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The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market 1st Edition

4.6 out of 5 stars 110 customer reviews
ISBN-13: 978-0471686170
ISBN-10: 0471686174
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Editorial Reviews


Not long ago, MagicDiligence reviewed Mary Buffett and David Clark's Warren Buffett and the Interpretation of Financial Statem...... and concluded that, while possibly useful for beginners, experienced stock investors would dismiss the book as simplistic and adding nothing new. The review also mentioned that a good alternative for more experienced investors looking to add to their knowledge is Pat Dorsey's The Five Rules for Successful Stock Investing.

Today we'll take a look at that book. The author, Pat Dorsey, is currently the Director of Equity Research for Morningstar. Morningstar has historically been known for their 5-star scale of mutual fund ratings, but several years ago began applying the same scale to individual stocks. Since Morningstar's focus is on durable competitive advantage, the firm's investing philosophy correlates very well with that of the Magic Formula and of MagicDiligence. That makes the book particularly relevant and much of my stock analysis is based on techniques outlined in it. The Five Rules... is more or less a two part book. The first half deals covers the title, laying out the five rules for successful investing and then proceeding to expand on each of them. Without spoiling too much of the 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 investor to the techniques of stock analysis. Topics covered include detailed explanations of each financial statement, the points of emphasis to look for in a good investment (such as growth potential and financial health), how to spot accounting blowups before they happen, how to value a stock, and so forth. For everyone interested in stock analysis, from 10 year pros to those just beginning to dip their toes in the market, these chapters contain invaluable and vital information. Nearly every investor will learn something new about evaluating companies and valuing stocks. One particularly valuable chapter is titled "The 10-Minute Test", which will help you quickly throw out stocks that are not worth your time, while highlighting investment opportunities that warrant additional research.

The second half of the book is equally useful. In this section, Dorsey calls upon Morningstar's sector analysts to lay out the intrinsic moat qualities and the factors that separate good and bad companies in a variety of sectors, including Health Care, Consumer Services, Media, Banks, and so on. It's no secret to MagicDiligence Members that some industries are inherently better investment hunting grounds than others, and this book explains why. For example, retail is generally a difficult place to invest - there are no customer switching costs, tons of competition, and constantly changing consumer trends. On the other hand, most medical device makers have very high switching costs, as surgeons are trained on one company's products and are loathe to learn the intricacies of a competing product, unless there is a very good reason to do so.

To close this review, a personal observation. Most investors routinely cite classic investing books like Ben Graham's The Intelligent Investor as the place to start for novice investors. I respectfully disagree. I've read many of those great classics, but no one book has explained the details of company and equity analysis as directly or relevantly as this book. This is one of the most overlooked investing books out there, and comes highly recommended to all investors. -The Motley Fool

From the Inside Flap

Stocks can be the perfect vehicle for your investment journey–if you know how to pick them. With Morningstar’s unparalleled guidance you can get the story behind the numbers and learn how to invest in stocks with care and confidence.

In The Five Rules for Successful Stock Investing, Pat Dorsey, Director of Stock Analysis for Morningstar, Inc., helps today’s investors learn from the mistakes of the past in order to lay a solid foundation for future success. According to Mr. Dorsey, "Investment success depends on personal discipline, not on whether the crowd agrees or disagrees with you." In a highly accessible and down-to-earth style, Dorsey helps even novice investors understand how to evaluate companies and achieve success by buying stocks at a discount of their true worth.

Reading The Five Rules for Successful Stock Investing is like joining a community of fellow investors who want to better understand how stocks operate, avoid the common pitfalls of investing, and build strong stock portfolios they can be confident in. Dorsey and his team of stock analysts will open investors’ eyes to a wealth of investment opportunities that exist regardless of market conditions, as they learn:

  • How to develop a feel for what makes a company profitable
  • How to find great companies with a competitive advantage
  • How to make sure a company’s management team is on their side
  • How to recognize red flags that can cause blow-ups in a portfolio
  • How to apply proven valuation principles to improve results
  • And how to apply a 10-Minute Test to any stock in order to determine if it’s worth investigating in more detail

A complete investment guide for people who are serious about mastering stock strategies, The Five Rules for Successful Stock Investing outlines the rigorous process through which Morningstar evaluates stocks, providing readers with tried-and-true tools for selecting stocks that will make promising long-term investments–and perhaps more important–avoiding those that won’t.

In today’s economic climate, The Five Rules for Successful Stock Investing has something to offer every investor. Seasoned investors will welcome the kind of sound, reliable advice that can help them avoid the mistakes of the past, while novice investors will find the kind of "on-ramp" introduction they need to get moving along the road to better investment results.

--This text refers to the Hardcover edition.

