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The Five Rules for Successful Stock Investing 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. --Christopher C. Davis Portfolio Manag The Five Rules for Successful Stock Investing 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. --Christopher C. Davis Portfolio Manager and Chairman, Davis Advisors 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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The Five Rules for Successful Stock Investing 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. --Christopher C. Davis Portfolio Manag The Five Rules for Successful Stock Investing 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. --Christopher C. Davis Portfolio Manager and Chairman, Davis Advisors 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.

30 review for The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

  1. 5 out of 5

    Đạt Tiêu

    Excellent book, especially for novice investors. Some notes from the book: A. Core rules - Do thorough research on business and make sure understand it well - Find good business with economic moats - Have a margin of safety - Hold for a long time - Know when to sell B. Mistakes to avoid - Do not try to figure out the next Microsoft, just stick to business with economic moats - Learn lessons from the past and try to avoid them in future - Be objective about business - Keep calm and stay away from crowd madne Excellent book, especially for novice investors. Some notes from the book: A. Core rules - Do thorough research on business and make sure understand it well - Find good business with economic moats - Have a margin of safety - Hold for a long time - Know when to sell B. Mistakes to avoid - Do not try to figure out the next Microsoft, just stick to business with economic moats - Learn lessons from the past and try to avoid them in future - Be objective about business - Keep calm and stay away from crowd madness and emotion - Do not try to time the market - Never ignore valuation part - Do not just rely on earnings when value stocks C. Investigate economic moats 1. Evaluate profitability - Free cash flow to sales >= 5% - Net margins >= 15% - ROE >= 15% - ROA >= 6-7% 2. Find economic moats - Real product differentiation (by special features or superior technology) - Perceived product differentiation (by brands or reputation) - Low costs - High customer switching cost: client training, tight integration with customer business, industry standard, long term contract, small benefit - High barriers to entry for competitors 3. Find competitive advantage period -> Moat width: how long it lasts? -> Moat depth: how much money it can make? -> Often technology-based product is narrow or no moats 4. Do some industry analysis - Sales are shrinking or increasing in general? Look for trends - Is the industry cyclical or consistently making profit? - How is the market share? How intense is market competition? -> Look at industry reports. Find out statistics on sales, earnings, margins, growth rates -> Analyze some firms to compare with industry average -> get the feel of the industry D. Analyze business quality (fundamentals assessment) 1. Growth - Possible sources of growth (sales growth - orgnanic growth): selling more goods/services, selling new goods/services raising price, buying companies -> Identify the sources of growth and how much growth comes from each source and the quality of the growth -> Be careful with non-orgnanic growth: cost cutting, tax rate change, one-time gain,... -> low quality 2. Profitability - ROA = net margin x asset turnover - ROE = ROA x financial leverage ratio = ROA x (total asset / equity) - FCF/Sales >= 5% -> Look for trends over a long period and compare with other business -> ROE >= 20% is good, but >= 40% needs to investigate why (too good to be true) -> Banks and financial firms have large debt (big leverage ratio) -> Other ratios can be used: + ROIC (return on invested capital) = NOPAT (net operating income after tax) / Invested capital = EBIT - tax + ROCE (return on capital employed) = EBIT (earning before tax and interest) / Capital employed + Invested capital = Capital employed = Total asset - current liabilities (non bearing interest) - excess cash -> remove affect from debt -> assess business core profitability more precisely -> Use profitability matrix to investigate both ROE and FCF 3. Financial health - Financial leverage ratio <= 2 - ICR (interest coverage ratio or times interest earned) = EBIT / interest expense -> the higher the better - Current ratio = current asset / current liabilities >= 1.5 - Quick ratio = (current asset - inventory) / current liabilities >= 1 4. Risks -> Investigate bear cases when bad things happen -> see if business overcomes -> Investigate the affect from external factors like technology innovation, economic business cycle, ... 5. Management - Compensation: -> proxy statement - Character - Operations E. Analyze business stock (stock valuation) - Stock total return <- speculative return + investment return 1. Price mutliples -> Do peer comparison - P/S : + not much noise like earning, hard to doctored, different based on industry (very low in retail, but high in health care,...) + unable to evaluate profit + only compare P/S between business in the same industry or with the same level of profitability - P/B : + careful to use when it comes to intagible assets + not much meaningful to non capital-intensive (like service firms or high tech firms) + very good to evaluate financial business (because of marked-2-market book value) + go hand in hand with ROE when evaluate business - P/E : + do P/E inter-company, intra-company, market average and horizontal analysis for the full picture + affect by risks, capital structure and growth rate -> higher P/E for low debt, less capital and high growth business + More useful with mature companies than with growth companies - PEG : + no growth is the same, each growth goes with different risk + take into account also risks and capital structure + useful for growth companies - Cash return : + FCF / EV (Free cash flow / Enterprise value) > current bond rate + not meaningful to banks and financial firms 2. Discounted cash flow (DCF) -> Estimate the business intrinsic value * Basic concepts: - A business worths all expected future cash flow, reflected at present -> 3 factors affect business future cash flow: amount, timing and riskiness - Present value: value of future cash flow reflected at present -> time value of money, oppoturnity cost, inflation - Risk-free rate: interest rate from government bonds (government default risk is considered 0) - Risk premium rate: additional risk to take to get more return -> Required rate of return(hurdle rate) = Total risk = Cost of capital = Discount rate = risk-free rate + risk premium rate - Present value of discounted future cash flow in year N = CF in year N / (1 + discount rate) ^ N - Perpetuity value in year N = CF in year N x (1 + CF perpetual growth rate) / (discount rate - CF perpetual growth rate) - Discounted perpetuity value = Perpetuity value in year N / (1 + discount rate) ^ N -> Total equity value in N year = Discounted perpetuity value (in the last year N) + All discounted cash flow from year 1 to N - Estimate discount rate based on + Size: smaller size -> more risk + Financial leverage: more debt -> more risk + Cyclicality: more cyclical -> more risk + Management: bad management -> more risk + Complexity: business hard to understand -> more risk + Economic moats: less moats -> more risk -> There is no exact discount rate. In general, the higher the risk the higher the discount rate -> Estimate discount rate for an average business, for example: 10.5% (Morningstar) - Estimate annual CF growth rate to calculate CF for each year in the future -> Estimate the future growth rate based on + Compound annual growth rate CAGR in the last N year = [(Beginning CF / Ending CF) ^ (1/N)] - 1 + Use discount rate checklist estimation to adjust - Estimate perpetual growth rate + Usually range in [inflation rate, GDP growth rate] + Use discount rate checklist estimation to adjust 3. Margin of safety -> Buy stock at lower price than the estimated intrinsic value F. Quick stock screening - Firms follow SEC regulation? - Firms ever generate operating profit? - Firms generate consitently cash flow from operating activity? - ROE > 10% consistently with reasonable leverage? - Earnings growth is consistent? - How clean the blance sheet is? too much debt? where debts come from? business is stable? - Firms generate free cash flow? How consistent? - Number of share oustanding remain consistent over the year? - Management is transparent and clear? G. Important industries to find value stocks - Banks and financial services - Business services: technology-based, hard-asset-based, people-based - Health care: pharmaceuticals, biotech, medical device, health care service - Media

