Book Review: Contrarian Investment Strategies

Contrarian Investment Strategies: The Psychological Edge (2012) by David Dreman

This book provides a great overview of the psychology of investing and how success can be achieved using a contrarian (value-oriented) approach. It is divided into five parts:

• Part I looks at bubbles, panics, and other stock market manias, drawing attention to their common characteristics and showing that they do not change much over time. The author discusses how investor behavior in such situations can be partly explained by psychological findings about how affect (emotion) and cognitive biases influence decision making.
• Part II focuses on the "new dark ages" of investing by giving some history related to the Efficient Market Hypothesis (EMH). The author uses examples of market crashes to challenge EMH assumptions about liquidity, leverage, and volatility. The main conclusion is that EMH does not have much support when it is scrutinized closely and applied to reality.
• Part III examines the difficulties and flaws of market forecasting, demonstrating that analysts and experts are bad at estimating future company earnings and stock returns. There is an interesting quantitative and psychological analysis of how positive and negative earnings "surprises" are related to subsequent stock returns.
• Part IV discusses how investors can find success by following contrarian investment strategies and buying stocks that are out of favor. It is demonstrated that strategies based on (a) low P/E, (b) low P/CF, (c) low P/B, (d) high yield, or (e) low price-to-industry [i.e., a company being undervalued relative to its competitors] all provide superior returns in historical backtesting. The author attributes this success to what he calls the Investor Overreaction Hypothesis (IOH), which is the idea that out-of-favor stocks mired in pessimism tend to become undervalued, but subsequent developments (earnings surprises and fundamental improvement) lead to positive reappraisals that result in regression toward the mean over time. This part also includes an extended discussion of the price-to-industry strategy, commentary on high-frequency trading, and thoughts about risk.
• Part V concludes with commentary about recent market and economic events (e.g., the housing bubble and financial crisis), as well as topics such as free trade and inflation.

Overall, I think the book is an excellent resource for investors. In my review of the author's 1977 book, Psychology and the Stock Market, I noted that he provided "one of the most compelling counterarguments to EMH that I have ever read." In this book he builds an even stronger case against EMH from both psychological and value-based perspectives, showing that it does not fit well with reality. The book should be required reading for anyone who believes in EMH and related ideas, such as Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM). Moreover, anyone who takes a value-oriented approach to investing (as I do) will likely be interested in the analyses of the contrarian investment strategies described in the book.

Note: I read this book in January 2013 and re-read parts of it in May 2013.

Book Review: The Vigilant Investor

The Vigilant Investor (2011) by Pat Huddleston

This book deals with various kinds of financial fraud and was written by a former SEC enforcer who currently heads an agency that investigates such matters. Drawing upon his personal experiences as an investigator, the author explains how different investment scams work (e.g., Ponzi schemes, offering frauds, pump-and-dumps, etc.) and provides details about the con artists behind them, giving many enlightening real-world examples. He also discusses how unscrupulous and reckless financial advisors can mismanage the money of vulnerable people (e.g., the elderly and the sick) by churning their accounts and steering them toward bad investments. At the end of each chapter he lists several tips for due diligence that can help people become vigilant investors by recognizing (and avoiding) various scams and fraudsters. Overall, the book provides an informative look into a dark and dangerous area of the financial world.

Even though the author talks a bit about the science of financial decision-making and why people fall prey to investment fraud, a recurring thought in my mind as I read the book was that many of the scams and con artists could have been avoided if the victims had just a basic understanding of investing and used some common sense. For example, the long-term compounded annual return of stocks has typically been around 8-10%, but the return from one year to the next can be quite variable and even negative at times. If an investor knew only that information, then he should be extremely suspicious when someone approaches him with a stock investment scheme that guarantees a market-beating return with no risk of loss. If it sounds too good to be true, then it usually is. Of course, some frauds are more difficult to detect than others, but a modicum of due diligence should raise some red flags. If people educate themselves and approach a potential investment (and the individual touting it) with caution and skepticism, then they should be able to drastically reduce the probability that they will be victims of fraud.

