The Hindu Business Line : Sound investors enjoy sound sleep

HE WROTE an investment book and dedicated it "to all investors, large and small, who do NOT adhere to the philosophy: `I have already made up my mind, don't confuse me with facts.'" About this book Warren Buffett wrote — that it would enable one to make `intelligent investment commitments'. Considered a pioneer of modern investment theory, Philip A. Fisher, stated in the preface to Common Stocks and Uncommon Profits and Other Writings: "Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all." The half-century classic has resurfaced with a new intro by his son, Kenneth L. Fisher. A few frames from the flashback:

The investor usually obtains the best results in companies whose engineering or research is to a considerable extent devoted to products having some business relationship to those already within the scope of company activities. A company with research centred around each of its divisions, like a cluster of trees each growing additional branches from its own trunk, will usually do much better than a company working on a number of unrelated new products, which, if successful, will land it in several new industries unrelated to its existing business.

A young man or woman, or an older investor with children or other heirs of whom he or she is particularly fond, may be willing to sacrifice a dividend income of, say, $30 or $ 40 a month in order to obtain an income ten times that size in 15 years. In contrast, an elderly person with no close heirs would naturally prefer a larger immediate income. Similarly, a person earning a relatively small income and with heavy financial obligations might have no choice but to provide for immediate needs.

No investment principle is more widely acclaimed than diversification. Some cynics have hinted that this is because the concept is so simple that even stockbrokers can understand it. The horrors of what can happen to those who "put all their eggs in one basket" are too constantly being expounded. But there is a disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them.

Much has been written in the literature of investments on the importance of contrary opinion. Contrary opinion, however, is not enough. I have seen investment people so imbued with the need to go contrary to the general trend of thought that they completely overlook the corollary of all this which is: when you do go contrary to the general trend of investment thinking, you must be very, very sure that you are right.

Willingness to take small losses in some stocks and to let profits grow bigger and bigger in the more promising stocks is a sign of good investment management. Taking small profits in good investments and letting losses grow in bad ones is a sign of abominable investment judgment. A profit should never be taken just for the satisfaction of taking it.

A good pool of ideas to fish in.

(Book courtesy: Wiley www.wiley.com)

BookValue@TheHindu.co.in

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