My Top 5 Investment Basics Books, & why?

[srisaurabh2000]

Guess Pat Dorsey’s sales have gone up after Donald’s recommendation.

Even I got mine a couple of days back and the book looks interesting.

[Donald]

@rk1771

One of the Gem which is missing here is “Stocks for the Long Run” by Jeremy Siegel. It is about examination of various stock selection assumption. When we select any stock, knowingly or unknowingly, we are operating on various assumptions, most of them are untested. This book test many of those assumptions. After reading this book, many of my assumptions are shaken. For example I used to think that as Indian GDP is growing at a fast pace, Indian Stock market is bound to perform well… this book showed that historically stock market has not performed well in many fast growing economies. This book shaked many of my assumptions and forced me to rethink on many such assumptions. In my view it is a must in every investor’s library.

Thanks Rajesh. I have this book but got it after the other Siegel book “Furture for Investors” which I found fascinating. And never gave this book its due perhaps - sort of skimped through it:)

The points you mention can make for interesting insights. Looking forward to reading the book again.

-Donald

[Donald]

@giridesh3

These are excellent books mentioned by many people. My list all the above would be…

Manias, Panics and Crashes By Charles P. Kindleberger. This is history of financial crises over the centuries. Really scholarly analysis of causes and effects of the crisis. it also gives us the typical sequence in which events usually unfold in such manias and subsequent crashes. It also tells us that the events feed into themselves and things go round in cycle indeed. He says the one reason for the crisis is always expansion of credit panic spreads causing recession/depression etc. Must read if you want to understand why such financial crisis repeat and how to detect these and guard against.

Influence By Robert B. Cialdini. Although not an investment book it will tell you how and why you get influenced into something which you would have ideally avoided. Will help you save from IPOs, stock brokers, tips from friends, herd mentality, investing into your company’s stock in the market etc.

Damodaran on valuation. I think basic understanding of valuing any asset is a must if you are in a business of trading (buying and then selling) any asset. It will also help the readers demystify notion of intrinsic value that we hear so much in all value investing books.

Financial Shenanigans- How to Detect Accounting Gimmicks & Fraud in Financial Reports Third Edition by Howard Schilit. Apropos to what you said above this kind of book may be useful in Indian context where creativity thrives in our businesses…but it is possible that this author has not entirely comprehended the ingenuity of an Indian mind. If any one has comment on certain inadequacy of this book in Indian context then I would like to learn from them.

Another book in the same genre is "Quality of Earnings’ by O’Glove which I am reading now.

Essays Of Warren Buffett - Lessons For Corporate the horse’s mouth. All his wisdom is given here.

the Gods: The Remarkable Story of Risk It is ultimate book on risk, probability etc. It gives the history of evolution of probability theory, measurement of risk management, which assumes that future risks can be understood, measured and to some extent predicted, is the focus of this solid, thoroughgoing history. Probability theory, pioneered by 17th-century French mathematicians Blaise Pascal and Pierre de Fermat, has made possible the design of great bridges, electric power utilities and insurance policies. The statistical sampling methods invented by dour Swiss scientist Jacob Bernoulli undergird diverse activities such as the testing of new drugs, stock-picking and wine tasting. Bernstein (Capital Ideas) animates his narrative with a colorful cast of risk-analyzers, including gambling addict Girolamo Cardano, 16th-century Italian physician to the Pope; and John Maynard Keynes, whose concerns over economic uncertainty compelled him to recommend an active, interventionist role for government. Bernstein also traces the development of business forecasting, game theory, insurance and derivatives, and surveys recent advances in risk forecasting made possible through chaos theory and by the development of neural networks. Very high rating for this book on Amazon is

Hi Girish

Thoughtful, well articulated recommendations.

Think these are excellent additions to the next reading list. Do you mind reproducing this list in the Next Reading List: Beyond the Basics Link: …/…/99479466 thread, else these important books might lose the attention they deserve among the top5 books discussion.

Regards

Donald

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[sunslight1976]

We all are great fans of free cash flow ( FCF). FCF is defined as the amount of cash which can be taken out of the business without hampering the business. It is the amount of net capital generated by the business which is available to be distributed to shareholders. It is calculated as Net cash from operating activities LESS Capex.

My query is as follows: -

Is FCFby above method relevant only for debt free companies.

In case of companies having debt shouldn’t we also look at the amount of debt because the same carries repayment oligations and the same has to be repaid out of the FCF calculated in above manner.

Since there are only handful of companies which are debt free, what is the degree of emphasis we should put on FCF by above method.

Just to give an example: -

A company may have borrowed for expansion in the past. The expansion has just startedto bear fruits and in absence of any further capex the company is generating FCF. In such cases, FCF is first to be utilised to repay debt before it is available to shareholders. Hence, in such scenario I will prefer to look at the number of years the FCF will take to repay the debt first before it is available to shareholders.

