(Free Press Release) http://www.nytimes.com/2011/07/10/business/mutfund/investment-tips-for-the-accident-prone-review.html?_r=1
ITâ€˜S one of the oldest jokes on Wall Street:
Ã¢â‚¬Å“Whatâ€˜s the easiest way to end up with $1 million in the stock market?Ã¢â‚¬
Ã¢â‚¬Å“Start with $2 million.Ã¢â‚¬
Yes, in good markets and bad, investors invariably find ways to reduce the value of their holdings by doing stupid things. But two new personal finance books are intended to keep you from becoming part of the punch line.
The one that offers the most specific advice, in addition to being more entertaining, is by LouAnn Lofton, managing editor for online content at Fool.com, the Web site of the Motley Fool, the financial education company that also offers its own mutual funds. She argues that investors need to do research, be realistic, think long term and learn from mistakes. But that would make an awkward title, so Ms. Lofton calls her book Ã¢â‚¬Å“ Warren Buffett Invests Like a Girl: And Why You Should, TooÃ¢â‚¬ (Harper Business, $25.99).
Ms. Lofton begins by reviewing well-publicized research showing that when it comes to investing, women are far better than men at getting out of their own way. She dissects those studies and provides explanations Ã¢â‚¬” she calls them Ã¢â‚¬Å“the eight essential principles every investor needs to create a profitable portfolioÃ¢â‚¬Ã¢â‚¬” of why she agrees that this is the case.
Here are her conclusions: Women trade less than men, so their transaction costs are less Ã¢â‚¬” and lower transaction costs mean greater returns. Women exhibit less overconfidence. (Ã¢â‚¬Å“Men think they know more than they do, while women are more likely to know what they donâ€˜t know.Ã¢â‚¬) Women also shun risk, are more realistic, do more research, are more immune to peer pressure, learn from their errors and are less prone to taking extreme actions.
Ms. Lofton points out the benefits of each principle Ã¢â‚¬” for example, the less you know about an industry in which a company competes, the greater your chances of being surprised if you hold the companyâ€˜s shares.
Then, to explain her title, she argues that Mr. Buffett has used these same eight rules to amass his fortune. For example, he doesnâ€˜t trade excessively. He also does extensive homework before he buys, is fond of saying his favorite holding period Ã¢â‚¬Å“is foreverÃ¢â‚¬ and avoids investing in areas like technology that he says he does not understand.
The description of his investment style is a bit simplistic, of course. Not all of us can buy billions of dollars worth of a companyâ€˜s shares, sometimes getting very favorable terms in return. For example, the $5 billion worth of preferred shares of Goldman Sachs that Mr. Buffett bought in 2008 paid 10 percent a year in interest. That option wasnâ€˜t available to the average mutual fund investor.
Still, the idea of using Mr. Buffett as the symbol for her investing approach is effective.
There seems to be a (probably misplaced) rule in publishing that no one will take a personal finance book seriously if it has fewer than 40,000 words. This book rounds out its simple, clear and relatively short argument with four interviews with fund managers who share the authorâ€˜s beliefs, and includes an ode to the joys of compound interest, none of which seem to be needed.. And the book finds several ways of reprising its eight rules. That grows tiresome after a while Ã¢â‚¬” explaining the principles twice would have been just fine.
INSTEAD of offering rules of thumb, Ã¢â‚¬Å“ Taming the Beast: Wall Streetâ€˜s Imperfect Answers to Making MoneyÃ¢â‚¬ (Wiley, $27.95), takes a detailed look at various investment styles you can use. Its author, Larry Light, a veteran financial writer, says that no single approach works all the time.
Ã¢â‚¬Å“Successful investors have an ambidextrous ability,Ã¢â‚¬ he says. Ã¢â‚¬Å“They donâ€˜t put all their chips in one pot.Ã¢â‚¬ His metaphors clash, but his point is first-rate.
The good news is that he explains specifically how various investment strategies work. So-called value investors try to buy companies when they are trading at relatively low prices, while momentum investors hope to ride a stock on the way up, attracted primarily by the fact the price is rising and not by the companyâ€˜s underlying fundamentals. To buttress his central argument, he occasionally critiques the conventional wisdom.
While people who believe in index funds are correct to say a majority of mutual fund managers donâ€˜t outperform average market returns, there are usually about 30 percent who do beat the market. That means index fund investors are earning less than they could receive elsewhere.
And while stocks have produced greater returns than every other investment over the last 200 years, he says the important part of that statement is the time frame. Ã¢â‚¬Å“The obvious question arises: what investor has ever lived more than two centuries?Ã¢â‚¬ Mr. Light writes. The Standard & Poorâ€˜s 500 had a negative return of 0.95 percent during the first decade of this century.
Even diversification is not a panacea, Mr. Light points out. In 2008, a typical investor with a portfolio of 60 percent stocks, 30 percent bonds and 10 percent cash saw the overall value of his or her investments fall by about 20 percent.
So what should an investor do? Unfortunately, Mr. Light chooses not to provide specific recommendations.
Instead he writes, Ã¢â‚¬Å“My advice: read everything. Ask questions. Talk to people. Ponder.Ã¢â‚¬
While that answer is unsatisfying, understanding the various options and pondering should help keep you out of trouble, as should Ms. Loftonâ€˜s eight principles.
Investing is hard enough without tripping over your own feet. These two books should prevent you from stumbling too much.