In The Monopoly Method: An insider’s guide to navigating Wall Street and becoming a better investor, Wall Street veteran Greg McCall guides the reader through his value-investing approach to portfolio selection and management. Written in a straightforward easy to read style, McCall outlines his method of identifying and evaluating “monopoly” companies, i.e. those that have compelling “themes” and are sector dominators. Think Amazon and Apple.
The Monopoly Method approach
Selection of monopoly companies involves both in-depth fundamental analysis as well as some technical analysis. The author takes us on a tour of both.
Fundamental analysis includes balance sheet basics focusing on stats that give an indication of fiscal health and revenue growth. Technical analysis is limited to identifying when a stock may be breaking out or breaking down by looking at support and resistance levels, moving average cross-overs, and relative strength. Being a technician, I like his commentary on the first but feel that the discussions of the two others are inadequate and could confuse those with little or no technical training.
Sector by sector analysis
Monopoly companies are defined as those being in the right place at the right time. Sector by sector, the author identifies what he thinks are the monopoly companies of today, noting current themes as well as possible future ones. These companies can be used as a springboard for the beginning value investor.
McCall does a good job of explaining what sector-specific metrics are needed for proper evaluation. He also provides outside sources that he himself uses to determine fundamental values, sources that aren’t at the top of everyone’s lists. For example, www.greenmarkets.com is the place to go for pricing fertilizer, an essential metric in evaluating companies such as Agrium, Potash, and Mosaic. Who would have guessed?
Along the way, the author also explains how economic events affect price movement such as why commodities rise when the dollar falls. Those who have never taken an economics course might appreciate these observations.
[It's interesting to note that although McCall addresses most of the major sectors, he does not mention the drug sector. I don't know if the omission was intentional but it's certainly a sector that is too important to ignore without comment.]
The scoring system
He puts it all together by walking the reader through three specific examples—Apple, Cisco, and Wal-Mart. But before he does that he runs us through his stock scoring system, a list of a dozen or so fundamental criteria plus a couple of technical ones. (You can view a stripped down version of the scoring method on www.monopolymethod.com.)
Guidelines on assigning parameter values are given in broad strokes. It’s left up to the experience and knowledge of the reader to provide the appropriate value.
All of this guesswork leads me to my main criticism of the Monopoly Method: it’s highly subjective. Given that, though, someone who does take the time (and that’s my other big complaint) to go through this process will gain an in-depth understanding of a company’s dynamics.
One takeaway that many investors might find useful is the risk/return formula. Calculation of this ratio requires determining the upside price target using fundamental data and the downside price target from chart analysis. The ratio tells you how rewarding your investment would be at current prices with the added benefit of providing you with your profit target (the upside price) and your stop/loss point (the downside price).
The book is a good primer for budding investment analysts and portfolio managers. Of particular note is the appendix chapter on interacting with company management where the “Flattery will get you everywhere” maxim seems to be the modus operandi.
If you really want to sink your teeth into this method, the book gives you guidelines on how to structure your day. As it turns out, to fully work the Monopoly Method requires an eleven hour work day (yes, you read that right), from 7am to 6pm (I’m assuming that’s Eastern time). That might work for highly paid Wall Street analysts and fund managers, but does that work for you?
All in all, The Monopoly Method is a straightforward manual for value investors and those wanting deeper explanations than what Jim Cramer provides. Two major downsides that were previously noted are that it is time consuming as well as being subjective. I suspect there’s a long learning curve involved in figuring out how to accurately rate stocks which would only appeal to the most motivated. By its very nature, this method also tends to overlook new companies with high-growth potential due to the inherent lack of fundamental data.
This book would make a good addition to the library of any value investor or those interested in learning more about it. You could, however, save yourself a lot of time and trouble by going out and buying some shares of a value fund or better yet, Berkshire-Hathaway. (Class B shares are $70.) At least here you know that your portfolio is in the hands of the definitive master of the Monopoly Method—Warren Buffett.