Top critical review
Avoid the Audiobook CD (except perhaps the unabridged version)
Reviewed in the United States on September 28, 2012
This review pertains to the Audiobook CD.
It was extremely simplistic and devoid of material information. If you know absolutely nothing about investing, and you are a teenager, it might be a useful story to listen to. But for anyone else I recommend you don't waste your time.
The audio CD makes really big claims (about unhelpful other sources of information are, and how superior this simple strategy is) but then fails to provide any substantial amount of information. There seems to be an "unabridged version" which might have some meatier information, but this CD was extremely wordy to make a simple point.
There were perhaps just a few bullet points:
you want to compare companies by their earnings yield or % earnings per dollars invested.
you should expect to earn a greater return than low-risk investments, such as held-to-maturity treasury bonds.
you should be careful because some companies destroy value when they expand.
earnings can be volatile.
prices of stocks can be extremely volatile.
The first point and last point are his main points. Obviously, you want to buy a company you think will continue to have solid earnings, but whose price has sunk during market volatility, and hence you get a bargain. You look at a company's earnings yield, to tell whether it is a bargain or not. Does it get a 10% return on capital while another stock gets only a 2% return on capital?
The story he uses is really long and lame for anyone older than 18. (again: the unabridged version might be meatier, as might the book)
One big thing he doesn't expound upon is what time frame are you looking at, for earnings? Presumably last 4 quarters.
Others prefer to go upon analysts' expected earnings for next year. I haven't figured out how much more reliable using those figures are than past earnings, but I hope I can figure that out.
Some other reviewers of the book talk about EBIT. The audio CD doesn't go into different measures of earnings (dividends vs NI vs EBIT vs EBITDA) or dollars invested (common stock value vs enterprise value). The audiobook also doesn't explain why some high-growth company's have extremely poor earnings yields (like Amazon) which is b/c people are anticipating/speculating that at some point in the future it (after it has established so much market-share and well-developed products and product-spaces and infrastructure) it will be able churn out big earnings. Clearly, he advocates finding companies that are "bargains". However, he doesn't warn you about "value traps", where a company occasionally has rapidly declining earnings, but the company is a bargain based on past earnings. Good examples would be a company whose few patents have expired, its mineral resources have been depleted, or its technological product line is at a dead-end (1990s' wordprocessors or CRT monitors, for example) without a modern successor.
Back to the issue of growth stocks, there is always the hope that the company's assets (tangible and intangible, book and non-book) can far outlive their book depreciation expenses which dock earnings in their periods of rapid growth. For example, Google, according to one article expenses all its software R&D costs the year it incurs them, instead of capitalizing them as assets and depreciating them over time. This potentially means that future earnings might benefit from software product segments that have greatly reduced future development/maintenance costs. If competitive pressure is too great than this may never actually happen, and the company might always struggle to make earnings.
The risk of growth stocks is that there is much speculation about how much future earnings the rapidly growing company might be able to churn out in the future. This is not so easy, b/c sometimes competitive pressure forces margins to stay ultra-low or even force them to become unsustainable. I am still looking for a good book that will explain all these nuances in greater detail. I am starting to chew on Damodaran's books and the Wiley CFA series, as well as some Buffet books, and I recommend others to likewise.