Can someone please clarify this doubt?

[kulman]

Investment Psychology Explained: Classic Strategies To Beat The Markets by Martin Pring

I like this book as it covers ‘soft skills’ part of investing/trading. One may be good at fundamental and/or technical analysis yet it is temperament that separates the wheat from the chaff. The book covers examples of both investing and trading legends.

This thought from the book summarizes it all: âFor most of us, the task of beating the market is not difficult, it is the job of beating ourselves that proves to be overwhelmingâ.â

[Donald]

@kulman

Investment Psychology Explained: Classic Strategies To Beat The Markets by Martin Pring

I like this book as it covers ‘soft skills’ part of investing/trading. One may be good at fundamental and/or technical analysis yet it is temperament that separates the wheat from the chaff. The book covers examples of both investing and trading legends.

This thought from the book summarizes it all: most of us, the task of beating the market is not difficult, it is the job of beating ourselves that proves to be

Thanks Manish.

I like the way you described the book and what you got from it. Promptly ordered:)

-Donald

âFor overwhelmingâ.â

[basumallick]

A very good book I read on behavioral finance and its practical applications in the stock markets is

Behavioral Finance And Wealth Management: How To Build Optimal Portfolios That Account For Investor Biases

(http://www.flipkart.com/books/0471745170?pid=1xw3fcvobb&_l=CJHVEqJO3veuHytbACc9dw–&_r=W1tzAzg8suUzIAyi0QwpQA–&ref=dcf8bf0d-3831-4a16-a5de-03d1b4f7bae1)

This book has a chapter each for 22-23 biases and their practical market applications. Then it also has a few case studies of some typical scenarios you face as a fund manager.

Overall interesting book to read.

It is pretty expensive to buy (Rs 2600) but you can get a pdf version from the net.

[sunslight1976]

Will someone please help me with my query on FCF posted under this thread on 11th November, 2011.

[basumallick]

Sandeep, I think, you are right. FCF does not account for debt repayment. So, for a copmany which has a huge debt (and thereby repayment obligation) FCF may not be the best tool for evaluation. Just like it is not the right tool when the company does not generate consistent +ve operating cash flows.

[Donald]

In my limited experience, I haven’t been able to find many companies with consistent levels of Free Cash Flow - especially because our universe of stocks are high growth companies, mostly in early stages of their growth.

Early stage growth companies need to invest most of what they generate and more back into the business. It is unlikely that we will find high FCFs on a consistent basis; Mostly we see for 1 or 2 years after a big capex cycle. Mayur Uniquoters seemed a big exception of consistent FCFs also with high RoEs.

That is a sweet combination and one to latch onto! Sure enough it is also the highest dividend distributor in my portfolio. Every year I am able to buy chunks more of Mayur form the dividend received.

I don’t think we will find many companies with high debt and FCF combination on a consistent basis. Please point me to the cases you have come across, to understand this better.

-Donald

[Vedant]

Hi Sandeep,

Almost everyone here in ValuePickr including you are senior to me, but I would like to make an effort in answering your query based on my ongoing CFA level-1 test preparations.

Cashfow is better analysed dividing into its three components - Cashflow from operations (CFO), Cashflow from financing and Cash flow from Investments. This will give a clear idea as to where the money is going/coming.

Free cash flow to equityis “CFO - Cash Req for Capex + Net Borrowing” ( net brorrowing is “debt raised - debt repaid”). FCFE estimates are used in discount models to arrive at common-stock value as this shows the “dividend paying capacity” of the com. Yes, if there is no debt, the last part -“net borrowing” -does not arise.

Do correct me if there are any gaps (might help in my exams aswell :))

Rgds

Vinod

[sunslight1976]

Just finished reading “Its when you sell that counts” by Don Cassidy. The book was suggested by Neeraj Marathe on his blog.

While there are many books on how to value a stock and eventually when to buy them, there are hardly any books which deals with the other leg but equally important part of the transaction. This book is one of the few which deals with the sell side of the transaction. The book is written in a very very simple language. It deals with how all of us including brokers, institutions, retail investors have a buy bias and how to overcome them. It also explains how due to this bias we continue to hold on to our losers. It explains the emotionalbarrier in selling since there is a finality (death like) scenario attachedin selling a stock.

I suggest all of you to read this book just for a change from other value investing books, valuation and behavioural finance books.

[hitesh2710]

I recently read up Common Stocks and Uncommon Profits again and probably with much more concentration. The first read was just a cursory read since it was followed by multiple readings of One Up on Wall street and hence I found it lacking in flair and good narration.

