Fidelity – Book of the Month
This doesn’t look like it’s going to be a particularly interesting book. But it is in fact interesting and entertaining, and deals with some of my favourite investing subjects with such infectious aplomb that I’ve found myself quoting sections to friends and colleagues and becoming something of a bore.
But the fact that most of the people I know are unlikely to read this and it is unlikely to be a publishing phenomenon on a par with Harry Potter or even the 1949 investing classic The Intelligent Investor, suits me just fine. If everyone read it, as indeed they should, then the book’s claim to hold the ‘Secret to investing success’ would be out and no longer be a secret.
As Dr Daniel Crosby is quick to remind us, the stock market is a zero sum game. So no matter how good you are at it, if everyone else is better than you, you will lose money. But what if everyone else is just as good as you at investing?
That is where this book comes in. By concentrating on the science of psychology, Dr Daniel Crosby shows us how we can manage our behaviour using Rules Based Investing (RBI). By controlling our behaviour, we can beat everyone else at this game. There are some pretty simple ideas in here that make a lot of sense, and the beauty is that they can be used whether you dabble in the stock market yourself, have your own financial advisor or if you invest via mutual funds.
There are some truly staggering figures in here that show how poor behaviour impacts long term returns. Some of this is regularly highlighted by our experts, such as the folly of trying to time the market. How can it be that the highest returning stock fund from 2000 to 2010 had investors that lost 10% of their money during their time invested in the fund? Not only is timing the market not necessarily going to help you beat the market, but also makes it more likely you will lose money.
My favourite chapter deals with one of my pet hates and that is the definition the financial services regulators have of Risk. All over this website you will encounter warnings of each fund’s potential to lose you money; yet at the same time if you read the objectives and investment policy of the funds on our platform, excepting cash funds, they will rightly advise you that investments in the fund should be regarded as a long-term investment.
When I get to retire I want to have a pension pot that allows me to live a comfortable lifestyle with a few treats thrown in. The Junior ISA I have for my daughter I hope will allow her to pay for a deposit on her first property so she can benefit from the apparently inexorable rise in property prices.
If my goals for these savings are realised I could not care less if during the interim period the value of those savings has gone up and down.
Despite this, the risk profile of the funds I own are weighted towards the riskiest. If I kept my money in cash I would be taking no risk at all. Yet the risk is that I won’t have enough money to retire, or that my daughter won’t have the helping hand on to the property ladder that my parents gave me.
Defining risk is one of the most important behavioural lessons this book can give you. There are also loads of real life comparisons that show how our normal behaviour which helps us survive and prosper as humans can be counter-productive in “Wall Street Bizarro World”. One of my favourites involves a series of dates with a potential lifetime partner which is all going very well until the fifth date when the object of your desires turns out to be a duff. Do you go on a sixth date?
This book’s concentration on your own behaviour, something that only the reader can control, makes it accessible to anyone, no matter their current wealth or investment experience.
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