Young Investor

Book profits!

Adarsh Gopalakrishnan | Updated on June 11, 2011

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For those looking to take the plunge into equity markets, the early days can be daunting. Newbie investors find themselves battling challenging jargon, reports, an endless stream of news and company updates – the list is goes on. Here's a brief on four books for a solid grounding to effectively approach investing.

Peter Lynch

Peter Lynch's ‘One Up On Wall Street' and ‘Beating the Street' look to summarise the methods he applied over the 13 years he managed the enormously successful Fidelity Magellan mutual fund Lynch's own frenetic stock picking pace is reflected in his ‘look under 10 rocks to find one potential stock to own' approach. While this might prove a little intense for most retail investors the lesson is to temper your expectations of picking winners in the market. Lynch's most telling suggestion is to view an investment as ‘simply a gamble in which you've managed to tilt the odds in your favour'.

His books provide a framework on how to categorise a company based on their earnings volatility. By bracketing companies into cyclical, growth, comeback, dividend plays and slow growers, you have a rough classification method. Investor expectations of return could be based on the category they believe the company falls under.

His more generic advice is this - public attitudes to investing could serve as a thermometer to market valuations. An expensive market is where the public buys at a feverish pace and rather indiscriminately. This leads to a situation where “stocks are likely to be accepted as prudent the moment they are not”. He also cautions investors to not ‘pull out the flowers and water the weeds'; that is, don't stay put with losing stocks in the eternal hope of a comeback and exiting winners out of the fear that they have run up too much.

Benjamin Graham

Benjamin Graham is regarded the founder of ‘value investing', a school of investment thought which promulgates investors to pick up stocks when they are trading at values lower than intrinsic value. This number is arrived at based on financial metrics such as profitability, book value and cash holdings, among others.

His ideas on intrinsic value, or the rough figure on which to base the price you are willing to pay for a stock, can be a lifesaver in choppy markets. However Graham's work assumes that investors are familiar with basic accounting and financial concepts.

‘The Intelligent Investor' is most valuable for its lesson on how to view a stock as a claim of ownership in a company rather than merely as a ticker sign. His personification of markets into an entity named Mr Market is a valuable perspective. His lesson translates into how you should choose to deal with Mr Market on your own terms and any time of your choosing rather than out of misplaced compulsion. This is a wonderful anecdote for new entrants to the stock market who feel compelled into activity on a daily basis. Graham asks you to use sound reasoning and have a high level of conviction once you have researched and decided to buy into a company. As he says, “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'

Philip Fisher

Complementing Graham's quantitative framework is Philip Fisher's qualitative one, illustrated in his work ‘Uncommon Profits From Common Stocks'. His scuttlebutt approach advocates that investors research various aspects of a company such as its product mix, marketing capability and the amount it allocates to research and development efforts among other aspects. As Fisher puts it, ‘the successful investor is an individual who is inherently interested in business problems'.

However, certain aspects of Fisher's scuttlebutt approach may prove hard to apply, such as researching the quality of R&D given the secrecy surrounding it these days. Gaining access to management and labour could also prove difficult for individual investors.

Still, the scuttlebutt approach brings to light the downsides of a purely quantitative approach. A company with the fittest balance sheet could find its competitive standing eroded by competition.Case in point, Henkel, the detergent company which sold out to Jyothi Labs after the former was unable to compete against the likes of HUL and P&G among others.

Fisher is also a member of the ‘buy and hold' camp, advocating holding on to the right companies if picked up at the right prices. This perspective is a rather useful one while interacting with the financial community which is incentivised in getting you to transact as frequently as possible.

Burton Malkiel

Malkiel's work ‘A Random Walk Down Wall Street' stands as the odd one out in this list given his scepticism of an individual investor's ability to beat the general index such as BSE 200 or BSE 500. What Malkiel teaches is a healthy dose of scepticism for outsized claims in a crowded market.

Claims of superior performance of a ULIP, mutual fund or any other financial product, while possible, requires a great deal of intellect and skill. Malkiel's contention is that when there are several smart and average investors who crowd in looking for bargains, the bargains become a lot harder to come by, therefore rendering outperformance far more difficult.

So ask the very valuable question - How and why is this investor or company performing better, especially since they have peers who try just as hard? This question can save the newbie investor a world of pain from losing a pot of money. Malkiel is in favour of investing systematically in index-based products which negates the risk of hand-picked winners' underperforming.

Published on June 11, 2011

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