This time since I focussed more I found that it reflects the Buffet method of having only 20 or so picks over a lifetime but each one should be carefully selected. I

I liked Fisher’s method of investing after careful consideration of each aspect of a company and its future potential. But I feel his methods are difficult to implement unless you have a team of colloborators as we have at valuepickr. All the scuttlebutt, initial research on a stock and then meeting with the management fully prepared with the question list. On deeper thought I think what we all are trying here to do is implement something similar to the fifteen principles of Fisher’s, by dissecting stock and its prospects threadbare and then management meet…

[Donald]

Wonderful Hitesh! Thanks for your discerning comments.

We are going some way there. Let’s hope with more folks joining our efforts, we will gather more momentum!

What’s the trick in re-reading? I have been carrying around the Lynch book for last 1 month…but haven’t gone past the first re-read attempt. Not that I haven’t had enough leisure…its prioritising, i think:(

-Donald

[Donald]

@sunslight1976

Just finished reading “Its when you sell that counts” by Don Cassidy. The book was suggested by Neeraj Marathe on his blog.

Thanks Sandeep.

You bring out very clearly why this book should be on my reading list:) I have become better at selling based on Capital Allocation principles …but I am sure I will learn more from an investing psychology point of view …and that should be very valuable.

Cheers

Donald

[basumallick]

Donald…re-reading is important for me…currently I am re-reading Margin of Safety by Seth Klarman…my own maturity as an investor has increased (hopefully), so what I learn from the re-reading are things I might have missed in the previous reads…So, I maintain a list of books I go back to every few months (or years)…

On the"Its when you sell that counts" by Don Cassidy… I have the book and think it is not a very good one (with all due respect for Sandeep and Neeraj). It covers very basic technical analysis and behavioral psychology. I think the popularity of the book is mainly because it is one of the very few books on selling (probably the only famous one).

[rk1771]

Recently I read a small boon - “The Richest Man in Babylon”. When I was reading the book, i was getting the feeling that I am reading Graham & Buffet. There is so much simplicity, and there is so much wisdom… which does not change with time.

An introduction of the book is here on this page… and it is my sincere wish that more and more investors should read that book. The book is useful at any stage of investing… but extremely useful after you loose some capital in investing.

http://en.wikipedia.org/wiki/The_Richest_Man_in_Babylon_(book)

[basumallick]

“The Richest Man in Babylon” is actually a cult classic in the personal finance space. I will rate it very close to “Rich Dad,Poor Dad” in my favourite personal finance or thinking-about-money genre.

[madyam]

@sunslight1976

We all are great fans of free cash flow ( FCF). FCF is defined as the amount of cash which can be taken out of the business without hampering the business. It is the amount of net capital generated by the business which is available to be distributed to shareholders. It is calculated as Net cash from operating activities LESS Capex.

My query is as follows: -

Is above method relevant only for debt free companies.

In case of companies having debt shouldn’t we also look at the amount of debt because the same carries repayment oligations and the same has to be repaid out of the FCF calculated in above manner.

Since there are only handful of companies which are debt free, what is the degree of emphasis we should put on FCF by above method.

Just to give an example: -

A company may have borrowed for expansion in the past. The expansion has just bear fruits and in absence of any further capex the company is generating FCF. In such cases, FCF is first to be utilised to repay debt before it is available to shareholders. Hence, in such scenario I will prefer to look at the number of years the FCF will take to repay the debt first before it is available to shareholders.

Can someone please clarify this doubt?

Hi Sandeep,

Here are my two cents!

There are several cash flow definitions that are being used. I think your question pertains to FCF to Firm which is basically the free cash flow that accrues to the firm (including debt and equity holders). Another term used is FCF to Equity which is basically the free cash flow to equity holders and this subtracts any debt repayments during the period and adds any new debt raised during the period. Basically FCF to the Firm - Debt Rapayments + New debt raised.

Obviously for a leveraged company one also needs to look at the FCF to Equity.

FCFby startedto

[madyam]

My understanding is like this, any company whose return on capital is higher than the growth rate will generate free cash flow. When the return on capital is lower than the growth, the company needs to raise additional money through equity/debt to fund the growth. Ofcourse, even the return on capital will vary as the company grows…for some co’s it will increase due to economies of scale while for others it might stay flat or even decline (if competition arrives!).

Obviously, if one looks for companies with 30%+ growth, most of them will be FCF negative as return on capital in excess of 30% is rare in such markets (basically competition jumps in if both growth and RoCE is in excess of 30%+). There are of course a few companies which does manage this…currently the list that comes to my mind includes Page Industries, Eclerx and Titan. As their RoCE is substantially higher than their growth rates, they are able to grow at 30%+ levels while generating substantial cash.

It is though inevitable that such high RoCE and growth rates will trend down at some point in the future (depending on how much moat the companies have), typically it is the growth which moderates most while RoCE may remain at an elevated level (but lower than the original high levels). This is something that we can see how the IT industry developed in the last 2 decades. In the first decade they had both high RoCE and high growth so they were able to continue to grow at a fast pace while generating substantial cash. Now the growth has moderated while the RoCE’s still remain relatively high.