Investment Books For The Stock Market Player

When Markets Collide (Mohamed El-Erian)

2008-11-13T00:41:00.000-08:00

Mohamed El-Erian has had one hell of a career. He was a university academic, worked in the IMF for 15 years, went to work at PIMCO --- the world's largest bond fund --- alongside the legendary bond king Bill Gross, left to manage Harvard's multi-billion dollar endowment, then returned to PIMCO to share equal status with Gross as co-CIOs (chief investment officer). He is now one of the most respected investment gurus whom the public seldom hear about, though he is coming more into the public eye, through his regular commentaries on CNBC and the like. His first book thus warrants a read, especially when it comes concurrently with the "greatest financial crisis since the Great Depression" (as the media like to coin it nowadays).

Many books start off promisingly and then start to lose the reader's interest as they ramble on, and I'm afraid that this one is not an exception. The premise of the book is about the growing importance of emerging markets and the possibly turbulent transition process, hence the title "When Markets Collide" (ie. collide with the incumbent dominant Western markets), with the current financial crisis as a potential catalyst. El-Erian speaks authoritatively because he was dealing with emerging markets at the IMF and PIMCO, and the starting chapters are indeed very interesting, as he outlines his observations of various anomalies in the past few years, such as how long-term bond yields rose even as the Fed raised interest rates in 2005. He also highlights the importance of picking up information signals from apparent noise, in order that one may make sense of these anomalies. Then he defines the new destination: emerging markets.

According to El-Erian, the destination ie. the way that the world will evolve into over the medium to long-term, differs from the present in three main ways:
(1) For those seeking to understand global economic and financial developments, it will no longer be sufficient to get the US, Europe and Japan right. It will also be a matter of getting the emerging market economies right.
(2) New pools of capital, in particular sovereign wealth funds (SWFs), will become increasingly important and people need to understand what and why these new investors are likely to buy.
(3) Fundamentals will no longer be sufficient for projecting forward. Financial innovation via derivatives means it is also necessary to understand how the technical dimensions of markets are evolving ie. the financial infrastructure, the interactions between derivatives and underlying assets.

These predictions are justified correspondingly, through descriptions of how consumption of commodities, world trade have become increasingly dominated by emerging economies, how these economies have accumulated huge surpluses, and how securitisation has changed business models forever.

Having defined the destination, the rest of the book then goes on to describe the journey to get there, which El-Erian says he is less sure of than the eventual destination. In short, the medium-term evolution is more difficult to anticipate than the long-term destination. He does point out that there are likely to be "market accidents" ie. undesirable market volatility, given such a historic transition. My attention started to waver from this part onwards, especially when El-Erian talks about "action plans for policy makers and global institutions" and macro suggestions for "improved risk management" ---- topics which are very dry and not very relevant to me as an investor --- hence my earlier observation on the book being interesting at the start and disappointing towards the end.

Some of his views that are pertinent to the investor are interesting to note though:

(1) He advocates equity exposure away from the US and towards emerging markets. He believes there should be strong exposure to commodities, infrastructure, real estate ("real assets") in view of the new secular realities. Interestingly, he seems to recommend underweighting bonds, surprising since he works in bond specialist PIMCO. I might be mistaken.

(2) He sees emerging economies' macro policy evolving in a 4-phase process: benign neglect --> sterilisation --> liability & asset management --> embracing change. In essence, emerging economies that find themselves changing from operating in debtor regimes to operating in creditor regimes tend to be initially conservative in the management of their new-found foreign reserves, but will eventually realise the permanence of this structural change and manage their assets and policies proactively. El-Erian sees bond markets losing favour with these SWFs and equities gaining. Currency regimes could also become more open.

(3) He points out in fact, policymakers around the world already share a consensus on what constitutes a correct macro-policy response to facilitate the realignment of national economies and smooth functioning of the international financial system. This is as follows: the US is to reduce consumption to allow for a reversal of trade and budget imbalances; Europe and Japan are to implement reforms that will allow their economies to increase growth capacity and productivity; Asia and the oil exporters are to stimulate domestic components of aggregate demand. This coordinated response would reduce global imbalances and reduce financial system instability over the long term. However, all this must be done together; no country will want to implement this in isolation as it would be impacted negatively --- a classic "prisoner's dilemma". Perhaps this is what the G-20 are assembling for this weekend and will eventually work towards over the next few meetings.

A word of caution though: already El-Erian's expectation of emerging markets behaving relatively stronger than developed markets has turned out to be apparently wrong so far because in fact the flight to safety plus the deleveraging process has subjected the former to greater stress than the latter. It remains to be seen whether his long-term views will come to pass, but of course they carry a lot of weight.

Those not too well-versed in macroeconomics might find this book a bit hard reading. I myself have a general understanding but feel more at home in sectoral and company analysis, and I did lose interest at certain junctures of the book. I nearly did not buy it but eventually did, because it's this guy's first book and he'd probably have put a lot of honest thoughts into it.

The Aggressive Conservative Investor (Martin Whitman)

2008-08-10T21:00:00.000-07:00

This book is actually co-written by Martin Whitman and Martin Shubik; the former is the better-known of the two as he is founder of Third Avenue Value Fund and is well-known in value- and distressed-investing. Offhand I recall that Third Avenue was a key shareholder of Chuan Hup which was privatised at big profits to the holders; it also has holdings in undeniably "value-type" stocks like Boardroom and Yellow Pages, though it seems to have been quieter on the SGX in recent years.

The book was written in the late 1970s, when the stock market was in the pits due to stagflation. The timing of its origination might partly explain its value bent, which might not be evident from the title but becomes clear as one reads the book.

The "aggressive" part of the title actually refers to investors who are "aggressive" within their own contexts because they expect a well-above-average return over the long term, and NOT because it wants to introduce a trading approach to stocks. This is strictly a book on fundamental analysis. In fact, its stockpicking approach is very simple and can be summarised in 4 points:
- Strong financial position
- Honest management that is creditor-aware and shareholder-oriented
- Adequate disclosure of information relevant to the success of the company
- The stock can be bought for less than the net asset value (adjusted book value) of the firm

The conservative nature of the stockpicking approach clearly suggests a bear market strategy (which might be useful currently).

It is refreshing to read a book that is so focused on fundamental analysis (in particular, financial statements) and yet does not go too hard on numbers, which tends to alienate readers. There are many good insights that are made, such as:

- stock investors should analyse a company from a creditor's perspective which would lead them to have greater focus on its financial strength, ability to meet obligations as well as the value of assets on its books.

- audited financial statements are the investor's boon and should be utilised extensively, since they are so comprehensive and the auditors will not risk their professionalism to lie for their clients (unless their interests are extremely intertwined)

- the P&L statement should not be over-emphasised because it can distort interpretation of real economic value if one relies too heavily on it; the balance sheet is just as, if not more, important

- earnings is just one facet of the value-generating activities of a company; value generated from asset conversion (sales of assets, restructuring, even use of tax-loss carryforwards) should not be ignored as well (hence explaining why balance sheet is also important)

- the need for the investor to consider exit strategy via cash bailouts, which could take place not just through open market sales, but also via privatisation potential and cash dividends issued by the company

The asset conversion approach is interesting and worth documenting down here for future reference. Basically, the authors recommend looking for situations where resources in a company can be used in a better manner, creating value in the process. There are several situations which might suggest potential for capital/operational restructuring that could unlock value:

- Overly conservatively financed company -- borrowing money to buy back stock, or issuing a special dividend could unlock value.
- Divisions that are undermanaged, or which would fit better in another company
- Company looks like it could be better off going private
- Analyzing corporate structures for where the value is (eg. holding company structure and finances)

Given Martin Whitman's interest in distressed investing, there is also a chapter on investing in loss-making companies and another one on merger arbitrage, both pre- and post- (read the book to understand what they mean).

This is not a Wiley Investment Classic for nothing. The concepts expressed inside are timeless and the fact that they were conceived in a bear market mean that the investor would do well to incorporate them into his philosophy in his quest to protect the downside. The book, however, is not recommended for those who are less than adept with financial statements because even though the authors are sparing with numbers, the writeups on financial statement analysis assume a certain degree of accounting knowledge of the reader.

Wealth, War and Wisdom (Barton Biggs)

2008-06-28T02:41:00.000-07:00

I have covered an earlier book of Barton Biggs ("Hedgehogging") and his latest one is about a totally different subject (albeit still linked to investing). WWW (for short) deals with World War 2 and its effects on investments in the buildup, the course of the war, and in the aftermath.

Barton Biggs is a closet war historian, although his multi-decade career (before his turn to running a hedge fund) was as much-revered global market strategist for Morgan Stanley. This is very clear given his choice of subject for this new book, and the meticulous way he deals with the warring parties, the course of the war, the various narratories on the war on both the Allied and Axis sides, through to the various war anecdotes that makes one wonder how many volumes of World War 2 tomes he must have read to distill all these commentaries.

I personally have read many books on World War 2, many of them thicker than this 300-page volume. But Barton Biggs' approach on how World War 2 affected stock markets in the various warring countries offers a fresh perspective. The two broad themes in the book are:
(1) An uncanny ability of stock markets in general to anticipate turns in military fortune during the war, such as the market bottom in the UK markets at the 1940 Dunkirk evacuation, the market bottom in the US markets formed at Midway 1942, the market top in Germany at Stalingrad 1942. All this despite strict propaganda control, especially on the Axis sides, during the war.
(2) How wars can cause great wealth destruction and transfers between various classes of society. Biggs also examines the wealth-preserving power of the various asset classes, such as stocks, bonds, real estate, gold/jewellery, even art, in the chaotic and often hyper-inflationary environment generated by war and its aftermath (especially for the losers). His conclusion is that land ownership (but not the buildings, which were often bombed out) turned out to be the best assets to hold in most cases for the loser countries, while for the victors like the US, stocks did superbly, especially in the long term, if bought at the bottom. Asset performance was also a function of the political environment; where the authorities in power were liable to looting/plunder eg. Nazi Germany in its occupied territories, the wealth-preserving power of the various assets was simply a matter of luck (eg. whether the jewels could be successfully hidden from the looters or not). Generally, bonds proved to be the worst investment in the loser countries, as inflation soared.

To an investor who reads this book, the value of it is in providing a historical perspective to probably the most significant event of the 20th century, and not just from the viewpoint of investments. Too often, people eyeball the stock prices on their screen from day to day, churning and arbitraging and scalping, attempting to earn "kopi-money" and some even engaging in the petty mudslinging and fear-mongering that is so easily facilitated in today's online world. But the real money is made in the big movements and the secular trends happening in the world around us; miss the forest for the trees and you will be penny-wise pound-foolish. Many great fortunes were lost in the war and new ones made in the great asset redistribution following the war (a significant example being Japan where General MacArthur as occupying commander-in-chief ordered the redistribution of farmland and taxed inheritance heavily). And indeed, once one reads about the sufferings and sacrifices made by our fellow human-beings about 1-2 generations before us, investing and making money seem a trivial, almost coarse, topic, in comparison.

Too often nowadays the popular topic is America-bashing (me also a guilty party) in the wake of the subprime crisis which originated from Wall Street. However, the tremendous soft power that it still wields globally is probably a result of the enormous goodwill it generated from its participation in two world wars, and in particular its handling of the loser countries in the aftermath. America's liberal approach towards Japanese rebuilding allowed the latter to swiftly pick itself up to become the world's second biggest economy, and the latter is unlikely to ever forget it. It also saved South Korea from communism in the Korean War. This political goodwill is part of the reason why in its time of need, the world is likely to be ready to sink its funds back into an ailing US economy.

Trend Following (Michael Covel)

2008-05-28T20:21:00.000-07:00

My first impression of this book was that it was about technical trading, which would have turned me off because I hate seeing charts and the patterns they attempt to decipher out of it. Well, flipping through it subsequently, I found that it was about technical trading based on trend-following systems, but it focused more on the general philosophies behind it as well as debunking a few myths of conventional finance theory. It's one of those books that is more interesting than originally thought.

Trend following is actually a mechanical trading approach employed by many futures traders in commodities, currencies, stock and bond indices. Mechanical as opposed to discretionary: the latter is based on trading decisions at the "discretion" of the trader, whereas the former is based on an objective and automated set of rules. In effect, mechanical systems believe that the harm done by emotional trading outweighs the benefits that experienced human judgment can bring to the table.

I happen to believe in discretionary trading, but then of course part of the reason is because I don't have the skills nor infrastructure nor inclination for devising and implementing an automated trading system. And besides, the difference between the two categories is actually academic: a mechanical trading system must have been programmed using human experience and judgment as well, wasn't it? So it's the underlying trading philosophies that's important.

And the underlying philosophy is actually quite interesting and sound, and I have always felt it's important to get new perspectives on the market and not stick to one single view all the time. The author questions the following conventional views:

1) The definition of risk. Is it really volatility? Are mutual fund managers shunning volatility and adhering to benchmarks when volatility is in fact, natural, and tends to lead to better returns? Large drawdowns is a feature of trend following.

2) Decision-making process. How much of fundamentals is actually programmed into the market price of an asset already? Are the market professionals really chasing the wrong alley by trying to absorb as much fundamental information as possible and then trading on them? Trend following adheres to so-called one-reason decision-making --- and that reason is based on price.

3) Buy-and-hold. That's the approach of unit trust managers, and they point to Warren Buffett. Trend followers scoff at the buy-and-hold approach; they have strict cut-loss rules and attempt to ride the trend, whether upwards or downwards (of course, such a flexible approach is easier to adopt in futures, where one can long or short with equal ease).

The author also makes a distinction between "predictive" technical analysis that attempts to forecase significant market events, and "reactive" technical analysis which is what trend followers adhere to. The idea is that trend followers take trading positions with no knowledge that an event/crisis will occur; they take their positions as markets move. The fact that these particular small, initial price trends lead to big trends that lead to big events is not something anyone can predict. In essence, this approach is a "riding the wave" approach, as opposed to "calling the bottom/top".

I can actually identify with trend-following at its core, simply because it is difficult to see how far a trend can go (just look at oil prices now, for example). This, in my view, is especially so for financial assets which are subject to complex demand-supply dynamics which, like macroeconomics, are composed of a thousand moving parts and might prove difficult to decipher fundamentally and might be more subject to short-term momentum and sentiment. On the other hand, my approach is that my entry into a stock should be fundamentally-driven; it is trend-following as well, except that I follow a fundamentals trend.

