One Book That Changed My Life As An Investor

What investing books do you recommend for someone just starting out on their investing journey? That’s a question I get a lot. And I usually answer it with a question.

What are you exactly looking for?

• Personal finance?

• Technical Analysis and trading?

• Mindset building?

• Success stories about entrepreneurs?

• A book to learn the basics or how to read financial statements?

What I didn’t realise is that most people asking for a great investing book don’t necessarily know what they should be looking for.

Some might be bored easily. And not everyone will be keen on learning how to build a three-statement financial model on their own or deep dive into decades of stock market history, or heck even want to bother with the intricate details like building a DCF model or candlestick reading.

Back to basics

The books teaching investment basics tend to repeat the same ideas and the same conventional wisdom:

• Patience is virtue

• Avoid mutual funds/unit trusts that charge exorbitant fees

• Save more and invest them

• Invest your retirement nest egg in low-cost index funds

• Stock market is unpredictable so its pointless to time the market

These essential lessons can be gleaned by many investing books oriented toward beginners. They include classics like The Little Book of Common Sense Investing by John C Bogle or the very accessible The Only Investment Guide You’ll Ever Need by Andrew Tobias. These books generally focus on the fundamentals of the stock market and investment vehicles available.

You also have mindset building books such as Rich Dad Poor Dad by Robert Kiyosaki _or Secrets of the Millionaire Mind by T. Harv Eker._

Most books will teach you that you can achieve fantastic returns by simply being invested in low cost ETFs that closely follow the market over time such as the S&P 500 (SPY) or the Nasdaq (QQQ). While I believe index fund might be the best bet for the majority, what if you want to go one step further and simply think index returns are still way too low for your liking?

Now, once you’ve covered your basics and have made sure you have a clean financial state (i.e. no short-term debt, emergency fund in cash, retirement savings in broadly diversified low cost index funds), a new category of books can open up your horizon. Such books are trying to offer various solutions to generate alpha. They generally focus on stock picking or temperament.

To curate this post, I tried to ask myself what were the turning points of my life as an investor. What are the books and authors that truly opened my eyes, made me take notes frenetically and empowered an investing strategy that I would make my own?

Let’s us review:

One Up on Wall Street by Peter Lynch

This is one of the best books on investing hands down. It is easy to understand, and allowed me to strategise and change the way I invest in stocks.

It is super practical and you can easily adopt the strategies taught by Peter Lynch in determining the “Multi-Baggers” as he calls them which will 3X, 5X or 10X your initial capital.

Although the book was published in 1989, you will realise that 90% of what is said in the book, will still apply in today’s context, as investing is very much human behaviour and history tends to rhyme.

The author Peter Lynch, is arguably the best performing fund manager in stock market history. He earned a place in Wall Street hall of fame by achieving a 29% annualised return between 1977 and 1990 as a manager of the Magellan Fund under Fidelity.

If you had put 10,000 USD into the Magellan fund in 1977, by the end of 1990, you would have obtained 280,000 USD! Thats a 28-bagger right there.

During these 13 years, he more than doubled the return of the S&P500, making the Magellan Fund the best mutual fund in the world and investors of his fund definitely got much richer.

How the book impacted me – Key Ideas

1. Peter Lynch stresses the importance of looking at the companies you come across in your everyday life.

If you drink coffee every day at Starbucks, you like the coffee, you see that there are always people buying, and more and more stores are opening, Peter Lynch recommends you to analyse the company and find out what makes it tick.

“If you like the store, chances are you’ll love the stock”

So things like Grab, banking services, etc are things you should analyse, since there’s a high chance they might be potential winners if you did the research into things you come across daily.

By analysing these type of companies, retail investors literally have the upper hand as we can understand the product from a consumer’s point of view and also analysing them like an investor. This is what we call circle of competence, or in short, your competitive advantage over other investors.

2. Individual Investors can (easily) beat Wall Street Analysts

Professional investors usually invest in large and well-known companies because these companies are “more popular.”

Peter Lynch highlights that below sentences is common knowledge among Wall Street analysts:

“You’ll never get fired for buying IBM (now Apple/Google/Microsoft)”

You have to keep in mind that analysts are not only looking to get good returns, but also to keep their jobs.

That’s why they often invest in popular companies and don’t pay attention to smaller businesses. If these big companies get poor results and the share price plummets, they will excuse themselves by saying “the company has had a bad year”but they won’t get in trouble since any other Wall Street firm invested in it.

According to Peter Lynch, professional investors are restricted by the type of stocks they can invest in depending on their assigned funds, and hence, might not be allowed to invest into promising smaller-cap stocks with huge potential due to lack of liquidity and potentially getting scolded by their superiors for being different.

