The Neatest Little Guide to Stock Market Investing (Paperback)

I presume the majority of the glowing reviews on this site are from novice investors. Afterall, that’s what this book is aimed towards. While it contains many useful bits of information, some of the things mentioned by Mr. Kelly would most certainly be detrimental to a new investor. Allow me to explain.

First, the good. Kelly does an excellent job of defining various stock terms — everything from P/E ratio to beta — and doing it in simple language. As a side note, his writing style and prose is significantly better than that featured in most investing books, since he was an English major. Additionally, Kelly provides excellent research resources, including ones that I had not found in my extensive internet searches. More information and more sources is never a bad thing, and Kelly provides the latter in spades. Finally, his introduction to such investment greats as Warren Buffett and Peter Lynch — while rudimentary — are very helpful for the new investor. I find it particularly good that he utilizes Lynch extensively in his own strategy, because Lynch is (arguably) the best fund manager that has ever lived.

Unfortunately, Mr. Kelly adds a bit of his own intuition and thoughts into the strategies he presents in this book. First and foremost, his notion that investing in the UltraDow mutual fund is sound is beyond ludicrous. Not only is this an ineffective use of money, but its volatility and risk far outweighs its gains. Secondly, Kelly seems to be a bit full of himself, calling Wall Street professionals “gurus” who know as much about the stock market as YOU do. In the preface, he states that using this book “always works” — a pretty bold statement from someone who is A) not a business major and B) not really even a market professional. Only later, towards the very end of the book, does Kelly admit that he has “limited experience” in the area of stocks. Er…what was this about “this book always works”? Kelly’s strategy is, in essence, based upon filling out a worksheet and setting arbitrary numbers as “good” or “bad” — i.e. when X ratio outweighs Y number, this stock is a good buy. Get enough of these “good buy” signs together, and you have a stock to buy. Not only does this show his lack of knowledge on the subject, but worse, he makes these statements as if they are guaranteed to make you money. Interestingly enough, Kelly almost always talks about buying shares in the HUNDREDS. That’s right, as in 200 shares of Microsoft. Almost anyone who knows something about the market will tell you that investing $5,000 or even $10,000 will yield underwhelming results. The # of shares Kelly is dealing with proves to show that he is not only small time (re: has not made a lot of money off trading) but probably hasn’t been at investing for very long. Remember, the market has returned an average of about 9%. Even if you’re the worst stock picker ever, by probability, you will earn 9% on your picks over your lifetime. The question really isn’t whether you’ll make money, but how much will you make? If you follow Kelly’s advice, prepare to be underwhelmed.

By far the worst part of the book is Kelly’s complete and utter dismissal that short term trading works. Essentially, the strategies outlined in his book — which you shouldn’t use, if you value your cash very much — are all for very long term investing. While that’s a valid strategy, somepeople are exceptionally successful owning a stock for three months, six months or a year. You don’t have to be in a stock for three years to see wild gains, and you can perform sound technical analysis on a stock you plan to hold for three months. Kelly makes it seem as if short term investing is not only impossible, but not profitable. For some, though — even those who do it part time — it may prove more effective.

As a glossary of investing terms, list of investing resources and a quick overview of how the market works, “The Neatest Little Guide…” is a winner. Unfortunately, Kelly’s strategies are inherently flawed, and while they may appear to be solid to a new investor, they should not be trusted. Kelly’s view is a narrow-minded one and a rudimentary one at best. In some instances, this reads like a “Fisher Price” version of meatier, more substantial investment books. While it is worth the $10 — for the definitions and list of investment companies, research sites, newspapers, magazines et al — you should take Mr. Kelly’s strategies with a grain of salt.

A better book for the novice investor — which isn’t bogged down too much with technical terms/complex numbers — is Jack D. Schwager’s “Stock Market Wizards” book of interviews with market professionals (fund managers, independent traders etc.). This should prove to give you an overview of many different strategies and things to look for. It was the first thing I read before I started buying stocks, and it was a tremendous resource.