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28-Oct-09

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17-Nov-09

Investing Book Review: Why are we so clueless about the stock market

Holding Rationale for MHH.

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Investment Book: Why are we so clueless about the stock market

Many people are clueless about the stock market. I was as well in the beginning. I didn’t know where or how to start.

Considering the amount of noise in the media and people flogging that you are not smart enough or good enough to know how to pick your own stocks, it’s no wonder people have a misconception about getting started in stock investing. Value investing is also another language to them at this point.

Why Are We So Clueless about the Stock Market? is a great little book on how to start investing in the stock market and a fine book for the seasoned investor to organize their explanations and analogies when explaining supposedly simply concepts such as discount rates, growth rates, basic concepts of business, diversification and so on.

Easy to Read & Understand

The book is written in a very simple and clear manner. It makes reading very easy to follow and understand. So easy in fact that it would be a great first book for young budding investors.

Each chapter of the book is very concise and to the point with a short summary at the end of each chapter. A good way to maintain the flow of your reading and learning.

It’s probably on the same level as Greenblatt’s The Little Book That Beats the Market. The big difference being that there is more detail and it covers a wider range of topics and answers many questions that new investors are sure to encounter.

What types of questions does it answer? Let’s see below.

What’s the Book About

Why Are We So Clueless about the Stock Market? follows on the old school investing concepts of Warren Buffett. That is, stocks are small pieces of businesses and we should approach picking and buying stocks as if we were purchasing a real business.

The book will help beginner investors to answer and guide them through questions such as

What is a good business?
How do you identify a good business?
When do you buy?
How do you value a company? (note I didn’t say analyze)
When do you sell?

I especially like the chapter that discussed the concept of using debt in a company. It’s definitely something that will help learning investors.

The book discusses other ideas such as how the economy affects the market, why investing in IPO’s is a bad idea and offers 4 good case studies of Burlington Northern Santa Fe (BNI), Thor Industries (THOR), Wells Fargo (WFC) and Moody’s (MCO).

Personal Comments

The one big topic that I felt was missing was a discussion on margin of safety. Even though the author shows the reader how to value a company using the discounted cash flow method, there is no mention of the all important margin of safety.

Another point is that while there is a chapter dedicated to valuing companies, there isn’t one on how to analyze a company. I mention this because I know from first hand the dangers of just “knowing” how to value stocks without understanding or knowing how to analyze them.

Summary

Overall, the book is a superb primer for the new investor and will help to open their eyes to the bigger picture of investing.

It’s also a great book if you’re a seasoned veteran but have trouble clearly explaining or teaching investing concepts.

The author, Mariusz Skonieczny, also has a website and blog at Classic Value Investors. You can listen to his radio interviews (interview 1 & interview 2) brought about by his due diligence on Mastech Holdings (MHH).

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