There are timeless and valuable investment books that guide investors in their selection of shares for investments. Their methodologies and gems of ideas are being followed by many investors. Their methods and investment philosophies are even more relevant in today’s climate of stock prices volatility. The following are some priceless books for those who are going into equity investment for the first time.
“The Intelligent Investor – The Definitive Book on Value Investors” by Benjamin Graham was first published in 1949. There are several revised editions ever since Graham passed away in 1976. Graham taught finance classes at Columbia University and managed the respected Graham-Newman investment fund. Graham was the mentor for Warren Buffett who himself has been very successful managing the Berkshire Hathaway.
There is another book that I would recommend: “Benjamin Graham on Value Investing” by Janet Lowe. This book listed 14 points which Graham subscribes to:
1. Be an investor, not a speculator
2. Know the asking price
– Is the business worth as much as the market capitalisation based on current share price?
3. Rake the market for bargains
– Buy stock when its unit price is below the “Net Current Asset Value” per share (after deducting also short-term debt and preference shares)
4. Buy the formula
– buy stock at price below the intrinsic value of the company based on a formula
5. Regard corporate accounting numbers with suspicion
6. Don’t stress out
– Allow a band of 20% above or below the intrinsic value as range of fair value
7. Don’t sweat the mathematics
– when calculating stock values stick to simple arithmetic
8. Diversify, rule#1
– Investors should have minimum 25% in bonds and another minimum 25% in equity. Investor can divide the remaining 50% between the two according to the varying stock and bond prices.
9. Diversify, rule #2
– Graham believes in holding large number of stocks with relatively small number of shares of each stock. Graham suggested holding at least 30 different stocks.
10. When in doubt, stick to quality
– Buy quality stock at reasonable price and not at the upper reaches of the bull markets. Quality refers to good earnings, solid dividend histories, low debts and reasonable Price to Earning (PE) ratio.
11. Dividends as a clue
– Companies with a long record of paying reasonable dividends reward shareholders.
12. Defend your shareholder rights, if you are unsatisfied with policies of companies
13. Be Patient, and prepared for poor showings of the overall stock market
14. Think for yourself, don’t follow the crowd
“The Warren Buffett Way – Investment Strategies of the World’s Greatest Investor” by Robert G. Hagstrom, Jr. Warren Buffett has been the second richest man of the world consistently after Bill Gates. Buffett earns his fortune from investments whereas the Gates is the founder of Microsoft. Investments can make one a very rich man despite one does not produce products or software.
So what is Warren Buffet Way?
Buffett does careful and in-depth analysis of each stock before he buys big on this stock when it is undervalued. His strategy is to buy and hold stock for a number of years instead of buying and selling at short term. His analysis of companies includes:
1. Long history of operating profits
2. Company resources are generating profits
3. High returns on equity (ROE) of at least 15%
4. Shares which are cheap relative to real cash earnings (low share price to free cash flow)
5. Company is creating profits for shareholders in form of higher stock prices.
Another great investor guru is Peter Lynch. His National Bestseller “One Up on Wall Street” is an easy read.
The book is divided into 3 parts: Part 1 – Preparing to Invest; Part 2 – Picking Winners; Part 3 – The Long-term View. Each chapter provides tried and tested methods of picking winners and staying invested. It also provides keys to some accounting ratios to look out for in the financial statements.
Peter Lynch placed stocks into 6 general categories and suggested ways to adapt investment strategies for each category:
1. Slow Growers
3. Fast Growers
5. Assets Plays
Overall, he focused on sustainable earnings growth, relatively undiscovered companies, insider buying by directors, and manageable debt levels.
(Source: Jack Hough’s “Your Next Great Stock” published by John Wiley Sons, Inc. – reported by Sunday Times 6 January 2008)
“Common Stocks and Uncommon Profits” by Philip A. Fisher focused on qualitative aspects of the company instead of the quantitative financial mathematics. He provides 15 points which a shrewd investor should think about before investing. (Source: “The Best I’ve Read” by John Tan writing in Pulses, February 2008)
3 points were covered in Pulses:
1. Does the company have products or services with sufficient market potential to make sizeable increase in sales for at least several years?
2. Does the company have short-range or long-range outlook with regards to profits?
3. Does the management talk freely to investors about its affairs when things are going well but clam up when troubles and disappointments occur?
Written on 2/8/2008 5:46 PM
Copyright © 2008, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.