Note: I read this book in May 2013.

Book Review: The Little Book That Still Beats the Market

The Little Book That Still Beats the Market (2010) by Joel Greenblatt

This book is a slightly updated version of the author's 2005 book, with a new introduction and afterword. The core idea presented in the book is a "magic formula" for investing, which involves finding stocks that are highly ranked based on a combination of earnings yield and return on invested capital. The rationale behind these criteria is that a high return on invested capital is a sign of good management and a high earnings yield is a sign of a bargain-priced stock. The combination purportedly allows investors to identify well-run companies whose stocks are trading at bargain prices. Backtesting of an investment strategy based on the magic formula revealed that it handily outperformed the broader stock market for many years. It is an interesting approach that might be a useful supplement to one's investing strategy, but it might also give some readers the mistaken impression that successful investing can be achieved simply by applying the magic formula, without regard for other important quantitative and qualitative data about a company.

Note: I read this book in April 2013.

Book Review: Tap Dancing to Work

Tap Dancing to Work (2012) by Carol J. Loomis

This book is a compilation of articles about Warren Buffett that were published in Fortune magazine from 1966 to 2012. Many of the articles are prefaced with introductions by Carol Loomis, a longtime writer for the magazine and a friend of Buffett. The articles are organized in chronological order and deal with a variety of topics, ranging from Buffett's views on the stock market to his experiences with companies such as Capital Cities/ABC, Salomon Brothers, and Coca-Cola. As someone who already knew a lot about Buffett from reading his annual shareholder letters and other material, I will confess that there was not much in this book that I did not already know, so it was boring at times. The main exceptions were the articles about Buffett's recent philanthropic efforts and his relationship with Bill Gates, which I thought were interesting. Overall, I did not get much out of this book, and I think it would have been better as a newly written narrative than as a somewhat disjoint compilation of magazine articles. Readers who are interested in learning more about Buffett might prefer the excellent biography from 1995 by Roger Lowenstein, Buffett: The Making of an American Capitalist.

Note: I read this book in January 2013.

Book Review: Psychology and the Stock Market

Psychology and the Stock Market (1977) by David N. Dreman

Even though it was published over 35 years ago, this book provides a good overview of the role that psychology plays in the stock market. Part I addresses the poor performance of professional investors and the rise and fall of technical analysis. Part II takes a look at various bubbles and manias that have occurred throughout stock market history, showing that they tend to have common characteristics. Part III delves into the psychology behind the poor performance and bubbles by discussing the follies of groupthink, which is the lack of independent critical thinking among many investors that leads to herd-like behaviors such as panic selling. I appreciated how the author drew upon a great deal of social psychology research to support his groupthink idea. Part IV deals with the efficient market hypothesis (EMH) and the question of whether an investor can beat the market. It provides one of the most compelling counterarguments to EMH that I have ever read, highlighting psychological evidence that destroys EMH assumptions about investors being completely rational, informed, and unbiased in their decision-making. Believers in EMH should find themselves questioning their beliefs after reading this book.

Note: I read this book in November 2012.

Book Review: Even Buffett Isn't Perfect

Even Buffett Isn't Perfect (2008) by Vahan Janjigian

Most books about Warren Buffett tend to focus on his long-term investing success and rarely offer much in the way of criticism. In contrast, the aim of this book was to discuss some of the inconsistencies and potentially problematic aspects of his approach to investing, with the goal of helping readers learn from Buffett's missteps. However, I was disappointed in how the author went about trying to achieve that goal.

A prime example is the first chapter, which discusses Buffett's views on diversification. The author argues that Buffett is inconsistent on the topic: Sometimes he has advocated that investors maintain a small portfolio of 5-10 stocks that they know really well, whereas there are other times he has advocated widespread diversification via passive investment in index funds. What the author does not seem to fully appreciate is that Buffett's views were addressed to different kinds of investors. If someone has the time, knowledge, and ability to thoroughly evaluate companies and actively manage a portfolio (which Buffett is capable of doing), then it makes sense to have a small portfolio that represents only the very best investment prospects. However, if an investor lacks those qualities and is not interested in active portfolio management, then it might make more sense to passively invest in index funds.

