As i want to start investing in stocks, it would be great if someone can guide or recommend books or internet links on stock investment and analysis. Im looking for material which teaches from the basics of trading to doing in depth industry & company research, ratio analysis, forcasting, valuation, fundamental and financial analysis in excel for the purpose of stock trading ! Most people go by speculation, recommendation from brokers, market news, results for investing in stocks rather than being self informed and self assured that there investment will definitely return capital gain. I do know that there is no 1 rule in trading. no one can predict EXACTLY the stock prices in the future. Markets can go upside down any day. However i don’t think we can suffer losses if we trade with sound and informed investment decisions after proper analysis for LONG TERM investment horizons. As i have some time in hand and money to blow and eagerness to learn the markets, i want to make money by recommending myself to self made equity research reports. (: D) Any kind of suggestion /input will be extremely helpful. Thanks.
What you’re asking for is the CFA curriculum.
I’d recommend you start by reading “A Random Walk Down Wall Street” by Burton Malkiel. This gets to the issue about whether markets are efficient and whether any analysis of companies can do better (in terms of return per level of risk taken) than just holding a diversified index fund.
There is no consensus on whether Malkiel’s thesis is true or not, but it frames a lot of discussion about whether analysis is adding value or not. Money managers have a strong incentive to push the idea that active management adds value, because it is hard to make much money as an index fund, unless you are one of the largest ones (like Vanguard).
After that, you should read “You can be a stock market genius” by Joel Greenblatt. This basically gives the other side of the issue - acknowledging that it’s hard to beat index funds, but there are certain thigns that you can look for that can help. If you are going to try to outperform a market index, it’s best to know what you are trying to do and why you think it will work.
You may then want to read “Market Wizards,” which is more about trading. Trading tends to be a short-term strategy versus long term investing, which is more about capturing underlying value. However, there are useful ideas about how to execute investment ideas there, coming from many perspectives.
Finally, read something about position sizing. One key to investing isn’t just “what to buy” but also how much of it to have in your portfolio.
One of the bigger mistakes people make is in position sizing. Just because something looks like a good investment doesn’t mean that your portfolio should be that, and that alone. Making sure your portfolio lies within your risk tolerance and yet grows fast enough to meet your needs is a tricky balance. A lot of people take on too much risk because they want that higher-looking return, but then get burned. The book “Way of the Turtle” talks about this a bit, as does some of Alexander Elder’s trading books. A wikipedia search for “Kelly Criterion” gets at some of the idea, although the way you implement it in a portfolio context varies.
Most investors try either equal-weighted portfolios (equal dollar amounts in each position) or do some kind of portfolio optimization (mean-variance optimization, or risk parity or something like that). There’s no single book that talks about these, but it’s good to get informed about how that works.
Buy these stocks and hold on to them for 10 years then send me a fruit basket in thanks.
SSYS, DDD, AMAVF, XONE, SLCA, CRR, CJES, and PHOT.
Bchad: Do you use the Kelly criterion, or a derivative thereof, in practice?
I use a simplified risk parity allocation. The idea is that my asset choice decisions aren’t necessarily any better with one asset than any other, but the volatility of those assets can be quite different. A weighting that varies with the volatility of the asset helps to compensate for that. If I have exceptionally high conviction on something, I may make an adjustment for that, but it’s pretty rare.
I’ll need to take a deeper look into that. I’m trying to apply more structure to my personal allocations and I’m struggling with methodology so this is a topic of interest to me right now. Thanks.
cut your losses and let winners run…also risk mgmt is underrated
To the OP, the honest answer that very few people will tell you is that there are no books out there that will make you a great investor. Start by investing a small amount of money and learn from your mistakes before getting to the next level.
Once you gain experience and start making mistakes, you can start reading some of the suggestions above. You won’t understand or appreciate the literature without having experience in the markets and making mistakes. Only then will you start nodding while reading investing/trading books.
I agree with FT that there aren’t many (any) books that will turn you into a great investor. But that doesn’t mean there isn’t any value to reading up before you start putting real money on the line. There are a lot of dumb mistakes that people make when they start, and reading up can help you avoid those, or at least be conscious of what you’re doing when you do something risky.
@bchad Thanks for the recommendations !! -extremely helpfull.
So Is it impossible to break down investing into “exact science” i.e doing accurate quantifiable predictions and measurement ? … and foolproof one’s portfolio from incurring losses and make it highly profitable ?
Isnt there any way to learn how to get the right mix of Risk Diversification & Position Sizing and overall be a great investor?
Identifying stocks with untapped and extreme potential and tapping into it at the right time is what im looking at when i start trading.
@bchad Do you think is it possible that analysis can add value or be a usefull tool for short term trading / investment ?
