Investors in mutual funds and stocks are familiar with the Morningstar name. For more than twenty years, the Chicago-based firm has been offering succinct and objective reports that capture the performance of various investment products. Their star ratings and the concise one-page format of their analyses are legion among their fans. The current set of three volumes, written by Paul Larson, one of the company’s equity strategists, is aimed at the novice investor who may be hesitant to enter the stock market because of the fear of the unknown. In a workbook format, complete with multiple choice questions and exercises, Larson holds the tyro’s hand and eliminates the fear.
In the first volume, How to Get Started in Stocks, Larson compares stock investing to other investing vehicles and points out how stocks are the best choice for the long-run. The concept of risk versus rewards, so essential to understanding the siren song of the stock market, is explained early on to set the stage for an in-depth look at stock investing. The idea of compound interest (often called the eight wonder of the world) and how it helps early investors versus the procrastinators is also featured upfront. Larson introduces the concept of moats – defenses successful companies have against imitators and competitors – to help separate good companies from the also- rans.
Analysis of financial statements, so essential to investing, forms the core of the second volume, How to Select Winning Stocks. While the non-financial types are typically likely to be intimidated by this subject or watch their eyes glaze over, Larson simplifies financial statement analysis by eschewing jargon and using simple examples. The statement of cash flows that traces the inflow and outflows of cash (regarded by experts as the one statement where financial chicanery is near impossible) forms an integral part of this book.
The third volume in the series, How to Refine Your Stock Strategy, allows the novice investor to examine various investing styles. A wide gamut of styles – from Benjamin Graham’s value investing to Warren Buffet’s growth at reasonable price (or GARP) - are described objectively. Morningstar also makes a pitch for its vaunted stock rating method.
The books’ appeal is in their eye-pleasing layout and reader-friendly writing style. The step-by-step approach tears down the intimidation factor, and the exercises at the end of each chapter allow the reader to remember and apply the ideas to his or her personal situation. The estimable Morningstar (and Paul Larson) have to be commended for this effort as it demystifies an area that most people regard as fraught with dangers.