Monday, February 20, 2012

Book Review: Sensible Stock Investing

Sensible Stock Investing (2008) by David P. Van Knapp

In this book the author lays out a complete plan for picking, valuing, and managing stocks. The book is divided into six parts (plus two appendices). Part A is an introduction that discusses why stock investing is the best way to build wealth and outlines three steps for becoming a "Sensible Stock Investor." (The three steps are the topics of Parts C-E.) Part B provides a general overview of the stock market and how it works, touching on topics such as market efficiency and bubbles. These first two parts were pretty basic and did not provide much in the way of information that I had not already read elsewhere.

Part C starts to get into the meat of the book by covering how to pick companies in which to invest. The author gives some good advice here; in particular, I like the emphasis on writing a "Story" about a company that summarizes what it does, how it makes money, etc. Part D discusses how to value stocks, providing an overview of valuation in general and a system for scoring stocks on different valuation measures.

Part E covers portfolio management and includes discussion of risk, diversification, types of stocks, momentum, timing, and buy/sell considerations. It is here that I started to get some mixed feelings about the author's strategy because it shifts from an investing strategy to more of a trading strategy with a strong emphasis on setting stop-loss triggers. For example, based on the strategy it can be okay to buy an extremely overvalued ("bubble") stock if it shows favorable price momentum. I thought this part of the book made the strategy less focused. Part F describes two real-life portfolios that were constructed and managed according to the strategy during the 5-year time span that the book was being written. While it was refreshing to see the author put his strategy into action rather than keeping it abstract, the results were okay but not overly supportive.

In summary, I found Parts C and D to be the strongest parts of the book because they provided good discussion of company selection and stock valuation that included a useful scoring system. I found Part E to be the weakest part, although other readers might find more value in some of the portfolio management suggestions. Overall, I think people would do okay if they were to follow the strategy described in this book.

Note: I read this book in February 2012.

4 comments:

  1. I've read several of DVK's articles at seeking alpha. I'll have to check out his book. Thanks for the review.

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    Replies
    1. Hi Stoic,

      I have also read many of his articles at Seeking Alpha. Based on those articles, I think his investing strategy has evolved since the time this book was written. For example, although he discusses the importance of dividends in this book, he does not focus on dividend-growth investing like he does now. Thus, this book provides some insight into the history of his thinking about investing.

      Best wishes,

      Deedubs

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  2. I think it would be interesting to read that perspective. I read seeking alpha daily and although I know it is maid up of both young and old contributors it seems like many have come to investing for income after years of asset accumulation. I often wonder if I'm not giving up a lot buy not tackling the growth side of the equations a little more aggressively. Any thought?

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    Replies
    1. Hi Stoic,

      I have also read suggestions that young investors should pursue growth more aggressively, but I feel uneasy about doing that because of my personal risk tolerance.

      I think the biggest advantage of being young is having the opportunity of letting compounding run its course. Time is the most powerful ally of long-term compounding and I think a dividend-growth strategy takes advantage of that. If you look at compounding effects over 10, 20, and 30 years, it is amazing what a difference just a few years can make, especially as the time period gets longer. Thus, the sooner one gets started, the greater the future outcome.

      That said, I do pursue growth more aggressively in the context of dividend growth. More specifically, I don't mind investing in a stock with a somewhat low current yield (e.g., 2%) if there are good prospects for strong dividend growth (e.g., a double-digit growth rate for the next several years).

      That's one difference I see between young and old investors. Old investors are more interested in high current yield (even if it comes with low dividend growth) because they often need that income now, whereas young investors can entertain a broader range of yield+growth combinations because they won't need to tap that income stream until later. I think a mix of fast and slow dividend growers can work pretty well.

      Cheers,

      Deedubs

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