Product Details

  • Paperback: 384 pages
  • Publisher: Wiley; 1 edition (December 29, 2004)
  • Language: English
  • ISBN-10: 0471686174
  • ISBN-13: 978-0471686170
  • Product Dimensions: 6 x 1 x 9 inches
  • Shipping Weight: 1 pounds (View shipping rates and policies)
  • Average Customer Review: 4.6 out of 5 stars  See all reviews (110 customer reviews)
  • Amazon Best Sellers Rank: #49,065 in Books (See Top 100 in Books)

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More About the Author

Pat is the founder of Dorsey Asset Management, which manages concentrated global equity portfolios on behalf of endowments, foundations, and family offices. Prior to starting Dorsey Asset, Pat was Director of Research for Sanibel Captiva Trust, an independent trust company with approximately $1 billion in assets under management.

From 2000 to 2011, Pat was Director of Equity Research for Morningstar, where he led the growth of Morningstar's equity research group from 10 to over 100 analysts. Pat developed Morningstar's economic moat ratings, as well as the methodology behind Morningstar's framework for analyzing competitive advantage.

Pat holds a Master's degree in Political Science from Northwestern University and a bachelor's degree in government from Wesleyan University. He is a CFA charterholder.

Customer Reviews

Top Customer Reviews

Format: Hardcover
I retired at 51 on my investments and have spent much of my time trying to counterbalance the instant-gratification claims of so many of those selling seminars and "help" to the investor.

While few people would be so foolish as to pay $40,000 for a Honda Civic despite that car's solid engineering, many will buy a stock with no concept of what its fair-market value may be. Of this number, some are subscribers to the Greater Fool School of investing. They'll happily overpay for a popular stock in the arrogant belief that they'll be able to unload it for a profit to some Greater Fool. Sometimes, they will indeed make a profit. (At other times, they'll make an excuse.) This book is not for them.

The rest overpay not because they subscribe to the Greater Fool school but because they simply have no idea of how to value a stock. THAT is where this book shines. It will make the investor more conscious of what a stock is worth -- thereby avoiding the payment of $40,000 for a Honda or (in some cases) the payment of $100,000 for a Yugo!

Will the identification of value stocks and the discipline of not overpaying for a stock guarantee a profit? On any given purchase, of course not. However, it is a fool's task to argue that conscious investing based upon some sense of a company's true value will not reward more of its practitioners than Greater Fool speculations will over time.

If you're a serious investor with at least the discipline and patience than you demand of your own children, following this book's counsel should help you to make more money with greater safety. It's more accessible than The Intelligent Investor and a must read both for the novice and for the experienced investor who would like to pick up some distinctions that will improve his or her performance.
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Format: Hardcover
"The Five Rules for Successful Stock Investing" is a guide to value investing by Morningstar's Director of Stock Analysis Pat Dorsey and the folks at Morningstar, Inc. The book's goal is to educate investors in how to "find wonderful businesses and purchase them at reasonable prices." Its title is a little misleading in that the "Five Rules" are a small part of this book. The five principles to which the title refers are: 1. Do your homework, 2. Find companies with strong competitive advantages (or economic moats), 3. Have a margin of safety, 4. Hold for the long term, 5. Know when to sell. Those are vague principles, but most of this book is dedicated to telling you just what homework you need to do and exactly how to do it. Pat Dorsey and Morningstar are advocates of long-term investing who are skeptical of trading and portfolio churning, so this book's intended audience is value investors. No technical analysis here. This is all fundamental analysis, but traders may find the advice on analyzing company finances useful as well.

"The Five Rules for Successful Stock Investing" has 2 parts: Chapters 1-12 are a "how-to" for analyzing companies, their finances, and determining what their stock should be worth. Key points include how to evaluate a company's competitive advantages, what to look for in financial statements, analyzing a company's management, spotting financial chicanery, and how to determine a company's intrinsic value. This is all fairly complex, and there is math involved, but the book takes you through the process, with examples, explaining why and how every step of the way.
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Format: Paperback Verified Purchase
Have been meaning to put in a good word for this book for a long time. It's a gem. I've read an embarrassingly large number of introductions to investing in equities and this is probably the best. Other books purport to tell you how to identify hot stocks; Dorsey shows how to value companies. This isn't just a matter of understanding PE ratios and other traditional metrics, which most books explain more or less adequately. Instead, it means analyzing balance sheets and cash flow and income statements. _Five Rules_ provides as reader-friendly an introduction to assessing a company's financial statements as I've come across, with plenty of real-world examples. The object in the end is to determine the present value of a company's future cash flows, and Dorsey's explanation of a simplified version of Fisher's and William's discounted cash flow model is lucid and lively. Clorox is the company evaluated in this chapter, and en route there are instructive comparisons of HP and Dell, Best Buy and Circuit City, and, finally, AMD and Biomet. Chapter 8, Avoiding Financial Fakery, is particularly helpful. Obviously, having read this book and nothing else, you're not going to be able to spot something fishy in the footnotes to Microsoft's income statement that has escaped the attention of all the analysts. But for someone without a background in accounting, _Five Rules_ is a godsend.

Dorsey then conducts a very informative tour d'horizon of 13 industries. It should go without saying that before you invest in a company, you'd want to find out something about the economics of its industry, so you can compare apples with apples. The chapter on health care is especially good, but I found them all excellent.
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