This is why the average person has an advantage over Wall Street’s professional analysts since Wall Street analysts abide by herd mentality and not behaving like a contrarian.

This is also why Warren Buffett is able to outperform Wall Street for decades, as their primary goal was to focus on businesses and not much being a trend follower chasing “Stock of the Months” or “Hot Stocks of the year”.

The retail investor does not have to choose well-known companies to please his boss. You should search for companies that perform well, even if they are not popular.

Simply by using common sense, the investor can make extraordinary profits without any restrictions of company choice.

3. Six Types of Stocks

For Peter Lynch, there are six types of companies mentioned in the book. Let’s look at the main characteristics:

• Slow Growers: Established firms with little growth in the long term. They tend to stand out for offering high dividends. Peter Lynch does not recommend including them in the portfolio because of the poor performance they offer. (Eg. SPH, Singtel, IBM, Exxon Mobil)

• Stalwarts: Large and well-established companies. The key is to buy them at a good price, and get a 30-50% return in a couple of years. Peter Lynch recommends having these companies in our portfolio as protection against economic recessions and potential double digit returns. (Eg. Apple, Google, Facebook, Microsoft, Alibaba)

• Fast growers: Small, usually new, fast-growing companies, often at 25% CAGR or more annually. This is where we can find our potential ten-baggers. (Eg. Square, Etsy, Teledoc, Zillow Group)

• Cyclicals: Companies that alternate periods of growth with stagnation, due to the economic cycles of their sector. This causes stock price to go up and down frequently. They are typically airlines, cars, mining or semiconductor stocks.

It’s important to buy them at the bottom part of the cycle, and sell them at the top part of the cycle (something which is extremely hard to do). _Eg. AMD, TSMC, SIA, Boeing, _General Motors

• Turnarounds: These are companies that are going through difficulties. They have bad results, and may even be about to go bankrupt, which makes their price be very low. If the company recovers, the potential upside might be insane. These are usually extremely high risk bets but may be highly rewarding if successful. (Eg. Gamestop? SPH? AMC?)

• Asset plays: This category includes companies that have something valuable that few people know. It can be a new product about to be launched, inventory not valued correctly or an alternative asset class for diversification.

Again you have to be careful with this category. We must be very confident that we know the real value of the hidden asset, and its impact on the company’s accounts. (eg. Bitcoin, REITs)

Peter Lynch mentioned in the book that his favourite category is fast-growers, which typically make up 30-50% of his portfolio. He also always has stalwarts and cyclical companies constantly which makes up the rest of his portfolio.

A small part of its portfolio is invested in tunrarounds and asset play companies. And unlike Buffett, Peter Lynch’s philosophy is to invest into more positions, so his probability of getting a ten-bagger is much higher.

You can buy 10 stocks (each with equal amount) and 9 of them go bust but you just need 1 to be a ten-bagger and outperform the market.

For myself, I prefer to go overweight on fast-growers and also owning a few stalwarts to cushion my portfolio during a market downturn. Eventually as the long term trend plays out, the probability of me getting a ten-bagger will be higher since I allocate more towards the fast-growers, with the caveat of short term volatility and uncertainty.

4. Know what you own, and why you own it

One up on Wall Street highlights the importance of understanding why we buy a stock.

There must be a detailed investigation of the company to justify the purchase. Fundamental analysis must support it and you must be able to explain easily to even a 3 year old why this stock is worth buying.

Peter Lynch points out that the reasons cannot be “the price is about to go up” or “A friend told me it’s going to shoot up”, which basically means you are speculating, and not conducting your due diligence with your investments.

Once we own the stock, it is also important to review the company periodically. If the company’s financial situation deteriorates, there might be reasons to sell the stock if the original thesis does not hold anymore.

So ultimately, before investing into anything, make sure to do your own due diligence, understand the business or asset thoroughly, and consider valuations. If all of these makes sense, the investment is sound and might be worth purchasing into.

5. Common Misconceptions and knowledge gaps

Peter Lynch also taught us that there are misconceptions among retail investors and a change in mindset will benefit the investor greatly and prevent them from making mistakes.

A few common ones are:

• “If it’s already so down, it won’t go any lower”: The thing is, you can never know the lowest price of a stock, and trying to predict the bottom is futile and should be avoided at all cost.

• “If the stock is near all time high, then it won’t go any higher”: Again, there’s no limit that defines how much the price of a company can grow since businesses generate profits and it can keep on going higher, which will be reflected by the share price over time.

