The Hindu Business Line : Invest in style

Those too busy with money may tend to think that style is only for the ramp. No, style is relevant to investing too, reminds Streetsmart Guide to Managing Your Portfolio (www.tatamcgrawhill.com).

"Groups of assets with similar or common characteristics are often called asset classes or styles," defines the book. "A fund manager who invests in a certain style of assets tends to be labelled that way." Thus, we have growth managers, as well as value, large- and small-cap managers. Portfolio investment based on selection among styles rather than among individual assets is called style investing, say the authors Frank Yao, Bret Xu, Patrick Adams, and Kenneth Doucet.

A search for universally accepted definitions of growth and value may be elusive. "In general, a growth-oriented manager tends to buy stocks that are experiencing rapid growth in earnings. These stocks are usually associated with price/earnings (P/E) or price-to-book (P/B) ratios that are higher than those of the overall market."

In contrast, a value-oriented manager buys stocks that are undervalued compared to the overall market. "These stocks tend to carry low P/E and P/B multiples. The expectation of the value manager is that an undervalued stock's P/E or P/B ratio will return to some more normal level and therefore the price will go up, even if the company's EPS (earnings per share) or book value per share remains unchanged."

Then, there are the hybrid or blend style managers, who follow both growth and value styles. The `perfect timer' chooses the right style every year, `knowing with certainty at the beginning of each year which style portfolio or benchmark will perform best'. In contrast, a `momentum trader' always allocates his money to `the style with the best past performance (relative to other styles) in the previous year'.

The book can be useful for small investors because it discusses valuable insights and `Nobel-prize winning methodologies' that have `long been used by Wall Street pros', and also offers `guidance on inexpensive tools' to implement the know-how. Necessary, because "the art of investing is evolving into the science of investing," as notes the intro.

Learn, therefore, from chapter 1 how VaR (value-at-risk) analysis along with stress testing can provide you with `a better idea of the potential loss of a portfolio under both normal and abnormal market conditions'. The authors discuss three popular approaches to calculate VaR, that is, VCV (variance/covariance matrix) or parametric method, MC (Monte Carlo) simulation method, and historical simulation method.

Throughout the book are sprinklings of breakthrough financial findings that could yield rich dividends to the number-savvy.

In sum, the book can make you realise that `stock tips and intuition need to give way to a more systematic, disciplined approach to investing.'

Courage is not the absence of fear

A nugget of wisdom you can make a poster of is this: "A risk well defined is already a risk half-taken." To those who you ask you `how', you can narrate the story of `a frog in search of a new pond', which Stuart Avery Gold pens in Ping (www.wisdomtreeindia.com).

With `leap of faith' begins the book, and you meet Ping, a frog that realised it didn't have enough water in the pond.

Stirrings, these were, of `the most meaningful journey': the journey within. Not a problem that other inhabitants of the pond felt. Because `there was contentment enough to go around'.

Most took to spending average days living out average lives without too much moodiness, recounts Gold.

Well, Ping's dreams were getting bigger, but the pond was getting smaller. The change to the waterscape was unsettling. Only `twigs and stones and hapless bones' plus much mud were left. "Change — real change — is unsettling," says Gold. "It can instil confusion, hesitation, anger, anxiety, and desperation.

Fear of change can grip and grab and seize you with such strength, it can paralyse you. But only if you let it... "

Writes Gold: "Fear of change, fear of taking risks, fear of ridicule or that someone will disapprove of your goal and dreams - these are the enemies of intention and transformation." Thankfully, `even enemies have enemies'! The enemy of fear is found in courage, says Gold. What is courage? Not the absence of fear, but `acting in spite of fear'.

Words that can also ring true for those who wade through the treacherous waters of the markets.

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