20 September 2011

The five rules for successful stock investing – Morningstar's Guide to building wealth and winning in the Market: Summary

This is a summary I jot down after read the great book of "The five rules for successful stock investing". From this book, Pat Dorsey (Director of stock analysis) recommends five rules for investors to succeed in their investment.

1. Do your homework

-Don't buy a stock unless you understand the business inside and out.
-Know about accounting and how to boil the analysis process down to a manageable level

2. Find Economic Moats

-Economic moats is used to describe a firm competitive advantage
-Focus on companies with wide economic moats that can help them fend off competitors.

3. Have a margin of safety (PE)

-Don't buy a stock without a margin of safety

4. Hold for the long haul

-Treat your stock buys like major purchases, and hold on to them for the long term.

5. Know when to sell

-Sell only (a) You made a mistake buying it in the first place; (b) the fundamentals have deteriorated; (c) the stock has risen well above its intrinsic value; (d) you can find better opportunities; or (e) it takes up too much space in your portfolio.

In addition, the director of stock analysis also points out the seven common mistakes which investors should be avoided:

1. Swinging for the fences

-Don't try to shoot for big gains by finding the next Microsoft. Instead, focus on finding solid companies with shares selling at low valuations.

2. Believing that it's different this time

-Be a student of the market's history to understand its future

3. Falling in love with products

-“Is this an attractive business? ” “Would I buy the whole company if I could?”
-Before you get swept away by exciting new technology or a nifty product, make sure you've checked out the company's business model

4. Panicking when the market is down

-“The time of maximum pessimism is the best time to buy” (Sir John Templeton)

5. Trying to time the market

-Attempting to time the market is a fool's game. There's ample evidence that the market can't be timed.

6. Ignoring valuation

The best way to reduce your investment risk is to pay careful attention to valuation.

7. Relying on earnings for the whole story

Cash flow is the true measure of a company's financial performance, not reported earnings per share.

That's all for today. More fascinating articles and sharing will be updated from time to time in Xaivier Blog. So, you are welcome to subscribe our feed, look at our sitemap or simply visit our Homepage.

Written by: Xaivier Chia

A copy of "The five rules for successful stock investing – Morningstar's Guide to building wealth and winning in the Market" can be found at Amazon.com.


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