Knowledge is power and power is money. Just ask any great money manager and he’ll tell you it’s all about the three R’s: reading, ’riting and ’rithmetic.
Take Charles T. Munger, right-hand man to Warren Buffett. “In my whole life, I’ve known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero. ...You’d be amazed at how much Warren reads—at how much I read. My children laugh at me. They think I’m a book with a two legs sticking out,” he says.
Myriad factors contribute to wealth creation, with no one area taking precedence over another. It’s important to have a working knowledge of price-to-earnings ratios, how to read and understand quarterly reports and debt loads.
But for Munger and Buffett, who have created a lot of wealth for themselves and the shareholders of their companies, it was the pursuit of knowledge, the eagerness to know and read more about everything around them, which got them acclaim. They, however, haven’t restricted the knowledge to themselves. Books by them and about them have become must-reads for money managers.
We set out to find out from money managers and individual investors about the books that have guided them towards managing either their money or other people’s money. Not surprisingly, most of them had similar choices. Almost all swore by Benjamin Graham’s The Intelligent Investor, One up on Wall Street by Peter Lynch and Poor Charlie’s Almanac k by Charles Munger.
Benjamin Graham, known as the father of value investing, was Buffett’s professor at Columbia University. Graham’s The Intelligent Investor, written along with David Dodd in 1949, talks about how to buy companies cheap, introduces concepts like margin of safety, and the relationship between yield on earnings and bonds.
These concepts have become gospel not only for legendary investors like Buffett but also for all those people associated with the stock markets.
Buffett’s introductory note to The Intelligent Investor—Superinvestors of Graham and Doddsville—sums up the book nicely. It concludes, “You have to have the knowledge to enable you to make a general estimate about the underlying value of the business. But you do not cut it close. That is what Ben Graham meant by margin of safety. You don’t try and buy a business worth $83 million for $80 million. You leave yourself a fair margin. You build a bridge that can take 30,000 pounds but you drive 10,000-pound trucks across it. And that same principle works in investing.”
Ashok Atluri, managing director of Zen Technologies, a Hyderabad-based defence company, thinks this introductory note is an everyday read—“something you should photocopy and get framed”. He is not an active investor in the stock market these days but his family owns shares of Buffett’s Berkshire Hathaway, and he makes it a point not to miss his yearly trip to the Berkshire’s annual shareholder meeting in Omaha, Nebraska.
Chetan Parikh, another Buffett fan, who runs a stock advisory firm Jeetay Investments and an online forum capitalideasonline.com, counts on The Intelligent Investor.
The Wharton University alumnus was puzzled when he started applying his business school learning that stock markets always act efficiently and there is no scope for mispricing or undervaluation of assets. “When I started applying the efficient market hypothesis in real life, it didn’t seem to work—neither in Indian markets nor elsewhere. After getting introduced to books like The Intelligent Investor in the late 80s, I realized that the textbook world is very different from reality,” says Parikh, looking around his book-lined office—there are over 200 titles on the shelves.
HDFC, the home–loan company, was his first stock pick in 1990 after reading The Intelligent Investor. The stock multiplied eight-10 times within a year of the investment. Investing, if restricted to looking at price multiples and management meets, doesn’t give him a big high. “In future, companies are going to have shorter lifespans and you need to evolve your thinking by being creative and by reading more about other disciplines. It helps you develop a perspective beyond balance sheets,” says Parikh.
Considering his library of 600-odd books, his list of must-reads is endless. Some which have had a profound influence on his investing are Lattice Work by Robert Hagstrom, Essays of Warren Buffett by Lawrence Cunningham and Poor Charlie.
Essays of Warren Buffett separates the legendary investor’s speeches according to topic related to investing. Hagstrom’s Lattice Work is inspired by Munger’s philosophy of understanding disciplines like physics, biology, social sciences and literature, and using them to make informed investment decisions. At the outset, Hagstrom warns that it’s not a “how-to book on investing” but a book on how to think about investing. “It’s no longer enough just to acquire and master the basics of accounting, economics and finance. ...new investing starts with the basics and extends outward in all directions...,” says the author in the preface.
Without any direct references to stocks, companies or markets, Poor Charlie’s Almanack captures the public speeches, the temperament and the thought process of Munger, vice-president of Berkshire Hathaway, in a witty manner. That’s what makes it the top pick for most investors.
