Review: The Little Book That Makes You Rich
While travelling for a business trip last week, I had the opportunity to read The Little Book That Makes You Rich, by Louis Navellier. It’s one of several books in the Little Books Big Profits series, in which various investment professionals cover different investing strategies. The book claims to contain “a proven market-beating formula for growth investing.” Since I personally lean towards the value side of the investing style scale, I was curious to see if Mr. Navellier’s growth strategy would sway me.
The book is relatively short, as the title implies, and it’s an easy read. Navellier’s writing style is fairly engaging, and novice investors should have no trouble following the investing advice he provides.
As for the advice itself, Navellier starts with a pretty strong argument for looking at fundamentals. He recommends focusing on eight fundamental factors, including free cash flow, return on equity, and operating margins. I’m used to seeing this approach from value-oriented analysts, so I was pleasantly surprised to find advice along similar lines in this book. He also recommends looking at other fundamentals that are more growth-oriented, such as positive earnings revisions, positive earnings surprises, and increasing sales. His discussion of how analysts make their earnings forecasts was particularly interesting. He repeatedly argues that one should make a decision based purely on the numbers, rather than getting caught up in a company’s “story” or other psychological pitfalls. I found this part of the book convincing, and its lessons apply to investors of many different styles.
Next, Navellier discusses risk ratios. He launches into a nice explanation of alpha, beta, and standard deviation, and says he uses these to produce a quantitative grade that reflects factors that should cause a stock’s price to rise, such as institutional buying pressure. Navellier states that his stock rating comes from 30% fundamental analysis and 70% quantitative analysis. This is where the strategy laid out in the book gets foggy, because the details of this quantitative formula are never explained, and most of us can’t do quantitative analysis on our own anyway. To solve this problem, the book has a companion web site, www.getrichwithgrowth.com. Signing up on the web site gives you free access to Navellier’s ratings of 5000 different stocks, updated weekly. The rest of the book discusses how to assemble a portfolio of stocks, global investing, and some different trading strategies.
Since 70% of the book’s investing strategy comes from something you can’t do on your own, the end result is that you can’t use the book without relying on the companion web site. Ultimately, you must simply trust in Navellier’s quantitative analysis. This is the major shortcoming of the book – you can’t fully implement this strategy on your own. In fact, if you’re just going to sign up for the web site and use the stock ratings there, you don’t need the book at all. In the end, the book comes across as a promotional tool.
Navellier’s long-term record from his investing newsletters is impressive, and I enjoyed the brief tour of his growth investing strategy. However, experienced investors won’t find much new insight here. The book does have some decent information for new investors, but not enough to begin picking stocks on your own. You might be able to use the web site’s ratings in combination with some other type of evaluation, but you don’t really need the book for that. This Little Book was a fun read, but if you want to pick stocks you’ll need to look elsewhere for a more complete strategy.
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