At the end of the day, the approach one takes is a function of one's beliefs and the tools availabe at his disposal. There is no single best approach. The book devotes one chapter listing the various successful and well-known trend followers: John W. Henry, Ed Seykota, Richard Dennis etc, probably as evidence of the viability of trend-following. Sure (though we don't know how many have failed using this approach), but if more and more people adopt trend-following, it might lose its viability. Such is how the market operates.

Hot Commodities (Jim Rogers)

2008-03-20T21:42:00.000-07:00

Now, whatever what one thinks of Jim Rogers --- former affliate of George Soros and now chief doyen of the burgeoning commodities brigade --- it is worth listening to what he says, for his views on commodities and the dynamics that drive them. He has written a few books but this book is the one that crystallises his worldview on commodities, so it's the best one.

Jim Rogers wrote it in 2004 --- or more accurately, before 2004, since the book was published in 2004. That was probably 1-2 years into the boom in energy and metals commodities, and the agricultural commodities boom would only come 2-3 years later. One would have profited immensely from following the advice in this book, but of course it is all on hindsight.

The book offers a beginners' perspective to commodities so it is not heavy reading. To broadly sketch its contents, it begins by introducing commodities and the means to trading it plus the common terminology, then drives home the key catalyst for the coming boom (China), and then examines a few commodities in detail (Precious metals: gold; Industrial metals: copper, lead; Energy: oil; Agricultural: sugar, coffee). There is a set of very useful appendices at the end listing the main commodity indices and the various commodity contracts. Among the commodity indices are his self-created Rogers International Commodities Index (RICI) --- no harm having a little self-promotion.

To me the meat of the book is in the individual chapters on the various commodities. How Rogers structures the discussion is an indication of how he views the commodity market, and it is clear he see demand and supply as the critical issues to focus on, because he devotes separate sections to specifically discuss them --- the main consumers and applications for the commodity, the main supplying countries, the volatility of supply, what drives the supply volatility, and then a historical overview of the impact of demand-supply dynamics on commodity prices. There are some traders who trade on technicals such as trend-trading (some have been very successful at it); it appears that Jim Rogers is more a big-picture, fundamentals-driven type, my kind of man.

It is actually a very simple book; as I said, good for beginners, not much quantitative stuff. My main grouse with it is that Rogers does not cover more commodities than those mentioned. For those who want in-depth comprehensive coverage on the whole commodities universe, he recommends the yearbook published by the CRB (Commodities Research Bureau) which he snaps up every year and reads through front to back. So that's a tip there.

Inflation is here to stay, so whether one is really planning to trade in futures, or is just strictly a share investor, it will be useful to get a feel for commodities prices, because they are, generally without exception, the main cost components to an industrial business, and sometimes but less often, a key cost component to a service-based operation. Read my recent HotTrendsWatch writeup on Global Inflation for more details.

The Alchemy of Finance (George Soros)

2007-09-27T10:55:00.000-07:00

He is one of the legends in the investment industry and everybody within the financial circles as well as many members of the public know of him, the latter perhaps notoriously due to his alleged part in the 1997-98 Asian currency crisis. On the basis of his >30% compounded annual return for nearly 30 years running big money, any book by George Soros (see my article on the man) has to be worth paying attention to.

The problem is that it is not easy to understand Soros' book. Part of the problem is because Soros ran his Quantum hedge fund along global macro lines, making bets in currencies (his specialty), bonds, commodities, stock indices. Hence his was a top-down approach focusing on understanding structural macroeconomic changes and their impact on various asset classes. Reading the book entails a strong understanding of macroeconomics in the first place.

The contents of this book is particularly relevant now because we have just experienced a major dislocation on the global markets which illustrates clearly the merits of at least a rudimentary understanding of macroeconomics; the book describes in particular, how a bubble can form in various asset classes and then tailspin in a destabilising rather than self-stabilising manner, what Soros grandly calls an "imperial circle".

The key theme running through the book is what Soros describes as his theory of "reflexivity". In essence, reflexivity is about the feedback effect, or a two-way coupling between cause and effect, such that the latter actually flows back to influence the former. With specific reference to investment, it means that prices do in fact influence the fundamentals (instead of the mere textbook theory of fundamentals driving prices) and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices. This self-reinforcing pattern in fact is what causes the destabilising nature of markets in severe dislocations.

Although this is really nothing new, it is worth reading about Soros' thinking process in action in the second part of the book, where he describes his trading experiences in a window period from 1985-86 (which unfortunately doesn't capture his most famous episodes eg. his breaking of the Bank of England). He outlines his thinking and trading patterns in what he calls his "real-time experiment" (he has a penchant for grand phrases), which turns out to be rather complex and yet natural to him; others who read about his philosophies and methods, I think, cannot practise what he preaches, unless they can internalise it, and that takes years of experience.

The book is rather hard reading, and I consider myself to have quite good grounding in macroeconomics, so it might be worse for others. The main idea to take away from the book is a corollary of the "reflexivity theory": the stock price can and does influence the fundamentals of the stock/company. The most direct manner is that a high stock price/high PE facilitates low-cost fund-raising on the capital markets, and hence the company can expand organically or make new acquisitions more easily. At the same time, should the process reverse, the negative impact on fundamentals could run like a nightmarish set of dominos.

How I Made $2,000,000 In The Stock Market (Nicolas Darvas)

2007-06-08T21:16:00.000-07:00

With such a title, how can one not be interested?! Self-explanatory, and it captures the imagination of every stock market trader everywhere.

This book was written by Nicolas Darvas, a retail investor, more than 40 years ago, in 1960. It documents how he came up with his stock trading approach that was to see him achieve more than US$2M trading profits in just 18 months, during the 1957-58 bull market. The book was an instant hit when it was published then, selling nearly 200,000 copies in eight weeks. Before that, Darvas had been interviewed by Times magazine as his trading record spread by word of mouth among broking circles.

The book is quite lightweight, at less than 150 pages. I finished it in about 2 hours or so, skipping many of the trading records where he documented his trades (wasn't really interested in them, more interested in his techniques and market philosophies).

The interesting thing is that Darvas came from a completely alien background. He was a professional dancer, who happened to chance onto stocks when a client offered him shares as payment in kind for his dancing services. He got interested when the stock made him money, and went on to find out more on what drove stock prices and ultimately he developed his own approach, surviving several bumps along the way (as we all do).

Most technical analysts will be able to identify with Darvas' approach; he called himself a techno-fundamentalist but as you read you will find that with regard to fundamentals, he was not too concerned other than that the stock was associated with a theme that would excite the market (eg. electronics, credit cards in the 1950s). His efforts were mainly focused on reading price-volume movements of various stocks and acting on interesting patterns; his source of charts was Barrons, whose circulation doubled after the publication of Darvas' book!

Darvas' method would be what we now know today as buying on breakouts; he called it box theory. It was based on the observation that stocks typically stay within a trading band (the "box" within which the price bounces) but when it broke upwards out of the "box" with high volume it was a buy signal. Another aspect of his technique was to control his downside by always using trailing stops; apparently his methods forced at least one American exchange to modify its rules on stop-loss orders.

It is also interesting to read about the effect that more "knowledge" had on his market consciousness. According to Darvas, he acquired a feel for the "behaviour" of a stock by reading and interpreting its price/volume movements on Barrons and via telegram communications with his broker (he was on a travelling tour in different countries; there was no Internet back then) and he prospered during this period, but then he experienced a crisis of sorts when he decided to establish closer contacts with the market by operating in his broker's office; there, he was buffeted by such a constant array of information and opinions/rumours (he called it "noise") that he lost his "sixth sense" on stocks, his self-control and ultimately his money. It was lucky for him that he extricated himself in time and went back to the old telegram routine, where he soon regained his feel.

To me, there are no new ideas in the book, but what would surely entrance the reader the most is that it is possible to make so much profits on the market by utilising simple ideas and maintaining a certain discipline and self-control (aided by a bull market as backdrop, of course). Darvas' use of metaphors to describe various market philosophies is also very useful, once again proof that an outsider can sometimes see things from different and illuminating angles. For example, he compared trading to driving a car: the driver can be taught how to use the various controls, but he still has to develop his own feeling for driving; this has to be learnt only through experience. He likened breakout trading to humans exhibiting out-of-stereotype behaviour: the wild girl would be expected to jump onto a bar table and start dancing, but if the prim and proper matron were to do that .... then it was time to take notice. Such metaphors abound within the book, and I think many would find them both apt and insightful.

Darvas died in 1977 (see Wikipedia writeup on Darvas); nonetheless I think he would be a source of inspiration to retail traders today. His ideas were very common-sensical, and he turned the apparent disadvantage of being an outsider into an advantage. The book cannot be obtained easily as it appears to be out-of-print; it can however be borrowed at the libraries.

Bringing Down The House (Ben Mezrich)

2007-02-23T19:38:00.000-08:00

In fact, this is by most definitions not a book about investing or the stock markets. This is a book about gambling --- how a group of MIT (Massachusetts Institute of Technology) students won millions at the casinos in just a few years in a game in which they had found a loophole .... thus the title of the book.

The game was blackjack, and it is now widely acknowledged as the casino game where the house odds are negative, if you play your cards right. House odds, basically, are the marginal probabilistic advantage that the casino (or banker) typically holds over the players (casino customers) in most casino games (eg. in roulette, there are 37 numbers including the green "0" but the house only pays 36-to-1 for a number you guess correctly); in the long run, this means the casino should transform this marginal advantage to a financial gain.

Those who have heard of card-counting will know that it's a way of beating the odds in blackjack. Based on countless computational simulations by university professors, the technique at its essence is about monitoring the cards that have been dealt out and taking advantage of what it suggests about the cards remaining in the deck. Typically, a remaining deck containing many high cards (tens, pictures, Aces) is advantageous for the player; conversely, a remaining deck rich in low cards (2-5s) is advantageous for the dealer. All card-counting techniques are based on this principle.

The book, set in the mid-1990s, essentially is about a group of MIT students and alumni who refined this into an art form, by working in teams (and all the associated secret signals and jargon), maximising table opportunities, and running the money-spinning operations like a business by using other people's money (their rich "investors" were offered 20-30% returns on their money). The scale of their winnings? Several hundred thousand dollars for a team of ten for every 2-3 day trip to the casino stretch eg. Las Vegas.

Why am I highlighting this book here? Several reasons. Firstly, I have always believed there are some similarities between gambling and investing/trading on the markets. See my article on "Gambling and Investing". Both are essentially about probabilities --- in investing we know it as the "upside potential" and the "downside risk". You pick games/stocks that offer the best risk/reward ratio, and you press your advantage when things are good. For gambling, card counting enabled the MIT teams to identify opportunities when the odds were on their side .... and they put down heavy money in these cases. Of course, there were times when things turned out bad despite the odds, but overall they made money big-time. Card counting is a prime example of risk management in gambling, betting big money when the odds are good is a prime example of money management, the whole approach reflects a scientifically and logically coherent approach to gambling (hitherto known as a long-term losing proposition for the gambler). All these lessons can easily apply to investing.

The second reason is the interesting way in which both sides --- the MIT teams and the casinos --- think they are justified in their stance, reflecting a classic moral dilemma which draws parallels to many real-life situations. The MIT teams believed they were well within their legal rights to make money through card-counting, since the law did not prohibit that. The casinos, however, lumped card counters together with common cheaters (ie. those who slipped cards into their hand, or marked cards illegally) and took increasingly tough action towards them (from banning further entry to manhandling them). There is validity in both stands: one can say the card counters were just making use of their intelligence to beat the odds, and beating the odds surely is not illegal!? On the other hand, the casinos saw it as their right to protect their interests (especially when big money is involved) and since the casino was their property, they could ban unwelcome visitors --- which they did eventually. If one looks at the real world, everybody preaches free markets, but aren't there many practices that are designed to limit the degree of freedom with which businesses operate? Trade protectionism, anti-trust laws against mergers, rules against cartel formation --- all examples. So there are all-encompassing principles, limited by institutionalised rules, and if the casinos dictate no card-counters in their premises, then the MIT teams had to respect that. This state of greyness spills over to the stock markets. With insider trading technically illegal, many company directors still accummulate obviously knowing new developments outsiders don't. Why is window-dressing considered standard practice while other forms of market manipulation are considered chargeable offences? Aren't there conflicts of interest with the profit-oriented stock exchange being itself a market regulator? The answer is that there will always be grey areas and limiting rules set by governing institutions (the "bankers") and while short-term gains can be made by skimming the edges, it is seldom scaleable if it goes against the "spirit of the game".

The last reason why I highlight the book is that simply, it is a good read. Check it out and don't forget the last chapter on the technical aspects of card-counting. Maybe it might come in handy next time at the casino!

Liar's Poker ( Michael Lewis )

2007-01-13T01:14:00.000-08:00

Michael Lewis' 1989 book about his short career, or ordeal, in Saloman Brothers, then the top investment bank in the US, is considered one of the best-written first-hand accounts of trading in the bond markets, which were hot in the 1980s with deregulation in the financial industry and the junk bond boom.

The author started as a trainee in Saloman's highly-regarded training program (where students were all expensively-educated graduates) in 1985, and went on to become a bond salesman in their London office, set up to drive Saloman's global expansion. Between then and his eventual departure in early 1988, his experiences in the training program, his insider exposure to the political jostling in the higher echelons of power of Saloman, his rise from "geek" to "big swinging dick" are all recounted excellently with cynical humour in the book (a very readable 250 pages).

What is special about this book in comparison with other more self-centric first-hand-account type books (such as "Trading with the Enemy") is that it tries to also present a macro perspective of market developments in the 1980s --- in particular, the development of two big bond sectors from virtually nothing: firstly, the mortgage bond segment, built up by Saloman's Lewis Ranieri in the early 1980s, and secondly, the junk bond segment, pioneered by Drexel Burnham Lambert's Michael Milken, which exploded in the middle-to-late 1980s. A quarter of the book was devoted to the earlier, given its growing importance to the firm's bottomline as Saloman established a virtual monopoly in this segment in the early 1980s.

The account of growth, domination and eventual demise of Saloman's mortgage trading department is an entrancing read.

