clients having a psychological lock or gate because we trust each other, than one where I’ve put a legal restriction on them taking out the money.
Barron's Question: What other unsavory industry practices are you wary of?
Pat Dorsey: Not closing a fund at the appropriate time is the single biggest sin committed by most asset managers. Size inevitably degrades performance. At some firms, that happens at $5 billion in assets; at others, $50 billion. But the minute the economics of the asset-management firm begin to conflict with the clients’ interests and returns, you’re in trouble.
Barron's Question: What do you make of the ever-growing popularity of index investing?
Pat Dorsey: A lot of index-fund zealots believe that if you don’t index, you’re stupid -- much like some people think you’re stupid if you’re not a Ben Graham value investor. I find that a dispiriting conversation. It’s not about active versus passive. It’s about high cost versus low cost. Investing is one of the few fields in which you actually don’t get what you pay for. If you blindly spend $50,000 on a car, it will probably be better than a $5,000 car. But can you say categorically that a fund charging 150 basis points is better than one charging 75? Absolutely not. They can just get away with it.
Barron's Question: You own only 13 stocks. What’s the attraction of a concentrated portfolio?
Pat Dorsey: Concentration just makes intellectual sense to me. I’m not sure why anyone would want to expend mental effort on their 32nd best idea.
Barron's Question: What kind of companies do you look for?
Pat Dorsey: I want to find some of the world’s best businesses that can compound at high rates over long periods of time, identify them when they’re trading at a reasonable valuation, and then just marry them. Our goal is to find businesses we can own for five or 10 years. And if you’re getting married, you ought to be more selective than if you’re just dating.
Economic theory says that competition eventually crushes high returns on capital. But we also know that a minority of companies defy economic gravity: They maintain high returns on capital for far longer than they should if they were average. As an investor, you need to make an objective assessment of whether a company is likely to continue making high returns on capital or not.
Read the rest of the interview at: http://online.barrons.com/articles/pat-dorsey-follows-buffetts-lessons-to-pick-stocks-1436587387
