One up on Wall Street
This is a book about common sense. Peter Lynch is a bit of an investment legend so it is worth listening to what he has to say, but without wishing to over-simplify I would sum it up as:
- You have more knowledge than the institutional investor in terms of what is happening on your high street that is new
- It will be a while before the institutional investor notices what is on your high street or in your area of particular expertise
- Companies have to be a certain size before they are noticed and you can get in before that point
- Base your analysis on what appears to be good. Good quality food, clothing etc. Build a story – You wouldn’t buy a house after looking at it for 5 minutes. Dig around in the “basement” of the stock in the same way you would when buying a house. It is not an accident that most people make money on the houses they buy. The do their due diligence.
- It doesn’t have to be retail. For example if you are an expert in car parts and you see a new innovation. Basically focus on what you are knowledgeable about
- Try to hold for long periods and ignore short term volatility – another reason why people often make money on houses and lose money on stocks is that they are not patient enough.
- Once the professionals pick up on the company you like, they will often then bid it up to way over its intrinsic value. This is the point to exit
There are a few health checks, the most important of which is probably this:
You need to think about whether the business is scalable. A great local Pizza restaurant may not work if it is too local. Perhaps the success depends upon the community rather than the business. Great small businesses don’t always make great large businesses.
This book is worth a read, particularly if you are starting out in the investment world. It is clearly written and has some sound advice. There are some interesting and useful tips in terms of how to value companies, at a simplistic level – probably not in enough detail but quite a useful primer for the subject.
If you are more advanced I’d say you can safely miss this one off your reading list without doing any damage to your investment performance.
You can get your copy Here
- ISBN-10: 0743200403
- ISBN-13: 978-0743200400
Probably one of my all time favourite books for setting out the origins of risk measurement in an easily understandable way. This was the book given to me by my first mentor in the markets in the late 90s who could clearly see that my education in finance was in need of some extension.
Bernstein sets out the way in which the world of gambling (and in particular dice) informed the discussion around probability of certain outcomes. So for example the probability of a fair dice being thrown which comes up 6 is 1/6. The next time you throw the dice, the probability of getting a 6 is the same, 1/6. The fact that a 6 was thrown last time does not change the probability of a 6 being thrown the next time.
The book explores the evolution of these ideas and then in turn the evolution of the application of these ideas to the real world. Although the latest edition of the book was written in 1998, there are a lot of ideas here which were very applicable to the credit crunch and the over-reliance on mathematical models using these types of probability calculations.
The difference between a dice and the real world is that the odds of throwing a six are not affected by what goes before it. Conversely, the odds of a bank failing or a stock falling are very much affected by the events that precede it, and there are many events to consider. With a finite number of outcomes (dice), what happened in the past is a good guide to what may happen in the future.
How does this relate to investment? I think this is a great book to make you consider your own definition of risk and to question how you are quantifying that risk. I often see traders who believe that they are able to calculate all the angles and have a “surefire” winning strategy. This is often through back-testing to see how they would have done in the past. In a closed system (dice) this should give you a good idea of the odds of success. But the markets are not closed systems. I remember colleagues saying that banks rarely if ever defaulted because of the implicit Government guarantees – until of course they did, en masse. Within a very short space of time Lehman Brothers defaulted, AIG had to be rescued, Iceland defaulted (and so did it’s banks), WAMU, Ireland, Greece….
I was in a meeting the other day and a risk manager said the deadly words “that was a once in a lifetime event”. He clearly is thinking of the world as a closed system and therefore the past will guide the potential future. My response was to wonder how he knew. We are operating in the markets with an incomplete data set because there is no limit to what could happen in the future. There is nothing you can do about that. There is no model that will overcome that. Risk management has to be about recognising that you are limited in your ability to predict the future and you must position yourself accordingly. Against the Gods is a great way to cement in your mind this key difference between probability and risk.
Get your copy here.
I love this book. It takes a wide range of different scenarios and explains how predictability is often seen in hindsight where in fact, prior to the event, no such logic existed.
It poses the interesting question as to whether the 5 or 10 year good track record investor is a genius or a “lucky idiot”. Taleb demonstrates in easy to understand statistical argument that if you take a large enough sample size of incompetent money managers and run their funds through 10 years, you will be left with a very small sample of incredibly successful, yet still incompetent, people who think they are geniuses.
You can get your copy here. I highly recommend you do – you may be a genius in the markets, but you probably have a better chance of staying that way if you at least entertain the idea that you may be a lucky idiot:Fooled by Randomness
Current Portfolio Value £187,765
So it’s been a while. Need to get more regular with this thing! Glencore, my favourite share of the year continues to perform and is now my largest holding at just under £50k.
I’ve been reading a lot of Berkshire Hathaway reports recently. There is so much value in just catching up on the musings of Warren Buffet through the years. Most of what he says is timeless wisdom rather than point in time commentary and so it is of huge value even now to read the letters from 20, or 30 years ago. They are free at www.berkshirehathaway.com
Also there are Charlie Munger’s letters to Westco shareholders which are a very good investment of time. I think Charlie is sometimes underestimated because he doesn’t have the public profile of Warren but his books show a massive intellect.
There is a huge amount of free information out there. The information that isn’t free is cheap (relatively). You don’t need 3 month long training courses or expensive “support” packages. In my view you need to read a lot of books and know the difference between trading and gambling.
I’m going to be doing some book reviews over the coming weeks, highlighting what I have found to be the best advice as well as some inspiring stories.
The market has been a bit choppy since President Trump has come to town. Interest rate policy, Sterling devaluation and of course the ongoing tragic events in London and elsewhere are all contributing to the sense of unease. However, if you aren’t gambling with money you don’t have and are instead investing / trading over the medium term, none of those things should stop you making money in the markets.
GLA and DYOR