There are some other purported inconsistencies, such as whether Buffett invests more for value than for growth, and the extent to which he conducts due diligence when buying entire companies. The latter criticism is in reference to Buffett mentioning in letters that he has sometimes made acquisitions within a day or two of being contacted about the possibilities. In the last few chapters the author discusses Buffett in relation to corporate governance, stock options, and taxes, but these issues mainly serve as springboards for the author's personal opinions, which may or may not be any better than Buffett's. Overall, I did not come away with an improved understanding of Buffett's imperfections or how they might inform my investing strategy.

Note: I read this book in November 2012.

Book Review: Value Investing Today

Value Investing Today (1998, 2nd ed.) by Charles H. Brandes

This book provides a decent introduction to value investing, which is the strategy of buying stocks at discounts to the intrinsic values of their underlying companies. The first part of the book is the strongest section, giving a compelling explanation for why value investing makes sense and citing some historical data that support aspects of the strategy. Subsequent parts of the book deal with how to find stocks at attractive valuations and manage a portfolio, although I must admit that I did not really learn anything that I could use to improve my own approach to valuation. The book also has a large part on investing in foreign stocks, which I found moderately informative but somewhat secondary to the main theme. Overall, this book is about average when compared with everything else I have read about value investing.

Note: I read this book in September 2012.

Book Review: Markets Never Forget (But People Do)

Markets Never Forget (But People Do) (2011) by Ken Fisher

This book can be considered a sequel to the author's previous book, Debunkery, which I read and reviewed earlier this year. The main thesis of this book is that people tend to forget about (or ignore) market history, which results in misconceptions and improbable projections about the relationship between market performance and various economic and political factors. To give some examples from the book:

• In the past few years there has been plenty of talk about the risk of a "double-dip recession," even though it is an improbable event, reflecting less than 10% of past recessions.
• People tend to forget that major drops in the market are often followed soon after by strong rebounds, producing a V-shaped pattern.
• Even though the market's average annual return has been around 10%, it is actually rare for the return in a given year to be around 10%.
• If you are a perma-bear, then you will be wrong more often than right because the market has positive annual returns about two-thirds of the time.

There is also discussion of the market in relation to volatility, government debt, politics, globalization, and other issues. I disliked the chapter on politics; even though I agree with some of the author's views, he expresses them in a harsh and unprofessional manner that drags the book down to a lower level. Putting that aside, I think the book shows that a knowledge of market history can be useful for dispelling some of the misconceptions and improbabilities promulgated by the media and pundits.

Note: I read this book in September 2012.

Book Review: Get Rich with Dividends

Get Rich with Dividends (2012) by Marc Lichtenfeld

The author of this book advocates buying dividend growth stocks as long-term investments and automatically reinvesting the dividends. After 10 years, he argues that this strategy can produce 11% yields (on cost) and 12% average annual total returns, which he calls his "10-11-12 system." This sounds great on the surface, but there are several problems with the book that make it a poor guide to dividend growth investing:

