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Jason Zweig recommends the best books on

Personal Finance
The Wall Street Journal personal finance columnist explains why there's truth in the old adage
that investors get the returns they deserve, and recommends books that might help you avoid
being taken for a ride.

1 2 3 4 5
Common Sense Why Smart Against the Gods Where Are the How to Lie with
on Mutual Funds People Make Big by Peter L Customers Statistics
by John C. Bogle Money Mistakes Bernstein Yachts? by Darrell Huff
by Gary Belsky & by Fred Schwed
Thomas Gilovich

Bill Gross of PIMCO, the worlds largest bond fund, has


written articles saying the US treasuries market is a Ponzi
scheme. The stock market has been through a terrifying
plunge. Traditionally we learned that our own home, at
least, was a safe place to invest our money but a lot of us
Jason Zweig
have lost on that as well. Whats to be done right now in Jason Zweig is an
terms of personal investing? What should our approach investing and personal
finance columnist for
be? the Wall Street Journal.
It certainly is a frightening time. People had come to regard the entire He is the author of The
Little Book of Safe
world around them as an ATM. The bond market was making double Money: How to
digits every year. The stock market provided a double-digit return. Conquer Killer
Markets, Con Artists
Your house would go up at a double-digit rate. You didnt even have to and Yourself
be smart; no matter what you did, no matter what happened, you
would just keep compounding your wealth at 10% or better every year.
Because 10% is a round number, it had a strong effect on peoples
perceptions and they came to regard it as a right, as a given. Anything
you put your money into would go up at least 10% a year for the rest of
human history. That never was true, of course. It just took a while to
be proven false. Now that it has been proven false, people feel they
have lost their moorings. Theyre adrift. They dont trust their brokers,
they dont trust exchanges, they dont trust regulators, they dont trust
anybody. And, frankly, they probably shouldnt.

So what do we do? Do these books youve chosen offer a


clue?
There are a few basic principles that people should keep in mind.
Theres an old expression on Wall Street that Im very fond of, which
is: You get the returns you deserve. People who had gotten to the
point of believing that high returns were a given didnt deserve to earn
them, because the markets dont exist for our convenience. They dont
exist to make people rich. They exist to transfer capital from people
who have an excess of it to people who have a more immediate need
for it. Sometimes those are great growing companies that will take that
capital and put it to very productive use. At other times, it might be
somebody selling bundles of crappy mortgages, and youre going to
lose 95% of what you put in. The reason you get the returns you
deserve is because if you put the time and effort into proper research
and into forming realistic expectations then youre a lot less likely to
get wiped out or be caught by surprise. The real lesson for people from
what happened over the past 10 years should be that investing done
properly requires either a considerable amount of homework and
research, or an enormous amount of emotional equanimity. Ideally it
takes both. You have to be prepared for anything and you have to be
very humble about the abilities of the experts and yourself to predict
whats about to happen.

Your first book is John Bogles Common Sense on Mutual


Funds. Is this basically advocating that index fund
investing is the only way to go?
Yes. Its a wonderful book. Of course, as people say on Wall Street, Mr
Bogle is talking his own book, i.e. hes pitching his own speciality. But
as long as you bear that in mind, you can get an enormous education
from this book. Its a wonderful, comprehensive introduction to how
the financial markets work. It shows who has your interests at heart,
and what the various self-interests are, of all the people you are likely to
encounter when you invest. Every step of the way, somebody is going
to be dipping into your wallet and pulling money out often without
fully informing you. When you read this book, youll have a much
better sense of who is taking the money, where it goes, and whether
you should be willing to permit it.

Every step of the way, somebody is


going to be dipping into your wallet
and pulling money out often without
fully informing you.
My own view is a little different from Mr Bogles. I wouldnt go so far
as to say that you should never buy a fund that isnt an index fund. But if
you do, you need to have compelling reasons why you are departing
from that strategy, because indexing really works. Thats not because
professional money managers are stupid or dishonest. It works because
indexing is very, very, very cheap. Its an incredibly low cost way to
manage money. And its very hard for any other strategy to overcome
that disadvantage.

