The

 Unpopular  Method  
 
The  course  explained  through  the  words  of  Warren  Buffett  
 
“To   invest   successfully   over   a   lifetime   does   not   require   a   stratospheric   IQ,  
unusual   business   insights,   or   inside   information.   What’s   needed   is   a   sound  
intellectual   framework   for   making   decisions   and   the   ability   to   keep   emotions  
from  corroding  that  framework.”  
 
According  to  Warren  Buffett,  to  become  a  successful  investor  
 
• What  you  don’t  need?  
 
1. A  stratospheric  IQ  
2. Unusual  business  insights  or    
3. Inside  information  
 
• What  you  need?  
 
1. A  sound  intellectual  framework  for  making  decisions  and    
2. The  ability  to  keep  emotions  from  corroding  that  framework  
 
 
Who  are  ‘Stock  Market  Experts’?  
 
In  general  terms,  it’s  fair  to  say  that  a  stock  market  expert  is  a  person  who  has  
the  following  
1. A  stratospheric  IQ  
2. Unusual  business  insights  or    
3. Inside  information  
 
So  as  it  is  evident,  generally  stock  market  experts  display  a  formula  for  failure.  
The  following  examples  illustrate  it.  
 
• Performance  of  mutual  funds  
In  2012,  66.08  percent  of  all  domestic  equity  mutual  funds  under-­‐performed  
when  matched  against  the  S&P  1500.  In  2011  a  swollen  84.07  percent  were  
laggards  
 
• Expert  predictions  
"Dow  36,000:  The  New  Strategy  for  Profiting  From  the  Coming  Rise  in  the  Stock  
Market"  is  a  book  by  James  Glassman  and  Kevin  Hassett.  Published  in  1999,  it  is  
an   unmistakable   product   of   a   time   when   a   bursting   dot-­‐com   bubble   was  
unimaginable  and  irrational  exuberance  was  contagious  
 
• Stock  market  formulas    
What  Works  on  Wall  Street,  The  Foolish  Four,  The  January  Effect  
 
(We   are   not   discrediting   some   of   the   greats   in   the   stock   market   who   have  
displayed  discipline  and  skill  in  their  investing  and  gained  superior  results.  But  
unfortunately,   the   majority   seems   to   be   lacking   those   necessary   qualities  
required  for  success)  
 
How  popular  methods  fail?  
 
In   the   previous   section,   we   gave   examples   of   expert   predictions   and   formulas  
that   did   not   keep   up   with   their   promises.   Some   of   these   failed   at   launch   and  
others   became   ineffective   after   sometime.   A   few   reasons   for   the   failure   are   as  
follows  
 
• Financial  models  do  not  capture  the  whole  picture  ex:  100%  risk  assessment  
is  not  possible  
• Popular  methods  fail  once  publicized,  as  a  large  number  of  people  start  using  
them,  the  market  starts  reflecting  it,  making  the  once  effective  method  
obsolete.  ex  :  The  January  Effect  
• They  are  not  based  on  logic  and  does  not  apply  to  most  situations  /  people  ex  
:  The  Foolish  Four,  Buy  what  you  know  
 
Additional  Notes  
 
The  January  Effect  
 
In  the  1980s,  many  articles  and  books  explained  this  method,  which  says  that  if  
you  buy  stock  in  the  end  of  December,  and  held  them  through  January  you  would  
beat   the   market   by   over   5   percentage   points.   The   reason   for   this   is   that   most  
people  used  to  sell  in  the  end  of  the  year  and  buy  more  in  early  January  to  create  
tax   losses   to   offset   capital   gains.   But   now,   due   to   the   tax   shelter   offered   by  
retirement  funds,  this  sell  off  doesn’t  happen  and  the  effect  is  not  prominent.  
 
The  Foolish  Four  
 
A   formula   put   forward   by   the   Motley   Fool   website   which   claimed   to   be   able   to  
beat  the  market  and  ‘crush’  the  mutual  funds  by  only  spending  15  minutes  per  
year.  Thorough  analysis  of  this  method  reveals  that  there  is  not  logic  behind  it.  
Jason  Zweig,  in  the  revised  edition  of  the  Intelligent  Investor  comments  that  such  
methods   are   based   on   patterns   identified   in   analyzing   large   amounts   of   data.  
There  is  no  guarantee  that  those  patterns  will  continue  in  the  future.  
 
