The UNEMOTIONAL INVESTOR: Simple System for Beating the Market by Robert SheardThe UNEMOTIONAL INVESTOR: Simple System for Beating the Market by Robert Sheard

The UNEMOTIONAL INVESTOR: Simple System for Beating the Market

byRobert Sheard

Paperback | April 13, 1999

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Investing in Stocks -- Without Investing in Time, Tears, or Terror
When Robert Sheard decided to bite the bullet and get into the market, he wasn't the typical Wall Street player, didn't have years of trading experience, and didn't have an M.B.A. What he did have was the know-how. As one of the top stock researchers for The Motley Fool -- the widely popular and fiercely irreverent financial site that launched the bestselling The Motley Fool Investment Guide and The Motley Fool's You Have More Than You Think -- Sheard developed mechanical, emotion-free formulas for analyzing stocks. Now he shares his insights to help you earn gains that will crush market averages. The Unemotional Investor teaches you:
* How to evaluate stocks
* What numbers to look for and how to compare them
* When to buy and when to sell
* How to manage the portfolio you create
* Two investing models you can use -- one of which requires no math, no experience, and about fifteen minutes of work per year!
Like other books created by The Motley Fool, The Unemotional Investor presents an easygoing approach to a subject often shrouded in mystery, making it easy for even rank beginners to take the first steps toward reaping the rewards of a low-maintenance, high-profit portfolio.
Robert Sheard has been a writer and editor for The Motley Fool, Inc., www.fool.com. He now manages money as a director for Sheard and Davey Advisors, Inc., www.sdadvisors.com. He lives in Lexington, Kentucky.
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Title:The UNEMOTIONAL INVESTOR: Simple System for Beating the MarketFormat:PaperbackDimensions:240 pages, 8.44 × 5.5 × 0.7 inPublished:April 13, 1999Publisher:TouchstoneLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0684853752

