The Hindu Business Line : Self-education before buying stocks

Investing with a lifetime perspective is the logical and the most effective way to prepare for a financially sound retirement, says Clifford Pistolese in ‘Lifespan Investing’ ( www.tatamcgrawhill.com ).

“Individuals who practise the habits of saving and investing have the best prospects for achieving wealth by the time they retire. People who delay starting an investment plan will likely have a low-budget retirement.”

To the young wannabe investor, the author’s advice is of a program of self-education even before handling money. “If you have some money to invest, you can start by buying between one and five stocks. If you can only afford to buy one stock, look for one that pays a dividend.”

The primary objective in the first years in the stock market should be to make large capital gains, says Pistolese. “Purchasing small-growth stocks is a good way to accomplish this objective. The companies that issue these stocks can be found in young industries where revenue and earnings are growing fast and profit margins are high.”

Essential read.
Don’t jump to conclusions

When it comes to randomness, you can run but you can’t hide, says Jeffrey S. Rosenthal in ‘The Curious World of Probabilities’ ( www.jaicobooks.com ). So many aspects of our lives are governed by events not completely in our control and uncertainty is here to stay, he adds. What do we do, therefore? We have two options, says the author. “We can let uncertainty get the better of us or we can learn to understand randomness. If we do the latter, we will make better choices and learn to harness uncertainty for our own purposes.”

While an understanding of randomness can increase your probability of victory at games of chance, the final requirement to becoming truly a winner is patience, emphasises Rosenthal. “The Law of Large Numbers says that the person with highest probability of winning will win the most in the long run. This doesn’t mean you will win every time, just that you will win more than others if you play the game over and over again.”

Once you have figured out how to increase the probability of winning, you may need to play a lot before your winning ways click in, he instructs. “Similar considerations apply to investing in the stock market: to be successful, it is not necessary that all of your stocks go up all of the time, just that they go up on average.”

Be careful not to jump to premature conclusions, cautions Rosenthal. For instance, “regression to the mean is sometimes used by investors who reason that if a stock’s price suddenly falls, perhaps it got unlucky and will soon rebound, so now may be a good time to buy some more shares.”

But wait, there is no guarantee, the author alerts the eager investor. “Perhaps there was a reason for the stock’s decline, which will only get worse.” He gives an analogy, to explain: “Regression to the mean is a statistical version of what all parents tell their children after a really rotten day: tomorrow will be better. On the flip side, if today was a really great day, then tomorrow might be a little worse.”

Suggested study for a profoundly quiet day.
Be prepared when mistakes hit

The problem with mistakes is that they creep up on you, observes the sombre opening of ‘Will Your Next Mistake be Fatal?’ by Robert E. Mittelstaedt, Jr. ( www.crosswordbookstores.com ). “Individuals do not get up in the morning and say, ‘Boy, this would be a great day to make some mistakes.’ They just find themselves in a place they do not want to be, fighting to survive a crisis and, if they do not survive the crisis, wondering how it all happened.”

Getting near the top is really tough, as winners know. “But once you get near the top, mistakes are usually the difference between base camp and the peak.” The most important element in handling the unexpected in business is prior mental preparation, says the author.

“This preparation takes the form of training, orientation, expert consultation, and communication or cultural values for guidance.”

As Louis Pasteur’s quote in the book reminds, “Half of scientific discovery is by chance, but chance favours the prepared mind.”
Differentiating between gambling and investment, Mittelstaedt writes that taking calculated and thoughtful business risks is rarely a mistake, even when the risk leads to a failure. “Repeatedly taking such risks without any rationale for doing so and failing would likely be classified as a mistake or a pattern of mistakes.”
The most dangerous type of mistake that a business can make is failing to take any risks. “If you don’t make any mistakes, you may not be taking enough risk.”
Businesses that become so risk averse overtime can doom themselves to failure because innovation by others will render them irrelevant, states Mittelstaedt. “Learning to identify mistakes in an analytic and timely fashion is often the difference between success and failure.”
Valuable lessons.

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