Customer Reviews

Sensible Stock Investing: How to Pick, Value, and Manage Stocks

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This book stands head and shoulders above the great bulk of what I've read on the subject of stock investing. Much of what's out there these days seems to have been written either for the gullible, get rich quick types or for those who have completely given up on trying to come out ahead of the pack and have resigned themselves to the boredom of simply buying and holding index funds. But this book's premise is that the small individual investor actually can beat the market, not through some secret, author-discovered formula, but by applying logic, discipline, and a bit of effort. If you believe, as I do, that knowledge and diligence tend to be rewarded in the Market as in life generally, you're going to like this book.

The author does a great job of smoothly guiding the reader through a potentially dry and difficult subject, without presuming any particular prior knowledge or experience. In fact, the book could almost serve as a textbook on how the stock market operates if it weren't such a quick and enjoyable read. The contents are well organized, and the writing is clear and to the point. The author effectively uses two real world portfolios to demonstrate the application of his techniques and at the same time buttress his credibility. There are also several helpful appendices, including forms for valuing companies and reviewing a portfolio, as well as a handy investment calendar.

One other thing that makes this book special is the feeling it conveys throughout that stock investing can and should be approached as an engaging, enjoyable hobby, like, say, belonging to a fantasy football league. I think an investor who maintains such an attitude is the most likely to stick with the sound techniques this book espouses while at the same time he or she reaps an extra dividend of happiness.

The author uses a "points system" to identify potential investment opportunities. Returns on equity and dividend history are given the greatest weight, followed closely by historical and forecast earnings per share. Since the rating system takes multiple factors into account, a low score in one area does not automatically exclude a company from consideration.

Points are also awarded to companies that have compelling stories. Is the company a dominant player in its industry? Does the company have pricing power? Answers to questions like these will begin to narrow the range of possible investment candidates. To assist in that effort, the book includes a "company story" questionnaire that investors will find useful.

For stock valuation, the system looks at historical and projected price/earnings, price/earnings growth ("PEG") ratios, and dividend yields. Discounted cash flow analysis is not part of the author's suggested approach, for reasons that the book discusses in some detail.

The book also includes a sample stock watch list and sample worksheets for monitoring portfolio performance and for tracking market indicators, all nicely tailored to meet the requirements of the time-pressed investor.

The section on portfolio management takes an in-depth look at company- and market-related issues that enter into the decision to hold or sell, and examples are used to illustrate key points effectively. There is also discussion of circumstances unique to the individual that may warrant a sell decision, for example, the need to rebalance for diversification purposes.

The author's suggested guidelines for cutting losses (10% - 15% decline on new purchases) may strike some readers as overly cautious. However, the system allows for (and even encourages) departures from the baseline recommendation in certain circumstances. The system lets you keep things flexible. That's a good thing in my opinion.

The Introduction to the book refers readers to the author's web site, which among other things includes a brief overview of the investment approach and book excerpts.

I have read a variety of books on investing, but have never before come across one which is so uniquely suited to the individual investor. That may be because the author is "one of us." He appears to be a successful businessman who taught himself to become a successful investor. He is not from the "Wall Street" industry. Instead, he brings the perspective of the "Main Street" individual.

For example, Van Knapp has created easy-to-use tools to rate companies and their stocks--such as a simple point system which allows companies to be graded against each other. Forms like the one he calls the Easy-Rate sheet make for easy recording of the information. He shows you how to create a Shopping List, and how you should take a step back every few months to look at the stocks you own strategically.

This book is only about stock investing, and that is a plus. There is nothing here about how to manage your 401(k), how to allocate your money among asset classes, or whether to buy annuities. With all the space saved by leaving that information out, Van Knapp has written an amazingly informative book about stocks. Such subjects as how indexes (like the Dow) are computed are covered in simple language--things all investors should know, but usually only have a vague idea about.

Another strength of this book is that it covers portfolio management--meaning topics like how many stocks to own, how diversified they should be, when to buy, and (most important) when to sell. Again, topics that individual investors should be thoroughly familiar with, but often aren't. Taken together, it all comprises a stock-investing system, one that can give you confidence that you are not just shooting in the dark or bouncing from theory to theory without an overall strategy.

Van Knapp writes in a conversational style that is suitable for beginners or experienced stock investors. He does not talk down. This is the kind of book that you read once and then keep referring to again and again, because the information is so accessible.

