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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.
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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
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.
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.
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.
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.
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