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

by Pat Dorsey (Director of Stock Analysis); Foreword by: Joe Mansueto

• ISBN13: 9780471269656
• ISBN10: 0471269654
• Format: Hardcover
• Copyright: 2003-12-01
• Publisher: Wiley

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