Investing Education Books



Why Smart People make Big Money Mistakes

Author: Gary Belsky and Thomas Gilovich

Difficulty

Why Smart People make Big Money Mistakes
Behavioral economics have been developed to complement micro and macroeconomics. In general, economics models assumes that an individual act in economically rational way. Research on behavioral psychology has underlined the contrary.

This book was first published in 1999. Since then, it has been updated with today examples.The authors relied on studies done in behavioral investing theory, mainly on Amos Tversky and Daniel Kahneman’s discoveries.

Various bias are explained, here some common behavioral bias treated in this book:

»Mental accounting

Can be helpful if you want to save for college. But it can lead you to treat money differently according to its origin. For example, people treat an inheritance as sacred money and are afraid to invest it.

»Loss aversion

For some people, the pain of losing money can be twice superior to the pleasure of a gain.

»Money illusion

Ignoring the harmful effects of inflation.

»Sunk cost fallacy

Money already spent on an investment or a project may force people to spend more than initially planned.

»Bigness bias

The tendency to focus on big numbers.

This book will help you to identify your weaknesses when dealing with investments. It is a quick and easy read. The 200 pages can be covered within few hours.

The authors have done a good job at illustrating the various bias related to investing psychology. At the end of each chapter, you will find a recap with some advices on how to correct and avoid the corresponding bias.

If you are looking for investment advices, this is not the right book. That’s being said, why smart people make big money mistake is an excellent introduction to behavioral economics.

Buy Why Smart People make Big Money Mistakes by Gary Belsky and Thomas Gilovich

May 25, 2012

Hedge Funds For Dummies

Author: Ann C.Logue

Difficulty

hedge funds for dummies
Even if you will find the basics along the way, this book is designated for an educated audience.This book is sometimes directed to an American audience especially for chapters about taxes and partnerships.Any way, it is still useful for people living outside the U.S.

This book is written in plain English and illustrated with various comprehensive tables and examples.

The first part describes what a hedge fund is, presents a brief history about hedge funds and how hedge funds are generally structured.

In the part II, you will find some introduction to investment theories like Modern portfolio theory (MPT), arbitrage-pricing theory (APT) and efficient market hypothesis.

If you have already some experience about investing, you can jump directly top part III (beginning on page 165).Part III is dedicated to hedge fund strategies.

As hedge fund aren’t for everyone (only for accredited and qualified investors), the author explains how to build a hedge fund portfolio with other alternatives. The part on exchange-traded funds (ETFs) could have been longer as it is the easiest way for an individual investor to have a hedge fund exposure.

The author provides a good part on how to select hedge funds through due diligence and explains how consultants work. She also discusses various questions to ask to a fund manager.

Even if it is difficult to speak about hedge funds without presenting investment theory, things could have been presented without relying on so many academic theories. This book could have been easier and shorter. Finally, I was expecting more information regarding the specific hedge fund strategies.

To conclude, if you are a beginner, it is a good book because it covers a lot of information regarding hedge funds.

Buy Hedge Funds For Dummies

Dec 16, 2011


The little book of behavioral investing

Author: James Montier

Difficulty

the little book of behavioral investing
This book is a very good introduction to behavioral investing.Both novice and experienced investors would benefit from this book.It will help you avoiding all the common pitfalls the typical investor makes.

The author has illustrated by various games, psychologist examples, experiments and stories to illustrate the various investor biases. Additionally, James Montier makes references to famous value investors to further illustrate each behavioral comportment.

The major themes described in this book are the followings:

»Overconfidence

Contrary to a computer, the more data is available, the more confident a person become and the less accurate the result is.

»Over-Optimism

Don’t rely on third part advises, because it will remove your skepticism.

»Focus on facts

Look for evidence that refutes rather than confirms your hypothesis.Separate the facts from an appealing story, an investor must focus on facts and avoid the siren song of stories.

»Avoid forecast

Forecasts are useless, analysts always lag real earnings.

»Bubbles

A chapter is dedicated to bubble in investments. According to investment theories, bubbles shouldn’t exist. Unfortunately, more than 30 bubbles since 1925 have been found.

As individual investor, we have a huge edge over professionals. Except some rare cases, an investment professional should remain invested even if he knows a bubble is currently undergoing. An individual investor can choose to remain in cash.

»Have an investment process

An investment process will help to remain objective.For example, poor performance increases the desire to act. If you are losing money on your investment portfolio, you will have the irresistible desire to sell or buy more shares.

»Lack of independence

It is very difficult going against the crowd.

I have only one critic, the way the book is structured makes difficult to remember the concepts.To conclude, the book is well written and it is an easy read.

Buy The Little Book of Behavioral Investing

Nov 26, 2011


The little book that builds wealth

Author: Pat Dorsay

Difficulty

the little book that builds wealth
The author, Pat Dorsey is the director of Equity research at Morningstar Inc. The book explains how to recognize moats. Thanks to moats, companies can generate above average profits for many years. The concept of moat is due to Warren Buffett. A moat is a business’s competitive advantage. The author explains how to find, evaluate and use moats to make investment profits.

According to the author, moats can be identified in four ways:

»Intangibles assets like brands, patents or regulatory licenses.

A strong brand can be a moat if clients agree to pay more for that brand. Patent can be a moat but it is sometimes legally challenged. Regulatory licenses provide companies with a unique and protected market.

»Switching costs.

For example, it is difficult to close your bank account and open a new one in another bank (you have your mortgage, domiciliation payments for example).

»Network economics.

Companies with a huge network can for example launch a new product and benefit from their networks (like the Burn energy drink with Coca cola company).

»Cost advantages.

For example, a oil company can have access to unique underground wells, making the process cheaper.

Contrary to the traditional value investors, the author doesn’t mind investing in high multiples as long as a company has a strong moat. To conclude, this book is well written and provides a lot of examples.

Buy The Little Book That Builds Wealth

Sep 02, 2011


Quality of Earnings

Author: Thornton L. O'Glove

Difficulty

quality of earnings
If you don’t know what to look in the financial statement of a company, this book will help you to search for the most important items; it will also give you tips on how to avoid torpedo stocks. Even if you are a seasoned accountant or financial analyst, you will be pleased to have this book in your bookcase (at least as a refresher).

This book demonstrates how an individual investor can obtain some edge on the market by diligently reading the financial statements from cover to cover. Why? Because a lot of investment professional don’t even read the financial statements!

This book will answer the following questions:

» Why the analysts are always over optimistic regarding companies.
» Why tracking shareholder letter over the year is important.
» Why a company repurchasing shares program is better than a dividend distribution.
» How account receivable and inventories ratios can help you to predict the future of a company.
» Why you should analyse the earning composition of a company and look for any non-recurring items.
» Why a “big bath” in accounting will benefit the stock in the short term.

Maybe to most important thing of this book is the demonstration on how accounting changes can impact the valuation of a company. The author utilizes a useful comparison between two hypothetical identical companies using different accounting estimations.

It is true that some examples are out-dated, but the methodology is still valid.

Buy Quality of Earnings

Mar 14, 2011