Because any smartness that the fund manager has to get


ahead of the market that gain is lost in the fees that you
have to pay him?
Exactly. And it happens at several levels. The first level is because he or
she has all this brainpower, you have to pay for that. Its expensive to
research individual stocks, and to have a team of analysts doing it. All
of that costs substantial amounts of money often, for a large fund,
well into the millions of dollars a year. The second cost is that someone
who is attempting to buy the best stocks, and avoid the worst ones, has
to do a fair amount of trading. That fund manager will be buying and
selling pretty frequently. Each time he or she trades, that triggers
trading costs.

An index fund, on the other hand, is pretty much a pure buy-and-hold


vehicle. It buys all the stocks in a market index and just holds them,
until, for some reason, theyre no longer in the index and that can be
many, many, years. Typically, the average fund that is run by an active
portfolio manager will hold a stock for about 11 months at a time. For
an index fund, its often more like 10-20 years at a time. Thats at least a
10-fold difference in the frequency with which the stocks are traded.
Each time, brokerage charges are incurred, which come out of your
pocket and add up over time. For many funds, the costs of trading can
equal or exceed the costs of management. But at index funds, trading
costs are tiny. The third factor is taxes. Index funds tend to generate
lower tax bills for people who hold them over time, which can be a
very valuable advantage.

There are also two philosophical questions that investors might want to
ask themselves. One problem is, if Im buying into this fund because I
believe the people running it are extremely smart, then presumably I
want to own it as long as they run it. You wouldnt want to buy a fund
run by somebody who is likely to leave before youre ready to sell,
because you dont know who is going to take over to replace that
person. But life is very unpredictable, and at any given moment the
genius who is the reason you bought the fund may decide to leave, may
get fired, may get hit by a bus, and you suddenly find yourself owning a
fund run by someone youve never heard of. At which point, you may
say, Wait a minute! I dont want to own this fund anymore. Then, if
you decide you want to sell it, you may have to pay a tax bill to get out
of a fund you dont even want to own anymore.

The second problem is this remarkable paradox: Investors are charged


very substantial fees for all this research on stocks that the average fund
manager doesnt even bother hanging on to for more than 11 months.
Its as if the manager spends months and months on research, learns
everything there is to know about the company, puts the company into
the portfolio, and then as soon as it goes in, its time to take it out. That
should lead people to question the value of this research process. If,
after all that work, the fund manager changes his mind 11 months later,
how much could he have learned in the first place? Why was it worth
paying him all that money? Those are questions that arent easy to
answer, even for people who do it for a living. Ive never actually heard
a good answer to that from a fund manager.

In terms of Bogle talking his own book, does his company,


Vanguard, still completely dominate the index fund world?
In the US, at the retail level, yes, Vanguard is the largest provider of
index funds to individual investors, and anyone reading the book
should bear Mr Bogles perspective in mind. Chances are that if he had
run a fund company that specialised in something other than index
funds, he wouldnt have written the same book. We all have our biases.
But some biases are good for people. Mr Bogles is obvious, he doesnt
try to disguise it or excuse it away, and it so happens that his advice is
so beneficial for people that I think the bias is entirely appropriate.

Tell me about the next book, the Belsky and Gilovich, Why
Smart People Make Big Money Mistakes.
This is a wonderful book. The authors have a wonderful collective
voice, and then each of them separately has a distinctive and informed
voice. Tom Gilovich is one of the leading cognitive psychologists in the
world. Gary Belsky is a sports journalist, although earlier he worked at
Money magazine, where I once worked. You might think that being a
sports journalist has nothing to do with financial decisions, but youd
be wrong. Anyone who is an informed sports fan knows perfectly well
that there are a lot of analogies between sport and money management.
Thats not just because it all seems to be about who is ahead and who is
behind. Its also about understanding the proper use of statistics, being
aware of the strategy behind the scenes, and keeping in mind that who
is on top is not necessarily who wins the championship in the end. This
book seeks to explain a central puzzle in personal finance, which is,
Why dont smarter people consistently have better financial lives? On
average, you would expect they would, and in many cases they do, but
its far from universal. There is even some evidence that intelligence
and investment performance may be inversely linked.

Eek. Theres a few friends I might not mention that to.


