What I like most about this book is that the author doesn’t try to “sell” stock investing to the reader, but covers the basics like the difference between investing (including stocks, money markets, CDs) and speculating.
At first glance, this book seems very similar to Getting Started in Stocks by Alvin D Hall, but this book is not nearly as nuts and bolts about investing as is Hall’s book.
Mladjenovic covers basic terminology and concepts like: appreciation (capital gain), risk vs. reward, and the concept of yield. He also briefly covers the various Stock Exchanges: NYSE, NASDAQ, AMEX.
But the heart of this book is Mladjenovic’s key success factors.
Key Success Factors:
- Analyze yourself.
- Know where to get information.
- Understand why you’re investing: Seeking appreciation (capital gains) or income (dividends).
- Do your research.
- Understand how the world affects your investments.
- Understand and identify “megatrends”.
Analyze Yourself.
Determine how much you own and how much you owe. This is where the concept of assets vs. liabilities is brought into the discussion. Using these two categories, he encourages the reader to create and assess his personal balance sheet. This exercise not only provides an eye-opening window to the reader’s financial state, but it provides a basic skill that will be used later when analyzing individual companies when looking for stock to buy.
The focus of this step is to determine and understand your Net Worth. Later sections of the book focus on growing your Net Worth.
Know Where to Get Information.
Here, the author stresses the importance of using multiple sources for information and advice. He lists some key online resources, such as U.S. Securities and Exchange Commission (SEC) in general, and EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system) in particular. He covers different kinds of brokers and how to decide the right one for you, but he also discusses how to check the SEC, National Association of Securities Dealers (NASD) and the Securities Investor Protection Corporation (SIPC) to ensure that your broker does not have any black marks on his record. Incidentally, the NASD is currently known as Financial Industry Regulatory Authority (FINRA).
Understand Why You’re Investing.
Know your purpose!
If you want income, invest in dividend paying stock. If you want appreciation (growth) invest in growth (typically non-dividend paying stocks) stocks.
Stocks are a tool, a means to an end. To simply state that you are investing to “get rich” is not a plan. This part of the book covers short term, mid-term and long term goals. The author provides sound examples of when to invest in each type.
In one example, he recounts the story of one man who’s investment “advisor” put his child’s college fund money into Internet stocks circa 1999. Who know’s if this is true, but it is a prime example of why the latest investment fad is not a good place to stash your long term funds. Similarly, don’t have your emergency fund in stocks, but DO invest in stocks for long term like retirement (if your retirement is more than 5 – 10 years away).
This flows nicely into the topic of investing style: conservative vs. aggressive.
Conservative looks for a proven record, large cap stocks with market leadership and perceived clout. Conservative investors are looking for long term, consistent growth, but not a roller coaster ride of growth stocks.
Aggressive investors look for “jack rabbit” stocks with great potential and capital gains possibilities (no dividends). Such stocks tend to be innovative (i.e. new technology or service) and generally small cap.
Do Your Research.
This section is devoted not so much to where to get your research, but what kinds of things to look at when gathering your research. For example, the author discusses comparing a prospective stock to its respective index to see how well it performs against its peers. Most people have at least heard of the Dow Jones Industrial Average (DJIA), but Mladjenovic covers many other indices than just the DJIA. He also recommends visiting www.djindexes.com to analyze each index so that you can understand how they are weighted, and what exactly they track.
A quick visit to the site indicates that there are many indexes, and some are quite exotic like the Dow Jones DIFC Arabia Titans 50 Index. When investing in index funds, it’s best to stick with broad based indexes like the Wilshire 5000 and S&P 500 or sector indexes.
Mladjenovic outlines the following relevant questions when analyzing a company:
- Is the company making more net income than it did last year?
- Are the sales increasing?
- Do you understand the company’s industry?
He suggests that if you’re looking to invest in growth stocks, you should only invest in such stocks IF the company is profitable, AND if you understand where they derive their income AND from where it generates sales. This is good advice, but I’m not sure it pertains only to growth stocks.
Other factors in determine potentially successful stocks:
- Industry buying. Are mutual funds buying the stock you’re looking at?
- Analyst attention. This can offer positive reinforcement IF it backs the research you’ve done independently
- Influential Newsletter. See above.
- Consumer publications. If consumer reports rates a product of your company as good, that’s a positive influential factor.