Mortgage bonds are essentially similar to REITs which are probably more familiar to most of us --- they are to home loans/residential properties what REITs are to commercial/retail/industrial properties. Home loans are pooled into and securitised as mortgage bonds, which are then sold to investors who will collect the routine interest and principal payments from the homebuyers. There are plenty of lessons to be learnt from Lewis' narration of its evolution for students of the capital markets (bonds, and even equities) --- how at the start, huge margins could be grabbed by the pioneering investment bank (Saloman); how their quantitative models allowed them to capitalise on a grossly inefficient market in home mortgages; how competition (including departure of key personnel to other banks) and market maturity eventually forced pricing efficiency and squeezed the margins, eventually leading to the demise of Saloman's mortgage trading department. One might be able to, indeed, draw parallels to Singapore's REITs market, which were great bargains in 2001-02 when the first few were being launched but may now be less attractive as the market warms to this instrument.

Just as Jesse Livermore's Reminiscences of a Stock Operator offers relevant cross-market insights although he might be talking about commodities, so Liar's Poker is good reading even for the stock market-focused investor/trader. For one, it imparts insider understanding to the selling of investment instruments to the firm's customers --- it is common for undesirable instruments to be pushed to the customers by the articulate salesmen, especially when these are being held by the firm's proprietary traders who wish to dispose of them. Corollary: always be cynical when people try to sell things to you. For another: greed is supreme in these investment banks, and if these professionals owe no sense of loyalty to their employers but only to money (as repeatedly described in the book where staff are lured by higher wages elsewhere), what makes you think they owe any sense of commitment to their clients?

One of the most interesting characters in the book is a character named Alexander. His attitude to markets, if Lewis' description of him is accurate, is one to behold. It is about being able to see how the various asset and geographical markets are interrelated, much like a "tightly-woven web" where "yank on one filament in the web, and the other filaments had to move too", and where sensing the secondary and tertiary effects of a market development and betting on them offers huge rewards. Read these few pages on the trading methods of Alexander if nothing else (in the later parts of the book).

How to make money in stocks (William O'Neil)

2006-12-20T12:54:00.000-08:00

The tacky front cover of this book as well as its rather mundane title are hardly appealing features to the casual book browser, but this is actually one of the investment bestsellers and probably one of the most comprehensive books on pure stock investing around.

O'Neil's investment style is definitely not classical value investing Graham cigar-butt style, but his system has worked well for him (see "Market Wizards"). Some time back there were several online forummers on the various local stock forums who swore by his CANSLIM system. A writeup on the system comprises the first of three sections in this book.

CANSLIM basically is an acronym for the seven key factors that O'Neil watches for in his stock selection and asset allocation, as listed below:
C-Current quarterly earnings per share
A-Annual (significant) earnings increases
N- New products/management/stock price highs
S-Supply & demand of shares + big volume
L-Leader/laggard (he advocates the leaders)
I-Institutional sponsorship
M-Market direction

He covers each of these as an individual chapter. The gist of his system is to focus on near-term performance as well as growth drivers, and then layered on top of that one has to consider the intangibles --- the market factors which include technicals, share demand/supply and the quality of the players in the stock (institutions/retail?). All this is wrapped up inside an acute monitoring of market direction to constitute a dynamic buy-and-sell (some may call it trading) strategy, as opposed to the buy-and-hold approach.

The next two sections focus on his views on proper investment behaviour, with one section for those just starting up and the next for more seasoned veterans. The level of difficulty doesn't vary much from one section to the next: he merely talks about different aspects of investing. For example, in the section for beginners, he ruminates on typical investor mistakes (eg. focusing on low PEs, profit-taking too early, being penny-wise pound-foolish) and chooses to focus on a few important aspects: when to sell to cut loss, when to sell to take profit (it is significant that he divides selling into the above two chapters), whether to diversify and lastly, how to read charts. The later section discusses sector investing and also explores the various alternative equities-related investment instruments such as options, IPOs, foreign stocks, mutual funds. To me, one should read selectively, as certain parts are of little interest. Recommended parts to read would be the writeups on selling, reading chart patterns and sector investing.

In particular, the chapter on chart reading is insightful. Over the years my viewpoint on charting has evolved from being purely cynical to acceptance of its use in certain areas. As I have explained in my writeup on technical analysis, the fundamental and technical analysis routes can be complementary and the issue for the investor is that he has limited time constraint and hence has to be selective. The charts provide a route to gauging the pulse and psychology behind a stock, and it is clear that O'Neil believes these are as important as the fundamentals itself (looking at his CANSLIM methodology). My chart reading is typically a simple process, amounting to no more than observation of the price-volume trends, the moving average and the relative strength levels. O'Neil is a veteran chart-reader, and technical analysis constitutes a major portion of his stock-picking techniques. For me as one with a fundamental bias, it is easier to accept his integrated fundamental-technical (combined-arms) approach than a pure technical analysis strategy. The book introduced some interesting chart patterns and more importantly, provided sound reasoning behind such pattern formation, logic which is difficult to defy. I have added the cup-and-handle chart pattern to my arsenal of stock-picking monitoring techniques now :-)

Market Wizards (Jack Schwager)

2006-11-11T07:12:00.000-08:00

This is a relatively old book; it was written in 1989, nearly 20 years ago. I actually picked it up because I enjoyed reading the sequel "The New Market Wizards" (will review that another time); Jack Schwager has written several books on such interviews with market traders/investors which followed up on the success of his first book "Market Wizards".

For those who want to read all about stocks this may not be the most suitable book, because only one section is devoted to stock traders; the rest are devoted to futures/options traders, global macro traders (a bit of everything), floor traders, bond traders. Indeed, this is more a book on traders than investors, with regard to the focus on capital gains and short/medium-term payback periods employed by most of those interviewed.

As such, a majority of those interviewed might be alien to most of us, due to the long period between the current and the time of writing, as well as the fact that Asians tend to be equities-centric. For me, I could only recognise Michael Steinhardt, William O'Neill, Jim Rogers, Paul Tudor Jones --- mostly stock traders (with the exception of the last). However, that is not the point. Although it is reassuring to read about people and subjects that we have already had a preconception about, we also tend to learn few new things.

The value of the book lies in its illustration, via the various interviews, of the contrast in trading attitudes, philosophies and subsequently trading strategies employed between the traders in the other markets and those in the stock markets. There is no "one-size-fits-all" philosophy or strategy that can be transplanted from equities trading to futures trading, for example. Equities traders tend to refer to fundamentals more strongly, using technicals as a reference (eg. William O'Neal) and some, none at all (Jim Rogers); futures/options traders rely on technicals such as price trends, volumes much more, and focus intensely on risk and money management compared to the former. That is the general impression I get. Which is logical, of course, since futures employ a high degree of leverage and are essentially zero-sum games which imply a constant tussle not just with the general random vagaries of the market but also with the contract counterparties. It may be fair to say that the futures market is akin to the technology sector, which is exciting and attracts the brightest brains but who then cancel each other out such that eventually all participants suffer margin crimp. Floor traders tend to be similar in their approach as futures traders, focusing on technicals and tape-reading, although horizons can be even shorter, in a matter of minutes (easy since they are "live" in action). Hence, really, the gist of it is that one has to customise his approach depending on the market he is in.

At the same time, also remember that this book was written nearly two decades ago. Given the technological advances in computer processing power, it is highly likely that what used to work then eg. the methods of analysing price-volume data and trend-following, might not work today. That is another example of strategy evolution, with time. At the time when this book was written, behavioural finance was a relatively new subject (the book features an interview with a trading psychologist); today it is one of the hottest frontier areas of research for trading firms keen to get an edge on the market.

Nevertheless, the various interviews in the book dish out useful advice that are probably timeless. Pervasive common threads on "cut-loss", "emotions management" and "hard work" cutting through most, if not all, of the interviews means the aspiring trader would do well to take note of these likely ingredients for trading success. A mild obsession with the market won't hurt either.

One Billion Customers (James McGregor)

2006-10-16T07:53:00.000-07:00

With the rise of China there are countless new books appearing regularly on doing business in this new emerging giant economy. Recently I have been reading much on this topic and I shall introduce a few interesting books covering it. This book is one of them.

The book was actually highly recommended to me by a friend who promised that it would not be dull reading. And so I picked it up and indeed it proved hard to put down.

First, a word about the author James McGregor. The credentials of the author often determine the credibility of the book, and this guy is no slouch on the topic of China. He was a former Wall Street Journal China bureau chief post-Tiananmen massacre, chief of the Dow Jones' China business operation during the 1990s, and a former chairman of the American Chamber of Commerce in China. He now serves as a China business advisor and investor. When you get Henry Kissinger praising the book at the back cover, you know instantly that this is not another run-of-the-mill book on China.

The book is actually a collection of tales of various Western companies' past experiences in doing business in China. Each chapter can be read separately, and that is why it is so enjoyable reading (it helps that the author is a former journalist). The tales span a wide variety of industries: from Morgan Stanley's partially successful efforts to start an investment bank in China through a joint venture, to Dow Jones and Reuters' regulatory tussle with the state-owned People's Daily in the financial data services market, Rupert Murdoch's transition from villian to mentor of the media industry in the eyes of the Chinese propaganda ministry, the emergence of the Personal Handyphone mobile telecommuncations system in China against all odds, and the problems faced by the high-technology industries of satellite/aerospace arising from export restrictions triggered by government-to-government tensions, which have crippled US competitiveness vis-a-vis European competitors in this area. Each of the above tales form one chapter in the book.

A common thread running through the book is the dominating role played by the Chinese government and state bureaucracy in Chinese business. Anecdotal as well as statistical evidence suggests the importance of the state is decreasing in recent years (by design), given the emphasis given on selling stakes of SOEs (state-owned enterprises) through IPOs as well as the growing importance of private enterprise verses state-owned enterprises. However, James McGregor's tales show clearly how influential the Chinese government were in the 2-3 decades following the economic liberalisation initiated by Deng Xiaoping (in the late 1970s). Although McGregor did not say it, it was clear that rule by law, not rule of law, was the buzzword as China groped around in the initial stages to integrate the essence of market economics and liberalisation with their socialist roots. Given that all assets were owned by the state, the opening up involved relinquishing/transferring state control, issuing licences, setting standards and regulations, defining the boundaries --- all requiring local discretionary exercising of bureaucratic judgment and interpretation that gave great power to local and state governments. This of course led to economic rent-seeking behaviour by the local entrepreneurs and corruption on the end of the bureaucrats. But more importantly, the power of the bureaucrats and the state meant it was important to understand their priorities: to strengthen their economy and bring progress. Foreigners who did not understand the corridors of power in China often ended up on the losing end, while those who understood to emphasise on adding value to the overall strategic government aim (while not making their hosts look bad) did well.

To a certain extent, the author's strong links with the Chinese government and the various big businesses make me wonder if his hands were tied in presenting a more cynical view. At the same time, many of the tales, with their details and intricacies, suggest that he might have interviewed many of the protagonists who might have embellished their versions of events to present themselves in the best possible light. But nonetheless, the industry backgrounding provided by the author at the start of each chapter provide some of the most insightful commentaries on China I've read, while the stories themselves are great reading.

One chapter to read in particular is a tale of corruption extending up to the highest echelons of the Chinese government that enabled a Chinese entrepreneur to make a fortune off his connections ("Eating the Emperor's Grain"). It fully reveals the system of patron-client relationships that existed between corrupt politicians and compliant Chinese businessmen that characterised the gold-rush attitudes infecting all classes of Chinese (lawmakers/enforcers included) accompanying the economic liberalisation of China. This, alone, is a risk that should be factored into the valuations of China stocks, mitigating the enormous potential of the Chinese economy.

Trade Like Warren Buffett (James Altucher)

2006-09-27T07:43:00.000-07:00

I always look for new viewpoints when choosing new investment books to read, because that is where the value-add lies. No point reading about ideas/concepts which are rehashed versions of what one already knows ...... it would be a waste of time.

That is where the value of this book lies. The title alone is promising, for it suggests that it is not another eulogy to Warren Buffet's buy-and-hold strategy which the mass media have promulgated outrageously (probably with the acquiescence of Buffett himself).

The book is divided into different chapters on the various investment strategies and instruments adopted by Warren Buffett, which may not be familiar to Buffett fans who primarily know him through his widely publicised buy-and-hold type stock investments in Gillette, American Express, Disney and of course Coca-Cola. The objective is to present the other main facets to Buffett's investment selection process.

At this point it is useful to outline what the author considers as Buffett's three main plays. Buffett himself has divided his investment activities into three main groups: generals, controls and workouts. Generals are the long-term value plays we all know him for; controls are situations where he accumulates a majority stake and ends up with control of the company --- suitable for highly-undervalued stocks trading below NTA where corporate control confers ability to appoint new management to re-direct operations and unlock value, as well as control of the liquidation process so that the shareholders can secure good returns (the best example is Berkshire Hathaway). Finally, workouts are the special situational plays which actually form half or more of Buffett's profits, yet are often given little press.

Although the author gives some coverage (a chapter or two) on the first two investment categories, it is the third --- the workouts --- that he devotes most of the book to. That's because these workout plays are most like what we know as trading, in terms of investment horizon and holding period, use of leverage to magnify gains, focus on price and situation rather than business fundamentals. Thus it is that individual chapters are devoted to various workout plays that Buffett has been involved in:

Merger arbitrage - betting on consummation of a merger
Relative value arbitrage - playing the spread between a listed parent and a listed subsidiary
PIPEs - Private Investment in Public Equities. Private placements usually take the form of share placements at discounts or as convertibles (Gillette and Salomon investments were in fact born of PIPEs)
Junk bonds - High-yield bonds of low-quality companies
Closed-end fund arbitrage - Convergence of closed-end fund towards its net asset value (these funds typically trade at a discount to NAV due to tax issues and illiquidity of holdings)
Fixed-income arbitrage - plays on spreads between different bonds (eg. between corporate bonds and Treasuries)

One common thread that runs through these investments, and repeatedly emphasised by the author, is that Buffett always considers multiple exit strategies. In other words, should his workout play fail, he wants sufficient margin of safety or an alternative exit route. For example, he desires to be comfortable enough with the investment per se to hold for a longer-than-expected period even if the workout fail to work (eg. the merger fails to go through in his merger arbitrage play). This is worth learning for any investor. It reflects early consideration of the risks of an investment and not just the potential returns, thinking about the "what-ifs", thus adding another layer to the investment analysis process ---- something that will become more important as assets under management grow.

