Book Review – Why are We So Clueless About the Stock Market?

 

If you spend as much time learning about (and possibly attempting to teach about) investing and money management, as I have, you discover that a lot, perhaps most, people don’t have that much knowledge in this area. Granted, you could say that about most fields; prior to four years of undergraduate education, several years on the job, and the two years of graduate school I’m finishing up, I wasn’t an expert on biochemistry, either. But money and personal finance is different, in that we all need to know how to boost our savings and invest our money, which means understanding things like the stock market.

Why Are We So Clueless about the Stock Market? from Mariusz Skonieczny attempts to clarify just how the stock market works, and more important for our typical investor, how to invest in a way that should build up your money over time. It takes a value investment approach, looking at how to evaluate companies to determine how much they are worth and use that knowledge to find a reasonable price for the stock being offered. Does it help eliminate your cluelessness and give you information you need to invest, or leave you just as perplexed as you were before? Let’s read on and find out!

Summary

Why Are We So Clueless About the Stock Market? opens with a Preface that shares how Skonieczny invested in a way that yielded positive returns during the broader market downturn in 2008-2009, and how he intends to shares advice on stocks and how to invest in them. The first chapter of the book provides a brief explanation of the difference between a business and stocks, and shows how stocks can come into existence. It shares the story of a fellow named Tom who operates a lemonade stand, to illustrate the basics of business operation.

Chapter two looks at how businesses are able to make investors wealthy. It shows how Tom could take his lemonade business public, and the various ways, from dividends to stock buy-backs, that could benefit those investors who bought shares of stock in Tom’s company. The third chapter looks closer at just what makes a good business, with particular emphasis on how businesses can build ‘moats’, ways of keeping their competitors at bay and making their own businesses more valuable. There’s also discussion about why buying a business (or part of a business, at least) on the public market through stocks is usually a better, or at least, easier, method of getting ownership of a company than buying a whole business on the private market.

The fourth chapter looks at when to buy your stocks, and particularly how to avoid buying at the same time as most other people. Things like P/E ratios and building a margin of safety with your investments are discussed in more detail. Chapter five gets into much more detail on valuation, covering how to discount the future value of a stock price or dividend payout to find its current worth. There’s also discussion of how to use an appropriately created spreadsheet to do your valuation calculations for you.

Chapter six covers basic capital structure, looking at things like how taking on debt to increase leverage can affect companies’ return on equity, and lists some businesses that were taken down by having too much leverage. (AIG, anyone?) The seventh chapter is a short one, looking at the effects of diversification, most notably how owning stock in a hundred companies makes even a dramatic rise of a single one have much less of an impact on your net worth. Chapter eight looks at how the broader economy affects the stock market and individual stock prices, and how investors can take advantage of broad market downturns (such as the one from 2007-2009) in order to buy quality stocks at a discount.

Chapter nine covers Initial Public Offerings (IPOs), mainly stressing how it’s not usually a good idea for investors to try to start investing in companies that are just going public. The tenth chapter provides a few quick steps on how to evaluate a company in whose stock you are considering investing, from looking them up on Value Line to checking what their employees are saying on sites like glassdoor.com. Chapter eleven gives a brief overview of when to consider selling your stock holdings, and how to do so in a way that provides the most financial benefit to you.

Chapter twelve lists  a few case studies, showing how the principles and techniques covered in the book so far were applied to four different companies (three of which were apparently purchased by Skonieczny). The thirteenth and final chapter is a short round-up of the lessons covered in the book, sharing what has been covered so far and what the reader should have learned. The book closes with an appendix that compares stock investing and real estate investing, noting that both have their advantages and disadvantages, and that neither is really ‘better’ than the other.

Pros

Why Are We So Clueless about the Stock Market? is a pretty solid introduction to stock investing. It explains the advantages of putting money into the stock market fairly well. It also provides a reasonable method for value investing, determining how much a stock should be worth, and finding ones that are undervalued in order to invest and maximize your profit.

Cons

Throughout the book, the dangers of stock investing, particularly in individual stocks as the book recommends, tend to be understated. There is also an increased emphasis on the negative effects of things like diversification, rather than the benefits of doing so (one or two bad stock picks can’t sink your portfolio, for example). The chapters in the latter part of the book tend to be rather short, not providing much information on the subjects covered (including, for example, when to sell the stocks you own).

Overall

Why Are We So Clueless about the Stock Market? is a pretty solid introduction to stock market investing, particularly value investing. The book does tend to overstate the advantages of individual stock investments and understate the risks. However, if used to support your stock investing as part of a broader investment plan, it should prove to be quite useful to the typical investor.

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