9780471269656

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

by ;
  • ISBN13:

    9780471269656

  • ISBN10:

    0471269654

  • Format: Hardcover
  • Copyright: 2003-12-01
  • Publisher: Wiley

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Summary

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.

Author Biography

<b>PAT DORSEY, CFA,</b> is the Director of Stock Analysis for Morningstar, Inc. He writes regularly for Morningstar.com and heads Morningstar&#8217;s team of equity analysts. He was instrumental in developing the Morningstar Rating for stocks and played a key role in building Morningstar&#8217;s stock coverage. Dorsey is widely quoted in the media, including USA Today, U.S. News &amp; World Report, NBC Nightly News, CNBC, and CNN. He also appears weekly on the Bulls and Bears financial show on Fox News Channel. <p> <b>MORNINGSTAR, INC</b>. is a Chicago-based global investment research firm. Morningstar is known for its independent research and analysis of stocks, mutual funds, exchange-traded funds, closed-end funds, and more. Morningstar is a trusted source for individuals, financial advisors, and financial institutions.

Table of Contents

Foreword ix
Introduction: Picking Great Stocks Is Tough xv
It's the Business that Matters xvi
The Long-Term Approach xvii
Having the Courage of Your Convictions xviii
Let's Get Started xviii
The Five Rules for Successful Stock Investing
1(12)
Do Your Homework
2(1)
Find Economic Moats
3(1)
Have a Margin of Safety
3(2)
Hold for the Long Haul
5(2)
Know When to Sell
7(4)
Investor's Checklist: The Five Rules for Successful Stock Investing
11(2)
Seven Mistakes to Avoid
13(8)
Swinging for the Fences
14(1)
Believing that It's Different This Time
14(1)
Falling in Love with Products
15(1)
Panicking When the Market Is Down
15(2)
Trying to Time the Market
17(1)
Ignoring Valuation
18(1)
Relying on Earnings for the Whole Story
18(1)
Investor's Checklist: Seven Mistakes to Avoid
19(2)
Economic Moats
21(18)
Evaluating Profitability
22(2)
Building an Economic Moat
24(9)
How Long Will It Last?
33(3)
Industry Analysis
36(1)
Investor's Checklist: Economic Moats
37(2)
The Language of Investing
39(10)
The Basics
39(2)
Where the Money Goes
41(1)
Practical Financials---The Statements in Use
42(6)
Investor's Checklist: The Language of Investing
48(1)
Financial Statements Explained
49(30)
The Balance Sheet
50(9)
The Income Statement
59(7)
The Statement of Cash Flows
66(10)
Conclusion
76(2)
Investor's Checklist: Financial Statements Explained
78(1)
Analyzing a Company---The Basics
79(24)
Growth
80(5)
Profitability
85(11)
Financial Health
96(3)
The Bear Case
99(1)
Conclusion
100(1)
Investor's Checklist: Analyzing a Company---The Basics
100(3)
Analyzing a Company---Management
103(10)
Compensation
104(4)
Character
108(2)
Running the Business
110(2)
Investor's Checklist: Analyzing a Company---Management
112(1)
Avoiding Financial Fakery
113(12)
Six Red Flags
114(3)
Seven Other Pitfalls to Watch Out For
117(6)
Investor's Checklist: Avoiding Financial Fakery
123(2)
Valuation---The Basics
125(14)
Paying Up Rarely Pays Off
126(2)
Using Price Multiples Wisely
128(7)
Say Yes to Yield
135(2)
Investor's Checklist: Valuation---The Basics
137(2)
Valuation---Intrinsic Value
139(16)
Cash Flow, Present Value, and Discount Rates
140(3)
Calculating Present Value
143(1)
Fun With Discount Rates
144(3)
Calculating Perpetuity Values
147(5)
Margin of Safety
152(1)
Conclusion
153(1)
Investor's Checklist: Valuation---Intrinsic Value
154(1)
Putting It All Together
155(22)
Advanced Micro Devices
155(9)
Biomet
164(11)
Conclusion
175(2)
The 10-Minute Test
177(6)
Does the Firm Pass a Minimum Quality Hurdle?
178(1)
Has the Company Ever Made an Operating Profit?
178(1)
Does the Company Generate Consistent Cash Flow from Operations?
178(1)