ISBN - 13:9780684853758

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Read from the Book

from PART ONE: Stock Market BasicsLet's start with a simple question: Is this book for you? That may sound a little silly, since my editor expected a book suitable for everyone interested in the stock market (and who isn't?), but there are a lot of people for whom this book is not intended. So let's make that clear from the start.This book is not for people wanting to get rich overnight. While the goal of investing is undoubtedly the creation of wealth -- maybe even more wealth than you ever really believed possible -- the approaches we'll be working with here are intended for use over a long period. There's no sure prescription for a home run in the financial world, and I won't even try to show you how to swing for one. What we're aiming for is a long investment career with lots of base hits instead of trying for that one lucky swing for the fences.This book is also not for Wall Street Whiz Kids or financial wizards. Most of what you'll find between these covers will either be old news to them, or they'll assume (wrongly) that because the approaches I'm writing about are simple, they cannot be effective. In other words, sophisticated investors (especially those in thrall to the Wise) will dismiss me and my work out of hand. After all, they've read my introduction, too, and know full well I'm an outsider looking in on the financial world, not an insider with access to the mystical keys to Wall Street. My feeling is that the individual investor has no more need for the Wise than the Wise have for me. Sounds like a pretty healthy arrangement all the way around.This book is for the Everyman investor. (In these more politically correct times, I realize that should read "Everyperson," but the fifteenth century was influenced by the Old English and gender-neutral definition of "man.") If you have an interest in managing your own portfolio, in building wealth gradually but effectively, in wresting control of your investments out of the hands of the mediocre mutual fund industry, and in getting better returns than you may have thought possible with an approach simple enough that a seventh grader can use it, this book is for you.In my experiences with The Motley Fool, I've taught the principles and strategies included here to readers I've never met in person, who span the globe (literally), who range in age from preteen to nonagenarian, whose education levels span a similar range, and who have had little or no investing experience or have spent their investment career watching someone else handle their money when they entered the online forum. Like me, they had an interest but no experience, and weren't sure where to turn.Perhaps the most satisfying aspect of my work with The Fool is hearing from people months or years after I have worked with them to learn the investment strategies included in this book. Most of their e-mails and letters discuss how much they enjoy the feeling of independence that they have now that they're confidently managing their own portfolios. Some even convey a touch of justifiable gloating in their tones as they compare their portfolio returns with those of the mutual funds they abandoned when they began investing in stocks directly. Not enough teachers get that tangible reward. In fact, it was all but absent when I was in academe. Today, it's a fairly common occasion when I hear from a former reader who is proud to report his or her success. Perhaps I'll hear from some of you in the future.It's time to get to work. I assume that if you are still reading, you are interested in becoming your own investment manager and that what you want now is a little concrete information. The first thing we need to tackle is the definition of a stock itself. Just what is this stock market and how (in basic terms) does it really work?There are essentially two major types of business structures regarding ownership of a company itself -- private and public companies. Privately held companies are those that are owned by an individual or a fixed group of individuals and the ownership only changes according to their own wishes. For example, Irving and Marylou's I. M. Diner is 100 percent owned by Irving and Marylou, making it a private company. If their son decides he wants to be involved in the I. M. Diner, and Irving and Marylou decide to make him a partner, it's still a private company, owned exclusively by Irving, Marylou, and Irving Jr. There is no limitation on the size of a private company or the number of owners. Typically, this type of structure suits smaller businesses, though there are some quite large privately held companies in America.Ten years down the road, however, the family business has grown. Irving, Marylou, and Junior own six I. M. Diners and all of them are always full of satisfied customers. Their diner is a major hit and now they want to expand into four more states, and fifteen new cities. Problem: Virtually all of their financial resources are already wrapped up in the six current diners and they are hesitant to borrow the extra capital they need to start the expansion. What are they to do to capitalize on the craze for Marylou's Heart-Stopper Special Meatloaf? One possible answer is to "go public."A publicly traded company is one that has raised capital by selling shares of stock, individual shares of ownership in the company itself. The company works with investment bankers who launch what is called an initial public offering (IPO). The owners and their investment bankers decide how many shares they will offer and what percentage of the company those shares will represent, as well as the approximate price per share, which is based on how much the company is worth and how much the company is trying to raise. The investment bankers (called the underwriters of the offering) then seek out interested investors to purchase the available shares of stock. The money raised from the initial offering goes to the company to finance its expansion plans, and then the shares of stock enter the open market.Once a stock is publicly traded, the original private owners no longer have complete control over the company's ownership; that rests with the current shareholders. (Though many original owners retain enough of the new public stock -- at least 50.1 percent of the shares -- to keep control of the voting.) Nor does the company control how often or to whom those shares of outstanding stock are bought and sold. That function is taken over by the marketplace. Stocks that are publicly traded act to a large degree like any other publicly traded item in a marketplace. The stock market brings together (through the stockbrokers) individuals and institutions who either own stock and are looking to sell it for the best price possible, or who are looking to invest money in a particular stock and hope to find the best bargain.The price of the stock for any given company, then, depends on the same market forces of supply and demand that dictate the movement of prices for apples or corn, Reggie Jackson rookie cards, or Joe Montana autographed sweatbands. When there are a lot of buyers clamoring for a small number of shares (or apples or sweatbands), the people who own that supply can command a higher price for the stock. Conversely, if you're trying to sell a stock and there is not a flock of eager buyers, you will probably have to settle for a lower price than you hoped for.While the actual workings of the stock market can get very complicated, what with all the middlemen involved in the actual buying and selling transactions, the basic functions of the stock market work pretty much like any farmers' market in the country. Visit one and you'll see that Farmer Lotsocare has the best-looking melons you've ever seen because of his special blend of organic fertilizer and the tender attention he gave them. He also has a frantic crowd surrounding his booth trying to get the best melons before they're snatched away. Contrast that to Farmer