Theres certainly not much good evidence that theres a strong,
consistent, positive correlation that smarter people are predictably
better investors. And the reasons are clear. They come out of the fact
that the limitations of the human mind arent correlated with
intelligence. The same behavioural pitfalls trip everyone up, regardless
of education, IQ or levels of experience. Its only at extraordinarily high
levels of expertise that some people can avoid these common pitfalls.
This book does a wonderful job of explaining the basic principles of
behavioural finance and the ways that some predictable limitations of
the human mind have very clear financial implications.

Do you want to give an example?


A lot of the book is based on the research of Daniel Kahneman and
Amos Tversky, two Israeli psychologists who did their best-known
research in the 1970s. They explored a number of persistent problems
in human thinking, including the law of small numbers, which is a
tendency of people to extract sweeping conclusions from very small
samples of data. You can see why somebody who is interested in sport
might pick up on this because if a team in baseball or basketball wins
three games in a row, its very hard for anyone to ignore the urge to
conclude that the team is hot or on a roll, when, of course, its not
actually that big a deal statistically, to win three games in a row. Even
the worst team in the entire sport is capable of doing that on any three
days. The same thing happens in financial markets. From a short streak,
people will conclude the future is more knowable, and that its
representative of how the investment is going to continue to perform.
In fact, all it really is is a little burst of randomness and, all else being
equal, theres no reason to assume that it will persist. This is the kind of
idea they explore over and over again, very beautifully in the book.
Anybody can come away from reading it better equipped to spot these
kinds of pitfalls in himself or herself.

Because once you know about a pitfall, youll be looking


out for it?
Yes, though its easier said than done. I wouldnt want to give people
the impression that all you have to do is read about it, and youll no
longer be prone to it. Even psychologists who have studied these
problems for a lifetime still go out and commit those errors of thinking
themselves. But you can at least see it in yourself after the fact, and
with luck, in certain situations you may be able to say to yourself, Am
I about to commit this kind of cognitive error that I just learned
about?

There was quite a nice review on Amazon.com saying,


Youll never spend money the same way after reading this
book.
Yes, and as someone who has written books like this myself, that is
what you hope for as an author. Thats the ideal. But these biases of the
human mind are very deep rooted. You dont stand much chance of
being able to avoid them unless you understand them and one of the
best ways to get to understand them is by reading a really good book
about them like this one. Its still no guarantee, but it certainly
improves your odds.

Your next book is about the history of risk, Against the


Gods, which I believe looks at the concept of risk all the
way from ancient Greek times to the present. Tell me
about it and how it ties in to investing.
Peter Bernstein was one of the most remarkable people Ive ever
known. He had an extraordinary mind, he was a wonderful person and
a profound, broad renaissance thinker. What he does in this book is
bring risk to life as an idea in a much richer way than anyone had ever
thought to do before. For anyone who has read a book like Longitude,
by Dava Sobel or some of the Mark Kurlansky books like Cod or Salt,
Peters book is very much in the key of those wonderful explorations
of a single idea. Its telling you everything you could possibly want to
know about a topic which turns out to be even more important to you
than you realised.

Risk is central to investing and personal finance. Without risk, there is


no return. What investors have often failed to understand is that it goes
both ways. Investments cant provide returns unless they carry risk, and
risk can be extraordinarily dangerous if you dont understand it. Of
course that was one of the lessons of the financial crisis, and it was
something Peter warned about throughout his long life [Bernstein died
in 2009 aged 90].

In the book, he explores risk at every conceivable level what it is


mathematically and what it is psychologically, how it has played out
historically, how people have thought to measure it and also to control
it. Its probably the best and most interesting high-level book on
investing I can think of. Its a very serious, very elegant, beautifully
written book that people should take the time to relish and understand.
Its not for casual readers, it does take some work. You have to be
literate, and you have to care enough about the subject to stick with it.
But its one of my favourite books of all time.

Does it help your mindset in terms of investing?


Yes, because one of the great things that Peter does in the book, by
providing an intellectual history of risk, is to show where people have
gone wrong in the past by not fully appreciating how risky
investments can be, or not fully understanding what risk means. The
historical and psychological perspectives that he gives are just so
valuable to anyone trying to be more mindful and more thoughtful as
an investor. Its a great intellectual voyage and a terrific book.

So hes focused on financial events or risk generally?


The book is centred on the history of financial risk, but it also talks a
lot about probability and the mathematics of taking risk. So even if
youre not someone who cares enormously about investing and
personal finance, you could get a great deal out of it, because it helps
you think probabilistically, which is a very important skill.