• His "10-11-12 system" is overly simplistic and represents more of a goal than a systematic approach to dividend growth investing. He suggests that investors need to focus on just three things: initial yield, dividend growth rate, and payout ratio. Almost nothing is said about assessing the quality of the underlying business. The topic of valuation is completely ignored, which I consider to be a major fault.
• He presents several tables showing projections of dividend income and total return over 20-year periods under various circumstances, many of which are unrealistic. For example, there is a bear market projection in which stocks slowly lose value year after year, yet the dividend growth rate is a stable 10% over the 20 years. While this results in phenomenal growth of the dividend income stream, it also results in stocks having current yields by Year 20 of 20% or higher, which is simply not going to happen for the blue-chip stocks under consideration, especially if their operating results allow them to maintain 10% dividend growth rates. Thus, I think some of his projections are wishful thinking that ignore the nuances of reality.
• He basically advocates a buy-and-forget approach to investing. He gives little to no advice on how to monitor companies or manage a portfolio (aside from recommending that a stock be sold if its dividend is cut). He does the reader a disservice by conveying the impression that a company that has raised its dividend for 25 years is pretty much guaranteed to raise it for another 25 years; he even calls dividend growth stocks "Perpetual Dividend Raisers," as though their dividend growth will never end, which is unrealistic.
• The secondary title of the book is "A Proven System for Earning Double-Digit Returns" but the author never actually proves it. That is, he presents some historical data showing how well dividend stocks have done in the past and projections of how his system might perform in the future, but he provides no proof that his system can produce the results he claims in actual practice. There is a chapter in which he discusses the "Perpetual Income Portfolio" that he manages, but he reports neither its long-term returns nor the stocks in it. (He provides a completely useless table showing just the dividend yields of the stocks in the portfolio -- without indicating the stocks!) If he has truly been able to prove his system works in practice, then his credibility would have been strengthened by reporting the results of his portfolio in the book.
• There are also some errors in the text that undermine the author's credibility. For example, "yield" is often used for yield on cost, muddling the distinction between current yield and yield on cost. In a section that addresses inflation, he argues that one should seek a current yield that beats inflation, which is erroneous thinking because what matters is whether the dividend growth rate -- not the yield -- beats the inflation rate. At one point he also provides a definition of standard deviation that is just plain wrong.
• More generally, the writing style is too verbose. For example, there is an 11-page chapter with the sole purpose of describing a few lists/indices of dividend growth stocks, such as the S&P Dividend Aristocrats. That information could have been summarized in less than two pages. Despite the book being 180 pages, I think a good editor could have easily shortened it to less than 150 pages.

In summary, I was disappointed by this book on dividend growth investing. The author presents an overly simplistic strategy that relies on unrealistic projections and he ignores important topics such as valuation and monitoring. I think there are far better books on dividend growth investing out there, such as The Dividend Toolkit by Matt Alden, The Single Best Investment by Lowell Miller, and Top 40 Dividend Growth Stocks for 2012 by David Van Knapp.

Note: I read this book in September 2012.

Book Review: The Dividend Toolkit

The Dividend Toolkit (2012) by Matt Alden

I was already familiar with the author of this e-book from his blog, Dividend Monk, which I visit regularly for his excellent stock analyses. The book is a guide for enabling an individual investor to build and manage a portfolio of dividend growth stocks. It is divided into six "core" sections and six "advanced" sections that address various topics of relevance to dividend growth investors.

The core sections begin with a discussion of living simply and building wealth, which addresses the psychological advantages of dividend growth investing and how it represents an effective wealth-building strategy. The compounding power of dividend growth investing is illustrated in the next section, which provides easy-to-understand numerical examples. The third section, entitled "Explore a Corporation," delves into how corporations are formed and how they operate and grow over time, using the fictitious example of a cafe business. I think it is the best introduction to the basics of a corporation that I have ever read. The next section covers some investing basics, including definitions of common stock metrics and a good explanation of why absolute stock price is irrelevant; what matters is the stock price relative to the company's value.

The fifth and sixth core sections focus more specifically on dividend growth investing. The author provides eight excellent reasons for investing in dividend growth companies, covers some important dividend metrics, and gives a detailed example of the long-term compounding of a dividend income stream. He then discusses how to build and manage a dividend growth portfolio, highlighting the traits an investor should seek in a core position and considering how an investor might go about diversifying his portfolio.

The more advanced sections include an analysis of stock/bond asset allocation, a consideration of problems with index investing that includes a thorough discussion of shareholder rights, an overview of MLPs and REITs, and three sections associated with stock analysis. Regarding the last point, the author explains how to quickly and effectively analyze dividend growth stocks both quantitatively (e.g., assessing valuation metrics) and qualitatively (e.g., assessing competitive advantages). The analytical method is too comprehensive to summarize here, so I will simply note that it is superb and better than any other that I have encountered in the many investing books I have read. One of the highlights of the quantitative analysis is the coverage of discounted cash flow (DCF) analysis and the dividend discount model (DDM). Not only does the author clearly explain how they work, but he implements them in spreadsheets that accompany the book and are very easy to use. I have now started doing DCF and DDM calculations as part of my own stock research.