Quicksale, who cut corners at every opportunity and has a melon crop that seems better suited to doorstop duty than as fare for your buffet table.As the fair opens, the crowds around Farmer Lotsocare's booth will pay just about any price Farmer Lotsocare asks (within a reasonable range, of course) for fear that they will end up empty-handed if they don't. In the meantime, Farmer Quicksale's booth is deserted. Who would buy an inferior product when a superior one is available right next door? Such is the power of the marketplace. The only buyers Farmer Quicksale will be able to attract as long as Farmer Lotsocare's booth still has melons for sale are ones who simply can'tafford the higher prices for the top-grade melons. But that means Farmer Quicksale is already having to mark his prices down to attract buyers. The supply is there, but the demand isn't evident at his original prices. Once Farmer Lotsocare runs out of melons, though, the few buyers who were too late to get any of his prize-winning crop may then decide to check out the booth next door. With the memory of what could have been, though, those buyers are not going to pay the same price to Farmer Quicksale for his obviously poorer melons. They may buy a few just to have something for their tables, but they won't pay a premium price and they won't buy in the same quantity that they might have if Farmer Lotsocare had not run out of melons. Plain and simple, market forces of supply and demand determine the price for whatever the commodity is. And in this pure sense of the word "commodity," that's how the stock market works as well. (I won't be advising you to look to the commodity markets for your investments, though. Might as well head to Vegas.)What drives the forces of supply and demand for stocks, however, is not as easy to see as what drives them for our two farmers. On the surface, it's not as easy to see which of two stocks is the better "melon," and that's where the techniques and strategies in this book come into play. You will need a way of thumping the melons to see which farmers are charging too much and which ones are offering you a bargain. Almost everyone who has ever invested has, at some point, run into the cliche "Buy low, sell high." Yet the actual task of determining those values can be extremely complicated. If it were a simple, guaranteed, and well-known process, every investor would be making a fortune in the market on every single investment. Obviously, that is not the case. What, then, drives the forces of supply and demand for stocks?These forces are driven by many factors, of course, but the crucial distinction we need to make as investors is between long-term and short-term market forces. In the short term, almost anything can affect investor psychology. A rumor that the chairman of the board left his wife, embezzled the company's pension fund, and ran off to South America with his assistant is enough in the short run to knock a stock's price down. Remember that the interplay between buyers and sellers is what determines a stock's price. Would you want your investment strategy to depend on market rumors?More relevant perhaps is a news story that affects how investors feel about a given stock. Several years ago semiconductor maker Intel was flying high. Everyone loved the company because it was dominating the personal computer market with its microprocessors. The stock was soaring. Then came the announcement that a flaw existed in its new top-of-the-line Pentium chip, which generated false results in certain very complicated mathematical computations. Wham! For a while, the stock price was hammered because of the fears that Intel might lose money on the new product, that a recall would devastate the company, that...well, you get the picture. A year or so later, with the Pentium problem solved, Intel's stock was again the darling of the market, making great gains and being touted as the one stock you must have in your portfolio by pundits far and wide. For now...All of that, however, is in the short run, a period we at The Motley Fool are not nearly as concerned about as what happens over a much longer time frame. Over the long run, there's no doubt what drives the forces at work on a stock's price -- the earnings a company records. There is a good reason "the bottom line" has come into our lexicon to mean "what everything boils down to." The bottom line, or how much a company earns in profits, is the factor above all else that will move a stock price up or down over time. Keep in mind, a shareholder is a part owner of the company and, therefore, "owns" a tiny portion of those bottom-line earnings. If the company is making a lot of money, it will take a higher price from a potential buyer to induce a shareholder to sell his share of the business. The stock price rises. The crucial nature of the company's earnings can be seen in a statistic that financial analysts watch constantly -- earnings per share (EPS). This is simply a figure derived by taking the total earnings for the company and dividing that number by the number of shares of stock outstanding.If you look at any of the great stock success stories over the last few decades, you'll find companies whose earnings per share have grown consistently, year after year. Let's just look at two examples from completely different industries: soft-drink giant Coca-Cola and computer software leader Microsoft. Over the last five years, Coca-Cola has had growth in its earnings per share on the average of 18.5 percent a year. That's a total growth rate for the five years of more than 130 percent. For one of the largest companies in the country, that's an impressive achievement in a seemingly stable and mature business. The earnings, though, continue a long-term trend for Coke that has led to terrific gains for shareholders over the years. Over the past decade (from the end of April 1987 to the end of April 1997), Coca-Cola's stock has generated annual returns of more than 30 percent a year. A $10,000 investment in Coke made in 1987 would have grown to more than $145,000 during that decade. Short and sweet: It's earnings, baby!An even more compelling example is the history of Microsoft, the world leader in personal computer software operating systems. The Windows operating system all but controls the personal computer market today and the company has recorded terrific earnings. Over the last five years, for example, Microsoft's earnings have grown at an annual rate of 35.5 percent -- a phenomenal performance for such a behemoth. As with Coca-Cola, shareholders who were a part of that phenomenal earnings growth profited handsomely. A $10,000 investment in Microsoft a decade ago would be worth over $420,000 today. The annual return on the stock during the decade has been better than 45 percent a year -- another example of the incredible growth in earnings over a sustained period pushing the stock value to loftier levels.The trick, of course, is identifying the Coca-Colas and Microsofts; before the fact, not after it. Copyright © 1998 by Robert Sheard and The Motley Fool, Inc.

Table of Contents

Contents
Foreword
by David and Tom Gardner
Introduction
The Birth of a Fool
Part One
Stock Market Basics
Part Two
Getting Started with Value Stocks
Part Three
Diversifying with Growth Stocks
Part Four
Putting It All Together
Part Five
Frequently Asked Questions
Acknowledgments
Index

From Our Editors

A financial wizard from one of the world's most popular investment Web sites offers simple strategies for beating the market in this best-selling guide. The Motley Fool site's Robert Sheard lends his know-how to everyone from the absolute beginner to the most experienced investor in The Unemotional Investor. In an easy-going manner Sheard reveals mechanical, emotion-free formulas for analyzing stocks designed to help investors make the most of their Wall Street dollars. This book also teaches readers what numbers to look for and how to compare them; when to buy and when to sell; how to manage a portfolio and much, much more.