Yes, as humans were very bad at assessing risks that way.


Like many people I sometimes get nervous on airplanes,
which my husband likes to point out is really not worth it
the chance of crashing is one in 11 million.
Thats right, and Peter explores that beautifully. As does the Belsky and
Gilovich book. There are any number of people who, knowing theyre
about to take an airplane, get a little nervous. Theyll have a few
cigarettes, theyll have a beer or a glass of wine to calm their nerves,
then theyll get in their car and drive to the airport. Of course
statistically speaking, theyre in vastly more danger on that drive to the
airport than they will be on the airplane, but on the plane theyll sweat
and grab the armrest in terror as the plane takes off and lands, while
they never gave a second thought to the cigarettes or the alcohol or the
fact that by driving they were taking their life into their hands.

Your next book is Where are the Customers Yachts?,


which is based on the authors experiences on Wall Street
in the 1920s.
This is such a fun book. The author, Fred Schwed, was, for many years,
a broker, but its very clear, when you read the book, that his real love
was for writing. He wrote beautifully. Even now, some 70 years after it
was written, I believe this is still the funniest book ever written about
Wall Street.

And his observations remain true?


Parts of it read as if he wrote it in 2008 or 2009. Its remarkable how
well the book has held up. There are a lot of old books about which
people say, Oh it reads as if it were written yesterday when if you
actually read the book it doesnt. This book is different. Its about
process rather than events. Its about what happens when stockbrokers
approach their clients with a wonderful opportunity, what happens
when money managers tell customers, We have the right plan for your
money, what happens when investors decide that a particular financial
asset is attractive or unattractive. He doesnt name a lot of names, he
doesnt talk in specifics about the Pennsylvania Railroad or Radio
Corporation of America. He mentions some of them in passing, but
hes talking about process more than events. And because processes are
generated by human beings, and human nature never changes, the book
has this phenomenal freshness. It really does read as if it were written
based on todays headlines. And the best thing of all about the book is
that it is laugh-out-loud funny. Its a very sophisticated kind of humour,
and the more times you read it, the funnier it gets.

Even the title, Where are the Customers Yachts?, is pretty


hilarious. Can you explain what it means?
This is a moment where I should say that I wrote the introduction to
the latest edition of this book (though I dont receive royalties or hold
any other financial stake in its success). In my footnotes, I make an
ever so slight correction to a bit of folklore that is the source of the
title, a wonderful story that Fred Schwed ever so slightly garbled. The
title comes from an anecdote that originated from a man named
William Travers, who was one of the great speculators on Wall Street in
the 19th century. He was one of the sharpest minds on Wall Street,
very cynical, almost bitterly so. He was in Newport, Rhode Island one
day with some of his friends. They were giving him a tour of the
harbour and pointing out the magnificent yachts that were moored
there, saying, This one belongs to this broker, This one belongs to
that banker et cetera. At which point Travers asks Where are the
customers yachts? Its a wonderful quip, which of course still holds.
The point he is making is that the brokers got rich and owned big boats
and it didnt seem as if any of their customers had big boats. Its one of
the most wonderful anecdotes in Wall Street folklore. The entire book
is just an elaboration of the various ways the financial system has of
picking peoples pocket, at every step along the way. What makes the
book so much fun to read is that it isnt angry. Its full of this mordant,
biting humour and its an absolute pleasure, that would probably take
the typical person three to four hours to read, if that. It also has these
delightful illustrations by Peter Arno, who was a cartoonist for the New
Yorker.

I dont know of any book that is this funny and I know of very few
books that are this informative about Wall Street. I know of no books
that are both this funny and this informative. So if you want to know
how the system works, and you dont have the patience for a more
serious, sober look, pick this one up, because itll tell you just as much,
but itll make you laugh.
Do hedge fund managers count as Wall Street customers?
Because these days they are extremely rich as well.
Hedge funds are customers in one sense, because they consume a lot of
products that Wall Street generates investment research, trading
services and a variety of lending and other sorts of products. But hedge
funds are also middlemen, because they themselves have customers.

And its those hedge fund customers that are the ones
without the yachts?
Put it this way: the hedge fund managers will tend to have bigger yachts
than most of their customers. They may both have yachts, but theres
not much doubt about whose, on average, will be bigger.

