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The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market (Paperback)
by Pat Dorsey
| Category:
Investing, Stock investing, Investment |
| Market price: ¥ 198.00
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¥ 168.00
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Pre-order item, lead time 3-7 weeks upon payment [ COD term does not apply to pre-order items ] |
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| MSL Pointer Review:
Filled with strong and unbiased advice, this book provides readers with the type of quality guidance that only Morningstar can offer. |
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Author: Pat Dorsey
Publisher: Wiley
Pub. in:
ISBN: 0471686174
Pages: 384
Measurements: 9.1 x 6 x 1 inches
Origin of product: USA
Order code: BA00145
Other information: Reprint edition
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- Awards & Credential -
As Director of Stock Analysis for Morningstar, Pat Dorsey has the credibility to present this highly valuable source of investment information. |
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- MSL Picks -
As the stock market begins to regain its footing, investors are seeking strong and unbiased advice. Five Principles of Profitable Investing fills this need. Based on the philosophy that 'investing should be fun, but not a game,' this book provides readers with the type of quality guidance that only Morningstar can offer.
This comprehensive guide gives readers the information they need to make intelligent choices when looking to invest in stocks - all in the independent and easy-to-understand style that has made Morningstar the most trusted and respected name in the investment research industry. Morningstar’s Pat Dorsey shows readers how to find great companies, pick the right stocks, and avoid paying too much for their investments. He also discusses the importance of thinking like the owner of a company when searching for the right stocks and how to focus on a single industry. Five Principles of Profitable Investing walks readers through the often-intimidating stock investing process, and helps them choose the right stocks to meet their financial goals. With so much on the line, readers simply can’t afford to base their decisions on questionable hot tips and secondhand information, so they will look to Five Principles of Profitable Investing for accurate and honest advice.
Target readers:
Value investors.
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Pat Dorsey is the Director of Stock Analysis for Morningstar, Inc. He has been instrumental in developing the new Morningstar Rating for Stocks as well as the main player in developing Morningstar’s stock coverage. Dorsey is widely quoted in the media, including in USA Today and U.S. News & World Report as well as on CNBC and CNN. He also appears weekly on the Bulls and Bears financial show on FOX News Channel.
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From Publisher
Over the years, people from around the world have turned to Morningstar for strong, independent, and reliable advice. The Five Rules for Successful Stock Investing provides the kind of savvy financial guidance only a company like Morningstar could offer. Based on the philosophy that "investing should be fun, but not a game," this comprehensive guide will put even the most cautious investors back on the right track by helping them pick the right stocks, find great companies, and understand the driving forces behind different industries - without paying too much for their investments.
Written by Morningstar's Director of Stock Analysis, Pat Dorsey, The Five Rules for Successful Stock Investing includes unparalleled stock research and investment strategies covering a wide range of stock-related topics. Investors will profit from such tips as:
- How to dig into a financial statement and find hidden gold... and deception
- How to find great companies that will create shareholder wealth
- How to analyze every corner of the market, from banks to health care
Informative and highly accessible, The Five Rules for Successful Stock Investing should be required reading for anyone looking for the right investment opportunities in today's ever-changing market.
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Chapter I
Five Rules for Successful Stock Investing
It always amazes me how few investors - and sometimes, fund managers - can articulate their investment philosophy. Without an investing framework, a way of thinking about the world, you’re going to have a very tough time doing well in the market.
I realized this some years ago while attending the annual meeting of Berkshire Hathaway, the firm run by billionaire superinvestor Warren Buffett. I overheard another attendee complain that he wouldn’t be attending another Berkshire meeting “because Buffett says the same thing every year.” To me, that’s the whole point of having an investment philosophy and sticking to it. If you do your homework, stay patient, and insulate yourself from popular opinion, you’re likely to do well. It’s when you get frustrated, move outside your circle of competence, and start deviating from your personal investment philosophy that you’re likely to get into trouble.
