This is part 5 of the book summary covering chapters 15-19.
Previous parts can be found here. Part 1 Part2 Part 3 Part 4
Chapter 15: International accounting
- Companies in US have two sets of books, one for IRS and one for investors
- In Europe, only one set of books.
- Example of Lindt. P/E on surface was 10 which was attractive by itself for a major consumer brand. Looking at depreciation and comparing to others, Lindt had high depreciation as % of sales. Double of industry. After adjusting this, the P/E was 7.5. ( Lesson: Look beneath the numbers and the statements and accounting rules)
- Usually such rules meant lower earnings were reported and lower asset values (as compared to US rules).
- ADRs make it easy to invest in international companies.
Chapter 16: Currency issues, hedging
- When you invest in foreign stocks, another aspect to consider is the currency. Currency could fluctuate against your local currency. You could choose to hedge the currency so that your return is dependent on the underlying investment.
- Example: If you buy 1000 pounds worth of a company stock, you could SELL a currency forward contract for 1000 pounds.
- Another idea is to not hedge for currency. Over long periods, currency effects are neutral.
- What does not work is switching from hedged to unhedged approach depending on your guess of the currency movements.
Chapter 17: Market timing does not work. Avoid it.
- 80-90% of the stock returns come from 2-7% of the time.
Chapter 18: Stocks versus Bonds. Avoid Bonds if you have a long term horizon.
In Jeremy Siegels' book Stocks for the Long Run, he shows that stocks as measured by an index beat bonds and cash in every 30 year rolling period from 1871 to 1992. In 10 year rolling periods, stocks beat bonds 80% of the time.
- Keep 3 years of spending in short term bonds/ cash. You will then not have to sell stocks when they are at their lowest.
Chapter 19: How do you pick a money manager?
1) Does the manager have an investment approach and can explain it to you or any layperson in plain English. Has he applied it consistently over time?
2) How is his Track record? Min 5 years, Prefer 10 years.
3) Whose record is it? Is it the manager who is presenting or his predecessor?
4) Do they eat their own cooking?
5) Does he own the investment management firm?
In the last article, I will conclude the summary of this book.
Previous parts can be found here. Part 1 Part2 Part 3 Part 4
Chapter 15: International accounting
- Companies in US have two sets of books, one for IRS and one for investors
- In Europe, only one set of books.
- Example of Lindt. P/E on surface was 10 which was attractive by itself for a major consumer brand. Looking at depreciation and comparing to others, Lindt had high depreciation as % of sales. Double of industry. After adjusting this, the P/E was 7.5. ( Lesson: Look beneath the numbers and the statements and accounting rules)
- Usually such rules meant lower earnings were reported and lower asset values (as compared to US rules).
- ADRs make it easy to invest in international companies.
Chapter 16: Currency issues, hedging
- When you invest in foreign stocks, another aspect to consider is the currency. Currency could fluctuate against your local currency. You could choose to hedge the currency so that your return is dependent on the underlying investment.
- Example: If you buy 1000 pounds worth of a company stock, you could SELL a currency forward contract for 1000 pounds.
- Another idea is to not hedge for currency. Over long periods, currency effects are neutral.
- What does not work is switching from hedged to unhedged approach depending on your guess of the currency movements.
Chapter 17: Market timing does not work. Avoid it.
- 80-90% of the stock returns come from 2-7% of the time.
Chapter 18: Stocks versus Bonds. Avoid Bonds if you have a long term horizon.
In Jeremy Siegels' book Stocks for the Long Run, he shows that stocks as measured by an index beat bonds and cash in every 30 year rolling period from 1871 to 1992. In 10 year rolling periods, stocks beat bonds 80% of the time.
- Keep 3 years of spending in short term bonds/ cash. You will then not have to sell stocks when they are at their lowest.
Chapter 19: How do you pick a money manager?
1) Does the manager have an investment approach and can explain it to you or any layperson in plain English. Has he applied it consistently over time?
2) How is his Track record? Min 5 years, Prefer 10 years.
3) Whose record is it? Is it the manager who is presenting or his predecessor?
4) Do they eat their own cooking?
5) Does he own the investment management firm?
In the last article, I will conclude the summary of this book.
