"If compound interest is the eighth wonder of the world, then value investing has to be the ninth wonder of the world. Together, they form a positive indestructible force that allows wealth to compound" -financiallyfreenow
This post covers the book review of “The Little Book That Builds Wealth” written by Pat Dorsey. Pat Dorsey is the Director of Equity Research at Morningstar. He has been instrumental in the development of Morningstar’s economic moat ratings. He is also the author of the renowned book, “The Five Rules of Successful Stock Investing”.
This book is all about uncovering economic moats in companies. According to the book, all moats can be divided into four categories and they are: intangible assets, switching costs, network effect and cost advantage. It explains each of this moat using real-life examples. If you find a company with solid returns on capital and with one of the four characteristics, you’ve likely found a company with a moat. This book makes discovering a company’s economic moat more like science than art.
Also contained in this book is a discussion on what are not economic moats. Great products, great size, great execution and great management do not create long-term competitive advantage unlike believed by many. I highly recommend this book to anyone who wants to learn more about uncovering economic moats easily.
Look at the video below by Pat Dorsey espousing the four categories of economic moats:
“Markets Never Forget But People Do” is a book showcasing the historical perspective of the stock market. By re-looking into history, we can convince ourselves why this time is not different unlike what the media portrays when the economy is in the doldrums. Instead of me explaining further what this book is about, why not listen to the author himself explaining it?
A summary of the contents of the book:
It’s not a new normal unlike what the media says and this time is not different. History tells us so.
Stocks can rise even though unemployment is high
Double-dip is always feared after a recession but rarely seen throughout history
Why the V-shaped recovery happens after a recession
Third year after a recession are usually ‘pause’ years where the market doesn’t rise that much
Why volatility is good and why we don’t have to fear the ‘black swan’ events
Government debt and how to see if a country is really in need of default. The way to see government debt is to determine whether the debt is affordable to be paid. Currently, the interest on the US debt is very affordable compared to history.
US politics and investing
It’s a global world and how countries affect each other
Below is a video on unemployment rate and the rising stock market after a recession.
How many of us investors actually pay attention to what goes on in our brains when, during and after we invest in a company? “Your Money and Your Brain” delves deep into an investor’s psychology and explains why we feel what we feel at certain times.
Content wise, this book talks about the different emotions such as greed, prediction, confidence, risk, fear, surprise, regret and happiness and shows us how to curb some of these excessive emotions.
This is the first book I’ve read on behavioral finance and it has opened up my mind on the biases I might have regarding to investing. All investors should read this book.
“Delivering Happiness” is a book written by Tony Hsieh, CEO of Zappos.com. I came to know about this book when I was in Kinokuniya a few weeks back and I saw this book staring at me from one of the shelves. It seemed like an interesting read from the blurb (and the cover looked different from the norm). I went on to Amazon.com (incidentally, Zappos.com was acquired by Amazon.com in 2009) to read the reviews of the book and it had good reviews. I don’t buy books nowadays so I decided to borrow this book from the library instead. Luckily, this book was available and not on loan when I wanted to borrow it.
This book is about Tony Hsieh’s journey to creating a company that delivers happiness for both employees and customers. The book starts off with his school-going days and how he liked doing business at such a young age. It then goes on to talk about his days in LinkExchange and after that, how he started Zappos. Zappos is a variation of “zapatos,” the Spanish word for “shoes”. More than half of the book talks about his days in Zappos and how he created a mega shoe empire amid lots of challenges. Zappos focuses on two aspects of business – branding through customer service and enhancing company culture.
Customer Service
Even though I have not bought anything from Zappos.com, I feel that after reading this book, Zappos.com has one of the best customer experience ever. It offers free shipping, 365-day return policy, surprises for loyal repeat customers such as overnight shipping, warehouse working 24/7, call centres running 24/7 (Zappos.com places lots of emphasis on customer experience through the telephone), among others.
Company culture
Zappos.com was ranked the 6th “Best Company to Work For” by Fortune magazine in 2011. This is not surprising if you had read this book. The whole company culture revolves around having a fun and weird working environment and also strengthening the bond between employees. For example, when employees login to their company account, instead of just typing in the userid and password alone, they need to identify the photo of a randomly selected employee in the form of a multiple-choice question. Afterwards, a profile of that employee is shown so that everyone can learn about each other. The employees are also looking everyday on how to create a “WOW” experience for both customers and themselves. There was an instance where a customer acted a little weird on purpose over the telephone and the employee at Zappos.com played along with the customer. There’s a transcript of the conversation in the book and it’s hilarious. This is how the employees think out of the box and are encouraged to do so.
The company also came up with a “Culture Book” where the employees talk about what they like and don’t like about working in Zappos. The book is published yearly and given to employees, customers and those who request for it. It’s a raw and unedited book that captures the essence of Zappos.
Tony says that the best businesses are the ones that figure out how to combine profits, passion and purpose and the vision and culture to do that and I feel Zappos exemplifies this accurately. The core values of Zappos are as follows and it has 10 of them:
Deliver WOW Through Service
Embrace and Drive Change
Create Fun and A Little Weirdness
Be Adventurous, Creative, and Open-Minded
Pursue Growth and Learning
Build Open and Honest Relationships With Communication
Build a Positive Team and Family Spirit
Do More With Less
Be Passionate and Determined
Be Humble
The employees are encouraged to internalize them and practice it in their daily lives as well.
To see how Zappos WOWs people, take a look at:
To see how crazy the employees can be, take a look at the following video:
How is the Zappos culture related to investing?