In summary, this book is an excellent guide for dividend growth investors. It covers basic and advanced topics in a comprehensive yet readily understandable manner. I recommend the book to anyone who is interested in becoming a successful investor by building a sustainable and growing stream of income from dividends.

Note: I read this book in August 2012.

Book Review: Margin of Safety

Margin of Safety (1991) by Seth A. Klarman

This book is widely regarded as a classic text on value investing. The basic approach involves buying a stock or a bond at a discount to its intrinsic value, then holding onto it until that value is realized in the market. A key factor is the discount, which reflects how much the security is undervalued and determines the margin of safety for the investment. The greater the discount, the greater the margin of safety because the upside potential will substantially outweigh the downside risk. The author discusses the value investing approach and the concept of margin of safety not only in relation to common stocks and bonds, but also in the context of special cases, such as financially distressed and bankrupt securities.

What I found most influential was the general commentary about investing and "where most investors stumble," which is the title of the first part of the book. He notes that the first step toward investing success is distinguishing between speculation and investment. Speculation involves trying to predict future price movements from technical analysis, which the author considers a waste of time. Investment involves recognizing that stocks reflect fractional ownership of underlying businesses and making decisions based on fundamental analysis of the perceived values of those businesses. Investors can be successful by taking advantage of market inefficiencies, such as cases of undervaluation. The author notes that "value investing is predicated on the efficient-market hypothesis being wrong" and backs it up with compelling arguments.

The author also discusses how investors can be derailed by their emotions (greed and fear) and get caught up in the "short-term, relative-performance derby" of trying to beat the market -- the latter being a major reason why many institutional investors routinely deliver mediocre returns to clients. His discussion of how institutional investors handicap themselves is quite interesting. With respect to valuing businesses, he makes the important point that investors should not focus on the precision of fundamental-based model analyses, but seek a range of value with a conservative emphasis.

In summary, the book provides some good insights into the value investing philosophy and investing more generally. It is not really a how-to guide, but the basic principles outlined in the text -- margin of safety being the main one -- should steer investors toward suitable opportunities for achieving satisfactory returns while minimizing risk. It is worth noting that the author has demonstrated the success of his approach in practice: As manager of the Baupost Group, he has achieved an average annual return of nearly 20% since 1982.

Note: I read this book in July 2012.

Book Review: The End of Wall Street

The End of Wall Street (2010) by Roger Lowenstein

I read this book about the 2008 financial crisis soon after I finished The Big Short by Michael Lewis, which deals with the same topic but from a different perspective. This book addresses the main causes and consequences of the crisis, covering the proliferation of mortgage-backed securities, the increasingly dangerous lending practices of financial institutions, the greed of big banks, and the ignorance of regulators. Two particularly bad practices involved (a) lending to people who provided no documentation of either income or assets, and (b) having loans start with low, short-term "teaser" rates that subsequently were adjusted to much higher rates that borrowers could not pay. These predatory subprime lending practices led to an astounding number of defaults and foreclosures when the housing bubble finally burst. In addition, they resulted in massive losses for financial institutions that invested heavily in mortgage-backed securities and other products that were nearly worthless despite having "AAA" ratings (which is one reason why I do not rely much on the opinions of rating agencies).

In contrast with Lewis, whose book focused on the personalities and actions of a few astute hedge fund managers who profited from the crisis, Lowenstein offers insight into the minds of the big names who were directly involved in mortgage-related lending, banking, or investing. For that reason, I thought this book provided a more well-rounded view of the situation and how it unfolded. Finally, consistent with Lowenstein's previous books (Buffett: The Making of an American Capitalist and When Genius Failed: The Rise and Fall of Long-Term Capital Management), the quality of the writing was excellent and made for an enjoyable reading experience.

Note: I read this book in July 2012.

