As a new contributor to Yahoo Finance Contributors, I’d like to begin by talking about a few books that have had a big impact on my investment philosophy. I believe that by using quantitative, rules-based and historically tested investment strategies, we can override our human hard-wiring that often leads us to make poor investment decisions.
One of the first investment books I read as a teenager was “Reminiscences of a Stock Operator” by Edwin Lefevre.
This book taught me that the one thing that never changes on Wall Street is that it is people who determine the price of stocks. First published in 1923, it is widely assumed to have actually been co-written by the infamous stock speculator, Jesse Livermore. On the second page of the book, we find a quote that still holds true today:
“Another lesson I learned early is there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market to-day has happened before and will happen again.”
The book provides endless examples that what I call the four horsemen of the investment apocalypse: fear, greed, hope and ignorance guide the pricing of stocks. Over time, these “four horsemen” have been responsible for more losses than any raging bear market. Human behavior drives the stock market, and we’ve been making the same mistakes since Isaac Newton, one of history’s most brilliant men, lost a fortune in the South Sea Trading Company stock bubble of 1720. Newton lost his money because he got caught up in the hype of the moment, investing in a colorful story rather than a reasonably priced stock.
The book is filled with passages that sound like they could have been written yesterday. Consider (even though the language is a bit archaic) this passage:
“Finally there came the awful day of reckoning for the bulls and the optimists and the wishful thinkers and those vast hordes that, dreading the pain of a small loss at the beginning, where now about to suffer total amputation—without anesthetics.”
He wrote that about the crash of 1907, but it could just as easily been written about the crash of 2008, when there were plenty of wishful thinkers peddling sub-prime mortgages and insisting that U.S. real estate prices would surge ever upward.
The book is not only a fun read, it reminds us that while stock names change, industries change, investment styles come in and out of fashion and a parade of innovations have made the world a better place since the book was written in 1923, the one thing that hasn’t changed is human nature. We have over-priced every innovation—from the railroads to the internet—because we’re human. Beginning investors should start with this wonderful book that’s as fresh today as it was in 1923. Next up, “Psychology and the Stock Market” by David Dreman.
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