Navallier, Louis. The Little Book that Makes You Rich. Hoboken, New Jersey: John Wiley & Sons, Inc., 2007. xxi+185 pages. No index. ISBN: 978-0-470-13772-7.
It would be nice if you could read a little book – in this case 185 pages – and you would learn all you need to know to get rich! Navallier doesn't promise you will be rich just by reading this book, but he does suggest that you can become rich over time using his strategy for picking stocks. The sub-title of the book is “A Proven Market Formula for Growth Investing,” which is no small statement about how you can become rich.
Navallier is a well-known investment manager who is quite successful. This follows in the path of other books in this series, which have authors well known for their role in the investment world or their track records in investing.
His strategy for investing is “growth investing.” He implements this strategy by using indicators of likely growth. This part of the strategy is similar to Browne's (2006) value investing. The indicators are quite different though. Rather than attempting to determine the firm's fundamental value as an indicator of future performance, Navallier looks at a firm's growth prospects and attempts to use them as indicators of future performance.
Basically, the indicators of future performance are based on earnings, earnings forecasts by analysts, cash flow and return on equity. In every case, bigger is better. Navallier interprets these indicators as helping to predict future “buying pressure” on the stock. He also estimates “alphas”, “betas” and standard deviations of individual stocks over the last year to assess their risk. This relatively technical discussion is quite clear and avoids technical details or formulas.
Anyone can compute Navallier's indicators from databases that are publically available for a price. Navallier actually makes the indicators and the other measures of stock performance available at http://www.getrichwithgrowth.com, so access to the data is not an issue. In fact, he makes grades available for individual stocks, from an A for Strong Buy to an F for Strong Sell.
If these data are available to all, how can I, as an individual profit by knowing them? To take an extreme, if I am the last person to find out that Grew Rapidly is a Strong Sell, others will have sold the stock before I find out. Their sales will lower the price and I'll just get the typical risk-adjusted return on the stock at this lower price. The price of the stock has fallen before I get the chance to sell it, and that's that. Navallier deals with this problem by suggesting that being successful with his strategy requires changing the weights on indicators over time. At different times, different indicators are relatively more or less important.
At the end, Navallier discusses how to put together portfolios of these stocks, to generate reasonable overall risk. The principles for forming portfolios are quite sensible, even though I remain dubious about getting rich from such a portfolio.
