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MagicDiligence provides useful, simple, and effective stock screening tools inspired by Joel Greenblatt's Magic Formula® Investing methodology. Our Spells give value and growth investors a list of great stock candidates every day, and our advanced Spell Caster lets you create the Magic-style... More
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  • Review of "The Monopoly Method" by Greg McCall 0 comments
    Nov 16, 2011 9:19 AM | about stocks: AAPL, CSCO, WMT
    In today's article, MagicDiligence will reviewThe Monopoly Method by Greg McCall. This book contains some investment processes and insights that can be useful to those interested in applying due diligence to stocks uncovered by Magic Formula Investing.

    The purpose of the book is laying out a structured stock investing process known as the Monopoly Method. The main theme of this process is choosing companies that, through various methods, have obtained "unfair advantages" over current and prospective competitors that allow them to consistently earn high returns on capital and provide greater returns to shareholders.

    We've seen this approach before, most prominently in Pat Dorsey's The Little Book that Builds Wealth. But Monopoly Method is wider than that book. McCall covers a lot of ground here. There is a chapter that goes into detail on the tenants of both fundamental and technical analysis. There is a useful chapter that covers the most important things to look for in 6 general industry categories (what's important to a tech firm is not necessarily important to a commodities producer!). And of course, McCall provides his own assessment of factors that provide a company the coveted "monopolistic tendencies" that so often lead to outperforming investments.

    Most of the later chapters of the book focus on putting together the method and laying out examples of it in use. Without spoiling the book too much, the method itself is a 15-point scoring system applied to a single equity, with 11 discrete factors. Some of the factors are pretty basic - revenue and margin growth, for example. Others require more subjectivity. Stocks scoring 10 or up are considered "buys". 8-10 are "holds", and 7 or below would not be considered for investment. Following this structure, McCall then applies the method in practice to 3 stocks in the summer of 2010 - Apple (NASDAQ:AAPL), Cisco (NASDAQ:CSCO), and Walmart (NYSE:WMT).

    Overall, I thought the book was a good read for those interested in analyzing their own stocks. A lot of these concepts have been covered before, but McCall's structuring them into a discrete system is very valuable. As he notes himself, successful investing usually involves sticking to a strict discipline and keeping emotion out of the equation. The sections going over what to focus on in each industry and an overview of some basic technical analysis are also extremely useful.

    Perhaps the best part of this book are the dozens of resources McCall calls out for assisting investors looking for data. Fundamental data, company due diligence and opinions, commodities data, and technical analysis resources are all provided, many of them free of charge. As a stock researcher, I can testify that one of the biggest roadblocks to analyzing stocks is finding reasonably priced, high quality data, and this book calls out sites that I had not come across before.

    A few nitpicks to mention. First, this is a book for serious investors. Implementing the Monopoly Method will take a considerable amount of time and research for each stock. This is not an easy "Magic Formula" for investing. Second, there is no real quantitative support for the Monopoly Method in the book. McCall does not provide any backtested results or even reference his performance at a number of hedge funds to support his strategy.

    In summary, if you are serious about analyzing your own stocks, The Monopoly Method will make a nice addition to your investing library. MagicDiligence recommends the book.
     

    Stocks: AAPL, CSCO, WMT
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