Most importantly, I learnt how to identify and evaluate good businesses. Investment success depends on personal discipline, not on whether the crowd agrees or disagrees with you. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. It should be easy to see why eBay has a near-monopoly in online auctions in most of the world. The long-run performance of stocks is largely based on the expected future cash flows of the companies attached to them—it has very little to do with what the stock did over the past week or month. Falling in Love with Products This is one of the easiest investment traps to fall into. Have a margin of safety.
Therefore, most highly profitable firms tend to become less profitable over time as competitors chip away at their franchises. I have the great fortune to work with a group of very talented and dedicated analysts, and a round of applause is due to the entire Equity Analyst team at Morningstar. This book could not have been written without their accumulated industry expertise. This book was recommended to me by a colleague after I showed some interest in stock investing. That is not to say he ignores the five rules completely, but mainly the book is divided in two big parts. One day, when I had all these shareholder reports scattered across my dining room table, I thought it would be useful if someone compiled all that valuable information into a book. After 2011 Pat Dorsey founded where he is still working.
It gives a sound, comprehensive and logically consistent investment strategy. Or a good company from a great one? What keeps competitors from stealing its profits? This means that most highly profitable companies tend to become less profitable as other firms compete with them. Customers may feel pressure from their own clients—or their peers—to continue using a well-known and well-respected product or service. Expecting to make a large amount of money with only a little effort is like expecting to shoot a great round of golf the first time you pick up a set of clubs. Think about companies such as Sony or Ford, both of which have wellknown brands. If you choose this type of franchise investment you also per necessity have to focus your research effort on finding that wonderful business and securing that it stays that way.
The results in the paper cited previously overstate the benefits of timing because they looked at each year as a discrete period—which means they ignore the benefits of compounding as long as you assume that the market will generally rise over long periods of time, that is. About the author: The Science of HittingI'm a value investor with a long-term focus. There is a lot of industry analysis which is very useful while analyzing real world companies. One area of particular relevance and somewhere that Mr. If you want to get a first impression and check out his way of thinking I recommend watching the video about the talk he gave at Google.
Morningstar brought rigorous, fundamental analysis to the industry. Panicking When the Market Is Down Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips. However, it can also be very powerful, which is why firms with high customer switching costs often have wide economic moats. Dedicated to long-term fundamental value investing this site offers analysis of stocks and comanies that seem interesting and like a good investment. If you are novice to intermediate level value investor then careful reading of this book at least twice will catapult you into next orbit. How many investors even do this level of valuation and evaluation of companies they invest in.
So, before we dive into the company analysis process, I want to introduce you to seven easily avoidable mistakes that many investors frequently make. Has the Stock Risen Too Far above Its Intrinsic Value? In general, firms can create cost advantages by either inventing a better process or achieving a larger scale. My goal is to make a small number of meaningful decisions a year. Thanks also to Catherine Odelbo, president of securities analysis and our retail business, for her ongoing support of this project and our equity research efforts at Morningstar, and to founder Joe Mansueto for having the vision to take a risk and build Morningstar. Are Returns on Equity Consistently above 10 Percent, with Reasonable Leverage? The costs of frequent trading can be a huge drag on performance over time.
. 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. Do You Have Too Much Money in One Stock? Is There Something Better You Can Do with the Money? Comparing firms with industry averages is always a good idea, as is examining the trend in profitability metrics—are they getting higher or lower? Includes bibliographical references pages 353-356 and index Introduction: Picking Great Stocks Is Tough -- It's the Business that Matters -- The Long-Term Approach -- Having the Courage of Your Convictions -- Let's Get Started -- The Five Rules for Successful Stock Investing -- Do Your Homework -- Find Economic Moats -- Have a Margin of Safety -- Hold for the Long Haul -- Know When to Sell -- Seven Mistakes to Avoid -- Swinging for the Fences -- Believing that It's Different This Time -- Falling in Love with Products -- Panicking When the Market Is Down -- Trying to Time the Market -- Ignoring Valuation -- Relying on Earnings for the Whole Story -- Economic Moats -- Evaluating Profitability -- Building an Economic Moat -- How Long Will It Last? These patents allow the company to charge high prices for new drugs for years after they hit the market. The gurus listed in this website are not affiliated with GuruFocus. By bringing a stock perspective to the mutual fund world, we began to define the Morningstar approach to fund investing. We thought we could do better.
The key to identifying wide economic moats can be found in the answer to a deceptively simple question: How does a company manage to keep competitors at bay and earn consistently fat profits? Those extra bidders attracted still more sellers— the sellers wanted to go where the buyers were, and the buyers wanted to go where the sellers were. Medical device firms such as Stryker and Zimmer are perfect examples of how firms can create high switching costs that help ensure customer retention. Net margin is simply net income as a percentage of sales, and it tells you how much profit the firm generates per dollar of sales. The proverbial light bulb clicked. The size of your margin of safety should be larger for shakier firms with uncertain futures and smaller for solid firms with reasonably predictable earnings. Driving Costs Down Offering a similar product or service at a lower cost can be an extremely powerful source of competitive advantage.
Many investors sell their winning stock too early and continue losers for too long Auther discusses in detail how to keep track on company performance and when to sell and when not to sell. I learnt about how finances are tracked. And the more we looked at information available for stock investors, the more we realized that we had something innovative, useful, and unique to offer. Stock quotes provided by InterActive Data. But both firms have struggled to generate solid returns on capital over the past few years because they sell goods that are simply not very amenable to brand-driven price differentiation. Among his many talents, Pat can communicate in a clear and engaging way, and he has the rare ability to distill complex questions to a form so that the answer appears obvious.