The various investment instruments and arbitrage strategies were explained in great clarity by the author who is himself a hedge fund partner. However, it is a bit disjointed towards the end and there are some interviews with certain fund managers which do not seem to serve any purpose. Skip judiciously.

Hedgehogging (Barton Biggs)

2006-09-08T06:30:00.000-07:00

Those who pay attention to Wall Street will know Barton Biggs, the author. He has been a partner at Morgan Stanley since the early 1970s, was the firm's first research director, and was head of its investment management arm since the mid-1970s. His last post was as chief global strategist to the firm before he left to start a hedge fund, Traxis Partners --- the largest new hedge fund of 2003.

This is the ultimate insiders' book on the workings of Wall Street at the highest level, and I wonder why and how he managed the time to write it --- probably to leave a legacy, since he obviously doesn't need the money. As the title suggests, it's a book about hedge funds and the people who populate them -- "hedgehogs".

In fact, probably only the first one-third of the book is about Barton Biggs' journey in setting up his hedge fund and his various travails --- the initial decision to take the leap, the networking, and above all the gruelling journey to secure investors --- institutional investors, wealthy individuals, where he illustrates how difficult it is to achieve a critical mass in the fund as well as the startling dropout rate. Outsiders think it is so glamourous to run a hedge fund.... and so do those on Wall Street as well, which is why top analysts, institutional salesmen, mutual fund managers quit to start up hedge funds, only to find that it is difficult to maintain performance with minimum volatility --- in other words, to achieve alpha, the excess return above corresponding risk levels. Biggs also describes a particular episode where his hedge fund shorted oil and saw it go up over several months when he and his partners were unable to sleep well .... eerily reminiscent of the experiences of CAO and their disaster with oil futures.

Frankly there is no definite structure to the book, more like a collection of articles expressing the author's views on various issues with fund management, as well as encounters with various industry professionals and their range of investing/trading styles. A lot of it is not even to do with hedge funds, just about investment management in general. It has nevertheless been a riveting read for me.... I devoured its ~300 pages in about 2 days. What makes it a great book are:
(1) Barton Biggs' lucid writing style and ability to draw on examples and quotes across various fields .... an immensely well-read man, and a visile just as I am (a visile absorbs information through the eyes by reading, as opposed to an audile who ingests information through the ears ie. talking and social interaction).
(2) His range of experiences with fund managers in the investment industry. Hedge fund managers, mutual fund managers, endowment fund managers, wealthy individuals ---he's seen them all in his 4-5 decades on Wall Street, most of them highly successful. He describes his experiences with them, and it is striking how various individuals have succeeded with different styles --- contrarian, momentum, alternative investments (gold, art) --- but all passionate about the profession, and all terribly disciplined
(3) His views matter. He was Morgan Stanley's ultimate big-picture man, as global strategist, and one pays attention when he talks about the differences between value and growth investing (he's an agnostic... he switches between one and the other), investment decision-making (decision by committee stinks.... one man has to make the call), the violence of secular market cycles (he's seen it all, the man --- the 1970s inflation, the 1980-2000 boom years, the Internet bubble, then bear market in 2001-03), the problems of managing big funds (one becomes a people/infrastructure manager, rather than a true investor).

Read it as a chicken soup for the investor's soul. It will be terribly readable and intellectually rewarding for investment aficionados. It's also extremely updated, having been only recently published in 2006.

Financial Shenanigans (Howard Schilit)

2006-08-07T08:01:00.000-07:00

The first edition of this book was written in the early 1990s in the aftermath of the junk bond and LBO boom of the 1980s, and the second edition, written in 2001-02, was even more relevant as it was right after the dot-com boom when all the skeletons in the closet sprang out.

The author is a former academic and the founder-President of the Center for Financial Research and Analysis (CFRA), an independent financial research organisation in the US. It is regrettable that Singapore does not have many of such independent equities research firms that can claim to have little conflicts of interest in their work. In line with the main specialty of CFRA, this book is all about the various manners in which financial statements can be manipulated by companies to portray things the way that they not really are.

A warning about the book: it requires basic accounting knowledge at least (and in fact, probably a higher level than that), given that it straightaway delves into specifics on the balance sheet and income statement. But more seasoned fundamental-inclined investors will appreciate the level of detail entered into and clarity of explanation shown by the author.

The author starts by describing several examples of financial chicanery, where companies have stretched accounting principles and often distorted the spirit of them entirely. He explains the three major reasons for such manipulation by the company executives: (1)it pays to do it (their remuneration is tied to performance), (2)it is easy to do it (given interpretation of GAAP, Generally Accepted Accounting Principles, are flexible; made even easier if internal controls are lax), and (3)they seldom get caught (eg. quarterly statements are not audited).

Financial shenanigans are actions that intentionally distort a company's reported financial performance (income statement cash flow) and financial condition (balance sheet). Half of the book is spent on describing the seven main shenanigans as follows:
(1)Recording revenue too soon or of questionable quality
(2)Recording bogus revenue
(3)Boosting income with one-time gains
(4)Shifting current expenses to a later or earlier period
(5)Failing to record or improperly reducing liabilities
(6)Shifting current revenue to a later period
(7)Shifting future expenses to the current period as a special charge

Basically, the idea behind these financial shenanigans is to overstate revenue and manipulate income through discrete timing of expenses, for example through creation of inventory reserves and acquisition reserves that can be written back to the income statement progressively over the next few years and hence padding operational income. It defies the basic spirit of accounting --- to match billable revenue earned during a period with the exact corresponding expenses incurred --- but yet is subject to such borderline interpretation or managerial cover-up that auditors often miss them. In particular, the author advises particular caution on merger & acquisition accounting and has one chapter entirely on it, due to its abuse by managers over the years through understatement of assets and overstatement of goodwill, taking big acquisition writeoffs that can subsequently be written back, etc (also see "Mergers and Acquisitions").

The rest of the book covers how to spot such financial shenanigans, and there is plenty useful stuff to be learnt here. The author lists down what to look out for in each part of the financial report; based on his experience, he advises that the oft-neglected parts are the most important (because management knows they are neglected and thus choose to put the devilish details there)-- things like the auditor's statement, proxy statement (litigation, related-party transactions), footnotes, insider transactions.

The author classifies two main methods of checking for financial shenanigans: quantitative and qualitative. Quantitative refers to stock-screening based on certain valuation parameters that appear abnormal: high and disproportionate inventory rises, sharply rising or declining gross margins, sequential decline in sales etc. There is a most useful set of methods introduced that I think every serious investor should implement when doing their stock research: common-size analysis where income statement and balance sheet items are expressed in percentage composition or percentage change within a time period to clearly reveal structural changes in asset structure (vertical analysis) or alarming year-on-year changes in an asset/expense (horizontal analysis). Qualitative screening is rather interesting: it refers to screening financial reports for certain words that spell trouble: examples include "changes in accounting policies", "changes in account classification", "insider stock sales", "unbilled receivables", "related-party transactions" etc.

Basically, it is quite impossible for one to analyse a financial report based on the entire checklist that the good author has drawn up, of course. However, he should at least be aware of all the possible ways that management can manipulate the accounting statements, and hence learn to take them with a fair amount of skepticism. That, in essence, is what the author hopes to put across to the reader --that a system (accounting) devised by humans could be circumvented in spirit by other unscrupulous humans.

Streetsmart Guide to Short Selling (Tom Taulli)

2006-07-12T19:14:00.000-07:00

Assuming the market moves up one-third of the time, sideways another one-third, and down the final one-third, the long-only investor stands to gain from the market trend only one-third of the time. In fact, assuming that stocks fall as a result of their own weight, they could be subject to headwinds the other two-third of the time. Surely the enterprising investor should look to capture some profit from this two-third pie? That's where the above book comes in.

Written in 2003, its timing was probably inspired by the bear years of 2001-2002. The approach is quite methodical: it discusses the what, how, why and most importantly, when, aspects of short-selling, in that chronological order, and is quite easy to read (perhaps the large font helps).

The context is the US market, so be careful about the "how" aspects. Generally the US market is more developed for short-selling and there are a greater number of stock scrips available for borrowing for short-sellers and there are even market statistics for short-selling (short interest ie. uncovered shorts) while in Singapore naked short-sellers have to contra within one day and there are limited stock scrips available for borrowing to short extended periods.

There are fourteen chapters in the book: the first four cover the what, how and why aspects to give an introduction to the novice. The next eight cover the "when" aspects, which is probably the meat of the book. There is strong focus on accounting statements (four chapters), with one chapter each for balance sheet analysis, P&L statement analysis, cashflow statement analysis (with the other being a general assessment of accounting rules). There is a chapter on insider sales, which gives an indication of just how important this is as in indication of declining company fortunes: a corresponding belief of mine. There is a chapter on technical analysis which chartists will love, and then a chapter on "special situation shorts": tech companies, finance companies and IPOs (tech and IPOs are pretty understandable, but finance is because if the trust in the bank is gone, customers will desert pretty fast).

But the most interesting and informative chapter is Chapter 5: Making the Case for a Short Sale. If you don't read anything, read this part: it lists the danger signs and trigger events for a short sale. Danger signs are clues (usually qualitative) that the business is having problems; trigger events are the catalysts that might prompt a run on the stock. Samples: danger signs listed and discussed in the book include fads (volatile), loss of strong growth, flawed business model, hype, public skepticism (can be verified by trips to the mall to assess product demand), mergers (1+1<2); trigger events include drastic fall in price despite seemingly strong business (eg, ACCS), resignations (especially key personnel), earnings below expectations, delayed financials announcements (usually bad), reverse splits, regulatory actions.

This book can be a contrarian guide for the long-only investor. Instead of reading books which preach on how to select good companies and stocks, he can comb through this short-selling guide to get an idea of how to spot danger stocks that he should avoid with a ten-foot pole. That is where the value in this book lies, to me.

A Random Walk Down Wall Street (Burton Malkiel)

2006-05-31T07:09:00.000-07:00

"A Random Walk" was first published in 1973, more than 30 years ago. Since then it has gone through seven more editions (the latest being 2003) and it is rightly recognised as one of the top investment books.

The author Burton Malkiel occupies both sides of the fence in the investment arena: he started as a market professional and still sits on the board of large investment funds, yet at the same time he is a top academic and an economist at Princeton University. It is this mix of experience that provides a unique perspective into the investment world in this book, where he explores professional investing and its practice, the main academic theories on investing, and gives an overview of various investment options available to the investment newbie.

The coverage of the book is one of the most comprehensive I've ever seen, and is useful in introducing the investor to the various perspectives. It is structured in a logical manner: Part One deals with a historical perspective starting with the 16th-century Dutch tulip bulb craze through the modern days till the dot-com craze, one of the best short descriptions of investing history I've ever read. The author then progresses to introduce the investing techniques employed by professionals in Part Two; these are fundamental analysis and technical analysis. He describes the shortcomings of both, although it is clear to me that whereas his bone of contention with technical analysis is the logic of the method itself, his concerns with fundamental analysis is more with the quality of the practitioners rather than the concept itself.

Part Three deals with the academics' theories on investing. These are the portfolio theory of Harry Markowitz, the capital asset pricing model (CAPM) of William Sharpe and the efficient market (EMH) theory. Of these the EMH is subject to rigorous exploration and is the most worth reading. Part Four, the past part, explains the various investment options at the investor's disposal, starting with the different instruments (stocks, bonds, real estate), then the customising of one's portfolio in relation to one's risk perception and time horizon, then finally the various methods of investing: index funds, mutual funds, DIY (do-it-yourself) and the respective pros and cons.

Perhaps what strikes me most about the author's ideas are his highly pragmatic approach as expressed in the book. In particular, two ideas: firstly, that one not only relies on business fundamentals to pick stocks (he calls it the "firm foundation" theory), but also by estimating what investment themes/situations are most likely to capture the attention of the investing public (the "castle-in-the-air" theory). In case one thinks the latter sounds rather trivial, it was actually used to great effect by the great economist Keynes himself in making great stock market profits through conceptualising investing themes ahead of the public (his background as an economist clearly helped). The second main idea that struck me is a different perspective of the Efficient Market theory (link to my own perspective), that the efficiency of the market lies in its not being easily exploitable by investors without assuming a corresponding amount of risk. For example, the mania during the dot-com boom is often quoted as an example of gross market inefficiency in valuation; however, this is a post-event observation; during the boom, given the momentum, the investor would have to assume a high level of risk if he perceives the market to be pricing the dot-com stocks inefficiently and starts to short them down. This view emanates from the author's recognition that price and valuation is often a dynamic process; there is no "real" or "correct" price to a certain company's value.

Read this book as a good introductory guide to investing, without all the dryness of say, Security Analysis or The Intelligent Investor by Ben Graham.

Asian Eclipse (Michael Backman)

2006-04-11T01:47:00.000-07:00

It's been a while since I updated this blog; I have still been reading voraciously though but some of the books I've read are not related to investment so there's no point writing about them. What I'm reviewing here is one that I read quite some time back, and which shaped my entire thinking about the nature of Asian business practices and its stock markets. (Note that I have done a review on the follow-up to this book, The Asian Insider, earlier; however, it is nothing compared to Asian Eclipse.)

Asian Eclipse was written in 1999, just after the Asian financial crisis of 1997-98 that decimated the emerging markets of Asia that until then boasted some of the highest growth rates in the world. The author, Michael Backman, is highly familiar with the Asia-Pacific, having worked in Indonesia and travelled widely around Asia: the corporate narrations and commentaries he delivers in his book is highly detailed and displays a high level of insight, though sometimes dripping with cynicism.

