Book of Wise Investors

Having different perspectives to a problem situation will result in better solutions surfacing. In other words, using multiple mental models to view the same problem situation. This is true in medicine as much as in equities investing also. Fundamental and technical investing may well be of different schools of thoughts but they actually got no conflicts.

Fundamental analysis involves looking over and analyzing the company three types of financial statements and business models while technical analysis is more towards observing and detecting price patterns and trends and developing strategies to exploit them. No amount of candlestick…

“I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.”

People say that investing is risky. When they hear the word – invest, they usually think that it is another synonym for gambling. While there are two words that mean the same thing in English Language, investing and gambling definitely do not mean the same.

There is no certainty in gambling; only increase the odds in your flavor…

“I’d be a bum on the street with a tin cup if the markets were efficient.”

In both academic environment and investment world, there is this efficient market hypothesis which states those stock markets and any other prices on traded assets like bonds and property is also efficiently changes to reflect the true value of the assets. But there are a number of reasons why stock market is always inefficient and why it will remain so in future.

1. 90% of trades, buying and selling is done by institutional investors

These institutional investors include banks, insurance companies, pension funds, mutual…

When it comes to investing for greater returns for ten years down the road, dollar cost averaging every single month of the year regardless of the prices of the stock market is not a very wise choice, especially since prices of equities always swings like a pendulum. While we all cannot determine the top and the bottom, we can at least know where the general top and bottom areas lie.

Be it enter the stock market through direct stock ownerships, actively managed mutual funds or passively managed index funds, it will be wise to at least know how to detect…

The standard and most talked about measure of risk in finance is standard deviation. While standard deviation has its reasons for existence in academic literature, a more applicable and intuitive measure of risk would be drawdown.

The drawdown of an investment is simply defined as the largest loss that occurs in the past. That is the difference between the highest and lowest price in all the historical price movements of the asset. Measurement of drawdown needs to consider the time period. In other words, the percentage lost from the highest point to the lowest point within a period.

In equation…

There are many three days stock trading seminars claiming that one can beat the market by consistently earning positive returns, or at least most of the time such that the overall returns over the long run is positive.

Then the high priests of finance, going by the names of financial planners, financial advisers, etc, in the wealth management industry that repeatedly drills you in the head that because it is difficult to beat the market when even professionals in this area are unable to do so consistently, as a result, you should concentrate on your job and profession, then turn…

There exists a belief that diversification not only reduces risk but also returns. In fact, the world richest investors become rich not by spreading all the eggs into as many baskets as possible but by focusing on “a few” outstanding companies. However, we ordinary investors don’t have the nerves and guts to place more than 50% of our net worth in new and untested companies.

But one does have to note that, at least based on historical data, most low price-to-book ratios does yield higher returns over the long run than investment grades blue chips, as far as…

Before continuing, it is good to recap the definition of dividend yield.

Dividend yield = dividend per share received / price of one share

Other than equity risk premium to measure whether stock market as a whole is normal/under-valued/over-valued, I wonder and have considered that dividend yield is another good indicator as well.

The reason why I came to this conclusion is as follows,

You see, as far as an individual company is concerned, we will never know more private and inside information than the managers running the company even if you own one share of the company and technically…