  2. 5 out of 5

    Daniel Olshansky

    Amazing book for beginners! This book was recommended to me by a colleague after I showed some interest in stock investing. Prior to reading this book, I knew practically nothing about businesses or the market at all. I had no clue what an index was, or what equity, assets or liabilities are. On my own time I would follow the stock price of some companies that were always under the highlight (apple, google, facebook, tesla) and imagine what would happen if I were to speculate and try to beat the Amazing book for beginners! This book was recommended to me by a colleague after I showed some interest in stock investing. Prior to reading this book, I knew practically nothing about businesses or the market at all. I had no clue what an index was, or what equity, assets or liabilities are. On my own time I would follow the stock price of some companies that were always under the highlight (apple, google, facebook, tesla) and imagine what would happen if I were to speculate and try to beat the market. Oh, how naive I was.... Pat Dorsey introduced me to a whole other world that I didn't even know existed. I learnt what the purpose of stocks and the market really is. Why people invest, and why they don't. I learnt that this isn't just a game where one gets lucky by stealing or outsmarting the other person by properly timing his buy/sell, but that stock investing is actually a science. Though there are assumptions and speculations one needs to consider, there are objectively bad right and wrong decisions that one could make. It is difficult to express how excited I was about applying the lessons I learnt from this book to the real world, but I need to remember that patience is virtue. In this book, I learnt about the inner workings of a company and it's management. I learnt about how finances are tracked. Most importantly, I learnt how to identify and evaluate good businesses. Seeing how stocks are always in the news, and that we all work for companies which are valued at something, regardless of whether they are public or private, I have gained a lot of insight into the world around me. In addition to learn a useful skill of what I should do with money, I also learnt how the company I work at operates, and believe that the skills I gained may also be very beneficial in the future if I choose to pursue entrepreneurship. I've always had a keen interest as to how companies function, but never knew how to act on this impulse. While reading this book, I started watching videos on youtube, reading various articles, and just browsing investopedia to educate myself furthermore. I realize that this is just the beginning, but it ignited a spark that has turned into a roaring flame. Some parts of the book I very dense, and even though I took my time reading through it, I still couldn't retain everything I learnt. That being said, it was written in such a way that I could use it as a reference until I familiarize myself very well with all the concepts it discusses. And if not, then the foundation that it has set up is priceless. Even though this book is a little outdated given how much our economy has changed over the past 12 years, I still think that it's a must for anyone who is interested in learning about stock investing but knows nothing about it.