Buy  what  you  know  
 
The   great   Peter   Lynch,   in   his   book   ‘One   Up   on   Wall   Street:   How   to   Use   What   You  
Already   Know   to   Make   Money   in   the   Market’   says   that   you   are   better   off  
investing   in   stocks   of   industries   you   are   familiar   with.   So   it   would   mean   that   if  
you  are  familiar  with  airlines,  you  should  buy  airline  stock.  If  you  are  a  techie,  a  
technology  stock  you  know  will  give  you  a  good  return.  But  history  has  proved  
this  wrong.  Airlines  are  a  terrible  industry  to  invest  in  and  most  tech  companies  
blew   up   during   the   dot   com   bubble.   Another   unfortunate   case   is   Enron,   where  
almost  all  the  employees  invested  in  their  own  company,  the  one  they  are  most  
familiar  with.  
 
A  Fundamental  Error  
 
When  analyzing  these  popular  methods  and  formulas,  it  was  clear  that  the  failure  
for  all  these  were  as  a  result  of  one  common  error  they  have  made  
 
• Predicting  the  future  (market,  economy,  performance  of  individual  stock)  
 
The  reason  for  the  failure  of  these  experts  is  that  their  superior  knowledge  and  
experience  has  given  them  a  sort  of  confidence  that  they  can  predict  the  future.  
Also   it   is   a   proven   fact   that   people   tend   to   look   for   patterns   based   on   past  
performance,  it  could  be  the  market,  the  economy  or  a  stock.  Then  once  a  pattern  
is  determined,  they  use  it  to  predict  the  future.  A  pattern  is  valid  as  long  as  the  
external   factors   affecting   it   are   constant.   But   in   the   real   world   they   are   not.  
Mathematical   formulas   do   not   capture   the   whole   picture,   they   never   do.   Risk  
assessment  is  never  done  with  a  100%  accuracy.  
 
Therefore  we  are  passing  down  the  stock  market  advice  that  Benjamin  Graham  
has  given  over  6  decades  ago,  ‘DO  NOT  TRY  TO  PREDICT  THE  FUTURE’  
It  is  always  wise  to  look  at  the  available  facts  and  make  decisions.  
 
Four  key  requirements  for  long-­‐term  investing  success  
 
1. Mental  discipline  
2. Basic  financial  knowledge  
3. Time  and  effort  for  analyzing  companies  
4. Long  term  emphasis  
 
Mental  Discipline  
 
• Refrain   from   speculation:   Trading   in   the   stock   market,   trading  
commodities  etc.  
• Logic   over   optimism:   Use   logic   and   available   facts   to   make   your   investing  
decisions.   For   example   when   you   are   buying   a   stock,   base   the   decision   on  
financial   analysis   and   other   information   rather   than   on   expectation   that  
the   stock   will   perform   better   in   the   future.   When   picking   a   stock,   make  
sure   you   buy   one   that   you’d   want   to   keep   even   if   the   stock   goes   up,   down  
or  even  stays  neutral.  
• Don’t  follow  the  crowd:  Doing  what  everyone  does  is  a  big  NO  in  the  stock  
market.   Don’t   base   your   actions   on   what   the   majority   does   or   what   you  
see  on  TV  .  So  on  what  should  you  act  on?  See  the  last  point.  
• Patience:  Patience  is  important  if  you  want  to  avoid  losses.  Stocks  you  buy  
will   not   go   up   in   price   the   next   year.   It   might   even   drop.   Given   that   you  
bought   stocks   knowing   this,   hold   on   to   it   as   long   as   you   planned.   Base  
your  buying  and  selling  on  your  principles.    
• Stick   to   your   principles:   Throughout   the   lesson   we   will   be   discussing  
principles  and   techniques   that   you   can   use   in   investing.   Using   them,   form  
 a   set   of   principles   to   guide   your   actions.   Then   follow   them   for   at   least   5  
years.   By   the   end   of   this   period   you   will   have   the   experience   and   the  
knowledge  to  alter  these  principles  and  polish  them  as  required.  
 
