Excess Returns: A Comparative Study of the world?s greatest investors – a book review by Leslie Masonson
Individual investors strive to be successful, but they often fail because they use an emotional decision-making process instead of a rationale rule-based disciplined approach. Newbie investors, as well as those individuals looking for critical insight into time-tested investing tactics, will profit from reading this book and implementing any number of its strategies.
Most investors have no idea how to invest successfully, and truly rational investors are scarce, according to Vanhaverbeke. Unfortunately, too many investors see patterns and trends that are derived from statistically insignificant sample sizes. Each investor needs to find strategies that are compatible with his/her personality, skill set and interests.
In particular, this book sheds light on the quantitative and quantitative-qualitative investment styles used by the most successful practitioners. The focus is on fundamental business analysis and valuation rather than technical considerations. Over 75 referenced items are provided for further follow-up by readers. In each chapter, the author skillfully weaves in wisdom and quotes from many successful legendary investors, including John Templeton, Bernard Baruch, Philip Carret, Peter Lynch, George Soros, Benjamin Graham and many more.
Top investors believe that beating the market requires discipline in conjunction with effort and focus. Moreover, they only invest when their well-defined buy and sell criteria are met. Interestingly, these investors do not believe that there is a clear inverse relationship between risk and return, and they manage their portfolio risk using approaches at odds with conventional risk theories. They also agree that risk should be defined as the probability of the permanent loss of principal.
The chapter on the most common buying and selling mistakes is especially pertinent to investors who have not had much success. Not surprisingly, the costliest investing mistake is holding on to losing positions too long trying to get back to even. This can be devastating and may result in a huge principal loss that takes years to recover from. That is why capital preservation is the top priority of the best investors. Their goal is to maintain consistent long-term performance that beats the market with reasonable risk. Furthermore, these investors stress that diversification leads to mediocrity, whereas concentration leads to excellence.
A few shortfalls of the book should be mentioned. Firstly, techniques such as charting, technical analysis and market timing are not mentioned by the author as methods used by the top investors. Thus, whether or not these methods are used by any of these investors is not known. Secondly, the book?s small font size may be an issue for some readers.
In summary, the Vanhaverbeke?s research has uncovered that the best investors are contrarians, do their homework, use specific strategies, tolerate small losses and know that beating the market is hard work. Investors who can assimilate these factors into their investing approach will have a better chance of investing successfully instead of following their emotions.
According to his profile, Vanhaverbeke has personally beaten the market by a considerable margin over the past ten years in his personal stock portfolio (though no evidence is provided in the book to support this assertion). Vanhaverbeke obtained a thorough knowledge of the best investing practices by reading books, articles and shareholder letters to pull together the worthiest ideas of top-notch traders and investors.
Leslie N. Masonson is a trader, as well as the author of Buy DON?T Hold and All About Market Timing, (Second Edition). Reach him at firstname.lastname@example.org.
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