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Anyway, onto tonight’s book review. I am genuinely not sure what to conclude on “7 Commandments of Stock Investing.” There was much that I liked, and much I did not. I know that Mr. Marcial wrote a column for Business Week for many years, but that was not something I followed closely. This is my first real introduction to his thought.
Let me take his seven principles, and go in order:
Buy Panic – Hey, I can go for that. The difficulty for average investors, and even many seasoned investors is that they buy too soon in a panic. One also has to focus on companies that are high credit quality in order to avoid big losses. That got some attention in the book, but not enough for me.
Concentrate, Diversify Not — Ugh, I like having 35 companies in my portfolio, because I concentrate industries. To the extent that you concentrate, you must have superior knowledge of the companies that you own. Without that knowledge, the average investor should diversify more, and investors with no special knowledge should buy index funds.
Buy the Losers – Again, I can go for this, but it takes a special person to separate out the companies that will crater from the companies that have a sustainable business model and will bounce. Buying quality companies is a must here, or else you can lose a lot.
Forget Timing — I agree. I keep roughly the same equity exposure all the time, and my rebalancing discipline helps protect me as well.
Follow the Insider – That’s a good principle, but I’m not sure that it should rank so highly in a set of stock picking rules. Insiders do do better than the market as a whole, but using insider purchase and sale data takes discretion to interpret.
Don’t Fear the Unknown – By this he means have some foreign equity exposure and biotechnology investments. One of my rules is, “If you can’t understand it, you won’t know how to buy and sell it.” Getting comfortable with any area of the market that is volatile takes study and effort. This is not trivial. As for biotech in particular, that takes a lot of incremental skill that I don’t have. After reading what Mr. Marcial wrote, I would not feel confident investing there.
Always Invest for the Long Term: Seven Stocks for the Next Seven Years — He employs a multi-year holding period, like I do, and then points out seven stocks that he thinks will do well. I’m not going to spoil that part of the book by mentioning any of the seven, but none of them interest me. (Well, maybe one or two at the right level.) All of them are large caps, and are quality companies.
Under his first principle, he recommends buying the stock of the company that you work for when it gets hammered down (page 8). Unless you are an industry expert here, be careful… you are compounding your risks, because your wage income derives from the health of the firm. Don’t put your savings there too, unless you are dead certain. (Full confession: I put one-third of my net worth on the line on my employer, The St. Paul, in March of 2000, selling in August of 2000. Great trade, but no one else knew in the firm did it.)
On page 62, calling Primerica the predecessor firm to Citigroup is a bit of a stretch. Yes, I know how the case could be made, but there were links in the chain where the smaller company was acquired by a larger one, and the smaller company came to dominate the management of the combined firm.
Under his third principle, he favored GM and Ford. I can’t support buying such credit quality impaired investments under the rubric of “Buy the Losers.” These are two companies that will have a hard time surviving in their present forms. Motorola would be another example… a pity there is such a lag between writing and publication.
The book is intelligently written, and is short enough for an average person to read in 4 hours (188 pages). He gives plenty of examples to illustrate his points. I wasn’t usually enthused by the companies that he chose — I prefer to go further off the beaten path, and buy them cheaper.
His basic principles are good principals to follow, but they need to be tempered by a focus on risk control. It’s one thing to serve up investment ideas as a writer — you can throw out a lot of promising ideas, and do it well. What is tough is owning the companies, and trading through their troubles. That’s a dirtier business; one where average investors will be more prone to fear and greed, and may not do so well, just because they can’t stomach the risks.
He also does not make clear how the seven principles work together. Need you follow all seven on every investment? I think that’s what he is saying.
Away from that, you can’t use his principles on low quality stocks; that would be a recipe for regular large losses. Buying panic, buying weakness, and concentrating requires a high quality approach to investing.
With that, I recommend the book to those that have enough maturity to know that they will have to bring their own risk control models to the game. His methods presuppose a degree of ability in interpreting the fundamentals of companies, so I do not recommend this book to beginners; it would be a dangerous way to start out in investing. Better to start with Ben Graham.
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