Tuesday, February 17, 2009

Gaining Knowledge from Books

In my quest to improve myself, I have taken to reading more books in order to furnish myself with the required knowledge and basic competence to understand equity investments as well as the world around me. In addition, I have also recently started to read other types of books to expand my breadth of knowledge instead of just focusing on depth of knowledge. There are a few basic types of books which I read and I shall list down the main categories and at the same time, give a few examples:-

1) Books on Value Investing - This is clearly self-explanatory and forms the basis for my knowledge for value investing techniques and principles. Such books are usually written with either Benjamin Graham or Warren Buffett as an example because they embody the essence of value investment, and these books attempt to distill the knowledge, methods and techniques used by these great investors and list them out to the layman reader. Suffice to say that the books offer just a foundation for understanding what goes into value investing, but the actual practitioner's effort should concentrate on modifying his style to suit his temperament, abilities and be country-focused (USA companies are different from Singapore companies in terms of certain aspects of revenue recognition, depreciation policy and tax regimes). No book can prescribe a method for proper investment except to lay down the template and fundamentals, and teach one how to interpret and understand financial statements. Examples of such books are "The Intelligent Investor" by Benjamin Graham and "Warren Buffett Wealth" by Robert P. Miles.

2) Books on Behavioural Finance - These books deal with a somewhat new and emerging philosophy which goes against the traditional beliefs in the efficient market hypothesis. This new branch of psychology is called Behavioural Finance and deals with people's behaviour and attitudes towards handling investments and money. Examples can be found in my behavioural finance series which include terms such as loss aversion, over-confidence and anchoring, among others. Behavioural Finance is important as it defines an investor's moods and behaviour with regards to his investment, and also help to explain market psychology and can help one to understand his own money management techniques and habits. With this knowledge, one can become more aware of these biases and behaviours and seek to actively correct them. Without the benefit of this knowledge, I may have suffered from a number of so-called "stereotypical" traits without being cognizant of them, thus severely impairing my ability to make worthwhile investments. I would strongly recommend that readers delve into such books to enhance their understand of the human psyche and to be aware of their own worst enemy within them ! Examples of such books include "The 7 Sins of Investing" by Maury Fertig and "Your Money and Your Brain" by Jason Zweig.

3) Books and websites on Personal Finance - I've been exploring the topic of personal finance for quite some time now, as it pertains to a very important aspect of one's investment philosophy, namely to accumulate wealth so that one can invest it ! In fact, my motto in life has always been the 3 "I" - Income, Insurance and Investments. These are part of my philosophy of saving, protecting and growing respectively; and one should note that saving is the most critical aspect of the 3 as it ensures you will have money with which to protect and grow ! Mainly, I've been surfing the web for websites on personal finance and also reading articles on personal finance. I have started a series on this and it is an open-ended series which helps me to collect my thoughts on personal finance and also to ensure I adhere to my principles for building wealth. Some websites I highly recommend are Five Cents Ten Cents (for Singaporean readers) and The Simple Dollar (more geared towards USA but the principles are still very helpful). Moving on to books, I am currently reading "The Richest Man in Babylon", a classic by George S. Clason as well as "Secrets of The Millionaire Mind" by Harv T. Eker.

4) Books on Market Cycles - Another area which I am currently reading and researching on is the concept of distinct market cycles, which of course are tied to economic cycles as well. Interestingly, this forms the basis of the stock market (as well as companies') valuations and is a key reason why people label companies as "cheap" or "expensive". Valuations as they stand in isolation do not mean much, but when viewed in the context of economic cycles, one can then infer if a company's valuation is rich or poor with respect to macro-economic growth, interest rate policies and industry stability and robustness. Such books also give insights into market panics, bubbles and subsequent busts and study the reasons for such cycles, as well as giving signs on how to tell if a bubble is forming or about to burst. I've begun to appreciate how useful such information is with regards to value investing as it can help one to identify a company and decide if it was over-priced with respect to its growth prospects. Admittedly, this can be somewha subjective but having an understanding of economic cycles means that one is equipped with an understand of what constitutes a clear future, and what represents a murky or bleak one. I am currently reading "Market Panic" by Stephen Vines and will move on to "Bull! A History of The Boom 1982-1999" by Maggie Mahar next.

The above 4 categories of books have helped me to expand my universe of knowledge significantly. Since knowledge is limitless, it is my goal to continue to enrich myself through reading and also the application of the knowledge to my personal finance habits and investment philosophy. Perhaps readers would care to share which books have had a major influence in their life with regards to investment (not trading) and personal finance as well ? The comments box is available for your sharing and thanks in advance.

Note: My next post will analyze the FY 2008 results for China Fishery Group Limited, and in a subsequent post I will summarize snippets from the results from Pacific Andes (3Q 2009), Tat Hong (3Q 2009) and Boustead (also 3Q 2009).


Simon said...

finally u r into market cycles.! good that you are departing from your anti-market cycle and anti-market timing stance....

cyclical investing is the way for asian markets.

musicwhiz said...

Hi Simon,

I feel the need to clarify that I do NOT feel that studying market cycles equates to market timing; neither did I specifically mention that I did not believe in market cycles. It's just one aspect I had failed to cover when I was reading on investing, now I seek to fill the gap.

To be more specific in my intention, I seek to understand how to identify over-valuation from a margin of safety standpoint, and to be able to identifying (or at least detect) possible over-valuation which would require the selling of shares. Whether you would term if "cyclical investing" or "market timing" is irrelevant, I feel. Value investing is actually the practice of purchasing shares below their intrinsic value and selling when they exceed their intrinsic value by a wide margin. Reading up on economic cycles would help in spotting when the crowd gets too exuberant for their own good.

Thanks for your comments, and keep them coming.


PanzerGrenadier said...

Hi Musicwhiz

Thanks for recommending my blog!

Appreciate the incoming link...hahaha!


ThinkNotLeft said...

Maybe James Montier's Behavioral Investing is a good addition here. A book review can be found here: http://blog.iii.co.uk/behavioural-investing/

musicwhiz said...

Hi Panzer,

You are most welcome !


musicwhiz said...

Hi thinknotleft,

Thanks for the recommendation ! Will check out the book at the library....