The Hindu Business Line : Identify the right businesses

The game plan to invest successfully has four steps, according to Pat Dorsey. First, identify businesses that can generate above-average profits for many years, he writes in ‘The Little Book that Builds Wealth’ ( www.wiley.com ). Second, wait until the shares of those businesses trade for less than their intrinsic value, and then buy. Next, “hold those shares until either the business deteriorates, the shares become overvalued, or you find a better investment. This holding period should be measured in years, not months.” And finally, ‘repeat as necessary,’ the author advises.

The book is largely about the first step; for, if you can get that right, you’ll already be ahead of most investors, Dorsey assures. He describes companies as big machines that take in capital, invest it in products or services, and either create more capital (good businesses) or spit out less capital than they took in (bad businesses). “A company that can generate high returns on its capital for many years will compound wealth at a very prodigious clip.”

Filled with profound insights.

New generation systems

In the exotic derivatives business, innovation is a key to success, says Eric Benhamou in ‘Global Derivatives: Products, Theory and Practice’ ( www.landmarkonthenet.com). While financial engineers have kept up pushing the limits of products to more and more tailor-made and computing-demanding pricing products, IT (information technology) systems are under pressure to innovate simultaneously, he adds. “The game has been to produce trading systems that can incorporate these highly customisable and computing-intensive products as quickly as possible.” Not surprisingly, therefore, trading systems have migrated to the third generation, a.k.a. generic or universal pricing system.

The first generation of pricing was mainly about analytics, and the second, more product-specific, the book elaborates. “In C++, the first generation would correspond to a class security with a virtual method price, which would encapsulate the complete pricing. The second generation corresponds to the separation of the concepts of security, model and price…”

For a detailed study.
Recognition and prioritisation

When big falls happen on the charts, do you wonder if you should have seen the disasters coming and then prevented them? If yes, ‘Predictable Surprises’ by Max H. Bazerman and Michael D. Watkins ( www.tatamcgrawhill.com ) should help. The authors define a predictable surprise as ‘an event or set of events that take an individual or group by surprise, despite prior awareness of all of the information necessary to anticipate the events and their consequences.’

RPM is their mantra to avoid surprises: ‘recognition, prioritisation, and mobilisation’. Recognition failures occur, the authors observe, due to positive illusions, self-serving biases, and the tendency to discount the future. “If their state of denial is strong enough, they may not even ‘see’ the storm clouds gathering. Even if they do, they may downplay the likelihood and significance of ominous developments.”

Prioritisation is all about focusing on the right problems. One of the ways to help prioritise is decision analysis. Adopt a rigorous means of defining decision options and potential outcomes by assessing the probabilities, costs, and benefits associated with different courses of action, the authors guide.

Imperative addition to your survival kit.
Maintain good health

Paradoxically, many working people, who say they look forward to an active and healthy retirement are setting themselves up for the opposite, laments Ernie J. Zelinski in ‘How to Retire Happy, Wild, and Free’ ( www.macmillanindia.com ). By working too much, many workers are subjecting their bodies to excessive stress that can lead to many ailments, including cancer, the author frets.

“Others are also eating too much, watching too much TV, and exercising too little. Still others keep on smoking cigarettes…”. If you are still working full-time, you must do everything in your power to maintain good health now, so that you still have it when you retire, Zelinski counsels. “More than anything else, poor health will limit you; it will put a lot of stress on your retirement.”
He, therefore, makes a forceful plea to those who are currently healthy not to take health for granted. “Great health is often not appreciated until it’s lost — sometimes for good.”
Valuable takeaways.

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