• “It’s just 1$ per share, how much can I lose?”: It doesn’t matter how cheap the stock look, if you buy 1000 shares of Stock A for $1 each, and if you buy 4 shares of stock B for $250 shares each, you can lose all your investment if both companies go bankrupt or if the stocks gets delisted.

• “The price will recover”: There are some companies that never come back because they are already in their final stage of growth or if they are in a sunset industry. Examples include Kodak, Nokia, Blackberry, SPH

• “When it gets back to my cost price, I’ll sell”: If the company’s growth story is no longer in-tact and showing signs of further decline, you should probably take a loss and re-allocate the capital somewhere else. If you wait for it to “recover”, the price might go even lower and you end up catching falling knives.

• “It’s been so long, but nothing has happened”: Be patient. Sometimes it takes years for the market to realise the true value of a company. Just look at Microsoft’s chart over the long term.

Experts barely know what they are doing most of the time

Aside from these important lessons, one thing that struck me the most was how Wall Street made retail investors believe that they are incapable of getting market returns and only the experts can.

That is completely untrue. The experts don’t even know what’s going on most of the time because there are so many factors in play in the stock market and any models, any prediction and any analysis is at best a calculated guess, but nothing is absolute.

Finding your Circle Of Competence

Instead of buying into the idea that the average Joe should listen to financial experts, you should first determine where is your circle of competence.

Are you an engineer? Or an accountant? Or banker? Or are you a doctor? Regardless of the occupation, everyone has a different niche and circle of competence.

If you work in the car manufacturing industry, you have way more advantage than 90% of Wall Street analyst that haven’t even stepped into a car factory in their lives.

The key thing here is finding out your circle of competence and use it to your advantage. You can be an expert in the mining sector and make tons of money just from mining stocks because you understand the dynamics and you know the value of these companies.

However, if you are an expert in the mining sector but chose to chase after high flying tech stocks which you barely understand how the business model work and what product they are selling, (cough, Palantir, cough) don’t expect to make any money from it because everyone was chasing it and there was no conviction at all.

Research, Research, Research

Chasing hot stocks after hot stocks might be one of the most foolish, and easiest way to lose your wealth in the long run. Not only is chasing after high flying names time consuming, you are generally relying on hype and for the herd to chase after it.

Speculation is a dangerous game to play if you have absolutely no idea what’s going on. And right now there are many which are happening such as Gamestop, Doge Coin, SHIBA Inu Coin that most people are chasing after.

Always do your own research, understand the investment, and build conviction on it, so when things go south, you will be able to hold and have diamond hands against all odds and uncertainty.

My View on the Current Market

Right now, there is a combination of froth, euphoria and fear happening at the same time. The market is very confused right now with inflation at 4.2% and leveraged positions are being wiped out of the system over the past few weeks.

Some tech stocks have been beaten down by over 20% which might signal a buying opportunity, but again, remember to do your own research and don’t rush to buy anything based on anyone’s opinion.

Crypto is seeing a flood of FUD (Fear, Uncertainty, Doubt) right now. Elon Musk said that Bitcoin has environmental concerns but literally 75% of Bitcoin mining is derived from renewable energy and Bitcoin mining is derived from electricity, not fossil fuel.

Other than the energy FUD, mainstream media is also using the bad light to target Binance which creates even more fear in the crypto market. In my view, these are tactics to scare the weak hands away in order for big whales to load up their bags so they have a pie in the crypto market.

Also, with a gradual correction that is happening right now in both the tech stock and crypto markets, it is actually healthy because price going down meant that greed is being washed out and the market is actually de-risking itself from a potentially bigger crash.

Based on on-chain metrics and crypto adoption rates, I believe we are at the halfway point of the bull market especially for crypto. I personally bought the dip and accumulated more Bitcoin and Ethereum as well as a few other Altcoins but again crypto is highly cyclical and may not be for everyone.

With inflation fears that are highly irrational (you should hold asset and not cash during high inflation), I think it is an extremely good chance to buy into heavily discounted tech names but remember, cheap may become cheaper, so understand the business before doing anything else.

And that’s it! Have a great week ahead, stay safe and stay invested. Cheers!

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Of my entire investments in 2020, fees only take up 0.1% of my entire portfolio! (2018+2019+2020 combined across all brokers and Robo)

Alright that’s it! For now, think long term, tune out the noise and avoid the temptation of gambling meme stocks, think of the companies that will do well in the long run simply find bargains/dollar cost into your positions. If you need some inspiration for companies to research, you can check out my post on 5 stocks to buy if the market crashes here.

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