Grounded in basics

It's yet another primer on markets, but both veteran and novice investors can benefit from the lucid, sound advice.

Namrata Dadwal        Print Edition: December 2010

Essentials of Investing
The maze of financial markets is sinuous enough to stump investing tyros. There are the arterial highways (equity market, debt market, mutual funds), crisscrossing streets (currency derivatives, futures and options, exchangetraded funds), and twisting bylanes (short-selling, put option).

These daunting routes deter most people from investing in the market for they are rife with peril; one wrong move and you could lose a large chunk of your hardearned money.

A handy primer to navigate your way through the markets is the Essentials of Investing by Mark Skousen. The author doesn't offer instant, get rich formulas. In fact, he scoffs at the money managers who promise astronomical returns within a short span, say, a few months.

THE FOUR STAGES OF INVESTMENT PSYCHOLOGY

FEAR
Stock market and commodity crashes create panic among investors, who sell out at any price, usually resulting in a loss.

CAUTION
Investors are cautious during an upswing or downswing, preferring to wait until the momentum picks up.

CONFIDENCE
Investors enter the market when good news begins to filter in and stock prices rise, but they miss out on initial profits.

EUPHORIA
As the indices touch their peaks, investors begin buying randomly in huge quantities, paying more than the true valuations.
The idea is spread across the book as Skousen goes on to prove that such tall claims cannot hold true in the long run.

Instead, he advises readers that the only way to choose a good stock is to understand its true value and, as long as the company fundamentals are sound, they should stick to it.

He charts a plan that is easy-even for beginners. Skousen devotes the first eight chapters to ways in which investors can identify value. He also elaborates on the stock price fluctuations.

In the chapters, 'A Rocky Marriage' and 'The Perversity of Mr Market', he explains why the stock prices of fast growing companies rarely rise, whereas the companies that are yet to record good performances witness a high demand for their stocks.

It is such insights that make the book equally relevant for experienced investors as well as beginners.

Veteran investors often believe that their mass of experience will ensure they make a killing every time.

However, Skousen's list of financial gurus, who have occasionally made wrong predictions, is meant to drive home the point to such complacent investors.

He shrugs off technical analysts who swear by statistics; after all, the markets have often proved them wrong. Even the indices haven't been able to time their decisions correctly, he says.

Take the churning in the companies of the S&P 500, which Skousen highlights in the chapter 'The Growth Trap'. If the index had held on to its original set of firms (inception in 1957), the returns delivered by it would have been higher than those generated by the continually updated version. He also cautions investors to stay away from initial public offerings, saying that these are skewed towards promoters.

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