Outsmarting the Crowd is a great guide for investors who are new to the world of investing. Through this book, you’ll learn everything you need to know about investing.
How to become a successful investor is the subject of countless books. All of these books focus on the same mantra: “Buy low, sell high.” But do you understand the meaning of this mantra?
If not, do not worry, because this book will teach you all that and much more. The authors explain the steps to take to enter the stock market, from getting to know the companies to buy their shares.
Another topic is why experienced investors are picky and why they do not take risks with their money. More importantly, you’ll learn why investing will not make you rich overnight.
You may be wondering if you should read the book. This book summary will tell you what important lessons you can learn from this book so you can decide if it is worth your time.
At the end of this book summary, I’ll also tell you the best way to get rich by reading and writing.
Without further ado, let’s get started.
Outsmarting the Crowd Book Summary
Lesson 1: The smartest decisions in the stock market are straightforward and sophisticated.
Developing a complex investment strategy may seem like a good idea at first, but it’s wise to keep things as simple as possible. Think about what matters most to you.
There is a seemingly endless list of metrics that can be used to evaluate a company, from public perception to financial results to executive charisma.
Think of the 80/20 rule or the Pareto principle. Here is how it works:
Nineteenth century Italian economist Vilfredo Pareto made the following observation: 20% of the population owned 80% of the land.
From this he concluded that the top 20% were responsible for the majority of the causes.
The same is true for investing: focus on the metrics that matter most to you and ignore the rest. In the long run, only a small group of people can drive up stock prices.
Another way to focus is to be selective. This means that you should not spread your money too widely by buying a variety of stocks, but rather focus on those that are most likely to succeed.
Filters are essential, to be clear. For Warren Buffet, the following criteria are crucial when evaluating a potential investment:
First and most important, do you have a clue about the industry? You should not invest in a company marketing a cutting-edge technology that you are not familiar with just because you think it is a good idea.
A second consideration: Does the company have a promising future? Some industries, like food and healthcare, are just passing fads, while others, like these industries, are absolutely necessary.
The third question is whether or not you have confidence in the leadership. Alarm bells should go off when a CEO has bankrupted multiple companies in the past.
Does the overall price seem fair? If you think the stock is too expensive, you should move on to the next opportunity.
Lesson 2: Invest your money in companies that can see around the corner.
Every day, stocks of thousands of different companies are traded. As an investor, you need to know how to ask the right questions to distinguish the good from the bad.
When analyzing a stock, it’s helpful to take a child’s perspective and ask yourself, “Why do people like or need the company?” Why do the company’s products sell so well? Is it a groundbreaking new company or just another fad in the startup world?
Also consider why this is the perfect time to buy. If Nike, Exxon and Microsoft have been around for decades, why is now the right time to invest in them? One explanation is that they have stumbled upon a lucrative long-term trend or entered a potentially fertile new market.
Alternatively, investors can put their money into companies that have one or more special characteristics that set them apart from the crowd and give them an edge over the competition. For example, a company with pricing power is one that can raise its prices without causing a significant drop in sales.
Apple is a good example of this. When it comes time to launch a new iPhone, Apple pays little attention to how much its competitors are charging. Apple can charge whatever it wants for its products because it knows its customers will pay more for them.
Finally, stay away from companies that can not adapt to new circumstances. There are a number of approaches that can be used to predict whether this mistake will cause a company to incur significant losses in the future. Competitive pricing and new technologies are two such examples.
Kodak fell out of favor when sales of film cameras declined in parallel with the popularity of digital photography.
Meanwhile, some companies have a greater ability to adapt to new market conditions. To keep up with ever-changing consumer tastes, companies like Coca-Cola have expanded their product lines over the years.
Lesson 3: You should keep investing because the market can rise or fall dramatically at any moment.
Today’s financial markets are volatile, with sudden drops and sharp rises. Possible explanations for these fluctuations are investor enthusiasm and the quest for higher returns.
This is because modern investors are constantly exposed to conflicting reports, rumors, and gossip from the media. As a result of their overreaction to all this data, they make hasty buy and sell decisions. As a result, modern investors tend to hold their stocks for only a very short time.
