The Five Rules for Successful Stock Investing (Pat Dorsey) 0 comments

I came across this book at Borders earlier this month and thought that I should introduce it to both newcomers to investing as well as more seasoned investors. There is something in this book for everyone.

Pat Dorsey is the Director of Stock Analysis for Morningstar, an independent financial analysis firm of fine repute in the US. The book is written in a serious and highly informative tone which does justice to the firm's reputation. For the stock investor who is inclined to the fundamentals side, this book covers all the essentials, and more.

Although the book has 26 chapters in total, I would categorise it into two distinct parts. Chapters 1 to 12 elaborates at length on the basics of fundamentals investing. There is no folksy overtone a la Peter Lynch here; the description is strictly no-nonsense but still highly readable because of the sheer relevance of the information presented to both beginner and veteran investors. It starts, of course, by revealing what are the five rules of successful investing: doing your homework, finding economic moats, having a margin of safety, holding for the long haul, and knowing when to sell. The author then delves into the key qualitative and quantitative aspects of value investing, including how to identify good businesses, management assessment, a detailed look at accounting statements, basic valuation, and possible pitfalls.

I would think the above topics covered in the first part of the book quite comprehensively cover the key bases of fundamentals investing, with perhaps a key omission being a complete absense in describing some market technicals such as price/volume factors which would be useful in advising the investor when to sell. Although the topics are sensibly written, the fact is that veteran investors would probably be familiar in general with these issues, if they have read books on Warren Buffett, for example. The views are nothing new (although one can find new insights here and there). This is where the second part of the book comes in, and I have seldom seen other books cover this aspect, which is why I highly recommend it. Chapters 13 to 26 provide the reader with an overview of the various important industry sectors, covering such diverse areas as healthcare, entertainment, consumer goods, industrials, energy, banks, technology, services etc in individual chapters. For each industry, the structure of the value chain is described eg. utilities would consist of upstream energy generation companies, then energy transmission companies, then finally the last-mile distributors. The author would then delve into strengths and weaknesses of the industry (eg. whether it requires high capital investment, whether it has strong and sustainable economic moats), red flags to look out for, and then end the chapter with an investor checklist for that particular industry.

I have skimmed through Benjamin Graham's The Intelligent Investor but I seriously think that Five Rules is a better book for the starting investor. For one thing, it is definitely more readable. It presents the key issues of fundamentals investing in a concise volume, and offers a working knowledge of the various industries for good measure. Definitely a book whose commonplace title belies its excellent content.