- Management team. The company should have a management team with a strong history of success.
- Growth of earnings.
- Growth of equity.
- Insider buying. If management is buying, they probably know something good about the company.
Mladjenovic does a good job of covering the basics of risk in growth stocks as well as possible Enron like companies. He uses Enron quite a bit as an example of how the numbers alone are not always enough if the company’s management is corrupt. In my opinion, this is another reason why individual investors should stick primarily to index and mutual fund investing, unless they are really going to take the time to baby sit their individual stocks. However, if investors do decide to take on individual stocks, Mladjenovic does a good job of outlining the application of stop loss orders to limit the downside. Again, he uses Enron as an example here.
Just to round out the section, he discusses IPOs and why they are rarely worth the risk, and covers DRP’s and dividends. He details how to determine when a dividend is “safe” and gives a good overview of the benefits and drawbacks to high yield stocks, and provides safer alternatives (bonds, treasuries, CDs, etc..).
He only touches on covered calls and options, but mostly refers to “Stock options for Dummy’s.” This is probably 1 third up sell, and 2 thirds good sense since these topics are not essential to becoming a solid investor.
Mladjenovic also stresses the importance of paper investing to improve your knowledge and risk tolerance.
Understand how the world affects your stock.
Mladjenovic spends a bit of time discussing various types of economic indicators: coincident indicators, lagging and leading economic indicators (LEI) and how to determine their effect on your investments.
He discusses causes and effects of interest rates, provides a good overview of larger economic indicators and ties it all together with what they mean and how they factor into a stock’s performance.
There is a good overview of how a bull market works (spawning from the bottom of a bear market) and how to avoid being gored by the horns of a mature bull market. He provides strategies for investing in a bear market as well as a bull market.
He also offers many useful links and resources for further study:
Understand and identify “megatrends”.
A megatrend (as defined by Mladjenovic) is a trend that has reaching impact on the population and hence economy and stock market.
Some megatrends are:
- The advent of Internet
- The aging of the U.S. population
- Rising energy prices
- The overheated housing market
- The hot international and emerging market stocks
He spends quite a bit of time talking about another big megatrend: Debt.
I think he gets a bit preachy about debt, energy prices and derivatives though. These are serious topics and carry sway over the economy and the stock market, but at times the tone seems a bit too “sky is falling” to me. That being said, his discussion of the risk that the enormous debt the U.S. government AND citizens have accumulated is pretty scary stuff and should not be looked at too lightly. In the end, I’m probably being a bit too picky here. 
Mladjenovic recommends the following to take advantage of megatrends – look for companies with:
- A strong brand (examples include Coke and Microsoft)
- High barriers to entry (example: UPS and FED Ex)
- Focus on research and development (example: Pfizer and Merck)
He wraps things up with a discussion of megatrends for the current decade and past decades: US large cap of the 90′s, Japanese stocks of the 80s, commodities, energy and natural resources of the 70s and 2000s.
Examples of future megatrends are debt, derivatives, aging of the boomers, and emergence of China and India.
Mladjenovic also does a great job of illustrating how the main stream media often amplifies trends just when they are ending, thus acting as a contrarian indicator!
Conclusion.
Stock Investing For Dummies gets at the roots of investing, rather than providing a how to guide. But how you go about investing is as important as what you invest in.
It is for this reason that I believe it makes a great companion read to Getting Started in Stocks by Alvin D Hall, Both books are a good place to start but I think that neither provides enough information on its own for the beginning investor.
Technorati Tags: Reviews, Investing, Building Wealth, Books
Some great tips & tricks here.I really liked it.Thanks.
[...] boomers and debt, it really drove home the “Debt as Megatrend” concept detailed in Stock Investing For Dummies, by Paul Mladjenovic. “The fastest growing area of bankruptcy filers are senior citizens [...]
[...] REVIEW: Stock Investing For Dummies, by Paul Mladjenovic. What I like most about this book is that the author doesn’t try to “sell” stock investing to the reader, but covers the basics like the difference between investing (including stocks, money markets, CDs) and speculating. At first glance, this book seems very similar to Getting Started in Stocks…… [...]
[...] you greatly to have an understanding of the basics of investing. I recommend getting a copy of Stock Investing For Dummies from your library (it’s free!) and get an idea of how interested in investing you really are [...]