Book Review: Beat the Market, by Charles Kirkpatrick

I am usually not crazy about books that propound a simple way to beat the market. This is one of those books. What makes me willing to write a review about this book is that the writer, Charles Kirkpatrick, is willing to incorporate some fundamental measures into his analyses, notably price-to-sales, which will help with industrial companies, but not with financials.

This is a simple book that reinforces the idea that one needs to pay attention to valuation (in a rudimentary way), and also to momentum. While I don’t endorse the specific methods of the book, I will say that for someone with a low amount of time, and wanting to do a little better than the market averages, he could do so over the intermediateterm with the methods in the book.

Note: I am not endorsing the technical methods in the book, but most of the methods boil down to momentum, anyway.

If you want, you can find it here: Beat the Market: Invest by Knowing What Stocks to Buy and What Stocks to Sell

PS — Remember, I don’t have a tip jar, but I do do book reviews. If you enter Amazon through a link on my site and buy things from them, I get a small commission, and you don’t pay anything extra. I’m not out to sell things to you, so much as provide a service. Not all books are good, and not every book is right for everyone, and I try to make that clear, rather than only giving positive book reviews on new books. I review old books that have dropped of the radar as well, like this one, because they are often more valuable than what you can find on the shelves at your local bookstore.

Comments

[Old Rick]

Bobtrader: The idea behind using P/S as a primary screen is a central tenet of Jim O'Shaughnessy's first book; "Invest like the Best" which is also a worthwhile read. P/S is useful in finding companies (non-financial as David points out) that have suffered earnings drops due to margin compression, but may still be selling stuff and through restructuring may be able to improve margins. Should be available through David's link to Amazon for $4-5.

2008 Dec 27 10:34 AM

[John Lounsbury]

Other ratios that can be use are price-to-cash-flow and price-to-free-cash-flo... As David Merkel points out, the value of different ratios varies from industries to industries. All of these ratios (including price/book, not previously mentioned, and the widely used P/E screening methods but not usually reliable stock selection methods. For example, people who bought low P/E banks in early 2008 have been slaughtered. With few exceptions, buying mortgage companies that topped many screening lists in early 2007 are nearly worthless today, or have actaully gone under completely.

So use ratios to screen, but then dig deeper into the income statements, balance sheets and footnotes in quarterly and annual reports to narrow down the field further. After all that is done, you will be most successful if you have a good view of a company's prospects going forward. The rear view mirror can be deceiving.

David Markel mentions momentum. I have two uses for momentum: (1) to help pick entry points for a purchase and the best time to sell when I no longer want to own a company; and (2) the most important guide for shorter term trading.

2008 Dec 27 11:15 AM

[MarvinMBA]

I have a book with over 300 financial ratios that can predict and describe anything about the company. You could also write a book on how to use these ratios for almost any analysis or comparison you would want to make.

Ratios by themselves are meaningless. Looking for successfull business models is the most important way to find investment opportunities. They exist in information technology, environmental products/projects and the drug discovery start ups....MarvinMBA

2008 Dec 27 12:21 PM

[Urbane Gorilla!]

If I only learned **one thing** during this market decline it would be; "There is no one way of investing. Every market requires its own approach.".

- Consider that Jim Cramer was a successful fund manager and now he's the butt of market board's jokes. His purely fundamental approach may have worked well in prior markets, but clearly doesn't work in this weirdness.

- Consider Vanguard Fund Manager 'John Bogle's' call approach to buying a fund and holding it forever. Clearly Mr. Bogle's admonishments were not only the cause of a tremendous amount of pain to many Americans, but very, very wrong in the last year's environment.(In fact, I feel he is a bigger criminal than Bernie Madoff... At least Madoff's mishandlings were limited in scope.)

- Consider 'buying calls'. A perfectly acceptable practice in a regular market, but caustic in a market with extreme volatility.

etc.. etc.. ect..

I lost a short article when my harddrive crashed recently. The author compiled stats on the 6 major market types; Up volatile, up calm, down volatile, down calm, sideways volatile and sideways calm. His point was that you need to recognize which market you are in and structure a gameplan in advance that best suits the type of market.

I wish I had heard that advice when I first began investing...

jegan

2008 Dec 27 03:42 PM

[Smarty_Pants]

Good points in both the article and comments. One comment I would add is that most people don't think too much about managing the risk of any given trade (and I don't mean simply using a stop).

Risk management is an area that is generally ignored by most "how to make money in the market" books and it is one of the most important areas of understanding to being successful.

Rule Number 1 should always be avoiding big losses. Any trade entered must consider the worst case and be able to survive in those circumstances. If the worst case is going to empty the account balance then the trade should be avoided, no matter how profitable it might turn out to be.

There is a very good book on this topic by Van K. Tharp titled "Trade Your Way to Financial Freedom" which I suggest everyone who wants to make 'big profits' in the market should read before beginning. It will be different than what you normally expect from such trading books but it contains information that is worth taking the time to learn.

2008 Dec 29 09:43 AM