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Book

Why Stocks Go Up and Down

Expanded Edition – Now Available

Our book is a favorite among value investors. It is listed on Value Walk’s Top 5 Investing Books along with Ben Graham’s Intelligent Investor and Phillip Fisher’s Common Stocks and Uncommon Profits. The book is also one of the six books that shaped the early thinking of Michael Burry, the founder of Scion Capital and the investor portrayed by Christain Bale in The Big Short.

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Ratings & Reviews

One of the best investing books to learn about the stock market
I read WSGUD with Ben Graham's books: "The Intelligent Investor" and "Security Analysis 4th Edition" before considering my career going into investment finance. If Ben Graham's books are about the theories and philosophies of value investing, I believe WSGUD provides the practical knowledge how companies are formed, how they go public, how to read and interpret the financial statements, how to conduct investment research using P/E and other key ratios to determine stock prices are low or high. I learned how to regress the high and low P/E ratio data of the stocks in the past and developed my own investing strategies for growth companies. I learned the basics from Chapter 18. I am highly recommending this book to anybody who wants to start investing in the stock market.
⭐⭐⭐⭐⭐
A must-read book for any aspiring security analyst
This book deserves a place on the same shelf as other investment classics such as Security Analysis, The Intelligent Investor, Common Stocks Uncommon Profits, and One Up On Wall Street. Highly recommend it!
⭐⭐⭐⭐⭐
Great Place to Start
I have been investing for over 10 years and read a number of investment books. When I got this book I was both skeptical and intrigued by the subtitle, "The Book You Need To Understand Other Investment Books", but after going through it, I can understand why the authors call it that. A lot of investment fundamentals are covered in depth that other books assume you know already.
⭐⭐⭐⭐⭐
A Superb Introduction to Investment Analysis
This book will get you started in understanding stocks and bonds, but you will also find yourself referring back to it again and again as your knowledge expands through further study. The authors introduce the most basic concepts and develop them right up through the point of making an investment decision. Their coverage of the topic is encyclopedic, so their book can fill in gaps even for experienced investors.
⭐⭐⭐⭐⭐
Very Thorough
I found this book to be a great tool to help me understand the basics of stocks and bonds, as I had only a minimal understanding coming in. It includes an extensive glossary but I rarely used it except to check my understanding. The final chapter shares its title with the book, concluding with a particularly valuable analysis of Abbott Labs stocks - a very effective way to convert the theory into a practice illustration. I have never seen this before. Strongly recommended.
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Puts the pieces into place
This book is a great tool for putting all the pieces together when it comes to analyzing a business or the market. Even if you're a little more experienced and knowledgeable it serves a good purpose in bringing it all back to basics. Sometimes it is easy to forget how all the various pieces fit together and act in unison. Recommended for both novices and more knowledgeable practitioners.
⭐⭐⭐⭐⭐
This is the best tutorial on stock investing I have ever read
This is the best tutorial on stock investing I have ever read. I am a partner in a venture capital firm and also run an investor relations/financial PR firm in NYC. This book is now required reading for all my employees. The author does an amazing job explaining how to analyze a business' fundamental value, as well as what drives movement in the stock market. I have met more than a few successful portfolio managers and financial professionals in Boston and elsewhere who credit the author with helping them achieve success.
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This is hands down one of the best books on the stock market
I have read over 20 investment books in the last year. This is hands down on of the best books on the stock market. If you really want to understand the numbers that drive a security up and down this is your guide. Easy to read, but I would recommend having a pen and paper handy to get the best out of this book.
⭐⭐⭐⭐⭐
World Class Book
Perfect book for making fundamentals of stock movements clear. This is not about how to pick stocks but makes a platform for reaching there. Real gem of a book. Authors have succeeded in sending messages and explaining concepts to readers in such easy jargon free language that I am in awe of the clarity of concepts in mind of authors and their teaching skills. Absolutely remarkable. They have great understanding for readers' thought process and have written each line considering what might come next in readers' mind. This should be an investment classic. Such great writing is only seen in Common Stocks and Uncommon profits in my view. Worth 100 times more than its price.
⭐⭐⭐⭐⭐

Our book was an Amazon best seller and is a favorite among value investors. In 2016, we were pleased to have the book listed in Value Walk’s Top 5 Investing Books along with the Graham’s Intelligent Investor and Fisher’s Common Stocks and Uncommon Profits.

