The Five Rules for Successful Stock Investing
Morningstar's Guide to Building Wealth and Winning in the Market
1. Edition February 2005
384 Pages, Softcover
Wiley & Sons Ltd
The Five Rules for Successful Stock Investing
"By resisting both the popular tendency to use gimmicks thatoversimplify securities analysis and the academic tendency to usejargon that obfuscates common sense, Pat Dorsey has written asubstantial and useful book. His methodology is sound, his examplesclear, and his approach timeless."
--Christopher C. Davis Portfolio Manager and Chairman, DavisAdvisors
Over the years, people from around the world have turned toMorningstar for strong, independent, and reliable advice. The FiveRules for Successful Stock Investing provides the kind of savvyfinancial guidance only a company like Morningstar could offer.Based on the philosophy that "investing should be fun, but not agame," this comprehensive guide will put even the most cautiousinvestors back on the right track by helping them pick the rightstocks, find great companies, and understand the driving forcesbehind different industries--without paying too much for theirinvestments.
Written by Morningstar's Director of Stock Analysis, Pat Dorsey,The Five Rules for Successful Stock Investing includes unparalleledstock research and investment strategies covering a wide range ofstock-related topics. Investors will profit from such tipsas:
* How to dig into a financial statement and find hidden gold . . .and deception
* How to find great companies that will create shareholderwealth
* How to analyze every corner of the market, from banks to healthcare
Informative and highly accessible, The Five Rules for SuccessfulStock Investing should be required reading for anyone looking forthe right investment opportunities in today's ever-changing market.
Introduction: Picking Great Stocks Is Tough.
Chapter 1. The Five Rules for Successful Stock Investing.
Chapter 2. Seven Mistakes to Avoid.
Chapter 3. Economic Moats.
Chapter 4. The Language of Investing.
Chapter 5. Financial Statements Explained.
Chapter 6. Analyzing a Company- The Basics.
Chapter 7. Analyzing a Company-Management.
Chapter 8. Avoiding Financial Fakery.
Chapter 9. Valuation- The Basics.
Chapter 10. Valuation-Intrinsic Value.
Chapter 11. Putting It All Together.
Chapter 12. The 10-Minute Test.
Chapter 13. A Guided Tour of the Market.
Chapter 14. Health Care.
Chapter 15. Consumer Services.
Chapter 16. Business Services.
Chapter 17. Banks.
Chapter 18. Asset Management and Insurance.
Chapter 19. Software.
Chapter 20. Hardware.
Chapter 21. Media.
Chapter 22. Telecom.
Chapter 23. Consumer Goods.
Chapter 24. Industrial Materials.
Chapter 25. Energy.
Chapter 26. Utilities.
Appendix.
Recommended Readings.
Morningstar Resources.
Index.
Today we'll take a look at that book. The author, Pat Dorsey, iscurrently the Director of Equity Research for Morningstar.Morningstar has historically been known for their 5-star scale ofmutual fund ratings, but several years ago began applying the samescale to individual stocks. Since Morningstar's focus is on durablecompetitive advantage, the firm's investing philosophy correlatesvery well with that of the Magic Formula and of MagicDiligence.That makes the book particularly relevant and much of my stockanalysis is based on techniques outlined in it. The Five Rules...is more or less a two part book. The first half deals covers thetitle, laying out the five rules for successful investing and thenproceeding to expand on each of them. Without spoiling too much ofthe book, Dorsey's five rules are:
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.
This first section then continues on to introduce the investorto the techniques of stock analysis. Topics covered includedetailed explanations of each financial statement, the points ofemphasis to look for in a good investment (such as growth potentialand financial health), how to spot accounting blowups before theyhappen, how to value a stock, and so forth. For everyone interestedin stock analysis, from 10 year pros to those just beginning to diptheir toes in the market, these chapters contain invaluable andvital information. Nearly every investor will learn something newabout evaluating companies and valuing stocks. One particularlyvaluable chapter is titled "The 10-Minute Test", which will helpyou quickly throw out stocks that are not worth your time, whilehighlighting investment opportunities that warrant additionalresearch.
The second half of the book is equally useful. In this section,Dorsey calls upon Morningstar's sector analysts to lay out theintrinsic moat qualities and the factors that separate good and badcompanies in a variety of sectors, including Health Care, ConsumerServices, Media, Banks, and so on. It's no secret to MagicDiligenceMembers that some industries are inherently better investmenthunting grounds than others, and this book explains why. Forexample, retail is generally a difficult place to invest - thereare no customer switching costs, tons of competition, andconstantly changing consumer trends. On the other hand, mostmedical device makers have very high switching costs, as surgeonsare trained on one company's products and are loathe to learn theintricacies of a competing product, unless there is a very goodreason to do so.
To close this review, a personal observation. Most investorsroutinely cite classic investing books like Ben Graham's TheIntelligent Investor as the place to start for novice investors. Irespectfully disagree. I've read many of those great classics, butno one book has explained the details of company and equityanalysis as directly or relevantly as this book. This is one of themost overlooked investing books out there, and comes highlyrecommended to all investors. -The Motley Fool
MORNINGSTAR, INC. is a Chicago-based global investment research firm. Morningstar is known for its independent research and analysis of stocks, mutual funds, exchange-traded funds, closed-end funds, and more. Morningstar is a trusted source for individuals, financial advisors, and financial institutions.
