Being a personal finance blogger has its perks, as I’m sure I shared before. One of my personal favorites is getting the opportunity to make money by reading books (one of my favorite activities, from long before I even considered starting a blog) and then reviewing them. The only thing that could make it better is if the authors (or their publishers) send me their books for review; all the fun of reading, without the expense.
Such is the case with Better Good than Lucky, a book on individual stock investing that I recently received. This is a special treat because the author Charles Rotblut is the vice president of the American Association of Individual Investors (AAII), an investment group in which I happen to be a member. I promise, though, that neither my membership nor the provision of this book for review will impact my review.
Better Good Than Lucky opens with an introduction, a discussion of Rotblut’s discussion of his philosophy of the risk-reward ratio (the idea of balancing potential rewards of investments with the risk of losing money via that same investment) and the difference between trading and investing.
The rest of the book is broken into four parts; the first looks at the investment community and how to build a winning portfolio. Chapter one looks at the investing media and financial advisers, providing advice on finding good sources of information (and more importantly, avoiding the bad ones). Chapter two looks into portfolio management theory, covering an introduction to asset allocation and portfolio management, as well as the differences between passive and active investment styles. Chapter three covers the psychology of investment, providing methods of keeping your mind from wrecking havoc on your money. It provides some strategies to depersonalize your investing, and provides an introduction to technical analysis.
The second section of the book covers corporate analysis, figuring out how to evaluate potential investments. Chapter four covers business models, determining how to evaluate the methods by which companies make money. It also provides some ways that companies can mess up, to try to give you a heads up.
The next three chapters look at some of the major pieces of paperwork provided by companies. Chapter five covers the balance sheet, which provides a snapshot of where the company’s finances stand on one particular day. It includes an explanation of the items included, and some ratios you can derive from the balance sheet to help evaluate the company. Chapter six covers the income statement, providing the same analysis, and chapter seven rounds out the analysis by covering the cash flow statement. All three chapters cover several of the line items included in the paperwork, and show methods of evaluating the information to determine whether the company would be a good investment.
The third part of the book covers valuation, determining how much the stocks you are looking at are worth. Chapter eight covers ‘The Two Most Profitable Measures of Valuation’, namely Price-to-Book Value and Price-to-Earnings Multiple, showing how these two measures can be used to determine the value of a stock. Chapter nine covers a third measure, the ‘discounted cash flow’ (DCF). In the rather lengthy chapter, the methods of calculating DCF are discussed, with the calculation components covered in great detail (and the flaws with such forecasts being discussed). Several other related methods of valuation get covered in the course of the chapter, showing how valuation of stocks are done.
The fourth section of the book is about ‘Creating Your Own Luck’, and the only chapter, chapter ten, is about applying the risk-reward ratio and the lessons from throughout the book. It reviews the chapters, providing a short summation of the information covered in each, before providing a section on how to create your own luck. The chapter ends with a section on the risk-reward scorecard, a method of tying everything covered in the book together and evaluating stocks as potential investments.
The book show a novice investor how to evaluate and invest in stocks. The chapters on reading financial statements, in particular, provide a great deal of useful information to would-be investors. The book is well written, and laden with illustrative examples.
The writing style is a bit dry. Some of the calculations provided are a bit complex, and the explanations on how to use the information are sometimes a bit hard to follow (I’ve read more than my share of personal finance information, and I still needed to re-read some sections of the book). Also, although Rotblut recommends keeping a portion of your portfolio in passive investments, virtually no information on how to do so if provided.
Better Good than Lucky is a solid investment book for those looking into individual stock investing. If you are just getting started in the investment world, you probably will want to learn more about passive investing first, but when (or rather, if) you want to get into individual stock investing, this book provides a fairly solid method of doing so. Although the math involved can get tricky at times, it’s necessary in order to make good investments, and this book provides a substantial introduction to do so.