The history of investing is full of contradictions. Every one wants to beat the market, but few investors do so consistently. There seem to be few common denominators, at least on the surface, among these successful investors. They use very different investment strategies and subscribe to very different, and at times, contradictory, views of how markets work and what leads to success. Some attest to the efficacy of charts and technical indicators, while others claim that fundamentals hold the key. Even within these broad groups, there are disagreements. Among those who subscribe to fundamentals, for instance, are both ‘value investors’, who trace their lineage back to Benjamin Graham, and ‘growth investors’.
All to often, we as investors are drawn by the success of those who have succeeded in this very competitive game – Warren Buffett and Peter Lynch, for instance, come to mind. We read books on how they succeeded and try to imitate them as best as we can. All to often, we find out, a little later and lot poorer, that imitating investment masters is a poor substitute for having a well thought out investment philosophy that meshes with our own strengths and psychological profiles. If there is a lesson that this book hopes to convey, it is not that there is one dominant or best investment philosophy that works for all investors, but that some philosophies fit some investors better than others.
The co-existence of so many investment philosophies in the market place raises several important issues –
Š What are the themes that underlie each of these investment philosophies? What are the differences in the way investors in each of these camps view the way the market works?
Š How do investors in each group, or at least the most successful among them, go about putting their philosophies into practice?
Š What are the characteristics that most define success in each philosophy? Is it research or is it timing? Is it patience or execution speed?
Š Is there any characteristic that investors who are successful share with each other, irrespective of investment philosophy? What is more important, consistency or flexibility?
In this book, we will go beyond investment strategies and look at the underlying philosophies. While we will talk about successful proponents and strategies within each philosophy, we will focus on the big picture. In other words, this is a book about ideas and not investors.
While writing this book, I wrestled with the idea of presenting investment philosophies without dealing with the details of risk, accounting valuation. I ultimately decided that it could not be done. Consequently, I spend five chapters early in the book (chapters 2 through 6) retracing the basics of risk (chapter 2), accounting (chapter 3), valuation (chapter 4), taxes and trading costs (chapter 5) and market efficiency (chapter 6). You can skip some or all of these chapters, if you feel comfortable with these topics, and go to chapter 7 where I begin my examination of investment philosophies. Within each chapter, you will find extensive references to academic and practitioner research on individual strategies. While these frequent references may be distracting to some of you, I hope that they will be useful if you want to consider any of these strategies for your own investment portfolio,
In closing, I want to emphasize that investing is a learning process where what we read and what we experience changes our views of how best to invest. Even in the course of the writing this book, my views have evolved on some issues and changed on others. I do not have the answers to all of your investment questions, but this book hopefully will go some of the way towards helping you answer them on your own.