Here are the five rules that we recommend:
1. Do your homework.
2. Find economic moats.
3. Have a margin of safety.
4. Hold for the long haul.
5. Know when to sell.
Do Your Homework
This sounds obvious, but perhaps the most common mistake that investors make is failing to thoroughly investigate the stocks they purchase. Unless you know the business inside and out, you shouldn’t buy the stock.
This means that you need to develop an understanding of accounting so that you can decide for yourself what kind of financial shape a company is in. For one thing, you’re putting your own money at risk, so you should know what you’re buying. More important, investing has many gray areas, so you can’t take someone else’s word that a company is an attractive investment. You have to be able to decide for yourself because one person’s hot growth stock is another’s disaster waiting to happen. In Chapter 4 through 7, I’ll show you what you need to know about accounting and how to boil the analysis process down to a manageable level.
Once you have the tools, you need to take time to put them into use. That means sitting down and reading the annual report cover to cover, checking out industry competitors, and going through past financial statements. This can be tough to do, especially if you’re pressed for time, but taking the time to thoroughly investigate a company will help you avoid many poor investments.
Think of the time you spend on research as a cooling-off period. It’s always tempting when you hear about a great investment idea to think you have to act now, before the stock starts moving - but discretion is almost always the better part of valor. After all, your research process might very well uncover facts that make the investment seem less attractive. But if it is a winner and if you’re truly a long-term investor, missing out on the first couple of points of upside won’t make a big difference in the overall performance of your portfolio, especially since the cooling-off period will probably lead you to avoid some investments that would have turned out poorly.
Find Economic Moats
What separates a bad company from a good one? Or a good company from a great one?
In large part, it’s the size of the economic moat a company builds around itself. The term economic moat is used to describe a firm’s competitive advantage - in the same way that a moat kept invaders of medieval castles at bay, an economic moat keeps competitors from attacking a firm’s profits.
In any competitive economy, capital invariably seeks the areas of highest expected return. As a result, the most profitable firms find themselves beset by competitors, which is why profits for most companies have a strong tendency over time to regress to the mean. This means that most highly profitable companies tend to become less profitable as other firms compete with them.
Economic moats allow a relatively small number of companies to retain above-average levels of profitability for many years, and these companies are often the most superior long-term investments. Longer periods of excess profitability lead, on average, to better long-term stock performance.
Identifying economic moats is such a critical part of the investing process that we’ll devote an entire chapter - Chapter 3 - to learning how to analyze them. Here’s a quick preview. The key to identifying wide economic moats can be found in the answer to a deceptively simple question: How does a company manage to keep competitors at bay and earn consistently fat profits? If you can answer this, you’ve found the source of the firm’s economic moats.
Have a Margin of Safety
Finding great companies is only half of the investment process - the other half is assessing what the company is worth. You can’t just go out and pay whatever the market is asking for the stock because the market might be demanding too high a price. And if the price you pay is too high, your investment returns will likely be disappointing.
The goal of any investor should be to buy stocks for less than they’re really worth. Unfortunately, it’s easy for estimates of a stock’s value to be too optimistic - the future has a nasty way of turning out worse than expected. We can compensate for this all-too-human tendency by buying stocks only when they’re trading for substantially less than our estimate of what they’re worth. This difference between the market’s price and our estimate of value is the margin of safety.
Take Coke, for example. There’s no question that Coke had a solid competitive position in the late 1990s, and you can make a strong argument that it still does. But fols who paid 50 times earnings for Coke’s shares have had a tough time seeing a decent return on their investment because they ignored a critical part of the stock-picking process: having a margin of safety. Not only was Coke’s stock expensive, but even if you thought Coke was worth 50 times earnings, it didn’t make sense to pay full price - after all, the assumptions that led you to think Coke was worth such a high price might have been too optimistic. Better to have incorporated a margin of safety by paying, for example, only 40 times earnings in case things went wrong.
Always include a margin of safety into the price you’re willing to pay for a stock. If you later realize you overestimated the company’s prospects, you’ll have a built-in cushion that will mitigate your investment losses. The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonable predictable earnings. For example, a 20 percent margin of safety would be appropriate for a stable firm such as Wal-Mart, but you’d want a substantially larger one for a firm such as Abercrombie & Fitch, which is driven by the whims of teen fashion.
