The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market

The goal of any investor should be to buy stocks for less than they’re really worth. Unfortunately, it’s easy for estimates of a stock’s value to be too optimistic—the future has a nasty way of turning out worse than expected. We can compensate for this all-too-human tendency by buying stocks only when they’re trading for substantially less than ou

If some firm were to buy Coke, it would have to pay far more than the book value of Coke’s equity, and that extra amount is called goodwill.

You don’t need to do detailed analysis at this point—just glance over sales and earnings growth rates and margins. The most important thing is to look at a variety of firms over a reasonably long time frame—at least 5 years and, preferably, 10.

recommend that you look at the statement of cash flows first when evaluating a company to see how much cash it’s throwing off, then look at the balance sheet to test the firmness of its financial foundation, and only then look at the income statement

This is an important number to look at because it indicates how a company is financing its activities. Rapidly growing companies often issue large amounts of new stock, which can dilute the value of existing shares but which also give the company cash for expansion. Slower growing companies that generate a lot of free cash flow tend to buy back sig

holy grail for figuring out whether a company is generating cash. Also known as operating cash flow, it’s the result of adding or subtracting the previous items from net income.

Operating cash flow minus capital expenditures equals free cash flow, or the amount of cash the company generates after investing in its business.

Comparing cash flow from operations to reported earnings per share is another good way to get a rough idea of a firm’s profitability because cash flow from operations represents real profits.

(Note: Low-quality growth doesn’t imply that a company is cooking the books, merely that the growth rate isn’t likely to be sustained over the long haul.)

successful stock-picking means having the courage to take a stance that’s different from the crowd. There will always be conflicting opinions about the merits of any company, and it’s often the companies with the most conflict surrounding them that make the best investments.