Books on investment

[chin]

I always like to read books about financial markets, ideas, companies, people, etc.... but hardly books on how to invest, valuation method, or other similar 'practical' investment books.

The last how-to book I read was "How to Make $1,000,000 in the Stock Market Automatically" in 2006. The book is about a mechanical method trying to profit from volatility. The idea is very similar to the constantly rebalanced portfolio method originally conceived by Claude Shannon perhaps 40 years ago (as told in Fortune's Formula.)

[chin]

Anyway, the reasons I start this new thread are not just because of recent exchange on chartist vs fundamentalist in the 書中自有黃金屋 thread, but also because I recently  read a book "The Dhandho Investor" by Mohnish Pabrai.

This is a short book on value investing. The author is a huge fan of Warren Buffet. I got to know the book from an Ed Thorp article.

The first part of the book is stories of successful business ventures, especially the Asian Indians who now owns most of the motels in the US. The key lesson is buy value & limit downside & be contrarian. The second part shifted the focus to "rules" on how to invest in value. Just like any other books on success stories, the examples may be subject to survior bias, and I also suspect there are a fair amount of urban legends in the stories.

To me the more interesting part of the book is the author's attempt to articulate "value" in the form of expected value, i.e. sum of all scenarios (probability * payoff). In theory, any time the expected value is >100%, then it's a good investment to make.

In analyse a company's financials and business prospect, I think it's very difficult to accurately assign probabilities & payoffs to various outcomes. To compensate for this difficulty, the author seems to propose that one should only invest if the expected value is approaching 200% or more, thus widen the margin of safety.

Another important philosophy of the author is to concentrate the portfolio (vs diversification) by "Bet Big, Bet Few, Bet Infrequent". This idea contrast sharply to the quantitative investors "Bet Small. Bet Frequent" idea in the Ed Thorp & CRW threads. In the quantitative approach, the probabilities & payoffs can be and indeed are projected accurately and explicitly, thus even a small EV edge, e.g. 102%, can be exploited. If turnover is fast enough, even low margin can translate to high return on capital employed. But in conventional equity investment (the main focus of this book), perhaps the EV cannot be computed accurately, thus lead to the contrast in philosophy?!

[hangchoi]

The best book I read so far about investment is "The Intelligent Investor" by Ben. Graham, the "Mentor" of Warren Buffet.

The most valuable part of this book is not about value investment or valuation, it is about what the "margin of safety" really is......I read that chapter numerous time and it gives me different insight everytime.

For example, people always talks about "diversification". Most people think this is a good practice in order to make a stable return of your portfolio, so that when you have some investment items earning while some losing. But the actual thing is that diversification is based on a portfolio that every items in the protfolio should have a positve return at least. If there are some items losing your money, diversification will only keep you loss.

[chin]

This is the book that I supposed to read when I got my first job as investment analyst.

And yes, mindless diversification mean you are getting the index return, minus the transaction cost.

When I was in college studying economics, one of the first book to read then was Random Walk Down Wall Street. And many of us mistaken the generally over all market efficiency for efficiency in every price. Just like the race betting market, the market in general is efficient, but not necessary every race.