Your last book is How to Lie with Statistics by Darrell Huff.


This is another terrific book. Its light-hearted and a lot of fun to read.
Its a wonderful introduction to critical thinking about statistics, for
people who have never taken a class in statistics, dont like statistics,
and may even think that statistics arent relevant to their decision-
making. What he does in a very entertaining and easily
understandable way is walk you through the techniques that people
who have something to sell will use to blind you with science and use
statistics as a weapon against you. The book is called How to Lie with
Statistics for a reason, because numbers are used all the time to mislead
consumers, particularly consumers of financial information. For
someone who cares about investing or personal finance, its important
to be an intelligent consumer of statistical information.

The book weight five ounces and is less than 150 pages long you
could read it on a long commuter train ride. But its absolutely
delightful, and the last chapter in particular is terrific. Its called How
to Talk Back to a Statistic which I just love. In it, he gives you five
rules on how, as a consumer of information, you can push back against
what youve been told and use your own scepticism as a shield against
people who may be trying to mislead you. This is the one book that I
universally recommend to people that always surprises them. Very
often, a few weeks later, I get emails from people saying, Thank you
so much for recommending that book. Now I understand how Ive
been taken advantage of. Its just a wonderful little tool people can use
to make themselves smarter.
One of the things Ive really noticed living in the US is that
figures really are used to mislead. You have the U-Haul
trucks, advertising a daily rate of $19.95 when I know,
from personal experience, that the real bill is likely to be
triple that, even for a short distance. In my bank yesterday,
they were encouraging me to get a Freedom credit
card, telling me how low the APR is when everyone
knows a credit card is an outrageously expensive way to
borrow money. Its so misleading and I dont understand
why these things are even allowed.
Once you become sensitised to it, you see this kind of thing going on
all the time. Anyone can get tripped up in the way pricing is used
against us. I filled up our car with gas yesterday, I was in Connecticut
and I paid $3.84 and 9/10 cents a gallon. When I got home, my wife
asked if I got gas and how much I paid. I said $3.84. Then, a few
minutes later, I said to myself, I didnt pay $3.84, I paid $3.85 but
the gas station wants me to believe I paid $3.84, because those are the
big numbers, the 9/10 of a cent doesnt count. But it really adds up
when you fill up your entire gas tank. Youre essentially paying a penny
more on every gallon, and believing that youre paying a penny less.
You see it everywhere. There have been studies done showing you get
an entirely different response from shoppers if you say 50% off,
compared to buy one get one free. People are much more likely to
buy if you say buy one get one free. If you read the Darrell Huff
book and the Belsky-Gilovich book together, you will be a lot more
aware of the ways the market plays and manipulates you. You wont be
completely immunised from ever being the victim, but you would be a
lot more sensitised.

But with credit cards or with getting a mortgage, there are


presumably numerous pitfalls along the way but with
anything involving interest rates, even if you are
sensitised, but not great at maths, its often quite hard to
calculate.
One thing both the credit card companies and mortgage lenders have
taken enormous advantage of over the last few years is that people are
not very good at making financial judgments about time. The very
essence of a credit card transaction is that you get pleasure now, and
pain later. You get the pleasure of having the consumer good that you
want the iPad, the Manolo Blahniks, the video game or clothing
product you happen to want you consume it now and have that
immediate pleasure and the pain of paying for it doesnt come till
much later. In your mind, you say, Pleasure now? Or pain later? Well.
OK. Ill go for pleasure now, and Ill deal with the pain later. The
problem is that for many people, later lasts forever. The temptation of
pleasure now encourages you to buy something you cant afford now
or later and you have to spend the rest of your life paying for it, in
many cases. There are hundreds of thousands of people declaring
bankruptcy right now because they incurred debts they could never pay
back. You should be able to anticipate the pain, but the immediate
pleasure kick is more powerful in the brain, and just overwhelms it.
Something similar happens with teaser rates for mortgages. People are
given an upfront rate. Theyre told it wont last, but the disclosure of
that tends to be pretty minimal, at least historically. The thrill of getting
a cheap rate upfront makes peoples minds up for them, and a few
years down the road they find theyve made a commitment they cant
keep.

Interview by Sophie Roell

How to Invest

FIVE BOOKS 2017

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