Highly recommended.

After reading several books on investing, I clearly fall into the "value" style of it. This book does a good job of explaining important financial evaluations, without relying on a discounted cash flow analysis to pick stocks. Considering the assumptions and projections needed to do such an analysis, sticking with financial valuation ratios is probably much easier for the average investor.

PROs:

- Rejects efficient market hypothesis, which states that stocks are always "properly priced."

- Doesn't rely on DCFA. (Even though I use it myself on companies I know well enough)

- His "black box" method of understanding financial inputs and outputs is easily understandable.

- Has a definite "value" tilt, which over the long run has proven to be the more successful style.

- Stressing continually that a stock's price is tied to its earnings.

- Gives historical averages for important financial ratios.

- Explains why a stock may have such a high P/E

- Goes against several value investors who say you should always be fully invested, by saying you should have some cash set aside (John Neff was big on this) if nothing looks attractive. Not a huge percentage of your portfolio, but 15% is fine.

- "Market timing," which is usually shunned by almost everyone, is given good treatment here.

- Uses technical analysis to explain WHEN to buy a stock. Despite most fundamentalist saying avoid technical analysis at all costs, a stock that has wild volatility in a given period is a much better buy in the long run when its purchased cheaper (see page 232). He also doesn't use it simply to buy a stock, but uses it WITH fundamental analysis. "Fundamental analysis tells you WHY to buy a stock, technical analysis tells you WHEN to buy it."

Despite the fantastic advice given here, there are several glaring point that I have to address.

CONs:

- No discussion of dollar cost averaging, which many of the most successful investors (Graham, Buffett, Lynch) consider to be the single best way to build wealth over the long term. This leads into my second negative point.

- Tells you to sell if a stock drops more than 10%, to automatically sell it. This makes no sense to me at all, and I also agree that capital preservation should be a focus, from a value and fundamental standpoint. The author clearly rejects the EMH, so unless the decline in price is matched by a decline in the fundamentals, this dip is a buying opportunity. If you've already have confidence in its financials, know its story, and bought it at a good value, shouldn't a decline in 10% or more trigger you to BUY more shares? Again, this sentiment is shared by the investors listed above.

Furthermore, what's the point of keeping a small cash reserve in your portfolio if you're not going to use it on companies you already feel strongly about? As Lynch said (paraphrased) in his books, "You shouldn't buy a stock at all if you were to find out it declined 50% in price, and aren't willing to buy more shares." Selling on a 10% decline is about as shortsighted as it comes.

- Isn't a contrarian, hence believes that "the trend is your friend." If you've done your own thorough analysis, and despite what others are saying about the stock, you should act on your own conclusions, and not anyone elses. Like I said above, if everyone is selling, and you're analysis was thorough, don't be afraid to go against the grain.

This is illustrated perfectly when he explains his (mistake) of selling most of his portfolio right after 9/11. He admits he was wrong, but for a "Sensible Stock Investor," this was perhaps the most nonsensical move to make, unless your portfolio was made up primarily of airlines and financials.

EXAMPLE: Intel dropped almost 30% due to the 9/11 attacks. Does a terrorist attack in New York somehow effect the fundamentals of a semiconductor company in California? Obviously, it doesn't directly affect it in any way. Sure, the economy may slow down for a little, and PC sales might stall, but that doesn't justify a 30% drop. It was (as the author said) a completely emotional response.

But instead of buying more during these types of episodes that have no actual bearing on the companies true prospects, the author instructs us to "sit tight" and let the market eventually revert to the mean, which it will. But in the time being, you could've added substantially to your portfolio to recognize huge gains at greatly discounted prices.

This takes a contrarian approach, to buy when everyone's selling. But if everyone is selling due to a pure emotional response (9/11), and not due to an inherent weakness in the overall economy or financial system (See 9/2008), then these type of events are a BUYING opportunity, if you have enough confidence in your stock selection.

- Believes Wall Street forecasts are useful in evaluating a company. Usually when a company is rated as a consensus "BUY," that's when it's time to sell.

- The Market Timing section, as good as it is, shouldn't be used by people who have little to no knowledge of the political economy. If you don't have this background, stick with Buffett's advice on buying a company, regardless of the economic forecasts.

- Margin of safety is implicit in a lot of his approaches, which is good, but doesn't discuss the concept itself thoroughly for those unfamiliar with it.