  3. 5 out of 5

    pavana Kumar Varanasi

    This is a very good book if you already knew the financials and have a fair understanding of investing. This book along with "little book that builds wealth", "competition demystified" are very good, since they take real world (USA) examples and explian in detail. There is a lot of industry analysis which is very useful while analyzing real world companies. This is a very good book if you already knew the financials and have a fair understanding of investing. This book along with "little book that builds wealth", "competition demystified" are very good, since they take real world (USA) examples and explian in detail. There is a lot of industry analysis which is very useful while analyzing real world companies.

  4. 5 out of 5

    Amelia

    This book explains fundamental analysis very comprehensively and should be in every investors' toolkit. The book is geared more towards those who are starting out. But more advanced readers will find the chapters on industry analysis highly insightful. For those who are interested, I recommend supplementing this reading with McKinsey's Valuation for a deeper understanding of ROIC. This book explains fundamental analysis very comprehensively and should be in every investors' toolkit. The book is geared more towards those who are starting out. But more advanced readers will find the chapters on industry analysis highly insightful. For those who are interested, I recommend supplementing this reading with McKinsey's Valuation for a deeper understanding of ROIC.

  5. 4 out of 5

    Jay Waghray

    Outdated (on tech, trends) but good to brush up on basics

  6. 5 out of 5

    Gergely Kovács

    Awesome intro handbook for fundamental analysis. Not recommended for short term investors (i.e. few years)

  7. 5 out of 5

    Mitul Patel

    If I am going to write a book on any topic this is how I will write and illustrate whatever information I want to convey. Perhaps the best book on stock investing. The only caution is that it will be a slow read for the readers who don't have accounting knowledge but that doesn't mean they should not read it. Also the industry analysis is based on the USA and may not be completely applicable to other geographies but one can learn from the base and develop the knowledge thereafter. If I am going to write a book on any topic this is how I will write and illustrate whatever information I want to convey. Perhaps the best book on stock investing. The only caution is that it will be a slow read for the readers who don't have accounting knowledge but that doesn't mean they should not read it. Also the industry analysis is based on the USA and may not be completely applicable to other geographies but one can learn from the base and develop the knowledge thereafter.

  8. 4 out of 5

    Ed Ball

    If you ever wanted to learn how to read balance sheets, income statements, and grasp the true meaning of cash flow. Don't buy another book, this is the one you're looking for. Gives a great insight to value investing, buying companies on the cheap side after you've done all your homework. If you ever wanted to learn how to read balance sheets, income statements, and grasp the true meaning of cash flow. Don't buy another book, this is the one you're looking for. Gives a great insight to value investing, buying companies on the cheap side after you've done all your homework.

  9. 5 out of 5

    Amithanand D'silva

    Very well written giving an excellent insight on the how to invest effectively. If you haven't been able to read the classic works of Security Analysis and Intelligent Investor you would find this a welcome change. Very well written giving an excellent insight on the how to invest effectively. If you haven't been able to read the classic works of Security Analysis and Intelligent Investor you would find this a welcome change.

  10. 5 out of 5

    Recle

    The Five Rules. Easy to read but hard to execute and follow.

  11. 4 out of 5

    Pradeep

    One of the best books investing

  12. 4 out of 5

    Krishna Agarwal

    A good book with theory of how to value companies and how to read reports. You will like the book based on how much knowledge you already have in the area.

  13. 5 out of 5

    Bett Correa-Bollhoefer

    I learned all about each major industry and how to evaluate a company. Excellent education for anyone who wants to understand how companies can be effectively operated.