Are Returns on Equity Consistently above 10 Percent, with Reasonable Leverage?
179(1)
Is Earnings Growth Consistent or Erratic?
179(1)
How Clean Is the Balance Sheet?
179(1)
Does the Firm Generate Free Cash Flow?
180(1)
How Much ``Other'' Is There?
180(1)
Has the Number of Shares Outstanding Increased Markedly over the Past Several Years?
180(1)
Beyond the 10 Minutes
181(2)
A Guided Tour of the Market
183(4)
Where to Look
184(1)
Conclusion
185(2)
Health Care
187(20)
Economic Moats in Health Care
188(1)
Pharmaceuticals
189(6)
Generic Drug Companies
195(2)
Biotechnology
197(3)
Medical Device Companies
200(2)
Health Insurance/Managed Care
202(2)
Investor's Checklist: Health Care
204(3)
Consumer Services
207(12)
Companies We See Every Day
208(1)
Restaurants
209(2)
Retail
211(6)
Conclusion
217(1)
Investor's Checklist: Consumer Services
218(1)
Business Services
219(12)
Outsourcing Trend
220(1)
Economic Moats in Business Services
220(1)
Technology-Based Businesses
221(3)
People-Based Businesses
224(2)
Hard-Asset-Based Businesses
226(3)
Investor's Checklist: Business Services
229(2)
Banks
231(16)
It's All about Risk
233(1)
Managing Credit Risk
233(2)
Selling Liquidity
235(1)
Managing Interest Rate Risk
236(3)
Economic Moats in Banks
239(2)
Hallmarks of Success for Banks
241(4)
Investor's Checklist: Banks
245(2)
Asset Management and Insurance
247(18)
Asset Management
247(6)
Life Insurance
253(4)
Property/Casualty Insurance
257(6)
Investor's Checklist: Asset Management and Insurance
263(2)
Software
265(10)
Segments of the Software Industry
266(2)
Economic Moats in the Software Industry
268(1)
Software Accounting 101
269(1)
Red Flags
270(1)
Hallmarks of Success for Software Companies
271(2)
What's Not to Like about Software?
273(1)
Conclusion
273(1)
Investor's Checklist: Software
274(1)
Hardware
275(10)
What Drives the Hardware Industry
276(1)
Hardware Industry Dynamics
277(2)
Economic Moats in Hardware
279(3)
Hallmarks of Success for Hardware Companies
282(1)
Investor's Checklist: Hardware
283(2)
Media
285(10)
How Media Companies Make Money
286(2)
Economic Moats in Media
288(1)
Publishing Profits
289(1)
Broadcasting and Cable
290(1)
Investing in the Entertainment Industry
291(1)
Hallmarks of Success in the Media Sector
292(1)
Risks in the Media Sector
293(1)
Investor's Checklist: Media
294(1)
Telecom
295(10)
Telecom Economics
298(2)
Economic Moats in Telecom
300(2)
Hallmarks of Success in Telecom
302(1)
Conclusion
303(1)
Investor's Checklist: Telecom
303(2)
Consumer Goods
305(12)
How Companies Make Money in Consumer Goods
306(1)
Key Strategies for Growth
306(3)
What's Not to Like in Consumer Products
309(1)
Economic Moats in Consumer Goods
310(3)
Hallmarks of Success in Consumer Goods
313(2)
Conclusion
315(1)
Investor's Checklist: Consumer Goods
315(2)
Industrial Materials
317(14)
The Problem with Cyclicality
318(2)
Economic Moats in Basic Materials
320(1)
Economic Moats in Industrial Materials
321(3)
Hallmarks of Success in Industrial Materials
324(2)
Red Flags
326(3)
Finding Opportunities in Industrial Materials
329(1)
Investor's Checklist: Industrial Materials
329(2)
Energy
331(10)
From the Ground
331(1)
To the Pipelines
332(1)
To the Refineries
333(1)
To the Consumers
333(1)
Providing the Services
333(2)
The Impact of Commodity Prices
335(2)
Economic Moats in Energy
337(1)
Hallmarks of Success for Energy Companies
338(1)
Risks in the Energy Sector
339(1)
Conclusion
340(1)
Investor's Checklist: Energy
340(1)
Utilities
341(8)
Electricity Primer
341(2)
Regulation, Regulation, Regulation
343(1)
Financial Characteristics of Utilities
344(1)
Hallmarks of Success for Utility Companies
345(1)
Risks in the Utilities Sector
346(1)
The Big Picture
347(1)
Investor's Checklist: Utilities
347(2)
Appendix 349(4)
Recommended Readings 353(2)
Morningstar Resources 355(2)
Index 357

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