Sunday, March 28, 2010

Book Review: The Greatest Trade Ever

The Greatest Trade Ever, by Gregory Zuckerman, is a very good and captivating read. In fact, I will recommend this book to any aspiring investor or trader.

Interesting points that I have learnt from the book:

1) Search for a sound idea. A good start may be 'Which market can I find mispricing?'

2) Look at the odds and probabilities. Little Downside, Huge Upside, and High Probability of occurence.
Structure your bets so that the downside is small.

3) Test and re-test your investment idea. Think contrary and see if your idea is correct.

4) Reverse track when you found that you are wrong

5) Be steadfast to your convictions, even if most peaple disagree.

6) It is extremmely difficult to get people to invest in your idea, when you are against the concensus. Most people will agree that betting against the concensus is a great profit-making method, but few will be able to put the method into practice.

7) Know when to strike (i.e. buy/short) is important. Sometimes, you may be hurt if you are too early.

8) People are psychologically inclined not to let the winners run.

9) Let the winners run, until winners overshoot.

10) Know what's acceptable to the investors

11) Keep the cards close to your chest.

12) Be less emotional.

13) Find new ideas relentlessly. New ideas are likely to come from new people, wide reading and new investment products

Difference between Investor and Journalist/Blogger

Ultimi Barbarorum has a great post on differentiating between investor and journalist/blogger:

It's a topic that I would not have thought about, and yet it is one that I should have thought about, especially since I am a avid reader of blogs and news.

And, I can't find myself re-reading and agreeing with this paragraph found in the post:

Much more than philosophy, investing should be a solitary activity. A group of people or colleagues you can check your ideas with is a good thing, but you must take responsibility for your investments yourself. You will receive conflicting advice, all of which will sound plausible but most of which is wrong. Consider that 98% of the people you encounter who claim to know what they are talking about simply don’t, and have as much chance of being right about these things as you do. You will find out about things you need to know much much later than the professionals. You will need to make most of your mistakes yourself, and it will take a long time and much capital to gain the context to be able to properly learn from them. Being in the market is the only way to get its benefits, the positive black swans that occur all the time and which rarely get written about, but know also that professionals as a rule consider retail investors to be the patsy in the market. In their minds they are the sheep, and the sheep get shorn. The greater level of sophistication you are likely to get out of watching Mad Money or subscribing to some websites may help, but it is a drop in the ocean compared to what you will need to succeed.

Sunday, March 14, 2010

Book Review: How The Wise Decide

How the Wise Decide is authored by Byrn Z and Aaron S.

It is an interesting book as it profiles the good CEOs on how decision are made. Nevertheless, the book commit a common scientific error: the lack of control group.

Interesting points:

1) Go to the source. Check with the source of the raw information before making the decision.
- Make this approach routine.
- Cultivate long-lasting contacts with the sources
- Know which source is more important, and which source is less important

2) Meet people who tend to disagree or tend to state their independent stand.
- Get all people to say their viewpoint at least once.
- People may quarrel over their viewpoints. Do not allow people to carry any bad feelings beyond the meeting.
- Seek differing opinions. Different opinions help to light up the blind spots.
- Ask for formal commitment to the decision, if you think that the person is likely to disagree with the decision silently.

3) Do not be afraid of the risk behind the decision.
- Check thoroughly what is the risk.
- Reward people who have taken the intelligent risk.
- Experiment the risky idea (i.e. setting up a small scale operation to test the idea)
- Create a risk-tolerant culture.

4) Align the decision with the vision
- Create the correct vision

5) Listen with Purpose
- Ask the correct questions
- Question the assumptions
- Listen to the people who have to carry out the decision

6) Be Transparent
- Be consistent
- Over-emphasize the important decisions, so that people will place it on higher order and implement it.
- Do postmortems on the decisions taken.

Sunday, March 7, 2010

Book Review : How We Decide

How We Decide is written by Jonah Lehrer, an editor/writer.

It is a good book, especially for people who wish to learn how to make better decisions.

I will attempt to list some interesting points that I read from the book. Read the book if you wish to make better decisions.

Some interesting points:
1) We have two parallel brains: the emotional brain and the rational brain.

2) The emotional brain makes decisions very fast but its accuracy depends on experience. Situations that require fast decisions would need the emotional brain. Emotional brain is better than rational brain for repetitive situations, as emotional brain recognizes patterns faster than the rational brain.

3) The rational brain is useful in new situations or situations where time is not a factor.

4) Also, always run a rational check on emotional decisions if time permits. This will help to reduce errors.

5) To make the decisions more accurate, one has to spend time to evaluate the decisions, aka spot mistakes in previous decisions.

6) Don't forget that we have blind spots.

7) It will be good to list down the knowns and the unknowns before coming to the decision.

8) Whenever you make a decision, be aware of the type of decision you are making and the kind of thought process it requires.

Friday, March 5, 2010

Secret to Investing Success!?

It's interesting to see a thread on secrets to investing success in Next Insight. And in that thread, you'll see people advocating value investing, quoting Buffet, asking for high dividend stocks etc.

It's interesting because I disagree.

I disagree because I feel that there is no one secret to investing success.

I think that each starting investor has to find their own path, and that path will be their own secret to investment success.

First, the investor should find the suitable investment philosophy i.e. whether technical or fundamentals, short-term or long-term, diversified or concentrated etc. A suitable investment philosophy should fit his own psychological traits.

Next, the investor has to consistently refine or expand his strategy. For a value investor, it may be starting with low P/E stocks and then moving to low P/B stocks. Or starting with quantitative ratios and moving on to qualitative measures.

In between, the investor also has to learn his own psychological traits, and either change the investment methods to fit his psyche or change his psyche to fit the investment methods. Personally, I think the former is easier, since Jesse Livermore chose the latter and died a pauper.

And when does an investor know that this investing philosophy is suitable? When the investor feels that he needs not search for another philosophy.

And when does an investor know that this investing strategy is right for him? Through his experiences and investing results over a full market cycle.

And what is one essential trait that most successful investors share? Obsession. He must be, to some extent, obsessed about investing. I do not mean about being crazy about the money. I mean being crazy about the philosophy, the strategy. For example, if you read Buffett's biography, when Buffett and Gates meet each other, you will know that they will talk about what makes a successful business. They do not talk about money.

For more information on finding an investing path, you may find Mark Tier's book "The Winning Investment Habits of Warren Buffett & George Soros" extremely useful.

And what if one does not wish to pay the price to become a successful investor. There are a few alternatives here. One, buy index funds or exchange-traded fund on stock indices. Two, find a good financial advisor. Three, earn very high pay.