Better understanding of investments, Diversification, Books, The Economy...

Books:

You should be very careful what you read and who wrote it. You want to keep the noise to a minimum.

Read and re-read intelligent investor. May be boring but you need to understand what he says in that book.

Then go read The little book on value investing. By Christopher Browne. There is a lot of good additional material on his funds site, tweedybrowne.com

Before getting into Security Anaysis (1940 best to begin with) I would become familiar with what some accounting:

Tutorial on Financial Statements:

http://www.baruch.cuny.edu/tutorials/statements/


As you are learning try to think about the following: what is the company really earning and what can they expect to earn in the future? Also what do you reasonably not know?


Diversification?

Diversification is over used. The typical issue with investing in only a few businesses is that aggregate returns could be adversely affected by any one security. Investment selection should be based upon a thorough
understanding of each business and its underlying economics, acquired only at sensible prices. While seemingly obvious, the fact is that most people who buy fractional ownership do not know nearly what they should to make informed long-term investment decisions (the so called "professionals" included).

Ultimately, the premise is that it makes more sense to invest large amounts in those businesses with which you understand a great deal, instead of putting very small amounts in many business that you understand very little. Concentration may very well decrease risk if it raises, as it should, both the intensity with which an investor thinks about a business and the comfort-level he must feel with its economic characteristics before buying an ownership interest.


Some stuff to think about:

The fundamental purpose to save or invest versus spend is to have more money in the future. In a simple world, one without inflation or investments as alternatives to saving, the money grows through saving more out of income relative to what is consumed, or spent. Today’s dollars are valued in the same terms as are tomorrow’s dollars. Any interest earned on savings translates into increased purchasing power-the ability to buy something.
Introduce Inflation and money not spent must earn an amount equal to the inflation rate just to maintain purchasing power. This is because $1 today with 3% inflation means that you need $1.03 in a year from now in order to have the same "purchasing power". That is what costs $1 today costs $1.03 next year, so if you save (or invest) you must earn at least 3%, otherwise you have less money than you started with. If you are unable to earn 3% you should just spend the money.

In this world the fundamental problem is where to put money in order to grow future purchasing power. This implies a reasonable rate of return over inflation (ignoring income taxes for now).


On the Economy:

A few things on the economy and the "markets". Don't worry about what people say, friends, media, whoever. In the last 100 years we have had two world wars, a great depression where unemployment reached unbelievable levels, two almost three serious financial fiascos, 9-11, the cold war, an assassinated president, etc. yet our living standards increased seven-fold. So called "bad-times" lead to good investment opportunities because of depressed prices, but only those who didn't loose money are able to take advantage of this. I'll spare you, with more details. The moral being do not pay attention to discussions about interest rates, the economy, the stock market, etc. do what makes sense at all times, nothing less.


I hate thinking of business valuations like this but you may come across such terms and should be familiar with them:

Generally speaking, there are two very broad and contrasting ideas: a “macro” perspective as opposed to a "micro" perspective. A macro approach is often also called a “top down approach” whereas micro is bottom up. Basically the macro approach looks at things like sectors or industries, potential changes in interest rates, foreign exchange rates, and the like. For more information on the differences between top down and bottom up see the following link:

http://www.tiaa-cref.org/about/press/publications/market_monitor/2006_11_20.
pdf


It takes time and effort!

If investing were easy to do there would be many, many more people like Warren Buffet. And while there are many people that have made great fortunes in the investment management and related businesses nearly all of them made their money on fees not associated with actual investment results. So this is one reason not to pay attention to about 99% of these guys especially those on TV. Of the investors who actually invest in securities with successful long term “track records” nearly all of them might be referred to as Value Investors, with the exception of maybe one. George Soros is a successful investor who practices what seems to be a very much top down approach, but the problem is that he cannot explain his success although others will claim that they can. Some have written books about his approach, but if they truly understood it they would apply it by investing and not so much by writing books. (Same goes for all those books on Buffett.)

It is not my intent to undermine investors like Soros, but his approach or selection process is almost equivalent to throwing darts (at least as far as outsiders are concerned). For one, it is truly difficult to determine what
the ultimate factors were in their decision making process.

Assume one makes a decision to buy a given stock, the stock price goes up, and then the person decided to sell ­at a profit. Can it be said that a good investment decision has been made?

This has a very dangerous implication too often overlooked. Just because you made money on an investment doesn’t necessarily make it a good decision. If you invested in a housing company and a year later you sell making a 20% return on your investment you might conclude that indeed your choice was a good one in which case you are likely to make future investments based upon a similar thought process. But if the reason you decided to invest in that company was made based upon a belief that demand for new housing was to increase in the near term, but the company decided that demand for new houses was actually declining and in response they issued a regular dividend that appealed to the big mutual funds resulting in the biding up of the stock price.

Such would not qualify as a good investment decision in my mind, because the next investment
is not likely to result in such a positive outcome. That is, the next company you invest in may not have funds to distribute as a dividend and the price may very well then drop off significantly-the direct result of failing to account for price paid relative to reasonable business value.

"You are correct only because your decision was based on the facts and sound logic."


The Term Value Investing:

By the way The term Value investor is redundant. Value investing is considered purchasing businesses for less than they would sell to a knowledgeable buyer in a negotiated transaction. But this is the only form
of an "investment", otherwise you are speculating. Furthermore, the purchase of commons stocks must always be thought of as buying fractional ownership of the entire business. So think of "Value Investing" simply as "investing" and everything else as speculating. Speculating is the purchase of a "stock" on the basis that you believe the stock price will go up. Speculators in other words, DO NOT ask themselves (i) what exactly am I buying and (ii) is the price being offered an attractive one?