 "Five investment classics that you must read this summer")
The man who is a fixture in the list of the world's richest, and has made his fortune entirely through investing, inspires many. Investors around the world religiously pore over his annual letters to shareholders. Many even make the yearly pilgrimage in May to Omaha to attend his company's annual general meeting. If there is one book that can explain in simple and lucid terms the essence of Buffett's investment approach, it is this one by Hagstrom. It begins by discussing the gurus who have played a part in the evolution of Buffett's investment approach. From Benjamin Graham, Buffett learnt value investing and the concept of margin of safety. Later in life, he tilted more towards Philip Fisher's approach of looking for high-quality companies available at a reasonable price. From John William Burr he imbibed how to calculate intrinsic value. In subsequent chapters, the book deals with how Buffett evaluates a business, its management, its financials, and finally, how he decides whether a stock is attractively valued.
Fisher's approach to stock investing was more qualitative than quantitative. In this book, he explains the concept of 'scuttlebutt'. It basically means interviewing a wide variety of people who are in one way or another connected to the company that the investor is interested in. These could include suppliers, customers, distributors, executives of industry associations, and finally, its management. Fisher says that a remarkably accurate picture of a stock's prospects emerges when an investor speaks to such a wide variety of stakeholders. Another key aspect of Fisher's investment approach is to build a concentrated rather than diversified portfolio, and to hold on to those few well-researched stocks for years, sometimes even decades – so long as their prospects remain sound.
The author is an economist who taught at such Ivy League universities as Princeton and Yale. In this book he advocates the passive approach to investing. First, he points out the shortcomings of the two major investment approaches that most people follow in the stock markets. Technical analysis, which depends on extrapolating past trends to predict the future course of stocks, fails whenever there is a trend reversal in the market. Fundamental analysis, he says, fails because of the inability of analysts to predict future earnings of companies accurately. If an investor must follow either of these approaches, the author offers tips on how to do so in ways that will reduce the probability of failure. But his larger message is that most investors will do very well by investing in a low-cost, broad market index fund or exchange traded fund. Malkiel's recommendations are relevant for Indian investors who have traditionally favoured active funds. As outperformance by active fund managers gets whittled down (as is already evident in large-cap funds), they too may have to turn to passive funds in the near future. Malkiel's book will provide them with the conviction needed to pursue this path.
As the reader may have guessed, this book was written by a person of Gujarati origin. He is a US-based fund manager who runs the Pabrai Fund. A Buffett acolyte, he shot to fame, among other things, for having paid $650,000 (along with his friend and fund manager, Guy Spier) to have a lunch with Buffett (the money from this annual event is donated to charity). The word 'dhandho', when translated literally, means endeavours that create wealth. Conventional finance teaches that one needs to take higher risk to earn higher returns. But the dhandho way of investing turns the concept on its head. With this approach, if you lose, you lose very little, but if you win, you make outsized gains. Pabrai then goes on to describe an approach that involves investing in stocks of deeply distressed companies that have a chance to turn around. Pabrai cites the US-based immigrant community of Patels, who have built a fortune in the motel industry, and LN Mittal, the steel baron, as instances of people who have successfully applied the dhandho approach.
Most investors select mutual funds by looking up their past returns. The slightly more evolved ones also look up their star ratings. But many of them find, to their disappointment, that the performance of the fund, which was doing very well when they picked it, tanks subsequently. While there is no perfect way to pick an active fund that will be a winner over the next five or ten years, this book by Morningstar can help you make better choices. It deals with the characteristics investors should look for in a fund to be able to pick long-term wealth creators. If you believe that the right processes lead to the right outcome, this book will help you identify the fund managers who follow those processes. After reading this book, if you can lay your hands on a mutual fund database, and teach yourself to crunch numbers using excel, you will be well placed to select the right funds.