Author: James P. O’Shaughnessy
Publisher: McGraw-Hill – 681 pages
Book Review by: Nano Khilnani
This large, bestselling book provides a lot of data, detailed analysis of that data, and some new knowledge that I think most readers did not have, no matter how much they know about investing, or think they already know. I know I picked about a lot of it.
The main (and pleasantly surprising) conclusion is that investing in stocks – rightly representing shares in the balance sheet, earnings and earning potential of companies, rather than just some “trading chips” – does work.
A lot of readers would be skeptical with that conclusion. But if you see the long-term performance records of successful investors in public companies such as Warren Buffett and others, your skepticism will change to positive belief that investing can help you increase your wealth as well as your passive income.
Like involvement in any endeavor, the amount of correct knowledge you acquire, the positive actions you take, the discipline you gain and the good investing habits you develop, determines the level of your outcome. I believe you can acquire all these changes in yourself with this unusual book.
This book can help you raise the level of your successful outcome if you learn the numerous lessons it provides within its pages filled with information about what works and what does not work on Wall Street.
I believe that most investors have become dismayed by the battering stocks have taken in recent years and are fearful of further drops, even plunges, in share prices tracked by United States’ stock market indices, such as the Dow Jones and Standard and Poor 500.
I believe very few investors look at battered stocks as buying opportunities. Those who do are investors in value, described commonly as value investors. Most people, I believe, buy stocks on hunches that their prices will go up.
If you ask most stock buyers why they bought or plan to buy shares of a particular stock, they will simply reply something like: “Oh, it has been going up lately and I feel it will keep going up.” You will buy or buy more of something because you feel it will go up in price? Would you buy some garden equipment in Kmart because you think it will go up in price? Wouldn’t you buy those items when they go on sale?
Perhaps it is people – who treat stocks as casino chips and trade them with the hopes that their prices will go up – who frequently lose. They think that by frequent trading, while watching price movements, they can develop a “strategy.” for success.
James O’Shaughnessy lays out the facts and numbers that do matter in successful stock investing. Over the course of 29 chapters, he shows you why fundamentals such as per-share stock price ratios do matter: price-to-book-value, price-to-cash flow, price-to-earnings, and price-to-sales, to name major ones.
He also shows you why another fundamental factor in a company stock is also very important: yield, which is money the firm gives you monthly, quarterly or annually. Being able to do this usually reflects a company’s ability to share its profits with you, the owner of some its balance sheet and parts of its earnings.
That ability is reflected in your getting dividends. Dividend yield is important, which is your dividend as a percentage of the price of the stock. With at least three identifiable chapters on the subject of yield, you learn why it is important to buy shares of large and safe companies that provide you a yield, which is a form of income on your investment. He shows you how you can be “buying an income” He also explains what is “shareholder yield” and what is “buyback yield” in two important chapters is.
Shaugnessy has also included information on the all-important matter of shareholder equity. Net worth (all assets minus all liabilities) is an important determinant for a safe investor. Value investors look at the all-important per-share net worth value of a company and compare that value to the price per share they have to pay, before deciding to buy some of its shares. This is found in the fundamental know as the per-share price-to-book-value.
From the above discussion, knowing that acquiring something of good value is much dependent on the price you pay, the author has devoted an entire chapter on how and when to buy shares at the most attractive prices. It is entitled: “The Persistence of Irrationality: How Common Mistakes Provide Tremendous Opportunity.” When traders, for whatever illogical reason, sell off large amounts of shares of a particular company, its stock price gets hammered down. Then, you can buy those shares at very low prices, enjoying high earnings and dividend yields emanating from it.
One other very important fundamental that Shaughnessy covers in this very useful book is: return on equity. This is the net income of a company typically over a one year period of time, on the per-share shareholder equity of that stock. This is net income after dividends are paid to preferred shareholder but before dividends are paid to holders of common shares.
The author is chairman and CEO of O’Shaughnessy Asset Management. He has written other bestsellers such as How to Retire Rich, Invest Like the Best, and Predicting the Markets of Tomorrow.
It is said that knowledge is power. I also believe that new knowledge acquired diminishes your uncertainty and your fear, and increases your chances of success. The knowledge that O’Shaughnessy provides you can make you a better, more successful stock investor.