There are two key threads running through the entire book. One is the view that Asian companies tend to be family-run conglomerates with cross-holdings all over the place, with plenty of inter-related transactions that take advantage of the minority shareholder, by various practices such as laxity of borrowing from banks that are owned under the group umbrella, dodgy accounting, and selling of lousy assets to public listed subsidiaries (while keeping the good ones private). A key insight is that minority shareholders are seen as "outsiders", and therefore could be exploited; this is of course antithetical to the Western idea of the stock market which advocates transparency and fairness, but that's the way it works in Asia (or if one is kind, the way it used to work). The other is the idea that corruption is an evil that is rampant in Asia, as a result of weak legal and corporate frameworks. The author points out that the issue of corruption is more rampant in some countries than others, pervading up to the highest level of government in some cases (Indonesia), which abuse their positions as lawmakers to cobble together business deals and enrich their families. In others, there is general tolerance of the corporate corruption issue from above, with key institutions (the media, the auditors, the bureaucrats) having to compromise their integrity given the size and connections of the business groups involved.

The author is especially critical of Indonesia, perhaps partly because he stayed there and hence was familiar with the ins and outs of business dealings. Of course, since Soeharto was then already marginalised, Michael Backman did not have to fear any backlash. The reader will be familiar with many of the characters mentioned (with some described in detail) in the book, ranging from politicians -- Soeharto and his family, Mahathir et al, various politicians in Japan; to businessmen --- Liem Sioe Liang (Indonesia's Salim Group), James Riady (Lippo Group, recently building up a presence as a property developer in Singapore), the Widjajas (of Sinar Mas, and of whom Oei Hong Leong is a part of), the Soeryadjajas (former owners of Astra), etc (note that the author quotes widely from Indonesian businessmen).

There are at least two chapters that the share investor in Asia should read --- Chapter 7: "Lambs to the Slaughter: Investing in Asia's Stock Markets"; and Chapter 10: "China: Rising Star or Black Hole". The former will make the reader more aware of the possible corporate maneuvres on the stock market to exploit minority shareholders, while the latter gives a good perspective on the state of the China economy (Hong Kong and Taiwan included): public (SOEs) and private, together with the key problems and challenges which I believe have not changed over these few years.

A book I would highly recommend to attenuate some of the bubbling optimism nowadays over the (re-)emerging markets of Asia.

Existing link: Niversphere the Savvy Investor

2006-04-07T17:58:00.000-07:00

Niversphere's blog is purely fundamentals-based, which would be quite similar to mine, except that he provides research on Singapore stocks that are worth buying. Those looking for extensive coverage of many stocks would be disappointed because he prefers to cover those in his stock portfolio only, an understandable position because it probably takes the least effort to cover these (I notice that he does not "commercialise" his site at all unlike other sites (including mine). But for those interested in the same stocks as him you would find a substantial amount of coverage and follow-through on them. I personally have benefited from a number of his stock research on several stocks, knowledge-wise, although I am not vested in the stocks. One learns to appreciate serious and well-researched views from fellow investors.

So far, Niversphere appears to have covered in detail the following:
UTAC
Hongguo (which has since run to the moon)
Ace Achieve
Tat Hong
Noble Group
Want Want

One significant point about his views is that they tend not to be valuation-driven, but business-driven. That is, his investing horizon might be longer.

You can check out the link on my sidebar on the left (Local Blogs section).

New Link: Lloyd's Investment Blog

2006-03-26T00:36:00.000-08:00

I was surfing the Web and came across this very interesting US investment site, with great articles on the US stock market. The blogger doesn't update it that often, about once every 1-2 weeks, but look at the quality of his writing. That is what matters.

I've realised that there's no point just adding new links quietly to my sidebar, since most readers probably won't notice. So from now on, every link added will be simultaneously broadcast as a new post across all my blogs, starting with this one. I will probably cover the existing ones as well.

You can check out the new link on my sidebar on the left.

Value Investing: A Provocative Guide (Sebastian Chong)

2006-02-01T07:43:00.000-08:00

This is a very useful book for the Singapore SGX investor, whether old or new, because it talks directly about stocks on the SGX, and is recently written (published in 2003). As such readers can relate directly to the Singapore-listed stocks the author is talking about, stocks like Sincere Watch, Jardine Cycle and Carriage, HTL, Raffles Lasalle etc. Those who had read this book early might even have got some good stock tips off it, such as the abovementioned.

The author Sebastian Chong is a former member of the academia, an Associate Professor in Finance and Accounting no less. So that lends weight to his views on investing in the Singapore stock market. He himself has been investing locally and globally for the past 30 years, and now operates a financial website www.shareowl.com which I believe was just set up. Readers of the local papers (Sunday Times I believe) might have read about the man in the Investing section.

As expected for one trained in Accounting, Assoc. Professor Chong is a fundamentals investor at heart, and his book is a study in this subject. He doesn't exactly discuss stock-picking in a systematic manner, so those newbies who're looking for a step-by-step guide or checklists a la Peter Lynch's One Up On Wall Street would be disappointed. Nor does he engage in any overview of the dynamics of the various industries/sectors in the Singapore context, a subject which I think would have been invaluable to any local investor. Rather, the book is more a collection of articles which, though not exactly well-integrated as a coherent whole, are nevertheless well-written enough to be worth reading individually. That is how I would approach the book --- no need to read from front to back in chronological order.

There are a few main threads running through the book which are each covered by a few chapters. One is the reading of financial statements and annual reports (why am I not surprised?). Another is stock valuation, which provides a few useful insights (eg. his view is that PE is simple and yet effective if used with good judgment: "it is like a scalpel in the hands of a skilful surgeon, still better than lasers used without care or proper diagnosis"). A third main thread, covered in the last few chapters, and which appears particularly relevant in the wake of local corporate scandals that have erupted since the book was published, is the issue of corporate governance, a pet topic of academics.

In between, there are miscellaneous chapters discussing various random topics such as "units trusts vs own stock-picking", "tech stocks or basic stocks","analysing business strategy" (that's a long chapter), which though interesting, somehow seem separate from the rest. There is a short chapter on "listening to the market" where the author comes close to talking about technical analysis but stops short: he just mentions that price patterns should also be watched, and that there are opportunity costs for holding "dead stocks" that don't move.

A glaring omission in the book, of course, would be a discussion of the Efficient Market Hypothesis. I would have loved to read the professor express his views about the validity of the EMH in the Singapore context. Most finance academics seem to be under peer pressure to profess their absolute belief in the EMH; I can almost imagine the author squirm and dodge this topic to avoid expressing views to the contrary.

All in all, the most useful aspect of this book is that it does provide some quantitative rules of thumb and "fair" valuations for SGX stocks, using several popular stocks for illustration. I find that when foreign books try to illustrate their discussions with examples from their home markets I tend to lose interest and skip that section, as I'm not well-acquainted with the stock. However, since this book adopts all local examples that I'm familiar with, the examples have been easier to relate to; it was instead refreshing to read the author dissect the earnings trends, price trends and historical valuations of stocks like Seksun, Metro, Sincere to make his point.

Bull! (Maggie Mahar)

2006-01-16T06:25:00.000-08:00

Courtesy of Moola from his blogsite "Where is Ze Moola?"
The myth of long term investing. The myth of buy and hold .

In the book Bull! by Maggie Mahar she explains how market players were taught to buy and hold their stocks for a longer term based on the then investing bible stocks for the long run by Jeremy Siegel, a professor from the famous Wharton School.

Folks were made to belief that if you bought a stock and held it long enough,the stock investment would have otperform all other investments.

Siegel used stocks such as Kodak, Polariod, Avon, Merk and Texas Instrument as the example. Dubbed the Nifty Fifty they were the equivalent of the Microsofts of today.

Siegel declared that if an investor bought these stocks and held it long long term (ze buy and hold) near the end of 1972 and held on to November 2001, the investors' return would average out some 11.76% a year. (see why the investing public were seduced so much by this theory?)

Now Steve Leuthold, a venered Minneapolis money manager, had a research which totally disagreed and contradicted Siegel's view point.

According to Leuthold, Seigel's hypothetical example ASS-U-MEd that an individual who invested in these Nifty Fifty stocks in 1972 had divided his portfolio evenly among the fifty stocks, putting 2 percent of their savings into each company and even if these group of stocks plunge, the investor would still rebalanced their portfolio each month for all these 19 years, cashing out on his profits and then adding money into the losers (fiyoh! Would you accept and follow such an investing strategy?) so that each stock position remained exactly at 2 percent.

Well, according to Leuthold (me too), such exercise is 'wholly unrealistic' to imagine that anyone would plow the gains from say Merck back into a loser such as Polariod, Burroughs or Xerox, year after year. (ahh.. u see Merck climbed a whopping 382%! .. and according to Leuthold, if this exercise did not include Merk, ie the investor failed to pick Merck into their portfolio, their portfolio in the long run would have sank by 12%. Err stock picking is important mah!)

Leuthold pointed out that from 1972 to 1982 the 10 worst performers in the group lost between 37% and 75%.

With losses that much, the commonsense question is that who would continue to send good money after bad money each month, each year? (make sense mah! tiok boh? Who on earth would put more money into a stock whose business is losing more and more money each year?)

And Leuthold argued that the investors who bought such stocks in 1972 would surely have been discouraged long before stocks started picking up again in 1993.

And according to Mahar, these investors would probably have dumped their fallen angels, probably at a much lower point than what Leuthold numbers had suggested.

(much of what's written is based on pages 41-42 of the book Bull )

How what's your opinion on this and long term investing?

ps:

Here is a good review of what Mahar wrote:

How did it happen that the very real risks of investing in stocks were forgotten? Mahar explodes the myth of "stocks for the long run," explaining how the market's promoters crunched the numbers to create the illusion that if an investor stays in the casino just a little longer, he is guaranteed to come out a winner. Casting Warren Buffett in a new light, she explains how a value investor is, in the end, a long-term market timer who understands that success depends on how much you pay when you get into the market -- and when you get out. By putting the bull market of 1982–1999 in a larger historical context, she shows how, over time, longtime bull markets beget longtime bear markets.

The future defies prediction, but the history of financial markets makes one thing clear: markets always revert to a mean. Taken as a single story, Bull! is both an illuminating history and a cautionary tale about investing. Analyzing the economic and psychological forces that drive financial cycles, Mahar shows how an extraordinary influx of cash and credit, combined with the obsessive attention of a new financial media, created a cult of equities. Challenging the notion that stocks always outperform all other investments, she reveals why many of Wall Street's most experienced investors believe that the 21st-century investor needs to throw out the old rule book and make a new beginning as he plans for his financial future.

No investor should keep his or her money in the stock market without first reading this book.

Afternote: I have extracted this from the blogsite of Moola (with his consent) because (1)I can't possibly read all the investment books in the world, nor is my opinion necessarily better than anyone else's; (2)It is a good quality blog; (3)I am a bit lazy to write a review of the book although I have read it heheh. Hope you like it. His site is located at the following URL.

Beating The Street (Peter Lynch)

2006-01-03T06:42:00.000-08:00

Yes, another Peter Lynch book. I chanced upon this at Borders several days back. Having read through it, I would say it is better than "Learn to Earn" but still lags behind "One Up on Wall Street", which I would regard as the classic.

The book essentially looks like, for a large part, a narrative of Peter Lynch's investing experience. Unlike "One Up", the focus is not on distilling his investing experience into a series of enlightening viewpoints and investing insights, but rather on how he came to invest in this or that stock. Thus it is that he focuses entire chapters on single stocks on single industries: one chapter on Supercut, one chapter on Allied (a department store), one on Fannie Mae (mortgage), one on CMS Energy (alternative energy), one on Body Shop (retail)... you get the picture. Of course, such a focus allows the reader to obtain a good picture of the industry in question, so it is probably a different approach to examining the central question of investing. To me at least, it is not such an engaging read (maybe if I had read this first instead of "One Up" I might have a different opinion).

One can tell this book's style was primarily driven by Peter Lynch (unlike Learn to Earn, at least that's my impression), for his humanity and enthusiasm for his stocks shine through. Nothing is worse than a writer who doesn't enjoy his subject matter; Peter Lynch certainly shows that he does, in spades.

One chapter, in particular, that any investor should read is Chapter 15 in the book, on cyclicals. Here Lynch espouses lucidly why low PEs are dangerous for cyclicals although positive for other stocks in general. If one had read it, he would have avoided the disaster of HG Metal and also the stagnancies of shipping stocks in the later part of 2005. If anything, buy/read the book for this chapter.

Learn to Earn (Peter Lynch, John Rothchild)

2005-12-11T06:42:00.000-08:00

Although this book bears the name of the legendary investing guru Peter Lynch as one of its co-authors, he is referred to in the third person within the book; also the style of writing is more the John Rothchild of "A Fool and His Money" than the Peter Lynch of "One Up on Wall Street".

The book is for the really greenhorn investor starting out and wishing to have a good perspective of the business world and the (really) basics of investing. I got this book at a fire sale and realised soon after that the investing portion was really quite basic and did nothing for the reader who had consumed Lynch's "One Up". The investing portion is found in one chapter (out of four), where various investment instruments (money market, bonds, real estate, shares) and various ways of investing in stocks (mutual funds, personal investing) are introduced, followed by some stockpicking tips. Hardly enough for the knowledge-hungry reader.

The good part of the book is in its description of business history. In particular, look for Chapter 1 which describes the evolution of business and the stock market through the ages and covers the major manias (eg. South Sea), crashes (eg. the Great Depression), and major personalities who had shaped the evolution (Adam Smith, the robber barons etc). John Rothchild (I believe) has crafted a closely-knitted tale of how each major market collapse has led to improvements and increased regulation of the system eg. the monopolies and massive trusts of the early 20th century led to the enforcement of the Sherman Anti-Trust Act; the Great Depression led to the setting up of the SEC for investor protection and to government commitment to increase liquidity (and hence demand) in future market panics.

The book is rather readable and in Chapters 3 and 4, one gets a feel of general business operation, the evolution of a typical company and finally some real-life examples of companies that have soared and of others that have fallen. Strictly this is not an investing book, it is more a book on business (though not business management). Good for bedtime reading, but not for deriving new investing insights.

Building The Perfect Portfolio (Curtis Montgomery)

2005-12-03T05:03:00.000-08:00

Those familiar with the Singapore investing scene would have heard of Curtis Montgomery, also known as Professor Sage on the popular investing website Wallstraits.com. Sage, as I will call him, is known for emulating the style of the original Sage of Omaha, Warren Buffett himself, significantly outperforming the STI over the years 2001-03, and in the process amassing a bunch of followers who have even paid up to subscribe to his member-only Intellivest forum.