Book Review: The Big Short

The Big Short (2010) by Michael Lewis

This book addresses the 2008 financial crisis by discussing how a few relatively unknown hedge fund managers recognized the impending crisis and profited from it by shorting mortgage-backed securities and the stocks of the financial institutions that owned them. It was interesting to read about how these managers saw the warning signs surrounding the subprime mortgage industry that others (government regulators, rating agencies, major banks, etc.) either failed to see or chose to ignore. There were also some details regarding how the managers went about profiting from the greedy and irresponsible actions of major banks. The book's focus on the personalities and individual decisions of the managers made for an interesting and provocative read. However, if I were to offer one criticism of the book, it would be that it covers the financial crisis from a single perspective (albeit a unique one), providing limited insight into what the people responsible for the crisis were thinking and doing at the time.

Note: I read this book in July 2012.

Book Review: When Genius Failed

When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000) by Roger Lowenstein

This book provides a compelling account of the people and events surrounding the dramatic rise and epic fall of Long-Term Capital Management (LTCM), a hedge fund that existed for a short period in the 1990s.

The first half of the book covers the rise of LTCM, explaining how top bond traders and esteemed academics came together and started the fund, using their combined knowledge and skills to engage in trading strategies involving bond, stock, and merger arbitrage. During the fund's first four years, from May 1994 to April 1998, it produced impressive double-digit returns with very low volatility, leading to an influx of new capital and great acclaim for the fund's principals.

The second half of the book covers the fall of LTCM, explaining how a combination of excessive leverage and overconfidence in precise mathematical models based on historic norms resulted in an accelerating downward spiral when the activity in various global markets failed to conform to model predictions. In a span of less than five months, from May 1998 to September 1998, the fund suffered catastrophic losses (billions of dollars) that threatened to disrupt the global financial system because of the fund's massive size and exposure. The situation was contained when the Federal Reserve helped coordinate a hasty bailout by several major financial institutions. After making up some of its losses, the fund was shut down in 2000.

I enjoyed reading this book, which could be considered a real-life financial thriller story. It was interesting to find out some of the things that went on behind the scenes and how such a massive failure could happen. From a practical standpoint, the book highlighted the dangers of using leverage and being overconfident in one's decisions.

Note: I read this book in July 2012.

Book Review: The Essential Buffett

The Essential Buffett (2001) by Robert G. Hagstrom

The author discusses an approach called "focus investing" that draws on the thinking and investing style of well-known investor Warren Buffett. He starts the book with three lessons about investing in Chapter 1, which are: (1) analyze stocks as businesses; (2) manage a focused, low-turnover portfolio; and (3) differentiate between investment and speculation. He goes on to give some background on Buffett and the history of Berkshire Hathaway in Chapter 2, followed by a discussion in Chapter 3 of how Buffett was influenced by Benjamin Graham, Philip Fisher, and Charlie Munger.

The middle chapters in the book deal with focus investing. Chapter 4 presents 12 "Tenets of the Warren Buffett Way" that address business, management, financial, and market aspects of investing. Chapter 5 provides some "golden rules" for focus investing, such as having a concentrated portfolio with only the very best companies that you intend to hold for the long term amid market volatility. (The preceding sentence covers all the golden rules.) Chapter 6 reviews the records of some well-known focus investors and Chapter 7 has a brief discussion of the emotional side of investing. The book concludes with speculation in Chapter 8 about how focus investing can be applied to tech, small-cap, and international stocks. Unfortunately, the arguments are not compelling and the examples fall flat (e.g., America Online is touted as a strong company consistent with the Buffett tenets).

Overall, I thought the book was interesting and the focus investing approach seems reasonable for the most part. However, I would argue that focus investing is more closely related to the approach of Philip Fisher than that of Buffett.

Note: I read this book in June 2012.

