This is an excellent primer on equities. Skonieczny begins as simply as in a Dummies or Idiot's guide by explaining what a business is and how investing in the stock market is buying a piece of a business. He delineates how businesses are evaluated in terms of bottom line success or failure, the details of which are what the investor should know about any business before buying its stock. This is the fundamentalist approach to investing, the sort of knowledge that cannot be skipped and is known by any savvy investor.
The prose and the illustrations are easy enough for a sixth grader to understand, and that is one of the strengths of the book. Skonieczny knows what he is talking about and has taken the trouble to make it clear to the beginner. A key idea, so basic that it is often overlooked or not really appreciated by the beginning investor is that of risk to reward. Skonieczny makes it clear that any stock market purchase must promise a reward greater than the prevailing interest rates and greater than Treasury Notes and other fixed income instruments because the risk in the stock market is greater. He shows how this thinking is merely an extension of the understanding that you wouldn't start and run or invest in a business unless its bottom line profit potential was greater than what the bank gives its depositors.
When to Buy? (the third chapter) concentrates on the objective value of a company based on its projected earnings relative to the price of the stock. Skonieczny eschews technical analysis. No voodoo technical charts with running averages and ghostly heads and shoulders. Instead there is a simple chart on page 37 showing the price/value fluctuations of a stock. Assuming that we can get a good grip on what a company is actually worth, it is obvious that you buy when the price is less than the value. Simple. And if investors followed this strategy with any kind of real fidelity bubbles and panics would go the way of the dodo.
When to Sell? (a later chapter) follows the same sort of reasoning. Skonieczy writes: "The best time to sell is when projections turn out positive, the company prospers well, and the market realizes its full value by pricing it correctly." He adds, "Another reason to sell is when an investor finds a better investment opportunity." (p. 117)
Skonieczy is not enamored with stocks that are unpredictable and/or have high price to earnings ratios or high volatility. He likes companies with "moats" and other advantages over its competitors. His is not a gambling approach to the market but rather a conservative, fundamentalist approach. Whether you are of similar mind or not, this book is still an excellent guide because to go beyond the fundamentalist approach it is essential to know the basics. It is one thing to gamble blindfolded, another to take calculated risks. And you can't know the risks unless you understand the fundamentals, and understanding fundamentals is what Skonieczy's book is all about as an investment guide.
One of the bits of advice that I especially like is Skonieczy's insistence that we not "blindly over-diversify, preventing our individual picks from having meaningful impacts on the overall performance." (p. 139) What's the value in painstakingly picking the best stocks with the best safe and sane prospects only to water down our portfolio with other stocks just to be diversified? Personally I don't think being diversified in the market is really the key to sound financial planning. I think it's being diversified overall, not just within the stock market. For the long run the wise investor should have some money in stocks, some in real estate, some in bonds, perhaps, some in cash (meaning CDs or such).
This book is particularly timely since we are just coming out of a recession it would appear, meaning that there are many publically traded companies that are undervalued. Reading and understanding the concepts presented in this book and applying them to the market now might very well help the investor separate the good prospects from the not so good ones, the risky ones from the less risky ones.
--Dennis Littrell, author of "The World Is Not as We Think It Is"