Essay Example on Unlock the Secrets of Value Investing: The Money Machine

Money Machine: The Surprisingly Simple Power of Value Investing. Gary Smith. New York: Amacom, 2017. 320 pp.

The Money Machine is a book about value investing. It is not the only book in this field. There are other books such as Greenwald, Kahn, Sonkin, and Van Biema (2004) that focus on investing in the value of the company. They caution investors from focusing on the day-to-day fluctuations of company stock in the market or sticking with losers when afraid of soaking in sunk costs.

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He believes that the price of stocks stabilizes at an optimal level during recessions and stock crashes. Why? He thinks that most hyped stocks have unreasonable retail prices. He believes that if one can time when a stock is cheap enough, it would be prudent to buy at that time. By cheap enough, the author focuses on the value of money paid to buy a stock. He explains that a Berkshire Hathaway stock valued north of $200,000 could be cheaper than a $20 blue-chip stock (Smith, 2017, p.39).

Gary Smith uses his experience and expertise in economics to propose a model of investing that completely ignores the movement of the stock market. He believes that once a person has invested, they should not even bother how the stock markets perform. This model is contentious, like many people, stockbrokers included, prefer the thrill of gambling and quick conclusions. The author offers insights and examples of how stock investors do. He gives two different examples of two types of investors.

The first investor that Smith believes typifies every jack and harry stock investor is the one who checks where the stock is every morning and every evening-the speculator. The speculator buys a stock because they hope the stock price will go up. So, they check in every day to cash in.

If the stock falls, the person cashes in any way to avoid further losses. He also provides a low down on the other investor. The investor invests with a purpose and plan. He also has a timeline for the investments, say ten years. Within that time, the investor ensures that the portfolio is diverse enough. From there, they wait for dividends at the end of every year.

The author shows how to focus on managing investment stress. He contends that investing is risky, but it definitely should not be a heart-wrenching exercise. It should strike a balance. It should not be overly cautious; neither should be a day-trading hustle. He debunks several investment theories, such as perfect communication, bigger fool, and efficient market theories.

The breadth of analysis of the concepts is unsurprisingly deep, drawing examples from experience, research, and common sense. He also reviews other scholars to enrich his arguments. He quotes scholars such as Eugene Fama, James Tobin, Harold Hoteling, and John Burr Williams. Throughout the book, he simplifies the arguments using understandable and straightforward expressions, formulas, and equations.

The audience of the book is everyone who is interested in stock investing. The author draws insights from real estate, consumer behavior, mathematical economics, and other related industries. More often than note, he relies on common sense to make economic decisions. The best criteria of judging this book is to focus on its ability to provide sufficient proof for a person interesting in value investing.

Gary Smith is a professor of economics with over 40 years of experience teaching economics at Pomona College. The subject of the book is about investing. As an economist, one would expect him to favor value over hype and numbers. He starts with simple things, such as the price of stocks. He cautions that the price of a stock is indicative of the general direction of the market.

He recalls the dot-com crash and how no one was interested in the price of stocks. In his opinion, the prices of stocks were unreasonable-too high. He supports his argument by suggesting that value determines the stability of the investment. Once the value of a stock is optimal, one can confidently invest in the stock.

He shows how stock investing should be based on trading values as those trading values reflect temporary phases of the economy or forces of demand and supply. He gives an example of market flash crashes that only leave more people miserable without affecting the share values at the end of the crash. Similarly, every stock today is a factor of several ratios, including net present value. To make a sound investment, one should ensure that the return on the investment at the end of the economic period that once is entitled to an income is acceptable.

If one is looking for a dividend payment of 10% per annum, they should choose a portfolio that at least generates such a proportion of profit. Again, sound investing is all about looking at the business model, environment, and organization. A positive industry outlook coupled with reckless management will not land anyone a winner.

If the numbers do not add up from a value perspective, the deal is not worth pursuing. Room for abnormal and instant returns is plagued by uncertainties. Today the return could be surreal, and the next one heartbreaking because no one has an idea how the stock will move along that coveted money line.

When information reaches the hairstylist, cab driver, or mail carrier about a hot stock, it is probably not worth knowing. Similarly, once the word hits Wall Street, the opportunity is probably already gone. The author justifies this using several illustrations, including the following.

He argues that if one has to buy stock from the market, they must be comfortable with the expected returns. During the dot-com bubble, the value was not important before the crash. The market eventually crashed. Even companies that did not intend to do anything had an impressive stock performance.

