The Forbes/CFA Institute Investment Course

The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth by Vahan Janjigian, Stephen M. Horan, and Charles Trzcinka (Wiley, 2011) is an introductory text for the beginning investor. It covers topics ranging from the role of the stock market in building wealth to the use of derivatives, from selecting a broker to fundamental and technical analysis.

The book is thorough in its approach and, although aimed at the novice, is no “investing for dummies.” For instance, in the chapter on reading financial statements (including the often telltale footnotes) the authors focus on Wal-Mart’s numbers from 2006 through 2010. They explain how to decipher the company’s income statement, balance sheet, and statement of cash flows. They then look at key financial ratios such as profitability ratios, asset utilization ratios, leverage ratios, and liquidity ratios. Overall, the authors conclude, Wal-Mart’s financial ratios look strong. But should you buy the stock? Is it underpriced or does its stock price already reflect its strength? Most often a company’s health is already priced in; “research suggests that investment returns from stocks with the highest ROEs are similar to the returns from stocks with only average ROEs.” (p. 112)

In a section entitled “Can You Trust Financial Statements?” the authors address the issue of fraud but also explain why conducting a proper peer analysis can be daunting. Take the case of “companies having different fiscal year-ends, especially when their businesses are seasonal. … Wal-Mart’s fiscal year ends in January, a full month after the Christmas selling season. As a result, the company’s inventories are likely to be low. In contrast, a retailer whose fiscal year ends in October would have high inventory levels as it gears up for holiday shoppers. This difference will affect inventory turnover and profitability ratio calculations.” (p. 116)

Although this book focuses on individual stock selection, it includes chapters on fixed-income securities, derivatives, and mutual funds. And it ends with 22 “tidbits of wisdom” which, we are advised, should be taken with a grain of salt.

In brief, The Forbes/CFA Institute Investment Course is a first-rate introduction to what we all hope is not a mirage: building wealth through investing.