My Review of Pat Dorsey’s Book, “The Five Rules For Successful Stock Investing”

One of my favourite investment books has to be “The Five Rules For Successful Stock Investing”, written by Pat Dorsey, the Director of Stock Analysis for Morningstar Inc.

I love it because the book gives a step-by-step guide on how to organise your investment process. The author talks about the five rules that would result in successful stock investing.

Pat also talks about the mistakes we should avoid as investors. He goes through the basics of analysing a financial statement, valuation and putting the entire process together.

Moreover, he also talks about the characteristics of different types of industry and how we should think about them. All that Pat has shared in his book is extremely valuable to me, and I continue to use these principles in my investment process.

Here are some of the important takeaways from the book.

The Five Rules

Since the book is named “The Five Rules For Successful Stock Investing”, the most important aspect of the book has to be these five rules. They are:

  1. Do your homework
  2. Find economic moats
  3. Have a margin of safety
  4. Hold for the long haul
  5. Know when to sell

Do Your Homework

Pat Dorsey reminds us that we should always do a thorough analysis on the company that we are interested in investing, rather than relying on speculation.

Find Economic Moats

The struggle of an investor is always to choose between finding great companies trading at a fair price and finding mediocre companies trading at a great price.

Pat Dorsey seems to be in the former camp. He advocates us to focus on finding companies with a strong economic moat.

An economic moat is a strategic advantage a company has over its competitors, making it extremely hard for the competitor to take market share from the company.

Have A Margin Of Safety

When we invest, we should have an adequate margin of safety. This means that we should only invest in a company that is trading at a discount to what we estimate its worth should be. In this way, we will less likely be hurt when we make a mistake in our analysis.

Hold For The Long Haul

This is one of the hardest things to do in investing. To do nothing after we invest is a huge challenge because the market constantly gives us quotes on how much our company is now priced at. Only those who can resist the temptation might be able to truly enjoy the benefits of long-term investing.

Know When To Sell

Pat Dorsey reminds us that we should not be selling simply because prices have moved up or down. Prices are merely the reflection of market expectation.

Instead, we should focus on the fundamentals and the intrinsic value of the company. We should only be considering to sell our investment if its fundamentals have deteriorated significantly, or we have made a mistake in our analysis. We can also consider selling if the company is massively overvalued in our view and that we have better use of the cash for greater opportunities.

Foolish Summary

Investing should be as simple as it can be, but no simpler. Pat Dorsey lays out five simple rules to help us achieve success in our stock investment. I have tried my best to follow his advice. And I have to say in the past decade of following his advice, it has been greatly rewarding, making this book one of my best investments.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.