Saturday, December 26, 2015

Investment Mistakes

I recently read "Investment Mistakes Even Smart Investors Make and How to Avoid Them" a 2012 book by Larry E. Swedroe and RC Balaban. This book devotes a few pages each to a list of 77 investment mistakes. I found this format a bit disjointed and annoying. I read the book straight through perhaps it is more suitable for dipping into from time to time.

For the most part I found the advice in the book unobjectionable. It makes the case for using index funds and not trying to beat the market. This is good advice for most people but these days it has become a type of conventional wisdom that can be found in many books.

One point of disagreement I had concerns modern portfolio theory (MPT). In the MPT framework the markets are rational and the only way to increase your expected returns is to accept more risk, and not just any risk but non-diversifiable risk. MPT is elegant but it is doubtful that it is in total agreement with reality. In other words real markets probably aren't completely rational. But this book totally ignores that possibility and makes deductions based on MPT that depend on markets being rational. So for example mistake 22 (p. 70-74) which compares value and growth stocks deduces from the putative greater returns from value stocks that they must be riskier than growth stocks. The problem is empirically this doesn't appear to be the case. In my view to the extent that the excess returns from value stocks are real a more plausible explanation is that investors find (or found in the past) growth stocks more exciting and were willing pay a little more for them on that basis. Causing the more boring (and hence cheaper) value stocks to outperform a little. And of course as with any other market anomaly once it becomes widely known it is likely to go away.

So in summary I didn't really care for this book. In part this is because I have read a bunch of books with similar advice. So although I don't think the book is terrible I don't see any special reason to recommend it.

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