Books provide theretical knowledge on position management/diversification/hedging. Anyway, markets (esp. stocks) can and will surprise you.
Make up your mind on your long-term goals and on the approach you´d prefer. Build a mix on fundamentals, use technical analysis to decide when to invest and when to sell.
In short: buy low, sell high!
There is both science and art to investing. The science is about knowing different sources of return and the way that constructing trades and portfolios affect your exposure to risk and such. The art has to do with the fact that there is a big psychological element to investing.
The psychology has two aspects: first is the fact that the market has a psychological state that ranges between euphoria and panic, and the timing of those shifts has thus far evaded any kind of mechanistic formulation other than “rules of thumb.” Thus, the timing of market psychology tends to be more art than science.
There is also the investor’s own personal psychology, which has to do with the investor’s own ability to withstand uncertainty and keep discipline. For example, buying and holding the market index is a good strategy for a long-term investment, in terms of the reward per unit of risk taken. However, many people decide to buy into an index only after the market has risen a lot, and then panic and sell as soon as there’s a crash. Thus, they call themselves buy-and-hold investors, but they end up buying at (high) market tops and selling (low) at market lows, so they vastly underperform the buy-and-hold results, even though buy-and-hold isn’t a bad baseline strategy, and they may even consider themselves buy and hold investors.
Some people are comfortable making small consistent gains, whereas others are ok with taking a ton of small losses for the occasional large gain. Some people are obsessed with buying something at as cheap a price as possible; others are more about catching momentum or growth. All of these strategies have times when they are profitable, so part of the trick is to find the investment strategy that fits with your skill sets and personality so that you can remain disciplined during those inevitable parts of the business cycle when your strategy isn’t working.
One reason why buy-and-hold tends to work well is because over the long term, broad stock indexes track the growth of corporate proftis in the economy as a whole. As the economy becomes more productive and efficient in terms of the allocation of resources (resources in vs resources out), that progress shows up in the index returns (to the extent that those efficiency gains are done by the corporate sector, which is most of the time).
In general, it’s a better bet that the economy as a whole will become more efficient over time than a bet that any one particular company is going to capture an outsized proportion of those gains. Oftentimes, one company does, but it’s hard to figure out beforehand who that is going to be, and it will take research to identify, because if it were easy, people would already be buying that company, which pushes the price up and makes those outsized gains (in terms of the stock price) no longer outsized. So one way to try to attack that is to search for things that look like obvious on the surface but actually aren’t. In order to outperform, you need to have (at least at some times) a view of a company or the market that is somehow distinct from the market consensus. The challenge is that the market consensus incorporates a massive amount of work and information gathering by people that are highly motivated to make money, so “finding an edge” in order to do better than an index fund, is not an easy or guaranteed thing.
The result is that you can get a large proportion of the gains, just by following a strategy that involves almost no research.
From there, it takes a LOT of skill and insight or luck to outperform what the broad market index can produce. I believe it can be done, but a lot of people underestimate how much work it takes to squeeze out a better rate consistently (meaning over one or more business cycles). This is more true when you try to adjust the returns you get for the amount of risk that it takes to get them.
It’s a long journey to incorporate all that stuff, but the books I mentioned help get you started with a lot of the issues and approaches.
If you think about it what is investing? It is allocating capital for a return. You could buy a house and rent it for income. You could buy a stock and hope it appreciates or a sort term treasury and clip a coupon or you could speculate in commodities. Labor is capital. All else equal, you allocate your labor for the highest possible reward.
Asking if it is possible to break down investing into an “exact science” is the same as asking if it is possible to break down making money into an “exact science”. The answer is no. There are innumerable paths to success, each depending on the specific set of circumstances with which the investor is faced.
Bchad, that was a nicely written breakdown of the elements to investing. Just curious, who are some of your favorite money managers?
The first thing you have to know is yourself. If you don’t know who you are, the market is an expensive place to find out.
But the question is - Does studying CFA …Makes you a great investor ?
I think the answer to that is no. It probably helps you “not be a terrible investor,” but it sure doesn’t guarantee that you’ll be a great one.
That doesn’t mean there isn’t useful stuff in the curriculum. But for each of us, we have to ask if the effort to get the charter is worth the result. For me, it was worth it, but for others, perhaps not.
I am not at the table to hear their investment decisions, so I don’t really have my personal celebrity money managers, but in terms of the people whose writing I like, there’s George Soros, Jeremy Grantham, John Hussman, John Maudlin, Barry Ritholtz, Ray Dalio, and Cliff Asness. Jack Bogle also has a lot of useful stuff to say, but of course his portfolio is just an index.
Don’t listen to anyone here, buy the lowest cost index fund and call it a day. Don’t waste your time trading.