Thursday, March 30, 2006

Sun Tsu on Investing - Book extract

Just want to share some extract from the book " Sun Tsu on Investing" by Curtis J. Montgomery from

"Investing is all about risk. The more risk you take, the higher your potential returns. And this is all correct, except for the fact that it is exactly wrong. Investing is all about perceived risk. Where you as an investor have an advantage is only in situations can correctly assess that the market has overestimated (or underestimated) future risk or returns. That requires foreknowledge)"

Markets always overreact when there is bad or good news. When there is good news, market tends to overestimate the future returns and push the price of the stock to unreasonable new highs and when there is a bad news the market tends to underestimate the future returns and bring the stock price to new lows. That is why i think CANSLIM point N for buying at New highs are not a very wise move. One good example is the internet bubble where P/E ratio reaches 300 plus for some stocks.

"... low price are usually offered only on less-than-excellence business, or at least those business currently perceived to be less-than-excellent by other investors and analysts. Since the majority of investors and analysts regularly and predictably overestimate the value of the business perceived to be excellent, and just as regularly and predictably value the business they perceived to be less-than-excellent, Sun Tsu style investors learn to intelligently discern victory as they investigate those low-priced out of favour stocks. A good place to begin your search is a list of low P/E stocks."

Hence in comparison to the CANSLIM method of selecting leaders, this suggest that we should select companies that have not emerge as leaders but will be in the long term. This way you would not pay high premiums for stocks (i.e. high P/E) that are already leaders, paying lesser for emerging leaders. Of course, in some sectors the leaders are too strong to be overtaken and there are small probabilities that others will emerge as a leader. For example Starbucks in the coffee retail industry. Its easier said than done to find emerging leaders as good foresight are required.


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