Book Report: Mind over Money

My most recent financial book was Mind over Money: Match Your Personality to a Winning Financial Strategy by John W. Schott. It's not exactly recent - published in 2000. Schott's advice lies somewhere between day traders and buy and holders - tailored to specific personality types. It was published before the recent wave of behavioral economics books (to wit: Mind over Money: Overcoming the Money Disorders That Threaten Our Financial Health, which I have not read but was published in late 2009.

I didn't really feel like I matched any of Schott's personality profiles but there were a couple of things I like. First a quote:

Wealth accrues from a pattern of generally right behavior, not from trying to extract the maximum profit out of each and every situation, since one never knows what the maximum might be.

Which I liken to my baseball analogy: it's better to hit singles and doubles, get men on base and move the runners rather than hit a home run at every at bat. The next part I liked was Appendix B: Net Present Value: A Calculation for Confident Buying. For awhile I've been looking for methods to calculate values of companies that is short of getting an MBA. This is a great 3 page start.

Book Report: The House of Mirth

Financial advice from Edith Wharton that Thomas J. Stanley and William D. Danko would be proud of:

"You asked me just now if I could understand why Ned Silverton spent so much money. Of course I understand-he spends it on living with the rich. You think we live on the rich, rather than with them: and so we do, in a sense-but it's a privilege we have to pay for! We eat their dinners, and drink their wine, and smoke their cigarettes, and use their carriages and their opera-boxes and their private cars-yes, bu there's a tax to pay on every one of those luxuries. The man pays it by big tips to the servants, by playing cards beyond his means, by flowers and presents-and-and-lots of other things that cost; the girl pays it by tips and cards too-oh, yes, I've had to take up bridge again-and by going to the best dress-makers, and having just the right dress for every occasion, and always keeping herself fresh and exquisite and amusing!"

Book Report: The Four Pillars of Investing

I just finished an excellent book on investing: The Four Pillars of Investing, by William J. Bernstein. His style is very engaging, especially for a subject that is inherently technical. There are a lot of ideas and I especially like learning about the theory of investing (pillar 1). Here's a brief synopsis of the pillars:

Pillar 1: The Theory of Investing

Risk and reward are inexorably linked no matter what the asset class (stocks, bonds, etc.) and it is relatively easy to determine long term expected returns. Results touted by money managers and mutual funds are almost all due to luck, not to skill. Portfolio theory and diversification are the names of the game.

Pillar 2: The History of Investing

Markets can become irrational with both optimism and pessimism. As recent events have shown, this boom/bust cycle has not ended (nor will it). And the counter intuitive point "is that at times of great optimism, future returns are the lowest; when things look bleakest, future returns are highest." Just like risk and return predict.

Pillar 3: The Psychology of Investing

The biggest obstacle to success in investing is you the investor, and our nature of of looking for the next Microsoft or lottery ticket. This leads to high trading churn (enriching traders rather than ourselves) and making poor buy/sell decisions.

Pillar 4: The Business of Investing

The incentives of most brokers and mutual fund companies are not aligned with the interests of the investor. They exist to make money - your money.

Investment Strategy: Assembling the Four Pillars

Most small investors are deficient in the areas of theory and psychology. As defined benefit plans (pensions) are being replaced by contribution plans (401k) it is increasingly important for 'average investors' to educate themselves on investing.