Title: Des klugen Investors Handbuch

Author: Dr. Markus Elsässer

Hi all,

This time I have snatched up another investment book, sadly only available in German. Therefore, as I always do, I will give you the highlights from the book.

As I have seen most other finance books do, they start off the book with the mindset that investor needs to adopt before starting to engage in trades. Thus, if all/most books stress this as important, then there definitely is something behind it.

The structure of the book is outlined below, into four sections, together with some of the take-aways that I wanted to highlight to you. Each chapter has more lessons within it, so read up:

I. The Investor – acknowledging ones own psyche

• Speculator vs. Investor – The starting point is to know whether you are an investor or speculator. This needs to align with the kind of person that you are; the reason for this is that if you would not be comfortable with trading daily, then maybe the approach isn’t for your.
• Identity – You shouldn’t try and become like your idol investor/businessman. You should study what they did in this world and see if that works for you as well, but you should retain your identity.
• Think % – When you look at the return that you made on an investment, do you look at the absolute amount (i.e. currency amount) or the % return on investment? The best measure is the % return, because this is the more important measure since that % will apply to every single currency unit you choose to invest.
• 10% rule – Starting to build wealth requires you to start somewhere with something. A good starting point is to take 10% of your earnings and invest that, then you live off the rest. Do not save what is left over after all the expenses were paid for the month.
• (7 more but you will need to read them up)

II. The Portfolio – not letting weeds stand idle

• Power of cash – An investor should always have some cash available to invest. Sometimes a big opportunity arises and then, when you have nothing put away, you miss the opportunity to jump in on the low, cheaper end.
• High standard – However, just because an entity’s price drops doesn’t mean it is a great opportunity. Company stock prices are driven by human emotions. When something bad comes up from the company then people like to sell, driving down the price. You may think this is an opportunity to jump in, yet, the company may not be good. Therefore, always have a standard against which you measure every company. If it doesn’t meet any of the criteria for you to invest in a company, then maybe it isn’t an opportunity.
• Power of dividends – It may sound fantastic when you see that your investment has paid out some of their earnings to you. Maybe you will take some of ‘your winnings’ and spent it on something nice. You have every right, but when you are trying to build up wealth another approach would be to reinvest your returns for more shares. This will then allow you to earn a return on your initial capital + returns on previous returns.
• Exit strategy – Even though we are not yet half-way through another lesson is that you should also have an exit strategy when you buy your shares. Why? Because you shouldn’t fall in love with the business, but should remember that your investment was made so it can generate a return. If the company, however, is no longer growing, but moving backwards, it would be advisable to let go and count your winnings. Most companies don’t exist for more than 50 years (own assumption – no data) and less survive 100 or 200 years. Therefore, an exit should always be something to keep in consideration.
• Don’t calculate your wealth too often – Another suggestion is to not look at your portfolio too often. You should give due consideration when you make a decision to buy a share in a company, and then let it rest for long periods of time. Thus, making good investment decisions will allow you to ignore the short-term noise coming from the herd and trend setters.
• (11 more lessons in the book)

III. The Stock Exchange – finding the great opportunities

• Taking the step, taking the risk – Making an investment will expose you to risks that your investment will drop in value or even result in liquidation. That is why you need to pick good companies. Also, we are sadly living in a world where central banks are printing a lot of money for government projects that never seem to end. This printing action results in the purchasing power of your money dropping every month/quarter/year, depending on the government. Thus, leaving money under the pillow or in the bank doesn’t avoid this silent tax called inflation. Another thing to consider is that no country is exempt from this. As an example, Germany today has a strong economy, yet, it once too had a hyper-inflation that caused its people to lose savings, only 100 years ago.
• Silent treasures – When you look for companies that have strong value one aspect you can look at is the company share price vs. company assets value. The market is driven solely by supply and demand and not based on economic reality. Therefore, if you can find a strong company (i.e. well established) which has many assets to back its liabilities, then you have some silent reserves.
• IPO effect – Something to be careful of is to get involved in the hype of another IPO. People buying the stock of a new company, hoping to be early birds and making significant returns early on. However, when the company doesn’t have a good foundation this often results in the price eventually dropping lower than its initial selling price.
• Two types of shares – When you decided between preference shares and ordinary shares, know that should the board wish to sell additional shares or a part of the company, you won’t be able to alter the decision, or even cast a vote when you bought the preference shares. Therefore, determine whether having a vote isn’t worth the extra few dollars.
• Monday is a no-go – You shouldn’t make a buy order on Mondays because over the weekend most amateur investors had some time to look through some investment reports and then want to kickstart the week by placing the order and then get back to work. Multiply this by a few thousand/million, and the price is already driven up, without the company having produced so much yet.
• (7 more in the book)

IV. The Business world – the reality looks different

• The management report – One of the reports to read from the information pack that is supplied at the end of the financial year is the management report. This is where the executives discuss what happened during the year, why they met/failed to meet their goals, and what are their plans for the future. If you plan you put your money into a company for the long term you will want to know that the company has plans in place to make money in the future.
• Innovation vs Imitator – Understand what the business model is of the company. If they try new things, they will incur some expenses into research that may never bear fruit, sometimes it will, but only much much later. This may not sit well with some investors. However, if they found something new they can produce it before everyone else and enjoy the pioneer profits before the others. On the other hand, the imitator companies don’t do a lot of invention, but try and stick with the trend by producing a competitor product to something that already is in the market. It is more stable, but it won’t have the same opportunity as the innovator to earns pioneer profits at the same rate.
• Customer satisfaction – Something else to look in to is how satisfied customers are with the product/services the company has to offer. If customers are satisfied, then it is a good indicator that the company may exist for some time. If, however, the company has a bad reputation, then the laws of economics may play against them and demand will no longer be there for their products. The benefit of today’s society is that we can see reviews online, and don’t need a news paper from the local store.
• World business perspective – Something else to consider is that when you look at the business you shouldn’t narrow your view within one country, but also understand what is happening in other parts of the world. There, you may see trends in society that your country will also adopt (and thus your business be best suited to when that comes around). You should always look out for the future and whether your company is up to it.
  • Remember, you own a share of the company and can therefore voice your ideas and questions at the annual general meetings (AGMs) because sometimes not even the executives could have thought of that
• (8 more in the book)

Summary:

The book is small, and gives vital lessons that a person can approach the subject investing informed and with caution. It breaks down what everything is really about for the starter and the seasoned investor. Thus, it is well suited for all investors because it lays down the foundation that should be kept throughout the journey. The book receives a well deserved 4.75/5.

As a final message, I want to leave you with something that I have picked up from reading these finance and economics books. And that is that they give us advice to follow, and the advice seems simple (not overly complex) and they tell us that we need to stick to that formula. Yet, instead of sticking to our method, we deviate and try something else because we feel it isn’t working. We are impatient for results, and here lies the crux. Even though we know very well about the concept of delayed gratification, we still chase after instant gratification.

As a lesson, try and practice patience and remind yourself that what you are doing won’t pay off now, but only in the long run.

All the best!