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Posted March 2, 2001
Covers a lot of ground very well and briskly. In the first part, it explains how markets work (and how lots of people think they do), the risks and limits of high-risk strategies like day and margin trading and what those mean for other people, asset allocation echniques, and a critical review of new economy rhetoric and what that all means for us. In the second part, key valuation ideas are presented in a way that is easy to understand but that still serious (i.e., really helpful). Topics again range pretty widely, from inflation and interest rates, to the 'circle of competence', to earnings and cash flows, to accounting games. The third part is also broad and tight, with a look at what corproate managers do and can be expected to do, including details of popular debates about corporate governance in recent years. The emphasis in this area is figuring whom to trust with your investment resources. The treatment of GE's Jack Welch is particularly rich (and full of a whole separate set of insights as rich as any of the Welch biographies have given). The book really covers all the ground any investor needs to think about, which is I guess a good reason for the title. My only criticism would be that in the area of investor psychology the book mentions some of the key topics but doesn't really get into them as much as it gets into the other topics. But that is really a quibble. It remains a riveting, wide ranging narrative. Worth a careful read.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
Posted February 3, 2001
Great Distillation and Updating of Graham and Buffett
Although the definitive popular book on Benjamin Graham and Warren Buffett remains to be written, this excellent work is certainly the state-of-the-art in this area. For those who do not have the time or inclination to read the writings and speeches of these important investment thinkers, you get the key kernels of wisdom in action-oriented doses here. This is the first book I have read that gives the stock investor who wants to outperform the market averages a sense of what is involved in order to have a chance. The examples of how to apply these methods to companies like General Electric, Coca-Cola, Microsoft, and internet retailers are very helpful. I thought this book was much more valuable in every way than Buffettology. Both Graham and Buffett see buying stock as being the same as buying a whole company. The analytical methods involved are similar to those used by companies thinking about making an acquisition, except there is no need to consider what the joint operating benefits of the companies will be. The strength of this approach to stock investing is that if stock values for a company fall too low another company or group of cash-flow-oriented investors will acquire the whole company. In the long run, stocks should not fall too far below their intrinsic value (a Graham concept) as cash flow generators. The book is organized into three sections. The first looks at whether the stock market is efficient or not. If it is, you cannot beat it. If it is not, you can beat it by investing where it is not efficient. The evidence here summarized estimates that the stock market is at least 20 percent inefficient and becoming more so. I am aware of a number of studies showing other kinds of inefficiency that Professor Cunningham does not cite. My own personal view is that the stock market is not very efficient at all, but is relatively predictable within a band of probability. A particular strength of this section is in creating a summary of many of the arguments for stock market efficiency and inefficiency. Trust me. Unless you really love reading this kind of research (which I happen to), you will be better off reading the summaries here rather than the originals. The second section discusses how to outperform the stock market. The best part of this section is an extremely well done parable about a man who wants to sell his apple tree. He is approached by many different types of potential purchasers, and they offer wildly varying prices. You get the interior logic of how each price is arrived at in a way that allows you to see the fundamental weaknesses and strengths of each approach. Nicely done! The heart of this section emphasizes the familiar Graham and/or Buffett (their philosophies do not coincide, but rather partially overlap) concepts of sticking to what you know well, having a margin of safety, and doing your homework. I particularly liked the detailed description of how to determine where you have a knowledge edge that allows you to potentially have an advantage as a stock investor. The cautions against overestimating what you know are very well done. The third section looks at the role of company management and boards of directors. It debunks a lot of the popular thinking about the importance of good governance. As Warren Buffett often emphasizes in his annual letters to shareholders, you should invest only with people you 'like, trust, and admire.' A CEO with a weakness (particularly a lack of integrity) can quickly tank your investment before you can do anything about it. Certainly, I have been sorry a number of times when I have not followed that rule. I certainly subscribe to it now. Every management will make mistakes. Only highly focused and capable ones will notice that they have and work on rectifying the errors rather than trying to explain why there really is no problem. If you read this book carefully, it will convince you that outperforming the stock market is a pretty hard thWas this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.