Building The Perfect Portfolio is the second of Sage's four pocket-sized books on investing so far, and in my opinion is one of the more informative and useful of the four, for the investor who is seeking a systematic way of screening stocks, to learn to make intelligent buy and sell decisions, and to develop a general investment philosophy. These issues are covered in detail in the book, through specific chapters on the Wallstraits 8 Business Screens (Chapter 3), When to Buy a Stock (Chapter 4), When to Sell a Stock (Chapter 5), and investment strategies/philosophies through Chapters 6 to 8.

Actually, any book covering Buffett's investment strategies would probably do just as well in outlining the investment approach. There is the same emphasis on anti-diversification in portfolio stock allocation, on selecting stocks based on a similar fundamentals-based GARP (Growth At a Reasonable Price) and distress-buying approach, and on a similar fundamentals-based stock selling strategy. There is even a chapter explaining the misunderstood buy-and-hold strategy which Buffett has espoused over the years. Probably the main point on which both differ is on the dividend issue: Buffett believes in capital re-investment by the company in place of dividends provided there are good opportunities, Sage seems to think dividends are preferable.

Let's think about the half-full part of the glass instead of the half-empty portion; Sage's book is as good a book as any in covering Buffett's general approach, and that is enough in itself: for any greenhorn investor, the best thing he could do to himself is to read a book on Warren Buffett's methods and internalise the philosophy that it is the business that matters, not the stock price. In addition, Sage has adapted the approach to the Singapore market and sprinkled local examples across the book, mostly based on his personal experiences on the SGX. The reader will find frequent mention of core Wallstraits holdings, in particular Osim, United Food and People's Food, and can also take a peek at the Intellivest portfolio on Page 164. (Since that is published material I guess it's ok to list down here: stocks like Celestial, Beauty China, Sunray, TSM (what's that?), Boardroom, JEL, Hongguo, Hersing, United Food, Osim, People's Food and Want Want - FYI). In addition, there are also descriptions of investing philosophies of other successful investors, in particular Peter Lynch, John Neff, Philip Fisher and of course Benjamin Graham. Of course, the common thread running through is the emphasis on business fundamentals.

The stock market is about investor psychology/sentiment/emotions as much as business fundamentals, and Sage recognises as much in the book. Investor psychology is covered in his later book (the 3rd). In truth one can't predict market psychology the way one can at least get a feel for business fundamentals; the former dictates the short-term; reversion to the mean ensures that the latter dominates the medium/long-term. Sage's book covers a viable and logical business fundamentals-based approach, and although some of his picks have not done well these two years (2004-05) I do not doubt that over the long term he is likely to perform better than most investors.

Shares Investment: facts & figures

2005-11-25T07:21:00.000-08:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I have been writing so much about general investment books which are all written overseas that I have completely forgotten about a regular local publication which is one of the most useful tools for investing in the local stock market. The book is shown in the picture above; 265 fortnightly issues have been published as of end October 2005 ie. it has been around for more than 5 years.

There're a couple of articles at the front showcasing certain companies but the real meat and value of the publication are the facts and figures for the more liquid stocks on the SGX (including SESDAQ) for the previous two weeks, spread over ~200 pages. For a quick overview, the front pages compile a list of the most active shares, top fortnightly gainers/losers, lowest PE, highest yield etc, and even has a list of upcoming results announcements (with expected dates) and major trades (director/substantial shareholder purchases/sales). These are then followed by the more detailed data and descriptions of significant developments for various companies, laid out in alphabetical order.

The metrics (valuation, financials) listed for the various companies in this publication are among the most accurate and updated I've seen around, compared to the online stock data on websites like Yahoo. One also learns to appreciate the choice of data presented for each company; it gives a nicely balanced view of the company. Key stock valuation figures are presented --> PE, NTA, dividend yield. It gives a 5-year overview of the company financials, covering topline, bottomline, assets and liabilities, and even return on equity; these give the investor a good idea of the likely long-term volatility of the company's business. Recent business developments are described in a short commentary, giving a good feel of near to medium-term prospects. The price chart covering as long as the last two years is given for chartists' benefit (as well as for general investors to appreciate the stock price volatility). In short, the company coverage succintly covers business fundamentals (long-term and near-term), stock valuation, and stock technicals.

The book could be used in a multitude of ways; it is up to the individual to integrate it into his investing routine. For example, its complete coverage lends it to good use in stockpicking. Also, one could use its company descriptions as a last-minute check-tool to get comfortable before actually putting money on a stock. The chartist could go through it regularly to check for any companies with interesting chart patterns that could suggest accummulation.

A few things to note: although I have said earlier that the publication offers one of the most accurate stock data around, it still have some inaccuracies around, in particular where stocks trading in foreign currencies are concerned (eg. Autron, Meghmani had some valuation errors). It is best that one cross-checks with company financial reports (on the SGX site) before the stock purchase. Secondly, except for the most short-term traders, it is not worth buying each fortnightly edition; the figures don't change that much right? Makes sense to buy every month or every quarter instead.

The publication costs $6 and you should have seen it being sold at newsstands everywhere. It usually comes out on Saturday afternoons; now that would be a good way to spend your Saturday evenings right, instead of watching ManU continue their descent to mediocrity?

2005-10-28T17:14:00.000-07:00

Contents up to end Oct 2005

The Zurich Axioms (Max Gunther)

2005-10-24T09:00:00.000-07:00

I had never heard of this book through the popular press until I came across some forummers, in particular the respected Oldman of Shareinvestor, recommending this book as a must-read several weeks back. This book was written quite a long time back, in 1985, and in recent years seemed to have got a second wind as it was reissued and reprinted in 2003, 2004 and 2005.

Frankly, I would not have bought the book on the basis of its cover, which is an amateurish cartoon of a hand fisting a bunch of dollars, and a proclamation that "this book can make you rich". It is a short book, at slightly >150 pages. The author is some unknown guy whose father was a Swiss banker who taught him the meaning of risk taking. But once one starts reading it is impossible to stop. I finished the book over one night and the following morning. It is highly readable and I can understand why it strikes a chord with stock market players.

I might as well list the axioms here, all twelve of them, with a concise description of the author's philosophy on them. They are as follows:
1) On risk - Dare to assume risk in a meaningful way (ie. a meaningful amount of your assets), and worrying is a healthy state of mind.
2) On greed - Always take your profits too soon. Think about every investment as a race with an ending point; when you reach the ending point, bail out.
3) On hope - Learn how to lose; don't pray and hope when the ship starts sinking.
4) On forecasts - In a world shaped by human behaviour, nobody knows what will happen in the future. Never forget the possibility that you have made a bad bet.
5) On patterns - Beware the historian's trap, chartist's illusion, gambler's fallacy, all attempts to decipher order when there is none to begin with.
6) On mobility - Avoid putting down roots in assets. In other words, don't fall in love with your holdings; be ready to move.
7) On intuition - It is sometimes, or even often, accurate. Try to corroborate with other evidence.
8) On religion/occult - It is unlikely that God's plan for the universe includes making you rich.
9) On optimism/pessimism - Optimism is a human tendency, which means it is not justified by facts half of the time.
10) On consensus - Think about things independently, don't drift with the herd. Then again, don't be contrarian for the sake of it.
11) On stubborness - Don't persevere; be flexible. Don't average down and tie down your capital on a stock you wouldn't buy if you didn't already own it.
12) On planning - Forget long-term planning; prepare yourself to react to the future's opportunities and hazards.

That is all there is to the book, with more detailed descriptions of course. If the above intrigues and interests you, you should pick it up at Kinokuniya where I found my copy. A lot of what it preaches is actually common sense, but it is another thing to internalise the whole risk-taking philosophy it advocates in one's approach to the stock market. I can feel myself nodding in agreement with many of the author's views; they are what I have come to accept over years of investing in the stock market.

A Mathematician Plays The Market (John Allens Paulos)

2005-09-17T05:19:00.000-07:00

John Allen Paulos is a professor of mathematics in the US and this book which was written in 2003 has an interesting approach: it dissects the subject of investing from the mathematician's/logician's perspective.

Using his disastrous investing experience with Worldcom as a backdrop for the book, the author discusses a number of key themes in investing/trading. These include the psychological aspects of investing, technical analysis, fundamental analysis, the Efficient Market Hypothesis, diversification, options and derivatives, and general market strategies. But readers will find his arguments quite unique, because it is unlike the common sense and experience-based advice typically dispensed in other such books; Professor Paulos analyses these issues using mathematical concepts and logic and presents his views as a conclusion of such analysis.

Don't be alarmed. Firstly, the mathematical concepts he uses for discussion are familiar to most of us with general training in maths: elementary statistics, probability, logic, arithmetic (eg. discounting of future returns), with a bit of game theory and chaos theory thrown in at the end. Secondly, he throws in a lot of analogies and mathematical anecdotes to illustrate his point and generally employs qualitative discussions while limiting use of quantitative calculations.

I think for those who like to think about the market and the logic of it all this is an excellent book to read. Of course Professor Paulos is no Buffett and does not have the backing of success; indeed his bad experience with Worldcom is the only one he discusses in the book; however his mathematical logic about various investing issues is impeccable. He employs information transfer analogies (probably from some kind of network theory) to explain why stock prices can suddenly collapse without any apparent immediate cause, and examines the frequent irrationality of people's investing decisions as a result of their inability to perceive the inherent probabilities. As expected, he sees more value in fundamental investing rather than technical analysis, the latter of which he admits he has problems understanding why for example, a stock might collapse or rally after a certain number of "waves" or whatever. What is the scale in question, he asks; one can perceive waves over an intra-day period or over multiple days. He, however, sees the logic of in simpler technical tools like moving average. I believe the professor also prefers fundamental investing because it tends to stabilise the market eg. bargain hunting arresting a stock's price fall, while technical players tend to be momentum followers chasing up prices.

It seems that a pet topic of academicians in the investing topic is the Efficient Market Hypothesis; it is a key theme of this book as well. Professor Paulos has some interesting ideas about it to contribute: his belief is that the EMH is true only if a majority believe it to be false. And vice versa. Why is this so? If everyone believes the market is efficient, they would not see any market inefficiencies to exploit or arbitrage out, even if there were; resulting in inefficient pricing. Conversely, if people believe certain stocks are undervalued (and hence inefficient) and buy in, they are effectively eradicating these pricing inefficiencies and justifying the EMH. As of now, he feels the EMH is approximately true, given the number of fund managers and traders believing they can outperform the market.

Another key theme he explores is the random nature of stock prices ie. the Random Walk theory. He is more interested in the nature of the price trends per se, rather than engaging in discussions on whether prices are truly random. Delving into statistics, he finds that the normal distribution does not describe stock price distributions well, because the latter tends to have fat tail ends ie. high frequency of very extreme (high or low) prices, while the normal distribution tends to decay rapidly at the ends; he suggests a power law distribution instead (not that it is of much use to you or me). He then discusses, in the last chapter, why it will be quite impossible to model price movements (and hence predict the future trends) given a random market: according to complexity theory, "a sequence cannot generate another sequence of greater complexity than itself"; put simply, a person has to be more complex than the market to predict its gyrations, and the professor's point is that a "random" sequence is the most complex of all, probably beyond our complexity horizons. Nevertheless, he ends by saying such market randomness is under the assumption of an efficient market; in periods when the market is less than efficient the complexity might decrease and it might be possible to model price trends (of course, again the problem arises as to how do we tell when the market is inefficient?)

Never mind if you don't understand my last one or two paragraphs. It was mainly for my personal documentation and future reference, for I found these sections quite interesting. Overall, the book is very readable but sometimes I skip over some of the numerical examples which are a bit dry. This book constitutes the professor's take on the stock market but after reading it you might be interested to find some of his earlier books, which explore the interesting role of mathematics in other aspects of everyday life. You can check them out under Amazon.

The Five Rules for Successful Stock Investing (Pat Dorsey)

2005-08-26T08:42:00.000-07:00

I came across this book at Borders earlier this month and thought that I should introduce it to both newcomers to investing as well as more seasoned investors. There is something in this book for everyone.

Pat Dorsey is the Director of Stock Analysis for Morningstar, an independent financial analysis firm of fine repute in the US. The book is written in a serious and highly informative tone which does justice to the firm's reputation. For the stock investor who is inclined to the fundamentals side, this book covers all the essentials, and more.

Although the book has 26 chapters in total, I would categorise it into two distinct parts. Chapters 1 to 12 elaborates at length on the basics of fundamentals investing. There is no folksy overtone a la Peter Lynch here; the description is strictly no-nonsense but still highly readable because of the sheer relevance of the information presented to both beginner and veteran investors. It starts, of course, by revealing what are the five rules of successful investing: doing your homework, finding economic moats, having a margin of safety, holding for the long haul, and knowing when to sell. The author then delves into the key qualitative and quantitative aspects of value investing, including how to identify good businesses, management assessment, a detailed look at accounting statements, basic valuation, and possible pitfalls.

I would think the above topics covered in the first part of the book quite comprehensively cover the key bases of fundamentals investing, with perhaps a key omission being a complete absense in describing some market technicals such as price/volume factors which would be useful in advising the investor when to sell. Although the topics are sensibly written, the fact is that veteran investors would probably be familiar in general with these issues, if they have read books on Warren Buffett, for example. The views are nothing new (although one can find new insights here and there). This is where the second part of the book comes in, and I have seldom seen other books cover this aspect, which is why I highly recommend it. Chapters 13 to 26 provide the reader with an overview of the various important industry sectors, covering such diverse areas as healthcare, entertainment, consumer goods, industrials, energy, banks, technology, services etc in individual chapters. For each industry, the structure of the value chain is described eg. utilities would consist of upstream energy generation companies, then energy transmission companies, then finally the last-mile distributors. The author would then delve into strengths and weaknesses of the industry (eg. whether it requires high capital investment, whether it has strong and sustainable economic moats), red flags to look out for, and then end the chapter with an investor checklist for that particular industry.

I have skimmed through Benjamin Graham's The Intelligent Investor but I seriously think that Five Rules is a better book for the starting investor. For one thing, it is definitely more readable. It presents the key issues of fundamentals investing in a concise volume, and offers a working knowledge of the various industries for good measure. Definitely a book whose commonplace title belies its excellent content.

