I’ve just completed reading The Ascent of Money by Niall Ferguson, a history of sorts on finance. This marked my fourth book on finance since becoming active in stocks, the others being Jim Cramer’s Real Money and Mad Money, and The Great Crash of 1929 by John Galbraith (which I wrote about here).
The Ascent of Money was the most difficult, and while it took me the longest to read I did gain solid understanding of many financial terms thrown about on CNBC. I can, for example, explain to someone one M0 and M1, and how leverage works. M2 and M3 I have the concepts down, if I can’t quote the exact differences. I understand the gold standard and why gold is a hedge against inflation. I can even break down a CDO.
Basic financial terms is only partly the reason I’m interested in these books. I’ve read many books on investing over the years but always felt I was given a sanitized view of finance. Over and over again I read that you should buy stocks of a few companies, and hold them for 5, 10, or 20+ years. That, since I really can’t buy enough stocks I should get into a mutual fund. I should add to this fund monthly, thus allow dollar cost averaging to take away the risk. It’s as if I was at Six Flags, yet only allowed on the tea cup ride for fear I might hurt myself on the rollercoaster.
When the housing market began to slip in 2007, and things got worse in the summer of 2008, I started watching more and more of CNBC. Some of this was due to the other news channels running election and fluff non-stop; CNBC’s financial focus means they only talk about news that can affect a stock: I was happy for the filter. Jim Cramer’s show Mad Money is very entertaining, so I decided to pick up his first book, Real Money.
It’s a shame Jon Stewart didn’t actually watch or read anything of Jim Cramer, or he would have seen Jim has ranted against “buy and hold” his whole career. In the opening pages of Real Money, Cramer destroys the conventional investment wisdom I had heard so often. That much of this comes not from experienced financial gurus, but marketing on the part of mutual and hedge funds that want your money so they can charge you fees and take a cut. Cramer's point is no one will ever care about your money as much as you, so only you can manage it best. He is very clear that it takes discipline and work to manage your own portfolio, asking a minimum of one hour per week, per stock of research be done. So important is this, he terms it “buy and homework.”
So, in addition to my stock homework I’ve added financial books to the list. Between all of these books I’ve developed a few insights to help me interpret how the market reacts in a given day. I’ve noticed that almost all of our crashes come after the government loosens regulations on acquiring money – most recent of which was helping to lower mortgage requirements. Also interesting, while it’s common to think of the stock market as this well oiled working example of the free market – pricing stocks based on economic reality instantly – nothing could be further from the truth. History has shown time and time again, the market is very human and carries a human’s ability to over react with fear or excitement. (Really, one doesn’t need to look further than Apple’s stock to see this.)
Perhaps the greatest insight is in understanding the thinking of investors. Some will look to a company’s balance sheet, debt ratios, revenue and economic cycle to determine where a stock should be priced. Others will look to the charts and draw from the wisdom of crowds to determine supply and demand of a stock. I’m falling into a third group, one I think is a minority. I look at the stock market not as an attempt to value a company's shares, but as share holders trying to value shares to each other. I look at a stock and try to determine what each type of investor would see, and go from there.
I’m far from good at this yet, but I’ll keep you posted. In the mean time, I can and do highly recommend all four of these books.
Posted By Mike On Friday, March 27, 2009
Filed under review investment |
Comments (1)
Nathan Blevins
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Friday, March 27, 2009
9:24:43 AM
Hey Mike,
I really apprecaite you sharing this information as you work through it. I am going to have to check these books out.
When you have it down to a science, I would love to see a breif outline of what you do when you consider new stocks or prepare to investigate a company. What sites do you use, whose opinions your trust, etc.
Thanks for the info!