In the 1960s, for example, the average holding period for stocks was eight years. Today, most investors hold their stocks for only six months before selling them. This rapid buying and selling causes major fluctuations on the financial markets.
It is important to stay calm and give less importance to the daily fluctuations in stock prices. Let us say you have a large stock portfolio. Many people are tempted to keep an eye on the daily fluctuations of their stock prices.
The frustration of each drop in value can lead to an early sale of the house. In most cases, stock prices will not go up every day, but any increase, no matter how small, can be frustrating. You should give the companies you have invested in the time and space they need to implement new strategies and grow, rather than checking prices monthly or annually.
Then you can start making money by taking advantage of the inexperience of those that have not yet developed immunity to the fluctuations of the market. Stocks are like an umbrella in this respect and can be bought like one.
Numerous street vendors in New York City charge exorbitant prices for cheap umbrellas when it rains. If you walk the same streets on a sunny day, umbrellas cost half as much.
Think of the behavior of distressed sellers when the market is unfavorable to them. The opportunity presented to those who rush to sell can be seized by smart investors. When this happens, stock prices fall and it is the perfect time to buy.
Lesson 4: Every prudent investor knows that he must buy low, set realistic goals, and spread his bets.
Protecting your investment capital is as important as growing it. Buy it low in case you misplace it.
If you buy expensive stocks, you expose yourself to the risk of suffering large losses. If you invest only in cheap stocks, this is less of a problem.
Think of stocks as a school. A good example of expensive stocks are honors students that everyone knows are great. Students who get into trouble temporarily are another source of cheap but valuable stocks.
They might have dropped out of school or done poorly on an exam. Yet, because of these shortcomings, these stocks trade far below their true value.
Buying cheap is important, but so is keeping your expectations in check. Predicting the future is pointless because you can not control it. Instead of crossing your fingers and hoping for the best, try to come up with scenarios that do not require the company to succeed against all odds. A company can only do this if it is honest with itself and asks itself if it can still make money in bad times.
Tesla is a good example of this. There will always be gamblers who bet that the company’s next car will be a blockbuster, but a smart investor will only put his money into a company that is focused on steady growth.
At the end of the day, it’s important to diversify your stock investments. A novice investor will have a harder time grasping the nuances of a particular area.
The more broadly diversified a portfolio is, the less devastating the impact of a stock market crash. Your entire portfolio could be wiped out if, for example, you put all your money in banks and then they go into crisis.
Outsmarting the Crowd Book Review
Outsmarting the Crowd is a great book I’d like to recommend to anyone who is interested in the business. If you spend some time digesting the ideas, it might make a positive impact on your life.
You may have heard that the stock market is a quick and easy way to get rich. However, investing requires a cool head, self-control, and time to see results. Successful investors know that with careful planning and perseverance, they can amass the portfolios and fortunes of their dreams.
The beauty of investing is that you do not always have to be right. You can make a profit on your investment portfolio even if you are wrong on individual bets. Accept the fact that you are human and prone to making mistakes, and remember that they are not fatal. You can even use the lessons you learn from your mistakes for future endeavors.
About the Author
Bogumil K. Baranowski is a New York City-based investment professional with over 15 years of experience. He manages a private investment fund at Tocqueville Asset Management in New York.
Buy The Book: Outsmarting the Crowd
If you want to buy the book Outsmarting the Crowd, you can get it from the following links:
How To Get Rich By Reading and Writing?
You must be an avid reader who is hungry for knowledge if you are reading this book review. Have you thought about making money using your reading and writing skills?
Thanks to the Internet, the world has undergone a massive change in recent years. Blogging has now become the best way to make money online.
Since no tech experience is required, as long as you’re good at writing, you can easily start a blog that generates cash flow for you while you sleep.
Warren Buffet said, “If you don’t find a way to make money while you sleep, you will work until you die.”
Instead of looking for a 9-5 job and staying in your comfort zone, it’s better if you become your own boss as soon as possible.
Find out how to build a blog and become a wealthy blogger today!