Nobleea is back! This time, he has written a review on one of the books that has changed his views on stock picking. Who is Nobleea? He is a regular reader, commenter, engineer, and personal finance enthusiast.
Since I started investing, I thought that my extensive reading of business news and stock tracking would allow me to get better than market returns. Besides, it’s glamourous! After beginning to read a lot of the PF blogs out there (such as the excellent one you’re reading now), I came across the couch potato investment theory.
Not fully convinced, but always eager to read new investment books, I came across the catchy title “The 10 Biggest Investment Mistakes Canadians Make and How to Avoid Them” by Ted Gadsby.
Who is the Author?
At the time of printing (2000), Ted Gadsby was President and CEO of CIBC Securities. I don’t know if he still works there, but the book definitely has a bias towards mutual funds. Granted at the time of writing, I don’t think ETFs or low cost index funds were widely available.
What is the book about?
The book starts off with an excellent discussion on what happens when human psychology meets finance. The brief introduction to Behavioural Finance mentions and explains the terminology and how it can impact your investments. The author discusses what he thinks are the Top 10 Investing mistakes that Canadians make. Some of the mistakes are pretty weak (probably just wanted to get 10 in total), and some are exceptionally good and salient.
The mistakes that are discussed:
- Misunderstanding Risk
- Timing the Market
- Overusing Tactical Asset Allocation
- Overestimating Active Management
- Succumbing to Home Bias
- Not Knowing What You Own
- Not Knowing How You’re Doing
- Underestimating the Power of Compounding
- Underestimating the Impact of Tax
- Overpaying for Guarantees
The Good and the Bad
There are some interesting riddles throughout the book which help to highlight how goofy and irrational we can act towards risk and money. For example:
- If you toss a coin 20 times in a row, what are the odds of flipping five heads in a row? (The odds are a lot higher than most people would guess – 25%)
- If there are 23 people in a room, what are the odds that 2 of the 23 people share the same birthday (out of 365)? (Again, much higher than most would guess, the odds are 51%)
The first chapter on behavioural finance is a must read. The discussion on mistake #2 Timing the Market is also excellent – the author uses statistics and historical data to show it’s nigh impossible to consistently beat the market for an individual investor.
While most of us try to use low cost index funds or ETFs as much as possible, some may not have the ability to do that with all their investments. I know the vast majority of my RRSPs are with Sunlife through my work plan so I have to use their mutual funds. The chapter on the Power of Compounding was pretty basic and probably well understood already by most. The chapter on Overpaying for Guarantees was probably not applicable for most (essentially discussed Seg funds).
What did I learn most from the book?
The odds that an individual investor will beat the market consistently over a long period of time are not good at all. Why, the odds aren’t even good for professional money managers, and the author presents a lot of data to prove that (most funds that are hot one or two years are absolute dogs the next few). The chapter on the impact of tax on your investment choices was good, though most who index their investments now already know about their inherent tax efficiency.
After seeing the historical numbers and statistics, I’m definitely convinced that indexing with low cost funds and ETFs is the way to go. If you still think that you’re a pretty good stock picker (and maybe you are), try and read through this book.
Want a free copy?
Unfortunately, I don’t have the connections that FT has, so there is no free copy. In fact, the book is out of print and hard to find. But I got a copy at my library and you might be able to as well.