Book Review: The Neatest Little Guide To Stock Market Investing

The Neatest Little Guide To Stock Market Investing (2010) by Jason Kelly

This was the first book I read about investing in the stock market. The author provides a fairly well-rounded, beginner-level introduction to investing, which is what I needed at that point. In Chapter 1 he discusses the nature of stocks and the market, and provides a brief overview of key terminology. In Chapter 2 he covers the investing styles of well-known "Masters" such as Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O'Neil, and Bill Miller, indicating points of agreement among them. In Chapter 3 he discusses value and growth measures that have some validity based on historical analyses, then in Chapter 4 he provides an overview of a few strategies for building a portfolio, including discussion of leverage and technical analysis. Chapters 5 and 6 cover how to choose a discount broker, place an order, screen for stocks, and where to find useful information in print and online. In Chapter 7 he presents a detailed approach to building a core portfolio that includes several criteria (most of which are useful and sensible) and a worksheet for analyzing stocks based on those criteria. The buying and selling of stocks are addressed and some general advice is given for dealing with market fluctuations. Overall, the book is a concise and informative guide to stock market investing that helped get me started, even though the eventual strategy I settled on (dividend growth investing) differs in many respects from the approach presented in the book.

Note: I read this book in the spring of 2011.

Book Review: The Money Game

The Money Game (1968) by 'Adam Smith'

George Goodman, writing under the pseudonym of Adam Smith, discusses the psychology of the stock market and the people involved in it. Back in the 1960s, not much consideration had been given to what is now called behavioral finance, so this book is often regarded as groundbreaking in that respect. Through a combination of anecdotes and general observations, the author provides many interesting and witty insights into investor psychology, driving home the point that many investors -- including professional money managers -- are anxious, biased, and irrational. To some extent, they are all playing a game, with the flow of money determining who is winning and losing the game. Even though the book was written over 40 years ago, it is remarkable how little some things change.

Note: I read this book in May 2012.

Book Review: Common Stocks and Uncommon Profits

Common Stocks and Uncommon Profits (1960) by Philip A. Fisher

In this concise and compelling book, the author outlines an approach that has come to be known as growth investing. He seeks companies that have very strong growth potential and may produce gains of several hundred percent in a very short time. However, unlike "get-rich-quick" schemes, his approach is based on a comprehensive analysis of a company and a thorough understanding of everything about its business, prospects, and so forth. He presents 15 sensible points to look for in a company, such as a product or service with great growth potential; management effectiveness and integrity; strong research and development; large and improving profit margins; outstanding labor, personnel, and executive relations; good cost and accounting controls; and a long-range outlook. He argues that much of the useful information concerning these points can be obtained via the "scuttlebutt" method, which involves tapping into various branches of the business grapevine to get a multifaceted, in-depth view of a company.

After discussing when to buy and to sell growth stocks, the author addresses the "hullabaloo about dividends." He basically considers the payment of dividends to be a poor use of a company's money, which I agree with in the limited context of a company with strong growth potential that is capable of re-investing all of its money into its business in ways that are highly effective in producing strong growth that will promote accelerated capital appreciation for shareholders. However, this depends on a lot of assumptions (critically, whether that strong growth can be realized), which is why it only makes sense not to pay a dividend if a company meets the 15 points he outlined for a growth company.

The author also presents 10 "don'ts" for investors that generally constitute good advice. For example, he says that investors should not: (a) buy into a promotional company that has no track record; (b) buy a stock because they like the "tone" of the annual report; (c) quibble over eighths and quarters (i.e., fail to buy or to sell a stock because the market price is a few pennies away from their target price); (d) overstress diversification (he recommends concentrated portfolios); and (e) follow the crowd. He concludes with some general advice on how to go about finding a growth stock, which at the time depended strongly on his "scuttlebutt" method. It might be easier nowadays with the wider access to information and customized stock screeners, but his emphasis on conducting a comprehensive analysis of a company -- to a greater extent than what 99% of investors likely do -- remains as valid today as it was over 50 years ago. Overall, I think his approach can be extremely successful, but it requires a tremendous amount of work (it would basically make investing a full-time job) and a keen eye for analyzing a company and its growth prospects.

Note: I read this book in May 2012.

