Book Review: The Motley Fool Investment Guide


If you do much investment reading, you’ve probably noticed that many, if not most, financial writers focus on investing in mutual funds, particularly creating allocations of index funds and only altering them slowly as you age, shifting the allocation to be more conservative over the decades.  From Suze Orman to Ben Stein, the emphasis from financial advisers is almost overwhelmingly on creating a portfolio of index funds and slowly shifting it over time.  Which is a perfectly acceptable plan; but, what should you do if you want to invest in individual stocks?

Enter the Gardner brothers, the founders of the Motley Fool website.  They make the case that not only can you safely invest in individual stocks, but by doing so, you can do better with your investments than possible with index funds.  How is this possible?  Well, to find out more about the Motley Fool philosophy, we can pick up The Motley Fool Investment Guide and find out.

Overview

motley-foolThe Motley Fool Investment Guide is divided into nine different sections (ten if we include the appendices).  The first section starts with an introduction to the Gardners and the Motley Fool website before covering some of the common mistakes made by investors.  (These include both buying stocks without doing your own research as well as not investing in stocks because you feel they are too risky.)  The section concludes with an exhortation for the reader to get online to take advantage of all the resources available to investors on the internet (which is probably second nature to anyone reading this blog).

The next two sections get into the Foolish (a term used in the book to describe the Gardner investment philosophy, and thus, the ‘wise’ course of action) investment philosophy.  The second section covers mutual fund investments, noting that the best choice for a fund investor is an index fund (particularly, they recommend one that mimics the S&P 500).  After spending three chapters building up to this conclusion, the third section of the book then tears it down.  They raise some issues with the Efficient Market Theorem (a major underpinning of index investing) and start to cover some of the sources of information that can be accessed when attempting to research stocks (including Securities and Exchange Commission (SEC) Filings, such as 10-K and 10-Q forms).

The fourth section is a brief introduction to the two types of stocks in which you are encouraged to invest: blue chip companies (large, established companies that offer stability and some growth potential) and small-cap growth companies (with high possibility of future growth and little institutional interest, yet).  In both cases, the Motley Fool guide recommends growth stocks, and the fifth section of the books goes into depth as to how to evaluate stocks for their growth potential.  This section gets a bit deep into valuation principles and calculations; the evaluations listed for stocks require some math, but everything is clearly spelled out (and with the SEC’s online website, the needed fillings are easy to find).

In part six, the book gets more into the qualifications they have set out for investing.  They describe how to find their Rule Makers (the blue chip companies that dominate their field) as well as the Rule Breakers (the strongest contenders in emerging fields).  They then provide reasons to sell, both for reasons of company fundamentals and for portfolio management and diversification purposes.  The section concludes with an example of mechanical investing, the (now defunct) Foolish Four.

The next three sections cover some other topics important to would-be investors.  The seventh section discusses the use of margin and short selling.  The eighth reviews some of the reasons and motivations to invest in stocks.  And the ninth serves as a farewell, as well as encouraging the reader to manage their own money, be aggressive, and give back to society.

The last part of the book is a serious of appendices.  There’s an introduction to stocks, a description of a penny stock scam/April Fool’s gag run on the Motley Fool website, and a carnival themed guide to investment scams and schemes.  It provides an interesting introduction to several issues that weren’t covered earlier in the book

Review

Pros: If you are looking for a book that covers the often tricky subject of investing in individual stocks and does so in a way that is both informative and entertaining, the Motley Fool Investment Guide is a pretty good option.  It provides an informative introduction to the subject of stock investing which focuses on evaluating the stocks for potential growth.  It covers how to read through a company’s corporate filings and evaluate them in a way that is largely understandable.  The attempts to spice up the material with humor come off rather well, in an area that can be tough to make humorous.

Neutral: The book focuses exclusively on growth investing, not really touching on the possibility of value investing or any other investment philosophies.  Furthermore, it takes swings at other investment possibilities, including mutual funds.  The suggestion to invest in an S&P 500 Fund as the best alternative to individual stock investing also barely scratches the surface of mutual fund investing.  If you are looking for a book on pure stock investment with a focus on growth, this is a good place to start; if not, you might be better served elsewhere.

Cons: This book understates the amount of research that needs to be done for individual stocks, even after they’ve been purchased.  The risk of individual stocks compared to mutual funds tends to be understated or completely ignored.  Lastly, the more technical chapters on evaluating stocks for possible investments tend to be over stuffed with information and figures, which might be a bit difficult to read through.

Overall: The Motley Fool Investment Guide is a pretty good introduction to stock investing from a growth perspective and understanding .  If you are seeking to invest in individual stocks, it’s certainly worth a look.  That said, if you are only planning to invest in mutual funds, or want to follow a more value based approach to investing, this book is probably not for you.

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