Interest in the book has been favorably impacted by the release of the film The Big Short, which prominently features Michael Burry, the founder of Scion Capital and one of the few investors to deliver high returns during the financial crisis. We are honored that our book is on Dr. Bury’s list of books that shaped his early thinking (https://www.thewaystowealth.com/michael-burry-reading-list/)

Why Stocks Go Up and Down

Over the next several pages, we will analyze Abbott Labs’ stock (symbol: ABT). The analysis is based on one completed on January 26, 2011.

As you may know, Abbott Labs is a diversified global healthcare company with prod-ucts in five categories: Pharmaceuticals (57% of revenues), Nutritionals (16%), Diag-nostics (11%), Vascular (9%), and Diabetes Care (5%). The company generated $35.2 billion in sales in 2010. Some of the company’s well known brands include: 1) HUMIRA, the leading biologic for the treatment of Rheumatoid Arthritis, 2) nutrition-al products for infants (Similac) and adults (Ensure), and 3) the FreeStyle family of blood glucose monitoring systems for diabetics. The company is headquartered in Abbott Park, Illinois, has 91,000 employees, and is a constituent of the S&P 500 Pharmaceuticals sector.

Over the past year, Abbott’s stock has fallen -14.2%, underperforming the S&P 500 by nearly 33%. The poor performance has been driven primarily by two factors:

1) investor rotation out of the pharmaceuticals industry
2) potential competition for the Abbott’s leading product, HUMIRA, an injectable for the treatment of Rheumatoid Arthritis (RA)

—– pages 341 to 373 are not included in this excerpt —–

VALUATION ANALYSIS

Price/Earnings Ratio

Given that earnings power is a key determinant of stock value, we begin our valuation analysis by looking at the price/earnings (or P/E) ratio. As noted in the last chapter, the P/E reflects the price an investor is paying per dollar of earnings generated by the company. The forward P/Es for Abbott and other, similar companies in the pharmaceu-tical industry are listed in Figure 19.11.

From the figure, we can see that Abbott Labs trades in line with the other companies in the pharmaceutical industry. Specifically, the company’s P/E of 10.3x 2011 EPS is equal to the industry average and only slightly lower than the median value of similar companies (10.8x).

Many investors would look at Figure 19.11 and conclude that the company is fairly valued and move on. That certainly could be the case. The reason we say could be is that we haven’t looked at how Abbott’s fundamentals compare to its peer group. The P/E multiple you’d be willing to pay depends importantly on the expected growth rate in earnings and your degree of confidence in those growth estimates. The last column in the figure lists the expected long-term growth rate in earnings for Abbott Labs and the other pharmaceutical companies. As you can see, Abbott is expected to grow earnings at a rate of 10.1%, while the peers are growing earnings at a much lower rate of 4.4%.

We can explicity account for the differences in growth by calculating what’s known as the price/earnings-to-growth (or PEG) ratio. To do so, we simply divide the P/E mul-tiple for each company by its expected growth rate. Using the consensus estimates from Figure 19.11, the PEG ratio for Abbot Labs and the industry are as follows:

PEG for Abbott = 10.3 / 10.1 = 1.0x
PEG for peers = 10.3 / 4.4 = 2.3x

The PEG ratio reflects the P/E ratio per unit of earning growth. In this case, Abbott Labs’ PEG ratio of 1.0x is noticeably lower/better than that of the industry (2.3x). This indicates that while Abbott has the same P/E multiple as the group, the stock may actually be undervalued after adjusting for the company’s higher expected growth rate. Remember, a company with a high price multiple may be an attractive investment opportunity provided the company is expected to generate even higher earnings growth (as we see here).

Now that we’ve looked at Abbott’s P/E vs. its peer group, let’s continue the analysis by looking at where Abbott is trading vs. it’s historical range…

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