Sticking to a valuation discipline is tough for many people because they’re worried that if they don’t buy today, they might miss the boat forever on the stock. That’s certainly a possibility - but it’s also a possibility that the company will hit a financial speed bump and send the shares tumbling. The future is an uncertain place, after all, and if you wait long enough, most stocks will sell at a decent discount to their fair value at one time or another. As for the few that just keep going straight up year after year - well, let’s just say that not making money is a lot less painful than losing money you already have. For every Wal-Mart, there’s a Woolworth’s.
One simple way to get a feel for a stock’s valuation is to look at its historical price/earnings ratio - a measure of how much you’re paying for every dollar of the firm’s earnings - over the past 10 years or more. If a stock is currently selling at a price/ earnings ratio of 30 and its range over the past 10 years has been between 15 and 33, you’re obviously buying in at the high end of historical norms.
To justify paying today’s price, you have to be plenty confident that the company’s outlook is better today than it was over the past 10 years. Occasionally, this is the case, but most of the time when a company’s valuation is significantly higher now than in the past, watch out. The market is probably overestimating growth prospects, and you’ll likely be left with a stock that underperforms the market over the coming years.
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| View all 10 comments |
(Christopher C. Davis (Chairman, Davis Advisors) (MSL quote), USA
<2006-12-28 00:00>
By resisting both the popular tendency to use gimmicks that oversimplify securities analysis and the academic tendency to use jargon that obfuscates common sense, Pat Dorsey has written a substantial and useful book. His methodology is sound, his examples clear and his approach timeless. |
J. Turner (MSL quote), USA
<2006-12-28 00:00>
This book is best suited to those that have some understanding of stock investing, and are wanting take greater control over managing their portfolio. Unlike so many "how tos" on stock investing, Morningstar's Guide starts with a basic explanation of understanding financial statements (something that too many investors simply ignore), and building upon those basics then introduces the reader to how to value the stocks market value relative to "real" value. Finally, the Guide ends with an almost 100-page analysis of the pertinent characteristics of stocks in major industry groups (e.g. energy; healthcare)… For a great and complete primer, this one hits the mark. |
A reader (MSL quote), USA
<2006-12-28 00:00>
Borrowed this from the library and decided to buy it after reading. Dorsey gives the "morningstar" method of evaluating stocks, which emphasizes safety through choosing stocks with a wide "economic moat," cash flow and income to survive worst case scenario. In fact, one of his rules for investing is to envision the worst case scenario for each stock. The method he outlines here is extremely rigorous and time-consuming. I don't see how anyone could take the time to evaluate each stock in a 10-20 stock portfolio using his method unless you didn't do anything else, i.e, unless you're a professional investor. That said, he does give lots of good points and cautions. The section on evaluating a company's financial statement is very thorough and detailed. Also valuable is an in-depth chapter on the ins and outs of all the major and minor market sectors, banks, technology, energy, health, and etc. |
Blee (MSL quote), Hong Kong
<2006-12-28 00:00>
This is a rather readable book abounds with good tips for amateur (or even professional) investors. It tells you which industries to put your money and which not, e.g. Energy is a luscious industry but not Power Generation and why; it tells you why a bank is preferred to an insurance company, and why larger banks are preferred to smaller ones... etc. It also pinpoints the bottleneck of various popular industries and draws our attention to where usually the pitfalls are as far as the management and their financial reports are concerned. It is most insightful in its rather up-to-date descriptions of the nitty-gritty of some popular industries.
However, this book doesn't touch upon asset allocation things like how bonds, commodities and cash could help your investment in stocks. There is little, if at all, on any derivatives. It is not meant to be a replacement of Warren Buffett or Soros or Peter Lynch's wisdom, still less the fundamentals of Grantham. In particular, note that with the change of a single element in investment environment (& there are huge differences between Asia or BRIC and US!!!), and then the choice of stocks should or could be the other way round, and if one chooses to follow the advice of this book to its letters, it might prove to be very costly.
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