- Doesn't emphasize nearly enough that stock investing should be as emotionally detached as possible regardless of how much you enjoy doing it.

- Doesn't mention how "insider buying" is usually a good indication that management is confident about the company's future, and should be a BUY signla to the outside investor.

Overall it's a good book, and certainly worth the read, but only if you are willing to read other books that give you the same basic (value) approach, with a slightly different perspective. I would recommend reading this with Peter Lynch's "One Up On Wall Street," "Beat the Street," Charles Mizrahi's "Getting Started in Value Investing," and Glen Arnold's "Financial Times' Guide to Value Investing."

As a woman who has recently become interested in stock investing, I found this work, Sensible Stock Investing, to be an invaluable guide in assisting me through the incredible maze of investing in the stock market. The author takes the time to explain his reasoning in clear, concise language without talking down to the reader. His thorough explanation of his methodologies, backed up by concrete examples, is hard to beat. So many times, the so-called experts recommend a particular stock or downgrade another without actually putting their money on the line. This author takes a different tack--he actually has "skin in the game" and that makes for fascinating reading. I highly recommend this book.

I am an Individual Investor and manage a family portfolio. Also, I evaluate professional money managers for a family trust and a Pension Plan. This book is a must for me in these roles. It is valuable for my own stock picking as well as understanding and evaluating the fee money managers. I highly recommend a sensible approach to investments.

First, what this book is NOT:

A primer on asset allocation or asset classes other the individual stocks. If you only invest in bonds, cash, and mutual funds, this book is not for you.

What this book is:

A primer on evaluating stocks to consider buying. The author explains what types of companies to look for. The author discusses developing the comapny's story, how a company fits into megatrends, how to determine a dominant company, and how to evaluate the company's financials. He has developed a scoring system that is easy to understand and flexible, so an investor can tweak the system to their own values.

A primer on stock valuation, primarily using valuation ratios. Again, there is an easy to use scoring system.

A primer on managing your portfolio. Several stock types are discussed, including aggresive Type A stocks, momentum stocks, dividend stocks, blue chips, and EFTs. Concentration vs. diversification are discussed including a recommendation for a reasonable number of stocks to own. When to buy and sell, market timing (based on eight easy to find market indicators) and investing strategy are also discussed.

The author has invested in two real money portfolios, one aggresive, the other more conversative and dividend oriented. He discusses his actual results for the two portfolios and lessons learned. The portfolios were started in 2001 and 2002, hardly during a bull market, so the better than the market results are not simply a result of favorable market conditions.

The appendices include several forms recommended by the author: a stock rating form, company story questionnaire, a stock shopping list, a market timing outlook, and portfolio review.

For those who hate books that are basically sales pitches, this book thankfully has little. The author has a web site, but it is only mentioned a few times, and never pushed.

In all, a good stock picking book with an easy to understand system for evaluating potential companies, valuing their stocks, and managing a portfolio.

The author does a superb job of shedding light on a complex subject in a way that's immediately accessible to beginners. He lays out the material clearly, writing in plain English to the extent possible, neatly billboarding the points he wishes to make. Then he makes his points efficiently and drives them home with (welcome) repetition, striking the right balance between simplicity and nuance. Wise investing still takes work -- there's no easy way around that -- but this book details a method that any reasonably competent person may follow. I will refer to it often. Wish it had come out 20 years earlier!

Well written and easy to understand, Knapp explains his point system of rating companies and valuating stock prices. It's still too early for me to say if his methods work, but I've at least gained a decent understanding of stocks and how to look at them objectively.

As an investor who believes in many of the valuation techniques of Buffett and Peter Lynch, I was constantly trying to find a way to properly grade a stock. Finally, someone tied all the important components together in an easy-to-use scoring system that takes all the emotion out of investing. David Van Knapp has written an understandable and extremely well detailed book that walks you through all the important points necessary to determine 1) If the stock is under or over valued, 2) Is the timing right to purchase it, and 3) When it's time to get out.

Since I began using Mr. Van Knapp's system, my returns have dramatically improved. Using his dividend strategy earlier this year during the exceptional market volatility we experienced, I outperformed the exchanges by 5%.

I would highly recommend this book to seasoned veterans and new investors alike as a staple for your library. Sensible Stock Investing is destined to be included with some of the great works of Graham, Lynch and Siegel.