Posted on February 21, 2009 - by musicwhiz

Gaining Knowledge from Books

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In my quest to improve myself, I have taken to reading more books in order to furnish myself with the required knowledge and basic competence to understand equity investments as well as the world around me. In addition, I have also recently started to read other types of books to expand my breadth of knowledge instead of just focusing on depth of knowledge. There are a few basic types of books which I read and I shall list down the main categories and at the same time, give a few examples:-

1) Books on Value Investing -

This is clearly self-explanatory and forms the basis for my knowledge for value investing techniques and principles. Such books are usually written with either Benjamin Graham or Warren Buffett as an example because they embody the essence of value investment, and these books attempt to distill the knowledge, methods and techniques used by these great investors and list them out to the layman reader. Suffice to say that the books offer just a foundation for understanding what goes into value investing, but the actual practitioner’s effort should concentrate on modifying his style to suit his temperament, abilities and be country-focused (USA companies are different from Singapore companies in terms of certain aspects of revenue recognition, depreciation policy and tax regimes). No book can prescribe a method for proper investment except to lay down the template and fundamentals, and teach one how to interpret and understand financial statements.

Examples of such books are “The Intelligent Investor” by Benjamin Graham and “Warren Buffett Wealth” by Robert P. Miles.

2) Books on Behavioural Finance -

These books deal with a somewhat new and emerging philosophy which goes against the traditional beliefs in the efficient market hypothesis. This new branch of psychology is called Behavioural Finance and deals with people’s behaviour and attitudes towards handling investments and money. Examples can be found in my behavioural finance series which include terms such as loss aversion, over-confidence and anchoring, among others. Behavioural Finance is important as it defines an investor’s moods and behaviour with regards to his investment, and also help to explain market psychology and can help one to understand his own money management techniques and habits. With this knowledge, one can become more aware of these biases and behaviours and seek to actively correct them. Without the benefit of this knowledge, I may have suffered from a number of so-called “stereotypical” traits without being cognizant of them, thus severely impairing my ability to make worthwhile investments. I would strongly recommend that readers delve into such books to enhance their understand of the human psyche and to be aware of their own worst enemy within them !

Examples of such books include “The 7 Sins of Investing” by Maury Fertig and “Your Money and Your Brain” by Jason Zweig. Read more…

Related posts:

1. Is Investing Gambling?
2. Education is the only solution
3. Behavioural Finance Part 5 – Gambler’s Fallacy