What is the modern day equivalent of a golden goose? Peter Stanyer’s answer — a good investment strategy. Chances are you’ll scoff.
Haven’t you heard that ubiquitous yet baffling term time and again — investment strategy? Similar to a lazy scribe’s notorious scrawl — "strong market fundamentals", something that is rarely if ever explained. Stanyer is out to prove you wrong. He does talk about strategy; in fact strategies for intelligently investing your money, things you can implement, scribble notes on and keep revisiting.
But this guide from the prestigious stable of The Economist is not what many Indians (thanks to our education system) would call a "good" book — no bulleted points to tell you how to or where to put how much of your savings, how to exit funds or magic mantras to time the stock markets. If you are ready to sit with Stanyer over your coffee for some days and patiently read, internalise and adapt his suggestions to the Indian finance environment, this is a must read.CHOOSE YOUR INVESTOR TYPE |
| The subsistence farmer |
| Grows food crops first and allocates remaining land to cash crops. Such investors have the "safety-first" portfolio. |
| The champion poker player |
| Allows a fixed amount of bankroll to be lost. Such investors take risks with limited funds. If they lose it all, they stop speculating. |
| The obedient husband |
| Has an agreement with wife to risk only interest income and returns from investments. Such investors can regularly take risks even if they fail. |
The book’s completely American thrust might be a put off initially. All examples, theories and insights are based on the American finance market, at best including a few European or Japanese case studies. However, this should not deter a discerning reader.
Many of the clearly defined instruments and data sources mentioned in the guide are yet to be as pervasive or in a few cases even launched in India.
However readers have much to learn from the underlying concept and theory behind choosing them as investment options.
Strategies are developed on the optimum trade-off between risk and reward customised to the financial goals of each individual and the fund size available for it. This core remains the same for investment strategies across the globe, the only difference being application. For instance, Stanyer claims that a particular type of investment should be chosen on the basis of the premium on returns above safe-haven investments of similar lock-in periods and according to the degree of their inherent risk. He mentions inflation-linked government bonds in the US as one such safe haven.
Though in India we are yet to see such instruments, the message is clear; returns on investment should be above inflation by an approximate percentage.
Readers are spared from collating such investment nuggets as Stanyer has gathered them in the first part of the book. Here he weaves these fundamentals with the philosophies behind investments and investing styles. The academician in Stanyer comes to the forefront when through a discussion of traditional and behavioral finance he unravels the psychology of investors which subtly influence their decision. You are brought into a world of regret risks, herd behaviour, bad outcomes and shortfall in expectations, reaction to action and inaction, self-attribution of successes and investor biases. Admittedly, it does get a little dull. Not that the concepts are uninteresting, only that once you’ve grasped them you would like to skip the explanations and examples.
But the simplicity of content and style make it worth the while. Stanyer engages the reader in evolving strategies using little more than common sense. If you’ve ever wondered what wealth managers mean when they say diversify or hedge, you’ll get the answers here. The guide clearly tells you to first identify a niche segment of investment, which suits your risk appetite , needs and aptitude.
Any deviation from this implies diversification and should occur not only across asset classes but also within an asset class. Stanyer emphasises the need to compare and contrast returns, put a price to your risk, tot up costs and then choose an investment option according to when you need the money.
He underlines the differences between short- and long-term investments based on these points and good and bad volatility. Stanyer brings forth the good and bad of every investment decision, but unlike others, doesn’t sit on the fence. He usually concludes each discussion by endorsing a particular option with adequate reasons for choosing it over others.
In fact it is exciting to apply different concepts to each asset class which have a chapter each devoted to them in the latter half of the book. But Stanyer beats you to it. Each time your thinking seems in sync with the author’s, he spins a novelty. Consider what he says about building “bond ladders” so that you invest in bonds that mature in different years to ensure recurring income, or that AAA-rated debt instruments ought to give you a premium on returns because having reached the top they can only stabilise for a while and then fall.
While such commonsense tips clearly have my favour, for those who insist on number crunching to prove a decision, Stanyer has done that too. Innovatively and thoroughly, he has gleaned important patterns and results to illustrate each investment strategy. When he suggests that equity has usually outperformed bonds and cash in inflationary times, calculations and historical data are in place.
There are a few sections in the book that are not very relevant to the Indian reader—hedge funds, private equity and currency hedging being the important areas. But these deserve a read as they might be in vogue in the near future. If you are still a little wary of the textbook feel of this useful guide, purchase it and casually leave it on your coffee table with a book mark. Once your financial planner sees it, be sure he won’t try and con you this time.