Lessons Learned

As noted, this book does not begin with novel ideas. It deals with existing ideas. The narration is impeccable, humorous even. The presentation is meticulous, too. Despite all this, the book succeeds in delivering significant life lessons that are practical in the modern investing scene. The lessons are not just valuable for long-term investors; they apply to speculative buyers, too. In this part, the quote that best summarizes the content is chosen and expounded on.

Any information about possible changes in the future is most certainly factored in the price.

This investment attitude ought to be entrenched in the core principles of the market. Though there are plenty of $100 bills left on the sidewalks, picking them requires measured caution. The theory of a bigger fool is the practical wisdom of most stock investors. They buy at a certain price with the hope of selling to a bigger fool.

Gary Smith shows the futility of using this model by suggesting that anyone who knows or even anticipates the price of a stock to be X dollars at a particular time will set the price to reflect that. Unless there is an extraordinary, unexplained, unimagined, and unheard-of event that changes the sails, the price is already adjusted. So, finding a cheap stock is next to impossible. The fallacy that one can get a cheap stock is farfetched. He gives examples of how company stocks reflect expected performance at the end of the year.

What everybody knows is probably not worth knowing.

Stock gurus feast on the market frenzies. They prefer to use all the rosy numbers that everyone will want to jump into without much scrutiny. The author uses several examples to drive this point. He argues that it is common that two experts will give two contradictory stories about what the future of a stock or the entire market looks like.

This 'professional' outlook is a work of engineering by the beneficiaries. He gives another example of mutual funds and their performance highlighting their incompetence. A stockbroker shows prospects how they can put them in at $20 and pull them out at $35 and blames it on the market when the stock underperforms.

Dog of the Dow strategy is still a reasonably successful way of investing.

The price to dividend ratio is a standard measure of stock performance. The higher the ratio, the better the stock. The author supports investment decisions pegged on this ratio. However, he cautions that there is no guarantee that a company's past performance will determine its future performance. He explains using several examples. He also cautions about regression towards the mean. Finding winners in the optimistic portfolio is not easy, as everyone seems to want an optimistic stock, which means the prices are adjusted for the potential rewards.

This lesson applies to today's stock investing and is practical for any investor. Companies that perform poorly in the profits may have internal and external challenges that could worsen their position in the future. For example, a company that is not posting profit could be suffering from management inefficiencies, or it could be in a redundant industry. Such issues will definitely have an impact on the performance of the company.

However, a one-off performance is not enough indicator of the position of the company. A company that performs lower than its mean will likely recover within a couple of years-and this is still not the full truth because when companies crumble, they start by performing below their mean, and some of them never recover.

Before making an investment decision, ranking all the available stock in any market based on dividend payout performance can separate possible winners from losers. As long as one's strategy of investing rests on sound judgment, it is hard to enter into what he calls 'Hail Mary Investments.' Even when responding to a disappointment, an investor should stick to the core of the investment strategy-and price to divided ratio is one way to eliminate emotional and impulsive buying.

If it looks too good to be true, it probably is not true.

Falling for offers that promise high returns is akin to falling for a Ponzi scheme. The author elaborates on the concept of a pyramid scheme in detail, including how they work and how they end up. Not all lofty promises are what they appear. Some are straight-up fraud cases, while others are just a ticking time bomb that does not have a contingency plan. Whenever the story about a company's stock glitters, the further one should be not to fall for that 'get rich quick' mentality.

However, there are exemptions to the rule, depending on the approach that one takes to identify the opportunity. The gamble is to know how solid the idea is. Can it stand an empirical test? The author debunks several apparently foolproof opportunities and investing strategies, with most, if not all, crumbing at the slight weight of a new set of data. Even computer algorithms err because of their inability to employ common sense, detect tricks engineered specifically to throw them off track, and such things.

Buy a stock for its dividends.

Dividends are payable every year. Some companies have differed dividends. Buying a stock for its dividends contradicts the normal hype of quick money. Who waits for a whole year to make cents on a dollar per share? The value investors do so because they realize the power of waiting. The author gives a valid example of a person who decides that buying a stock at ten and selling it at 20 gives one 100% return. However, once the investor cashes in, they lose a cash-dispensing machine. The problem is that though the person now has liquid cash, it will take significantly more money to replenish his

Do not try to time the market.

Trying to time a market is a mission in futility, as no one knows what will happen to any particular stock. If someone is looking to enter the market, the focus should be on the cheap stocks. The author's definition of a cheap stock is not hard for any i...