Bharat Shah of Ask Raymond James Investment keeps two copies of the book while Atluri also has an autographed edition. “Why reinvent the wheel? One can profit from the experiences of one of the great minds in investing,” says Ramesh Damani, another seasoned stockbroker who has read the book six times over the last three years. He holds it in such high esteem that he has gifted it to university students and college libraries.
This popular Bombay Stock Exchange broker, whose market musings are followed by novices as well as experienced traders, reminisces about his childhood when his parents would send him out to buy a loaf of bread. On the way back, he would devour every word of the newspaper in which the bread was wrapped. Little wonder that when asked about his five favourite books, he easily rattled off a list of 20. Besides Poor Charlie, he finds The Intelligent Investor to be a book for all generations; One Up On Wall Street, a great introduction to the art of investing; Of Permanent Value by Andrew Kilpatrick, a collection of anecdotes and stories on Warren Buffett; and Money Masters by John Train, which introduces the investing style of great investors of the last 50 years. But he cautions that readers shouldn’t look to these books for stock-picking advice. Instead, the books offer guidance on business sectors.
One Up On Wall Street, a long-standing best-seller by Peter Lynch, a legendary former fund manager of Fidelity Magellan Fund, once the largest stock–fund. Fans of the book say its appeal lies in its ability to connect with the reader—irrespective of whether he is a seasoned investor or a novice.
“With a common-sense approach, this book helps you spot opportunities everywhere,” says Harish Rao, Mumbai-based vice-president for a US-headquartered asset management company. For example, Lynch states the obvious that isn’t so obvious: If your wife shops at a store which is always crowded, it’s an indication of a good business to buy. If your kids and their friends play with toys made by a particular company, that’s a likely indication of a great buy. These musings and anecdotes from Lynch help to simplify the methodology behind investing.
Rich Dad Poor Dad by Robert T. Kiyosaki is another book that Rao strongly recommends. It’s not because of any investing gospels per se, but because the book forces one to take control of one’s own finances. “With this book, I got a sense of how to make my sons understand the value of money,” explains Rao, “at the ages of 12 and eight, they understand the meaning of a bank account, a passbook and interest rates.”
Atluri recommends another best-selling book written along similar lines: The Millionaire Next Door by Thomas J. Stanley and William D. Danko. It explains, with real-life examples, how regular people become millionaires by being disciplined about their spending habits rather than being extravagant.
On the other side of the fence, there are also books which focus on the investor psyche. Arindham Bhatacharjee, who advises US-based Emerging Markets Management on its India-dedicated funds, strongly recommends two books—A Random Walk Down Wall Street by Burton Malkiel and Unconventional Success by David Swensen. “Quite often we spend time and money on finding out how to perform better than the stock markets. Or most of the time we don’t know what we are doing and tend to get carried away with what is popular at that time. We tend to buy things when they have gone up rather than buying things, which haven’t performed. These books inculcate a lot of discipline,” Bhatacharjee says.
At the same time, there is a different school of thought among some money managers as to how effective these books are in today’s world. Bharat Shah, a strong proponent of value investing, feels that these books don’t add much value beyond a certain point. “Once you have grasped the fundamentals and the principles from these books, there is little incremental value which one can derive from them. Margin of safety and value investing are undoubtedly great concepts. But how many books actually provide tools and techniques in valuing businesses in real life?” he asks.
Nilesh Shah, another veteran fund manager, has great respect for Buffett and his principles of investing, but feels that it’s tough to replicate them in today’s scenario. “In early 1999, technology was indeed an expensive investment as per Graham’s or Buffett’s model. But if any fund manager had ignored technology at that time, his fund would have underperformed its peers and he would have been unemployed from early 1999 till the peak of the tech boom in early 2000. We are all working in a competitive scenario and don’t have the luxury of time to take into account the 10-year prospect of a company,” he says.
Instead, he recommends reading books such as Freakonomics by Steven Levitt, The Scam by Sucheta Dalal and Destroying Value by Debashish Basu. Freakonomics tells you that the real reason for an event may be something which is not so obvious. “As a money manager, I want to be more aware of how things can go wrong and what can go wrong. And this perspective comes from knowing what has gone wrong in the past,” he adds. The Scam gives an account of how the two biggest stock market scams happened in the country.
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