I strongly believe in the Zappos values and culture. Customer service is essential in any business-to-consumer (B2C) business. Having an exceptional customer service likes Zappos’s keeps the customers craving for more and locks in the customers. Exceptional customer service cannot be built overnight and it takes time. It also cannot be easily replicated by competitors as a lot of things must come in the right place. This actually creates a moat around the business.
By having a strong company culture, employees will be “stuck” to their company and would love coming to work. Monday blues will be replaced by Friday blues as they would not be able to see their fellow colleagues over the weekend in their office. Work will not seem mundane anymore and productivity will increase. It’s the wonderful friends made at the workplace that keeps the employees psychologically healthy. Also, by having a vision and purpose that are aligned to their own, employees will push themselves to go further and feel more satiated.
I believe that when investors invest in a retail business, they should look out for a strong company culture and an outstanding customer service on top of the usual financial numbers for the reasons cited above. When the customers and employees are happy, profits will automatically flow in and the company grows consistently.
Lastly, everyone should read this book. Even if you are not into business and investing, this book can really help you in your personal life as it can teach you how to deliver happiness into your own life.
I just finished reading “Millionaire Teacher” by Andrew Hallam yesterday. I read the book in record four days. It may not be a mean feat for the ardent Harry Potter fans but it is for me as I’m not exactly a fast reader.
I knew about this book during Invest Fair 2011 when I visited the MPH booth. There were posters put up in the booth pertaining to the launch of the book in the coming months. The author also gave a talk on that day but I couldn’t attend due to other commitments. I was keen to read this book as it was written by a school teacher who became a millionaire with a middle-class salary and I wanted to know how he did it. He is currently residing in Singapore.
I have to confess that I thoroughly enjoyed reading this book and it is one of the best investment books I have read so far this year. The cover has a testimonial by Burton G. Malkiel who is the author of “A Random Walk Down Walk Down Wall Street” and it says, “The newbie investor will not find a better guide than Millionaire Teacher”. I would say this is rather misleading as investors with all kinds of experience will benefit from reading this book. There might be some theories not heard elsewhere as they are from his personal experience or from his friends/colleagues.
This book is an easy read for beginners as it’s written in simple English, is funny and doesn’t have financial jargons. The advice given is also useful and some were new to me. Andrew also uses lots of statistics and references (found at the back of every chapter) to back up his investing methods. The emphasis of this book is how to make investment low-risk by investing in index and bond funds (known as exchange-traded funds or ETFs) and how to allocate the funds accordingly to one’s age. It also takes very little time to monitor the portfolio. Even though most of the passive investing methods he employ can be found in other books (can be seen from the references), he has collated all the theories and methods together into a single concise book. This makes it practical for readers to read this book.
Investing in bond funds was new to me as I hadn’t paid much attention to it previously. My focus was solely on stocks. I will certainly pay more attention to bonds from now on after reading this book. It’s my first time reading extensively on bond funds and how it helps to keep one’s portfolio from excessive risk that might emerge from the stock market.
Andrew places very little emphasis on individual stock-picking ala Warren Buffett style. He says if investors really want to pick stocks, they should reduce the exposure to less than 10%. This is because he believes it’s hard to beat the market for the long-term consistently by buying individual stocks. So, he rather buy ETFs.
Even though the average return of the passive investing portfolio was around 10% annually, he still made it to be a millionaire by investing prudently. After having read this book, it has given me added confidence that if a teacher with middle-class salary can do it, why can’t I?
For a preview of his book, you can visit Google books. For recommended readings by Andrew Hallam, you can visit his blog here and here (towards the end of the post).
In this part, we will look at a few aspects of investing “When to buy?”, “When to sell?” and a few don’ts for investors. In the previous part, we looked at “What to buy?” under the scuttlebutt and 15 questions approach.
When to buy?
Fisher says the time to buy is always. Timing the market is futile as many great investors say and this is true. Time in the market and not timing the market is what brings you the profits. Fisher aptly says, “Be undeterred by fears or hopes based on conjectures, or conclusions based on surmises”.
When to sell?
Fisher says, “There are only three reasons, and three reasons only for the sale of any common stock..”. The first reason is an obvious one. This is when a mistake has been made in the original purchase and the background of the company is less favourable than originally believed. To cope with this, the investor must have self-control and the ability to be honest with himself. Fortunately, the long-term profits from really good common stocks should more than balance the losses from a minimal percentage of such mistakes.
The second reason is when the company invested in no longer qualifies in regards to the fifteen points as discussed in part 1. This is why an investor should always be on their guard and must be in close contact with the affairs of the companies whose shares are held. Companies deteriorate for two reasons: either management has become slack or company’s prospects of increasing the markets for its products is decreasing.
The third reason to sell is to make funds to buy into a better company with better prospects than the current invested one.
Once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling at all. One should not sell due to fear of the economy or imminent war, for example. One should also not sell due to the reason that the stock has gone way up in price. The probability of participating in continued growth is obviously worth something. One cannot pinpoint just how much per share a particular company will earn two years from now.
So to summarise, “If the job has been correctly done when a common stock is purchased, the time to sell it is – almost never”.
Don’ts for investors
Don’t buy into promotional companies (eg. IPOs)
Don’t buy a stock just because you like the “tone” of its annual report.
Don’t assume that the high price at which a stock may be selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price. (A current price at 52-week high doesn’t been it cannot go any up further in the long-term)
Don’t quibble over eighths and quarters. (Don’t be particular of buying a stock at $0.205 instead of $0.210, which is at market price, if the company has potential to be a ten-bagger)