  14. 4 out of 5

    Steve

    Probably the best book on investing I have read. Clear, factual overview of valuing companies and how to approach investing. I went out and bought my own copy for reference

  15. 4 out of 5

    Mr13

    The book opens my mind and guide me to fundamental analysis

  16. 5 out of 5

    InvestingByTheBooks.com

    When I think of Morningstar I picture something similar to Moody’s or Standard & Poor’s, a correct, slow and slightly bureaucratic organization. This book gives a totally different insight. It takes a clear stance for the Warren Buffett “buy wonderful businesses at reasonable prices”-type of value investing (as opposed to the “Graham low multiple, cigar butt”-type). It’s clear that the author Pat Dorsey, Director of Stock Analysis for Morningstar, but also Joe Mansueto the founder of the same fi When I think of Morningstar I picture something similar to Moody’s or Standard & Poor’s, a correct, slow and slightly bureaucratic organization. This book gives a totally different insight. It takes a clear stance for the Warren Buffett “buy wonderful businesses at reasonable prices”-type of value investing (as opposed to the “Graham low multiple, cigar butt”-type). It’s clear that the author Pat Dorsey, Director of Stock Analysis for Morningstar, but also Joe Mansueto the founder of the same firm, are great admirers of Mr Buffett. If you choose this type of franchise investment you also per necessity have to focus your research effort on finding that wonderful business and securing that it stays that way. This is what Dorsey tries to do through this book’s five rules. In short they are: 1. Do your homework – engage in the fundamental bottom-up analysis that has been the hallmark of most successful investors, but that has been less profitable the last few risk-on-risk-off-years. 2. Find economic moats – unravel the sustainable competitive advantages that hinder competitors to catch up and force a reversal to the mean of the wonderful business. 3. Have a margin of safety – to have the discipline to only buy the great company if its stock sells for less than its estimated worth. 4. Hold for the long haul – minimize trading costs and taxes and instead have the money to compound over time. And yet... 5. Know when to sell – if you have made a mistake in the estimation of value (and there is no margin of safety), if fundamentals deteriorates so that value is less than you estimated (no margins of safety), the stock rises above its intrinsic value (no margin of safety) or you have found a stock with a larger margin of safety. After stating the rules Dorsey goes on to present a number of chapters to complement them. Topics like commonly made mistakes, descriptions of various types of economic moats, financial expressions, accounting, analysing companies and their management, how to avoid financial tricksters and valuation. I like the chapter on moats and there are a number of nuggets like “the bottom line about financial health is that when a company increases its debt, it increases its fixed cost as a percentage of total costs.” That’s why high financial and operational gearing combined with volatile sales is such a potential corporate killer. Yet this is only half of the book. The second half is a one after another review of the economic characteristics of various corporate sectors. As this book is written about 10 years ago it’s interesting to see which sectors that have changed the most during these years. Care to guess? Financials – naturally – but also media. Ten years ago we hadn’t started to understand the effect that digitalization and Internet would come to have. It’s really hard to grade this book. It gives a sound, comprehensive and logically consistent investment strategy. But, this is a book for the retail investor. It will take the novel investor a long way, but as the book is so comprehensive the coverage of each topic is quite shallow. If you have some investment experience you will learn very little. A practice where you buy undervalued stocks that you can own long term will serve the right person well if you got the stomach to stand the short term movement of markets. Above all this book reinforces the importance of being able to articulate ones investment strategy. If not, it’s very easy to get frustrated when the markets move against you, this will make you move outside your core competence and will unavoidably lead to trouble. This book gets you started.

  17. 5 out of 5

    Vincent Ho

    Easy 5 stars. It complements well with "The Intelligent Investor" as it provides a window to learn about qualitative analysis in detail, such as how to interpret financial statements and understand business models in different sectors, thus leading to sound stock investment that will lead to decent long term performance. I think it especially adds value to someone who has just started and has no prior knowledge in such field, accounting and finance terms and concepts are well-explained and backe Easy 5 stars. It complements well with "The Intelligent Investor" as it provides a window to learn about qualitative analysis in detail, such as how to interpret financial statements and understand business models in different sectors, thus leading to sound stock investment that will lead to decent long term performance. I think it especially adds value to someone who has just started and has no prior knowledge in such field, accounting and finance terms and concepts are well-explained and backed by examples from the past. Although this book is published in the early 2000s, it is interesting to see that most of the company mentioned in examples are still around these days which proves the effectiveness of Pat's strategy in identifying companies with wide economic moats. The last few chapters are gold in my opinion as they explain each sector in detail and why they should/shouldn't deserve an investor's attention, it is easy to overlook the underlying market that determines the profitability of a company. By avoiding certain sectors that fail to breed companies with a wide economic moat, one can expect better returns overall and reduce their exposure to cyclical businesses. Another than that, making some notes on this book will be beneficial too.

