The Laws of Wealth: Psychology and the Secret to Investing Success
by Daniel Crosby
Psychologist Daniel Crosby works in the field of behavioral finance. “Given that you, as a member of the human family, have tendencies toward impatience, arrogance and a fetish for complexity, it is very likely that you will screw this up… At my last count, psychologists and economists had documented 117 biases capable of obscuring lucid financial decision-making.”
Crosby presents 10 rules of behavioral self-management.
Rule #1 – You Control What Matters Most. “The behavior gap measures the loss that the average investor incurs as a result of emotional responses to market conditions.” As an example, the author notes that the best performing mutual fund during the period 2000-2010 was CGM Focus, with an 18.2% annualized return; however the average investor in the fund had a negative return! The reason is that they tended to buy when the fund was soaring and sell in a panic when the price dipped. More on volatility later… Continue reading
Narrative and Numbers: The Value of Stories in Business
by Aswath Damodaran
Aswath Damodaran is a professor of finance who has written several books on business valuation, including The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit.
In this book, he computes valuation based on the business narrative. “One of the most important lessons I have learned is that a valuation that is not backed up by a story is both soulless and untrustworthy and that we remember stories better than spreadsheets.” Conversely, “when a storyteller has wandered into fantasyland, the easiest way to bring him or her back to Earth is with data that suggests the journey is either impossible or improbable.” Thus, “you need to bring both stories and numbers into play in investing and business, and valuation is the bridge between the two.” Continue reading
The Little Book of Valuation: How to Value a Company, Pick a Stock, and Profit
by Aswath Damodaran
How do you determine if a stock is overpriced or a bargain? NYU finance professor Aswath Damodaran explains.
“There are dozens of valuation models but only two valuation approaches: intrinsic and relative… The intrinsic value of an asset is determined by the cash flows you expect that asset to generate over its life and how uncertain you feel about these cash flows. Assets with high and stable cash flows should be worth more than assets with low and volatile cash flows… In relative valuation, assets are valued by looking at how the market prices similar assets.”
The Interpretation of Financial Statements: The Classic 1937 Edition
by Benjamin Graham and Spencer B. Meredith. New Introduction by Michael F. Price
Benjamin Graham (1894-1976) was a pioneer in the field of value investing. He is most famous for being Warren Buffet’s teacher at Columbia Business School. The Interpretation of Financial Statements was originally published in 1937. This 122-page book focuses on the balance sheet and income statement. Graham also wrote Security Analysis, first published in 1934, and The Intelligent Investor, first published in 1949. Continue reading
Debunkery: Learn It, Do It, and Profit From It—Seeing Through Wall Street’s Money-Killing Myths
By Ken Fisher
Investors often rely on intuition and conventional wisdom, but Ken Fisher explains that “markets are inherently counterintuitive” and things “everyone knows” are often unreliable. Flawed assumptions lead to overconfidence or fear. Continue reading