 
Basic  Financial  Knowledge  
 
• Stock  market  basics  
• Financial  vocabulary  
• Financial  statements  basics  
 
All  three  will  be  explained  in  the  course.  So  you  will  be  in  a  position  to  make  start  
your   investing   career   by   the   end   of   the   course.   But   we   are   not   covering  
‘everything’   you   need   to   make   your   millions.   There   are   a   lot   of   things   that   you  
will  come  across  when  you  get  involved  in  the  stock  market.  But  the  basics  you  
learn   here   will   give   you   the   knowledge   to   understand   more   advanced   terms,  
concepts  and  theories  later  in  your  career.  Even  in  financial  statements,  we  are  
covering   more   than   sufficient   information   for   you   to   analyze   a   company.   But  
there   are   always   deviations   in   the   real   world.   So   the   more   you   analyze  
companies,  the  more  you  read  statements,  the  more  you  will  learn  from  them.  
 
 
 
Time  and  effort  for  analyzing  companies  
 
• Investing   in   the   stock   market   requires   you   to   spend   time   analyzing  
companies.   This   involves   financial   statement   analysis   and   also   doing  
background  checks  to  better  understand  the  figures  given  in  statements.  
In  the  beginning  stage,  new  investors  need  more  time  and  effort  for  these.  
But   only   3-­‐4   hours   a   week   is   recommended   for   a   beginner   because   it  
might   be   overwhelming.   3-­‐4   hours   will   give   him   enough   time   to   work  
without   making   it   a   burden   on   him.   But   once   you   get   the   hang   of   it   and  
starts  enjoying  it,  gradually  increase  the  time  spent  as  required.    
• They  need  not  be  serious  work  hours,  just  grab  an  ice  tea,  open  up  a  
statement  and  go  through  it.  
• Intelligent  effort  is  learning  while  practically  involved  in  analyzing  
companies  and  selecting  stock,  gradually  improving  your  own  
performance.  
 
Long-­‐term  emphasis  
 
“Investing  should  be  like  watching  paint  dry  or  watching  grass  grow.  If  you  want  
excitement...go  to  Las  Vegas.”  -­‐Paul  Samuelson  
 
The  quote  gives  a  good  idea  of  the  stock  market:  Investing  is  for  the  long  term.  
When  you  invest  with  a  long-­‐term  emphasis,  you  will  encounter  opportunities  
that  can  get  you  a  high  return.  
 
• Ignore  daily  market  fluctuations  
The   stock   prices   will   be   updated   throughout   the   day   until   the   market   closes.  
With   the   rise   of   the   Internet   and   mobile   devices,   you   will   be   tempted   to   check  
quotes   every   time   during   the   day.   But   this   is   counter-­‐productive.   You   should  
never   determine   the   performance   or   the   attractiveness   of   a   stock   based   on   the  
daily   quotes,   that   should   be   determined   by   other   factors   (which   will   be   later  
explained)  before  buying.  Once  you  buy,  the  focus  should  be  on  holding  on  to  it  
and  analyzing  other  companies  to  buy.  
• Hold  on  to  a  stock  for  at  least  3-­‐4  years  
Generally,   3-­‐4   years   would   be   a   good   period.   Most   people   who   have   selected   the  
right  stock  would  hold  it  for  longer  because  the  companies  will  continue  to  grow  
and  give  a  better  return.  
 
The  Method  
 
• The  method,  or  the  techniques  explained  in  this  course  are  based  on  the  
value  investing  principles  first  introduced  by  Benjamin  Graham  and  used  
by  Warren  Buffett  to  date.  
• Although  the  two  men  have  different  styles  of  investing,  the  foundation  of  
the  styles  is  the  same  value  investing  principles.  
• A  note  on  the  method:  This  method  is  not  going  to  make  you  a  million  
dollars  in  6  months  or  even  one  year,  but  it  will  lay  the  foundation  for  an  
investing  path  that  will  help  you  get  maximum  returns  while  covering  
downsides  of  the  stock  market