  18. 4 out of 5

    James

    Took several months to get through this comprehensive. Pat Dorsey covers a lot of ground--you might say, into the weeds--and it can get a bit tedious. But overall, this is a fairly good stock investing resource that is still mostly relevant, even though it was written quite a few years back. It generally covers the Morningstar approach to investing and is a bit dated in spots, especially when referencing specific companies. On the other hand, most of the principles of investing don't really chan Took several months to get through this comprehensive. Pat Dorsey covers a lot of ground--you might say, into the weeds--and it can get a bit tedious. But overall, this is a fairly good stock investing resource that is still mostly relevant, even though it was written quite a few years back. It generally covers the Morningstar approach to investing and is a bit dated in spots, especially when referencing specific companies. On the other hand, most of the principles of investing don't really change that much, so you can still benefit from the five rules Pat provides. I also like that Pat provides a handy list of wide-moat stocks, many of which are still big-name stocks today.

  19. 5 out of 5

    souradeep saha

    Great and Must read book The best part of this book is that, author will give you insight of different sectors, though not a deep analysis, but good enough for retail investors. Also it talks about fundamental analysis of company and finding intrinsic value of companies. Though a bit boring but a must read.

  20. 5 out of 5

    Ahmed Shadi

    If you have decided that you will become a value investor. This is your first book to go. It explains how to pick companies' stocks that have a competitive advantage. It clarifies how to read financial statements easily. How to value a company and when to buy the stock. It's written in easy and readable style. If you have decided that you will become a value investor. This is your first book to go. It explains how to pick companies' stocks that have a competitive advantage. It clarifies how to read financial statements easily. How to value a company and when to buy the stock. It's written in easy and readable style.

  21. 4 out of 5

    Shivam Bansal

    The book is a good starting point for an investing enthusiast, though I'd highly recommend to pick a few stocks and keep following this book as a guide. The book also has a segregation based on various economical sectors, one could always refer this book back and forth while analysing a stock. Overall, a good book to build up strong basics!! The book is a good starting point for an investing enthusiast, though I'd highly recommend to pick a few stocks and keep following this book as a guide. The book also has a segregation based on various economical sectors, one could always refer this book back and forth while analysing a stock. Overall, a good book to build up strong basics!!

  22. 4 out of 5

    Sudheer Reddy

    Exceptional in explaining the whole process from A to Z; Lucid writing style and clear examples. Dedicated chapters on how to value each sector is very useful. Reccomed this book to any serious beginner.

  23. 5 out of 5

    Joo Parn Ong

    By far the best and if not most comprehensive book on investing. What to measure, gauge, check, look out for, from business fundamentals, financial statements, management, valuation, and different industry checklist and barometer, this book has it all!

  24. 5 out of 5

    Kengsan Wong

    Practical and useful This is an amazing book. Easy to read, understand and digest. Highly recommended for all stock investors. It does provide a lots of hindsight for different industries which might take a long trial and error to understand. Thumbs up.

  25. 4 out of 5

    Leafy

    If I’d recommend one book for people who wants to start doing stock analysis but had no experience, yet fair understanding of financial knowledge whatsoever, this is the one. Love the detailed analysis on individual industries.

  26. 4 out of 5

    Rahul Chaurasia

    Chapter - 4,5 & 6 must read for the beginners who wants to understand the Financial Statements and how to analyse a company and also there is sector wise chapters in the later section if you are into any sector very much then do checkout.

  27. 4 out of 5

    Karthik

    This review has been hidden because it contains spoilers. To view it, click here. Willing to read this book

  28. 5 out of 5

    Harsh Thaker

    Good book for beginners. The analysis of sectors in second half is informative & thought provoking.

  29. 5 out of 5

    Choon Kent

    This book is not only about the fundamental analysis of stock investment, but it is also great book of knowledge for a business management in the perspective of company financial..

  30. 5 out of 5

    Abhishek

    A very good read to understand how to invest in stock markets. Such detailed analysis are described before buying a stock but no reliable analysis on when to sell a stock.

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