Buffettology (by Mary Buffett)

2005-08-08T08:54:00.000-07:00

Mary Buffett is a former daughter-in-law of Warren Buffett and she wrote this book in 1997 to describe his investment techniques, capitalising on her previous proximity to the billionaire.

There are countless books on Warren Buffett and nowadays I groan when I spot another new batch of such books hit the shelves at Borders. His stock investment techniques have been dissected so thoroughly from so many angles that I wonder perhaps that is why he has switched his attention to currencies of late, haha. I can just relate point by point the characteristics of his technique as described in so many books: thinking about the business instead of the stock, buy a strong business and hold forever, owning concentrated portfolios, the magic of compounding, look for consumer monopolies, buying during a market crisis. These are the standard points of the Warren Buffett investment philosophy.

And that is what is covered in this book. Some books are essentially biographies of Warren Buffett with bits of his investing philosophy thrown in, but Mary Buffett has chosen to place the spotlight directly on his investment philosophy. There is at least a chapter for every point I have outlined above, and also Mary Buffett tries to find examples in those companies that Warren Buffett has invested in over the years.

Depending on the reader, this would either be a very useful book or a boring book. For the starting investor, one of the most important things is to formulate an investing philosophy (eg. momentum trading or buying downtrodden value?) and one of the best ways to do this is to read up on well-proven and logically coherent ones like Warren Buffett's. In this respect Mary Buffett has done a good job with her outline on the main points of his philosophy. On the other hand, for more seasoned investors, it might be a bit of a bore as there is a lack of new insights and the book often drones on monotonously. There are also too many numerical examples which tend to make the reader sometimes feel like he is studying a textbook.

Devil Take The Hindmost (Edward Chancellor)

2005-07-26T06:17:00.000-07:00

The small investor should recognise the value of reading investment books on historical manias and crashes. There are several reasons: firstly, for the often-repeated but still true cliche that one can learn much from history, in this case even more, for a large part of investment is human psychology; secondly, true manias/panics are rare and might happen only once or twice every generation (people remember their pain so it needs a new generation to make the same mistakes), so personal experience might be rare and one has to know these events vicariously through books; thirdly, the simple reason that if you're interested in investment, then you will find its history engaging, provided its narration is not too plodding.

Devil Take The Hindmost will capture the interest of the reader once he starts reading. It covers a number of speculative manias (and the subsequent crashes) and each tale is about 30-40 pages long, which is just about the right length to both capture the spirit of the times and yet not bore the reader.

The book spans across three centuries of stock market speculation, and covers not just America (as many books seem to do nowadays) but also old Europe and even Japan. I have used this book as material for a few writeups on another blog (Tales of the Stock Market) and it was the only one I ever needed. From the South Sea bubble to the robber barons to the Great Depression to the 1980s Japanese asset investment mania, the author covered all the important bases in very readable fashion, from the mania's origins, its main protagonists and their roles (together with very lively descriptions of these characters), the development of the mania, the final collapse, and very importantly, the various anecdotes which impart a vivid flavour to events that had happened a long time ago.

For those who might want to read up on more recent financial history the book might not be suitable. Only about 2.5 chapters (a small section on the 1998 LTCM scandal) out of a total of 9 deal with events after 1950. Of course, as I have said above, true manias are rare; the author has taken a broader historical perspective in selecting which market manias to cover. However for those who are interested in how the financial world has grown to what it is today, in particular how corporate governance has evolved through the ages, incorporating new rules to tighten loopholes with each successive scandal, the book holds tremendous value.

The Asian Insider (Michael Backman)

2005-07-16T19:56:00.000-07:00

Michael Backman is a well-known columnist and author who specialises in Asia, and has lived and worked in Asia for many years. This mix of Western perspective and Asian experience has facilitated key insights into the Asian socio-economic sphere that have been shared both in this book and its predecessor, Asian Eclipse, which was named by The Economist as one of the best general non-fiction books of the year when it was published in the late 1990s/early 2000s.

Unlike the former book, The Asian Insider talks less about corporate (mal)practices in Asian economies (such as family conglomerates, related party transactions, corruption) and instead gives a more general overview of the various Asian economies, discusses some of the big Asian trends, and explores Asian cultures --- hence the "insider" in the title.

There is something in this book for different people interested in different parts of the Asian ecosystem. For those interested in Asian corporate practices, he still talks about his pet topic: family/government connections within Asian conglomerates, and the inevitable corruption and improper transactions that emanate from such an omelette structure of overlapping interests. For those looking for key trends in Asia in the coming years, he discusses a few in detail: growing linkages with the Middle East, a declining Japan, a growing China, India's outsourcing economy. There is even a section focusing on Singapore and Malaysia, both of which the author admires greatly for their relatively transparent and untainted corporate cultures compared to many other Asian economies (he was especially scornful of Indonesia in his last book). It is astonishing how much more he knows about Singapore than the average Singaporean; read the sections on Temasek Holdings and GIC, as well as Singapore's "thriving sex industry".

To me, the most interesting part of the book is its last and longest one, which explores the key North-east Asian economies Japan, China, India and North Korea. Besides discussing the key trends and developments, he also takes an inside look at the various key cities within these countries, such as Shanghai and Beijing in China, and Mumbai and Bangalore in India; this really gives a good picture of the dynamism that is driving the growing economies. In fact, it makes the reader keen to visit these cities to see things for themselves.

The tone of this book is considerably more optimistic about Asia than Backman's last book which explored Asia's complex business structures and gave generally unfavourable opinions on countries like Indonesia and China. (To an Asian, corruption seems like acceptable methods to grease the wheels of commerce and build relationships; to Westerners, it leads to poor corporate transparency and unprofessional capital allocation; that's why his Western perspective was so useful). Given that the last one was written in the wake of the Asian financial collapse while The Asian Insider was penned in 2004 when Asian economies are booming, it is not surprising. It is still worth reading although I think Asian Eclipse was a better-written one and a hard act to follow; I will probably review that book later.

Common Stocks and Uncommon Profits (Philip Fisher)

2005-07-08T08:50:00.000-07:00

Philip Fisher's book is one of the classic investment texts in all aspects. It is a venerable text written more than forty years ago, and it can be said to pioneer an investment philosophy that was in vogue during the bull years of the 1980s till 2000; today, this style of what is known as growth investing is adopted by many institutions, and forms a cornerstone of Warren's Buffett's investment philosophy, together with the value investment beliefs of Benjamin Graham.

The book is divided into three parts, but the first two essentially describe this philosophy, while the last part relates his personal experiences on the market which shaped his philosophy. It is the first two parts which are worth reading to get a thorough understanding of growth investing.

Philip Fisher believed that bargain stocks (meaning undervalued stocks according to Benjamin Graham) often languished for long periods and the investor who held these ran the risk of holding on to dead dogs whose fundamentals would continue to get worse. In other words, he felt low valuations were there for a reason; a precursor to the Efficient Market Hypothesis. On the other hand, companies which were superior in research and development (the reader will notice that Philip Fisher was very interested in technology and its ability to enhance and protect a company's niche), marketing and financial control and possessing superlative management proved to be excellent businesses with consistent earnings growth; their prices therefore rose to higher prices as they gain recognition by the investment community. This led him to conclude that the investor should well see these stocks as "conservative" investments and look for such stocks to put their money in.

The word scuttlebutt was first coined in this book to describe the legwork one should do to gain insight into a company prior to buying its stock. Philip Fisher described several: speaking to management, to industry insiders, to scientists. (An interesting omission was talking to brokers.)

One important observation that I made after reading the book was how the focus was placed on watching the business fundamentals, rather than the market price-volume trends. In fact, even in his chapters on timing when to buy and when to sell, Philip Fisher talked about watching the R&D progress and marketing sales of the firms and tracking any deterioration in business fundamentals as a means to make such decisions; never once did he talk about market price momentum, volume surges and all that chartist stuff. Like Benjamin Graham, he was a fundamentals guys, though both men obviously did not share similar investment philosophies. (However, my view is that the small investor won't be able to enjoy the same kind of access that the author had to eminent scientists or company management; hence it is my belief that sometimes price-volume data do offer some kind of clues to any deterioration in company fundamentals that are not yet made public.)

The thing about reading investment books is that no matter whether one agrees with the author's main views, there are always pieces of wisdom that one can take away from each book. This being an investment classic, I am sure the reader will find many insights worth their weight in gold. For example, I found one of his comments particularly illuminating, that one often should not set "target prices" when timing the stock purchase, but could consider setting "target dates of purchase" eg. periods when results of R&D are expected to be announced (hopefully successful). In short, this is buying prior to a probable stock catalyst. Another example, in my view, would be buying into an illiquid undervalued stock just before the release of its results, and not earlier (because no catalyst).

Trading With The Enemy (Nicholas Maier)

2005-07-02T17:44:00.000-07:00

It is my belief that an investor must have an idea of how the investment industry (buy-side institutions, sell-side brokers etc) operates before he can shape his own ideas about how he should invest and whose opinions he should listen to.

Trading With The Enemy is the author's account of his financially rewarding but emotionally harrowing time at Jim Cramer's hedge fund, where he worked for five years in the mid-1990s. Jim Cramer, for the uninitiated, was a well-known and successful fund manager on Wall Street in the 1990s before he moved on to work as a commentator on a financial portal, thestreet.com, that he founded (which IPOed big-time during the dot-com boom at the end of the 1990s). That portal, incidentally, is still surviving today (thestreet.com).

More than anything else, the book illustrates the pressures that a hedge-fund manager faces. The author portrays Jim Cramer as a volatile personality who can be charming at the best of times but when things turn against him in the market, he smashes phones and computers (his secretary keeps a backup store of phones for these occasions), and reduces his staff to tears (the author grew to dread going to the office towards the end). For an industry which increasingly focuses not just on long-term returns but also now on short-term (say quarterly or even monthly) performance, the pressure to outperform is tremendous. No wonder, also, that Jim Cramer, for all his temper, never fails to treat his biggest investors courteously.

One also reads about certain trading strategies that are employed by these institutions. For Cramer, the key to achieving consistent daily returns is to have a competitive advantage to costs and information. Since his fund trades actively and has reasonable scale, whichever broker gets his business would have access to excellent commissions. Hence Jim Cramer plays them off against each other to get the best rates and also the earliest access to broker reports (which stocks are going to be upgraded, downgraded etc). When the upgraded stock has its inevitable run once the report is made public, he can unload it onto strong buying interest. Simple, but the small investor has to think twice before buying on broker upgrades next time, since he might be taking over from early birds who have already caught the worm; and furthermore, brokers are not working for the public, but for their biggest clients. Thus, one has to be selective in adopting such opinions and employ a degree of independent thinking and judgment.

The book is a page-turner due to its good pacing, numerous anecdotes, and acute description of the various characters, not just Jim Cramer but also the various staff who are terrorised under his watch. But it is a subjective account, as it is for most such "personal experience" books. The author parted with Jim Cramer on bad terms, so the tendency might have been to exaggerate things a little on the part of Jim Cramer.

All in all, a very readable book (at just over 200 pages) for an inside look at the operations of a hedge fund. Check it out on the NLB Catalogue.

Fooled by Randomness (Nassim Nicholas Taleb)

2005-06-26T07:29:00.000-07:00

Nassim Nicholas Taleb was a former options trader who was inducted into the Derivatives Strategy Hall of Fame and now operates his own trading firm. This book, however, is not a narrative about his trading experiences, but rather an exploration into the role of randomness and probability in trading markets, and how humans often fail to appreciate these.

There are a few points which are constantly explored throughout the book: one, that successful traders' skills are often overestimated while the role of randomness is underplayed; two, that one should often be cynical about statistics and think about them more analytically; three, that humans are NOT genetically predisposed to consider decisions in probabilistic terms and often make errors in probabilistic thinking; and four, that a consequence of point three is that the probability of rare events occurring is often underestimated (in fact, he has made a career out of this fact by buying out-of-the-money options on improbable price actions transpiring).

To elaborate on these main points, NN Taleb covers a vast number of concepts in the book. He describes the probability distribution skewness, which leads to him seeking out "low probability, high return" bets rather than "high probability, average return" ones. There is the problem of induction, which states that theories can only be disproved but cannot be proven; hence the "black swan" problem, where a theory that "all swans are white" can be disproved straightaway by discovery of one black swan. The survivorship bias, which might be well-known to seasoned unit trust investors, is explored in detail: one corollary of this is that we should be careful about picking unit trusts based on their past records because out of a large sample size of funds there are always going to be a small proportion that will have made money consistently over the last few years, simply by virtue of probability and randomness rather than strong elements of latent skill being involved. And quite a number of human behavioural tendencies which are detrimental to trading are discussed: path dependency of beliefs, causality, tendency to interpret noise as information. Readers will appreciate that he describes these qualitatively with no excessive recourse to quantitative mathematics, and he uses a lot of examples to illustrate his point.

The fact that one can tell he believes fervently in his subject makes the book an even better read. However, his style of writing suggests that he is not one to suffer fools gladly. He is contemptuous of traders who trumpet their gains or those are married to their points of view, scientists who cannot adjust their viewpoints once they have formed them even in the face of new evidence, even the mass media whom he accuses of constantly being unable to analyse statistics intelligently.

All in all, this is a good read to get a proper statistical and probabilistic perspective of not just trading, but life in general.

Battle for Investment Survival (Gerald Loeb)

2005-06-14T18:33:00.000-07:00

Gerald Loeb was a successful stockbroker turned newspaper columnist in the 1930s, when the Great Depression had taken its toll on a generation and converted them to a nation of stock skeptics. Gerald Loeb's beliefs that the investor should treat investment as being a battle where one has to be constantly vigilant and should be active in trading and out were apparently mainstream thinking during his time, quite possibly due to the bear that had been casting a dark pall over the market then. As John Rothchild (himself a well-known financial author) noted in his foreword to the book, many of his beliefs are antithetical to the now well-known "buy-and-hold" strategy; yet he recommends the book as a good read as there are many good points in Gerald Loeb's investment philosophy. As they say, there are many ways to skin a cat.

The book is divided into many short articles, each usually not more than four to five pages long. In each, Gerald Loeb discusses a particular issue, such as reading financial statements, reading the technical position of the market, cash allocation strategy, his views on diversification etc. There are 33 main articles and another 45 in his postscript section, the latter being drawn from his newspaper columns.

