Book Review - Why are we so Clueless about the stock market?

Are you in the dark about the stock market? If so, or if you are not sure, Mariusz Skonieczny's book is for you. Why are we so Clueless on the stock market? is a quick read of 150 pages that focuses on the principles expressed by some of the most successful investors in the world. MagicDiligence recommends the book for both new investors and experienced investors who are looking to "get back to basics".

First chapters of the book covers a fact that often gets lost in the din of the forecasts of trend following technical and macro-economic: under a title is a business, and the result of these activities determines the outcome of an investment in its stock, the long term. Skonieczny briefly outlines what a business, and then talks about how a business creates wealth for its owners. For companies listed on public markets, the owners are equity investors. I liked how the book follows the example of a master lemonade stand, starting with "why start the stand"? The answer, of course, is to earn a better return on investment of capital that can be achieved through alternative solutions, such as a savings account. The author then goes through the factors that can erode the returns on capital, particularly competition, and how to have an economic moat protects against this.

Subsequent chapters cover the other points that investors should consider, such as diversification, broader economic trends, investment and more IPOs. MagicDiligence found most useful of these chapters to be those related to the assessment, complete a series of discrete, real-business examples. Mariusz has a slightly different method for inventory valuation and then discounted the traditional method of discounting free cash flows. Is done in a similar way, though. An investor with his method should use a range of expected growth rates, estimated a final P / E ratio, assign a required return (discount rate), and also estimate a payout of dividends over a period of 10 years. Using these, we can determine two components of the final return is the value of capital stock and dividends paid. Add these two together and you get a share price target. Using the range of targets, we compare against the current price to see if there is a significant safety margin. If there is, you buy.

These examples are very well documented too - the graphics of the book can be easily converted into a spreadsheet. Skonieczny also provides a little 'help, providing a "normal" range of discount rates, as well as using historical data to assign other values. I liked this approach. While the discounted cash flow free (DFCF) is the theoretically correct method for the value of a warehouse, in this way is concentrated on the estimation of the potential returns to real life. DFCF not really adjust to the realities of the stock market, as the average P / E ratios that differ by industry, or its payout of dividends between different companies.

Another chapter that I found particularly interesting described in a concise but complete as such, large reputable companies like Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG) and Long-Term Capital Management can implode in a matter of weeks. While the Magic Formula screens specifically financial companies such as these, which is absorbing reading about how debt can quickly destroy these companies. The explanation of leverage, why companies use it, and the dangers of using it was great.

Mariusz Skonieczny obviously shares many of the same influences as MagicDiligence. Why are we so Clueless ... corresponds exactly with Magic Formula Investing (MFI) using return on investment to determine what is a good deal and what is not. But the duration of that quality requires an analysis of the competitive advantages that this book and MagicDiligence believe is best explained in Pat Dorsey two books (The little book that builds wealth and the five rules for successful stock investment) by factors As regulatory barriers, unique goods, and economies of scale. MFI shorthand for the evaluation, the final performance gains can also be improved with a future-oriented examination like in the book. If the final performance gains is not sustainable, or if the earnings yield is not outside the realm of historical evaluation, the title can not be that cheap. This type of analysis to protect investors magic formula to buy into "value traps".

Finally, the brevity of the book may be its single greatest asset. Commonly cited investing primer, such as security analysis of Ben Graham, are, frankly, very long and mostly boring reads, whose salient points were extracted and compiled effectively in numerous shorter books, including this. Keeping the focus and not getting too technical, Skonieczny presents only the important parts of successful investment fundamental. For beginning investors, this is a very good background. Experienced investors value can not find a lot of new material here, but it's still a good refresher for staying the course ....