Parodox of wealth and the effect on expected return

William J Bernstein's article on "paradox of wealth" http://www.cfainstitute.org/learning/products/publications/faj/Pages/faj.v69.n5.1.aspx highlights an important investment rule implying that the expected return is inversely related to the wealth level created. Key points to taken from this article:

Rapid technology development is a destroyer of return(decreased return) by

1) Increasing societal wealth but decreasing cost of capital since there is an abundance of capital if the society get richer

2) Encouraging enthusiasm from gullible investors, meaning they are more willing to invest more capital therefore reducing cost of capital

3) Diluting shares as increase in share issuance required to capitalize new forms of technology and rapidly growing economies

So what's the implication for investor in the future? I think it is prudent not to assume a high return on equity in the future. This has also implied that the aggregate P/E of the companies in the future will be higher than the present level due to technological advancement and wealth creation effect. 

This can also shown from the generic valuation formula that as the denominator required to discount the future cash flow into present value decreases, then the valuation will become more expensive in the future.

Recommended Investment Books

Throughout the investment journey, I have read lots of investment books, below highlight some of the books which I found very useful for learning investment concept:

1) Berkshire Hathaway - Letters to Shareholders 1965-2012 - Warren Buffett
http://www.amazon.com/Berkshire-Hathaway-Letters-Shareholders-Buffett/dp/1595910778

It can be downloaded from http://www.berkshirehathaway.com/letters/letters.html as well, but I always think that reading from paper is much more effective from e-book. The book categorize the topics into different financial topics such as Investing, Value, Moats and Return on Capital, Accounting and also topics on industries such as Insurance which you can go to specific pages to look at the topics that you are interested at.

However, this is not for beginner as you do need to have a strong financial or accounting knowledge to fully grasp what he means for eg topic like goodwill amortization. For me I definitely looking forward to re-read this book many times to revise and implement value investing concept from the greatest investor of all time.

2) Investment Valuation - Aswath Damodaran
http://www.amazon.com/Investment-Valuation-Techniques-Determining-Finance/dp/111801152X

Damodaran is considered one of the top valuation guru in the field, there are different topics on how to value a company using Discounted Free Cash Flow, Discounted Dividend and Relative Valuation and other valuation methodology. I was hoping to study in much detail on the methodology that he proposed, but you can also read his blog on how to value a hyped company such as Twitter, Facebook etc(http://aswathdamodaran.blogspot.sg). I believed for someone to master the art of investing, valuation is a must-to-master subject.

3)The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New - Jeremy Siegel
http://www.amazon.com/The-Future-Investors-Tried-Triumph/dp/140008198X

If you are new investor and planning to do some asset allocation on your current wealth, you can start off by just reading this book. This book provides a great detail on how to do asset allocation (on the last chapter) for a long run. The rest of the chapters also highlight the reasons why you shouldn't buy IPO or buy stocks that are over-hyped. To me, I felt that he is the one of the few professors(including Damodaran) that research investing topics that really put theory into practical perspective.

4) The Winning Investment Habits of Warren Buffett & George Soros - Mark Tier
http://www.amazon.com/Winning-Investment-Habits-Warren-Buffett/dp/0312358784

Though George Soros is a Macro-economic investor and Warren Buffett is a Micro-economic investor, they shared the same 23 investing habits. As your habit highly correlated with your your investment result, therefore it is crucial to understand what the common habits that they shared.

I particularly like the investment habits of

Habit 1: Always protect the capital
Habit 4: Has already developed the investment system(selection, buy and sell)
Habit 22: 24x7 working for investment.
Habit 23: Put his words into action, eat what he cook.

Started the blog journey

Started a new investment blog. It will help to reinforce several things:

1) Valuation - If you don't write what you are thinking, it probably means that you don't understand the matter in deeper context yet, and valuation need a concrete number to support the thesis.

2) English writing - A solid english communication is essential to convey investment ideas to target audience, whether you are buy side or sell side. However I do not expect I will be writing like a professional writer, but the bare minimum is to convey investment idea with simple and plain english.

3) Retain and Reinforce - serves as collective historical thought of my investment journey, feedback is always essential in an investment process to learn the mistakes from the past and improve going forward. Howard Marks from Oaktree Capital wrote memos to the clients, detailing how he view investment in the more philosophical way, I believed it is through sharing then a person will grow