Book Review: Beating the Street

Beating the Street (1993) by Peter Lynch

This book can be considered the sequel to the author's 1989 book One Up On Wall Street, which I previously read and enjoyed. Similar to that book, this one is largely autobiographical. In the first half of the book he provides some general discussion of investing (with a sprinkling of "Peter's Principles" along the way) and a retrospective account of his time as a mutual fund manager at Fidelity. One of his most important points comes in Chapter 2 (entitled "The Weekend Worrier"), where he tells investors not to get scared out of stocks whenever they hear prognostications of economic doom and gloom from market commentators. If a major crisis does occur and the stock market tanks, then investors should ride it out while buying their favorite stocks that have been pulled down with the rest of the market. In the second half of the book he discusses how he went about selecting the 21 stocks that he recommended to the readers of Barron's magazine in early 1992. While it was nice to gain some insight into his thought process, I surprisingly did not find the discussion to be particularly interesting or useful to me, perhaps because it was too specific to extract many general points. The book concludes with "20 Golden Rules" that are quite good, but they are presented in a short list without any extended discussion, which was disappointing. I would have preferred a book organized around these rules rather than (or in addition to) the discussions of his stock picks.

Note: I read this book in April-May 2012.

Book Review: Top 40 Dividend Growth Stocks For 2012

Top 40 Dividend Growth Stocks For 2012: How to Create and Manage a Dividend Growth Portfolio (2012) by David P. Van Knapp

I had read rave reviews of previous editions of this e-book, so I bought the newest edition as soon as it came out earlier this year. Chapters 1 and 2 are introductory and provide an overview of the book, reflections on 2011, and a look ahead to 2012. Chapter 3 explores the conceptual foundations of dividend growth investing, introducing the reader to dividends and compounding. Chapter 4, which I think is the best chapter in the book, provides a fairly comprehensive discussion of the pros and cons of a dividend growth investing strategy. Chapters 5, 6, and 8 address the three phases of the author's approach to implementing the strategy, which involves: (1) finding excellent companies; (2) valuing stocks; and (3) portfolio management. I thought the chapters on finding excellent companies and valuing stocks could have been expanded a bit. Chapter 7 provides a scoring system for selecting dividend growth stocks, which I found to be just okay (I could quibble about some of the criteria and the point scales). Chapter 11, which comes near the end of the book for some reason (I think it would have been better near the beginning, perhaps after Chapter 4), provides a good discussion of the role that dividend growth investing can play in retirement planning. Collectively, I think Chapters 3-8 and 11 form the strongest part of the book, providing an excellent discussion of the basics of dividend growth investing.

Chapter 9 introduces the author's list of the top 40 dividend growth stocks for 2012 and Chapter 10 provides a one-page score sheet (using the aforementioned scoring system) for each stock. I found this part of the book to be mediocre. One issue for me was that the author restricted his list to stocks with minimum yields of 3% (or close to it). I understand his rationale for doing that, but it resulted in the omission of many excellent companies that are superior to several of the companies that made the list. A more critical issue was the lack of value provided by the score sheets. Each sheet has a summary of quantitative data that is somewhat minimal (e.g., few multi-year trends are shown) and a summary of the company (its "Story") that tends to be very basic. While I appreciate the author's intention to make the score sheets simple enough for readers to understand and construct on their own, I expect a costly e-book to provide me with in-depth stock analyses. Quite frankly, the score sheets were of no use to me because my own stock research produces better information than what I found in this book. Chapters 12-14, which conclude the book, provide previous lists of top 40 stocks, a short resource guide, and the requisite disclaimer.

In summary, my overall impression of the book is mixed. On the one hand, I think Chapters 3-8 and 11 provide an excellent introduction to dividend growth investing and how to implement the strategy. On the other hand, I think the top 40 list and score sheets provided in Chapters 9 and 10 are mediocre and cheapen the quality of the book. However, this is far from a cheap e-book ($40). For that reason, if the main update from year to year is the top 40 list, with only minor revisions to the rest of the text, then I probably won't buy a future edition. My personal preference would be for a stand-alone e-book on dividend growth investing (based on Chapters 3-8 and 11) at a more reasonable price, with the top 40 list offered as a supplement for separate purchase each year.

Note: I originally read various parts of this e-book from January to April 2012, then re-read it from start to finish in April.