The
theory of investing.
Diversification
and liquidity are dandy, but they both vanish when we need them the most. As
2008 began, millions of investors owned short - term bond funds holding
securities ranging in safety from plain - vanilla high - grade corporate debt
to more exotic asset - backed vehicles; a small but soon - to - be - highly -
visible minority of funds actually juiced their returns by writing credit
default swaps. In normal times, these securities were highly liquid, that is,
easily exchangeable for cold, hard cash. When push came to shove in the fall of
that year, however, shareholders in need of cash suddenly found that they were
worth less than they ever thought possible — in some cases, a lot less.
Similarly, during the great bull market of 2002 – 2007, investors piled into
mutual funds specializing in emerging markets and real estate investment trusts
(REITs) — ostensibly because of their diversification value, but in reality
because their recent performance had been red - hot. In the ensuing market
collapse, the diversification value of these two asset classes disappeared
faster than taco chips at a Super Bowl party, falling, in some cases, 60 to 70
percent. (In truth, REITs and emerging markets stocks do offer substantial
diversification benefit, but only if held for the long term: during the 10 -
year period from 1999 to 2008, these two asset classes provided investors with
salutary returns, while the S & P 500 lost money.)
The
history of investing.
The stock market is not as agreeable
a place as many would have you believe. Forget the “stocks for the long run”
bias inherent in both the pre - and post - 1926 databases used by almost all
academics and practitioners. JASON ZWEIG, simply put, is the reigning gold medalist in the investing Olympics decathlon, investing demolishes this paradigm with an efficiency rarely
seen this side of a Chuck Norris film: Stock markets do not become less risky
with time, do not always return more than bonds, and do vanish, with alarming
regularity, into the mists of history.
The
psychology of investing.
Your
own worst enemy is the image in the mirror; this goes double if you’re a guy.
As I read Jason’s sections on the investing heart of darkness inside all of us,
I trembled that they might fall into the wrong hands: a snappy ticker symbol,
for example, is worth a several - percent stock price premium. Of course, when
it comes to manic - depressive behavior, few can hold a candle to Mr. Market
himself, and the sooner you stop becoming his anxious co-dependent and learn to
administer to him the tough love he deserves, the wealthier you will be.
The
business of investing.
Beware
of geeks bearing gifts: Most financial innovation serves roughly the same
purpose as the pickpocket’s decoy, the innocent - appearing chap who bumps into
you or asks you the time while his deft accomplice relieves you of your wallet.
In much the same way, over the past decade hedge funds, bond funds with clever options
strategies, and structured investment vehicles have considerably lightened
investor’s wallets.
