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Preface

Preface

How can I become a better investor?

This one question is the source of an entire financial advice industry. Magazines, newspapers, books, TV shows, radio shows, and Internet sites are dedicated to the topic. With all this advice, why aren't we better investors?

Many of these sources of advice manipulate our hopes, dreams, and fears in order to get us to pay attention to their show or buy their magazine. It works. We are often drawn to bad advice simply because it is packaged in an exciting way. I have known financial advisors who were terrible at investing, but had many clients because they had a lot of flash and were great marketers. I have also known financial advisors very good at investing whose client base grew slowly because they didn't play on prospective clients' emotions. There is a lot of good advice out there, but it is not always from the sources that draw our attention.

Indeed, the investment industry plays to our emotions as well. Mutual funds focus their advertising on high recent returns. Investment newsletter writers use fear and hope to sell subscriptions. Investment authors offer the way to easy money. It is no wonder that investors develop misconceptions and form bad habits.

I wrote this book to help investors understand the sources of the mistakes they are being led into. Many mistakes are made that have only minor influences on wealth. However, occasionally an investor will fall into a major investment blunder that will seriously affect their life for many years. By reading this book, you should be able to avoid experiencing that blunder (or another one!). As you read the book, you may find that some of the advice you have received is bad. If that is the case, then you may have read this book just in time to avoid your own blunder.

The chapters in this book are grouped into three parts. The first part details many of the problems that investors commonly inflict on themselves. The topic of money (especially losing it!) can bring out strong emotions in people. These emotions can lead to poor choices and further financial problems. In addition, the way the human brain functions frequently leads investors to conclusions that are simply wrong. For example, people think they see patterns and trends in stock prices that are really random, or chaotic. These chapters discuss these emotions and the tricks of the mind. In addition, they illustrate the problems and foolish risks they lead you into.

Many investors turn to investment professionals to get advice on which stocks to buy and when to buy them. There are many analysts, economists, advisers, and other experts who are willing to sell advice. This advice can come to you in the media, through newsletters, or over the Internet. If you are paying for this advice then you had better read Chapter 5, “Profits from the Prophets?” which examines whether you can make profits from these prophets.

The second part of the book describes many of the problems investors face because of the drive to do better than everyone else. Even if you do not feel the need to get the best return, you probably want to at least beat the market (and many of your friends and colleagues). The focus on beating the market causes investors to do things that are harmful to their wealth. Investors try to second-guess the market by timing it. Investors also chase the mutual funds with the top performance over the past month, quarter, or year. The desire to make more money than your neighbor makes you vulnerable to the “get rich quick” scheme. These schemes are named after your desire, not your outcome, because nobody gets rich.

The third part of the book shows that the professionals can make enormous blunders too. They suffer from the same human weaknesses as the rest of us. Even very smart people can blow it. Read the fascinating tales of how respected traders, Nobel Prize Laureates in economics, portfolio managers, and others lost billion of dollars. Read about billions in losses that nearly crashed the world financial system, or losses that bankrupted one of the richest counties in California. Learn of rogue traders that bet the bank on their trades—and lost. While the book describes investment blunders of all types, these dramatic blunders boggle the mind.

How can you avoid making a blunder with your own money while also meeting your investment goals? The last chapter of this book relates a process and strategy for overcoming these problems. It details a disciplined approach to investing that will lead you to your financial goals.

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