Buying and selling stocks is a costly way to learn about investing. Better way: Gain wisdom from investors who have lived through bull and bear markets…and bubbles and busts…and made all the mistakes so you won’t have to…
Top financial advisor Ben Carlson, CFA, offers three books that were critical to his education as an investor and fun reads as well…
Devil Take the Hindmost, by Edward Chancellor, examines four centuries of speculative bubbles from the tulip scandal of 1630s Holland to the housing bubble of the mid-2000s. My takeaway: Investors often berate themselves for missing out on fantastical gains from bubbles, but in the long run you’re better off being cautious and conservative even if it means missing out on speculation. Reason: Recovery from post-bubble crashes can take so long that it can permanently impair the returns of many speculators. Examples: The NASDAQ index took 15 years to reach new highs after the dotcom crash in 2000…and after Japan’s Nikkei stock index peaked in 1989, it didn’t surpass that level until 2024—34 years later.
What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan. This memoir is about how a poor Kentucky kid became a star commodity trader and rose to a seat on the board of governors at the Chicago Mercantile Exchange. But when Jim Paul’s luck ran out and his hubris caught up with him, it cost him his job, his reputation and his seven-figure brokerage account. My takeaway: Of all the behavioral biases that can derail investors, watch out for overconfidence. There are many subtle ways you can fall victim. Examples: You perceive your winning stocks as a sign of great investment skill and losing stocks as bad luck…or you have a few good months in the stock market and figure your hot hand will surely carry on in the future. A large body of scholarly evidence links overconfidence to frequent trading, which sets you up to underperform the broad market because you are prone to make costly mistakes.
The Money Game by Adam Smith. Smith was a pseudonym for George Goodman, a member of The New York Times’ editorial board and later the Emmy Award–winning host of PBS’s Adam Smith’s Money World. Smith chronicles the late-1960’s go-go bull market, which shared many similarities with the past few years, including a booming bull market, wild speculation and nosebleed valuations in glamor stocks. My takeaway: I always remember one line from this classic book—“The stock doesn’t know you own it.” Smith was driving home the point that all the marvelous things you feel about a stock and narratives you construct to justify those feelings can undermine you.