As always, when discussing such investment books the emphasis is placed on the author's philosophy. Gerald Loeb has a few key beliefs. His overall investment philosophy is that intelligent speculation is a preferable strategy to buy-and-hold. In asset allocation, his view is that having an ever-liquid account (ie. with plenty of cash) is preferable to being heavily in stocks, and that being concentrated in a few stocks is better than being diversified. In terms of stock selection, he views a downtrodden stock whose outlook the market is pessimistic about as the best kind to buy, in contrast to the blue chip stock which might already be fully valued due to market optimism. Also, he has a highly pragmatic view of stock valuation, where he notes that there are no real theoretical equilibrium prices that a stock should command; the investor must assess the overall position and mood of the market and take a general qualitative position of the price movement accordingly. The corollary of course is that he will not buy when the market's technical position is poor (ie. economy is on downturn and there is undergoing stock distribution).

Clearly his opinions are debatable in the context of today's mainstream views, yet for the investor who is always open to new ideas and does not restrict himself to one investment technique there is plenty to learn from Gerald Loeb. Clearly he does not see buying stocks for the dividends they bring, but rather, for the capital appreciation. And he picks downtrodden stocks whose capital appreciation potential is highest when they are revalued (due to prior pessimism turning to optimism) and he makes it clear the investor should be looking at doubling or more of the share price: this is a clear "low probability-high returns" strategy. And again it ties in with his investment philosophy, because the high volatility (both in price and fundamentals) of this kind of stock demands the active attention of the investor. His top-down approach to stock buying (ie. watching market movements before deciding whether to buy stocks) is an illustration of the belief that three factors influence share price: market, sector and company (and not just the last one), and also a way to insure that one does not "catch a falling knife". And like many great investors, he believes in concentrating firepower on a few stocks (he calls it putting all the eggs in one basket) rather than diversifying and spreading resources, and hence potential returns, too thin

As those who have read my last few reviews will have noted, my cheapskate strategy to read the book is to borrow it from a library, and this book is no different. Check it up on the NLB Catalogue.

John Neff on Investing (John Neff)

2005-06-11T21:46:00.000-07:00

As John Neff's book came up for mention in the Sunday Times today, I thought I would cover his book on investing. I had read his book and I can relate to many parts of his investing philosophy. Maybe others might find his ideas useful too.

John Neff managed the Vanguard Windsor fund for thirty-one years, retiring in 1995. Over these years his fund had an annual compound return of 15%, outperforming the market 22 out of the 31 years. This is a remarkable record given that a large part of this period was during the stagflation years of the 1970s. He also, incidentally, emerged as the choice of many money managers to manage their own money, in several polls (see Money Masters of Our Time.

The book is divided into three sections, where part one is an account of how he came into the fund management business, part two describes his investing philosophy, while the last part is a sort of market journal describing his trades.

John Neff's writing is not a particularly enthralling read, and I myself have not read Parts 1 and 3 in detail. It is Part 2 that I would recommend the reader direct his attention on.

In this part, John Neff introduces his investment philosophy. He is best described as a value investor, and key points of his method resonate with me. His stock picking revolves centrally around picking stocks with low PE, and he explains why: low PE stocks often have mediocre prospects, but occasionally they are misunderstood by the market. In more optimistic times, the revaluation impact is twofold: price rises more than in proportion with earnings growth, because PE valuation is also raised upwards. Secondly, he likes to look regularly through recent losers in search of familiar names that have dropped significantly, say 40 or 50%, from their peak; this is a logical approach since fundamentals of companies with reasonable scale and brand names do not lose their fundamentals easily, and might have been oversold. A third insight is his emphasis on dividend yield; he views this as contributing significantly to total investment return, and also as "free money" since analysts typically peg target prices to earnings which don't change whether dividends are distributed or not; in this respect he differs from Warren Buffett who doesn't mind reinvestment of profits back into the company.

His approach also reminds me of a position trader in some aspects. Firstly, he doesn't believe in excessive diversification; he is ready to concentrate assets in sectors which he believes are ready to explode; one of his favourites seems to be oil plays and he had put up to a quarter of his funds in this sector at times. Secondly, a class of stocks he likes are cyclicals such as mining (commodities). In such stocks PE is less illuminating, accurate research on the state of the market is paramount, and requires the investor to take a clear position on the overall market outlook in terms of demand and supply; Neff's repeated success in buying low and selling high in these stocks does suggest his market instincts. Thirdly, he says that all stocks in his portfolio are for sale at the right price; he does not fall in love with his stocks. In this aspect he appears to be ready to take profits and plough them into other promising stocks, rather than let them run.

If you find that my description of his methods sound interesting to you, you could go borrow his book from one of the National Library outlets.

One Up on Wall Street (Peter Lynch)

2005-06-08T01:20:00.000-07:00

One of the modern classics. For those who don't know Fidelity, it is the world's largest unit trust company, and Peter Lynch was the manager of its flagship Magellan Fund whose world-beating returns from the late 1970s to 1990 made Fidelity great. His fame as a stock investor is probably second only to that of Warren Buffett.

The book was written one year before Lynch retired, in 1989, but it is hardly a boring chronological description of Peter Lynch's investing life. Instead, it is a description of his investing philosophy, sprinkled with appropriate examples of stocks he had succeeded and failed with.

Perhaps the most well-known theme that is espoused in the book is that the small investor should pick stocks of companies which they are familiar with and know from personal experience to be doing well. Lynch himself has practised this theme throughout his investing career, observing consumer patterns while accompanying his wife to the mall. He also describes his preference for small caps, which he feels have more upside (higher risk, higher reward), and because they focus on a few products (due to their size), have greater leverage to any improvements in the particular product sectors. He also made famous in this book the term "ten-bagger" (meaning a stock which has risen 10 times its original price), which has been the dream of countless investors ever since. Lastly, his description of how he classifies different types of stocks (slow growers,stalwarts,cyclicals,fast growers,turnarounds,asset plays) is highly insightful.

Lynch writes with a lot of common sense, and makes things easy for the reader as he does not bring technical terms in. His often self-deprecating and humourous comments of himself, and his unmistakable enthusiasm for his craft, also bring a personal touch that draws the reader in further. You don't want to put the book down until you have done with it.

If It's Raining in Brazil, Buy Starbucks (Peter Navarro)

2005-06-05T19:21:00.000-07:00

One of the main challenges that a stock market newbie faces is how to get acquainted with the general workings of the economy and its impact on the stock market. He is bombarded with endless streams of information every day: unemployment data, inflation risks, interest rates, budget deficits, trade deficits, commodity prices. How does that affect the stock market outlook?

Although I don't generally think market timing works, as I believe to a certain extent in the Efficient Market Hypothesis (prices already price in the future outlook), it is nevertheless important to understand qualitatively the relationships between the stock market cycle and the business cycle, and consequently how a fundamentals investor can shape his asset allocation in response to news and his overall reading of the future outlook of the market. This is where "Raining in Brazil" (shortform) comes in.

The author calls this "macrowave investing": understanding the links between major economic events and the movements in individual stocks, and explaining how these forces impact specific sectors of the stock market. There are three parts to the book. The first part introduces the general macroeconomic events that can affect the economy and a history plus description of tools and philosophies employed by governments to stabilise the economy. The second describes some investing principles that a "macrowave investor" (basically a sector investor) should follow, and lists many useful investing guidelines/advice. The last part elaborates more on the intracacies of key macroeconomic events, such as recession, inflation, budget and trade deficits, and even natural disasters.

The author's description of the various macroeconomic factors is quite good and concise, a good grounding for those with no previous economic education. The investing guidelines basically can be simplified down to four words:"buy with the trend". What I have found most interesting is one chapter in Part 3: Stocks to Pedal During The Business Cycle. This chapter illustrates the general business cycle, how the stock market cycle ties in with it, and what stocks to buy during each stage of the cycle. It has given me insight into sector allocation, and I have observed how well this description has panned out over the last two years as the economy recovered then stabilised. Technology stocks spearheaded the initial price surge as the economy recovered, as consumer demand rebounded. This was followed by capital goods (eg. machinery) because there was heavy investment in them to increase production to cope with consumer demand. This inevitably led to strong demand for basic materials like oil and metals, and then rising margins in these industries due to tight supply. The entire process is described in the book.

Again, this book is available in libraries so users can just check up its availability on the NLB Catalogue.

Reminiscences of a Stock Operator (Edwin Lefevre)

2005-06-05T02:18:00.000-07:00

This classic, written in 1923, is regarded as one of the best financial books ever written, and it is not difficult to see why after just reading the first few pages. Highly entertaining, filled with knowledge on how to play the stock market in a logical way, coupled with an infectious excitement through its pacy narration, it is one of the few books that I have read and re-read for inspiration.

The book chronicles the experiences and thoughts of Larry Livingstone, which was actually a pseudonym for Jesse Livermore, widely regarded as the greatest trader who ever lived, gainer and loser of several multi-million fortunes in his lifetime. The persona (Larry Livingston) describes how he honed his trading skills in the "bucket shops" (a type of stockbroker now made illegal) and solidified his reputation as the "Boy Plunger" in the big markets in New York; and his market experiences which shaped his trading philosophies. His startling insights are what keep many traders turning back to it again and again. A sample of the flavour of this book:

"I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit."

"After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It was never my thinking that made the big money for me. It was always my sitting..... Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn."

"I had made a mistake. But where? I was bearish in a bear market. That was wise. I had sold stocks short. That was proper. I had sold them too soon. That was costly. My position was right but my play was wrong."

I hope this has whetted your appetite. It has surely whetted mine and I'm going off to read it for a third time.

By the way, if you're getting it, make sure you get the Wiley Classic paperback edition, NOT the illustrated large hardcover which I recently saw at Borders. The content is different; the original is the former.

Money Masters of Our Time (John Train)

2005-06-04T19:05:00.000-07:00

There is a saying that there are only three things that drive men: an appetite, an idea or an inspiration. Quite often achievements of higher quality are derived from the latter two, as they derive less from the personal wants of the individual and draw on spiritual energies which are often more enduring.

But I digress. The reason why I mentioned the above quote was to illustrate the use for a book such as "Money Masters" for a budding investor. As the title suggests, it is a book which explores the recognised masters of investment, which in this book is mainly (and thankfully) focussed on equities. The reader can draw inspiration from interviews with these famous personalities of the investment world. I found that the sections that interested me most were those of some lesser known investors, such as John Neff and his value- and low PE-oriented approach.

There are 17 money masters in the book who are given their separate sections. There are the familiar personalities like Warren Buffett, Peter Lynch and George Soros; there are also lesser known ones like Richard Rainwater and Mark Lightbrown (though some more knowledgeable investment world insiders might differ). The book provides a concise summary of the investment techniques, experiences and even personal lives of these individuals, and provides better breadth of coverage; many other investment books focus on single personalities who are more well-known and offer greater depth of coverage. In this aspect it fulfils a niche. Budding investors can learn about the variety of investment "roads" that can lead to "Rome", and then read up further on the investor who best personifies their favourite technique/philosophy.

John Train writes with an easy style where he first provides a general summary of the investor, outlines his history and track record, describes the investor's appearance: he gets the reader comfortable with the investor as a person before he delves into the meat of the section: the investment techniques, philosophies etc.

This is one investment book worth reading for the starting investor. It is available at the libraries (NLB Catalogue) so you don't have to fork out your money.

A site to introduce good investment books

2005-06-04T08:23:00.000-07:00

(P.S: Sorry for any disturbances the advertisements above may have caused you)
I have observed that there is growing interest in stocks investment in Singapore; there are more and more people surfing the online share forums and hanging around the Personal Investment bookshelves in Borders. At the same time, this new generation of stock holders are understandably uncertain about how to build up their knowledge of the market.

I can empathise with that because I was a rookie investor once too. With beginners' luck, I made money on my first few trades, but without a consistent method and sufficient knowledge of how businesses and share prices function the gains soon turned to losses. It became clear to me that it was important to build up a framework of understanding in this field, in the way that subjects like Mathematics or Physics were structured in school. Of course, the structuring and teaching of the latter was done for us, for investing we have to structure the self-improvement process ourselves.

I remain a firm believer that market experience through actual buying and selling is the best teacher of trading psychology, but understanding of the key parts of investing, such as market history, theory of investment, philosophy, key players etc, can all be culled, integrated and internalised through the many investment books on the market today. Sometimes I find that the older the book, the more relevant and enduring the teachings (some might recognise this as the "survivorship bias"-- these classics have survived to this day precisely because they have proven to be relevant over the years).

I shall provide descriptions in this site of interesting investment books I have read. Those that I cover will be books that I have read before; I have quite a voracious appetite for investment books. As space is limited, I will mainly focus on my general opinions about the usefulness of the book. Those interested can check up sites such as Amazon to get more details, such as the table of contents for the book.

Sitemap

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All Books

When Markets Collide

The Aggressive Conservative Investor

Wealth, Wars and Wisdom

Trend Following

Hot Commodities

The Alchemy of Finance

How I Made $2,000,000 in the Stock Market

Bringing Down The House

Liar's Poker

How to make money in stocks

Market Wizards

One Billion Customers

Trade Like Warren Buffett

Hedgehogging

Financial Shenanigans

Streetsmart Guide to Short Selling

A Random Walk Down Wall Street

Asian Eclipse

Value Investing: A Provocative Guide

Bull!

Beating The Street

Learn To Earn

Building the Perfect Portfolio

Shares Investment: Facts and Figures

The Zurich Axioms

A Mathematician Plays the Market

The Five Rules for Successful Stock Investing

Buffettology

Devil Take the Hindmost

The Asian Insider

Common Stocks and Uncommon Profits

Trading with the Enemy

Fooled by Randomness

Battle for Investment Survival

John Neff on Investing

One Up on Wall Street

If It's Raining in Brazil, Buy Starbucks

Reminiscences of a Stock Operator

Money Masters of Our Time

Feedback

2005-04-01T05:35:00.000-08:00

Hindsight is 20/20. If you have any general views on this site, please offer your comments here. It will be very much appreciated. Of course, constructive feedback in the form of suggestions on how to improve the site will be better. Of course again, one man's constructive feedback will be an insult to another, so anyway, just feedback!