Customer Reviews

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

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"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. Chapters 13-26 provide overviews of 13 industries, from banks to software to industrial materials, including information on what the industries do, how they make money, hallmarks of successful companies, and risks to look out for. Each of these chapters concludes with an "Investor's Checklist" for that sector to help you identify key factors when choosing a stock. "The Five Rules for Successful Stock Investing" is among the best books I've seen for learning how to pick apart financial statements, and it packs a great deal of advice on evaluating companies within their sectors into one concise and readable volume. Highly recommended to value investors.

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.

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.

In an Ameritrade ad that aired this week, a teenager asks her dad for $80 for a pair of jeans. The dad is nonplused, but the girl assures him that everyone is buying these jeans. He asks her who the manufacturer is, promptly logs onto Ameritrade, checks a chart, and buys the company's stock. The guy then gives his daughter the $80, a reward for the hot tip, presumably. He might do OK this time, but you have to figure he'd be a lot better off in the long run investing a fraction of that $80 in _Five Rules_.

Bottom line: there are a ton of books on trading strategies, but if you're looking for a practical book on value investing, this is the best.

There are many books on financial statement analysis, and I've bought most of them...being a liberal arts major who is working toward an MBA in Finance, I've found mastering ratios and concepts related to reading company annual reports frustrating and challeging: my brain seemed not to be wired to be competent in this subject matter. However, I find Pat Dorsey's treatment effective in that he uses the concepts in a less intimidating context than other books might, without watering down the content. Can someone read this book and decipher GE's annual statement to the last footnote? Not hardly. It is often said that it's knowing the essential 20% of a subject that is responsible for 80% of one's success, and this book fills this role in understanding that 20%. Further, the chapters breaking out how to modify analyis of different sectors and industries in the market is also helpful to avoid comparing apples to oranges when evaluating stocks and companies. Beyond this book, the next step up from this would be "Analysis for Financial Management" by Higgins.

The best investing principles, as clearly reiterated here, are stable and evergreen. As an investor, you'll welcome author Pat Dorsey's unambiguous, straightforward presentation of the always valid wisdom of the markets. This conveniently organized book offers several chapters of general relevance to investors in all markets and industries, including an industry-by-industry examination of the determinants of value. The title is cute, but the content isn't about the title's rules - it is about learning and obeying the basics of stock investing. We recommend the author's long term perspective. Many of the directions he sets for potential investments could still be valid years hence.

This book is the best book on fundamental investing that I have ever read. It is clear, concise and filled with simply stated useful information. For anyone interested in value investing this is a perfect place to start. Financial information is demystified, and the worth and usefulness of each financial statement is explained methodically and completely enabling any investor to analyse a company in a logical and competent manner. Financial ratios and the importance of each is covered.
Additionally, and unusually, a number of industries are discussed, giving the salient factors to consider in each.
There is also an excellent bibliography for additional reading.
All in all, this is a superb book.

The Five Rules for Successful Stock Investing has recently replaced Buffettology as the best stock investing book I have ever read. Morningstar.com is always a great source of investing advice, and they have produced a very informative book.

Other titles I highly recommend:
The New Buffettology by Mary Buffett (Stocks)
A Random Walk Down Wall Street by Burton G. Malkiel (Mutual Funds)
The Theory of Investment Value by John Burr Williams (Stocks & Bonds)

Don't just read this book and let it languish on your library shelf. STUDY this book carefully, and keep it with you for reference.

Chapter 5, "Financial Statements Explained" is in my opinion, the most important part of the book. As an investor, understanding what the Cash Flow Statement and Balance Sheet is telling you is the only way to understand what's really going on in the company.

Did you know that the Accounts Receivable entry can tip you off that the company may be in trouble? The Balance Sheet can tell you if anything is tying up the companies cash flow and reducing earnings.

You can't discover this essential information any other way than by reading the financial statements and understanding them. Pat Dorsey, the author, is a master at explaining these important concepts without talking down to the reader. You probably won't take everything in on the first pass through the book. It will require some time and work on your part to really understand what Dorsey is saying, but then when has anything worthwhile in life come without effort?

If you can buy only one book on investing this year, buy this one. If only it had been available when I first started investing.

Great book on investing. The book covers information you would normally have to search in many places for.
There are errors in the perpetuity formula on page 150 and the multiple used for discounting on page 144 should be 1.1449 no 1.449.

This is by far the best stock market book I read. I read a lot of good books, Intelligent Investor, One up on wall street. The Warren Buffett Way, The Essays of Warren Buffett, The little book that beats the market, and this is by far the most helpful ccause it guides you step by step and it really goes into details. Most of the books just narrates with generalities. I really like the part where it teaches you how to look look at the income statement, balance sheet and cash flow, how to compute the future cash flow and get its present value and how to compute the intrinsic value. After discusing the procedures, it completes it with real life example the goes tru step by step. After each chapter, theres a summary. Highly Recommended!