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.
Recommended for You
The Chinese government on Tuesday took a step the U.S. government has long been calling for when it released a white paper outlining its general military strategy. The assurances sound fine, but there is a definitional problem that makes some of the Chinese government’s promises unsatisfying to its…The Fiscal Times
NEWARK, N.J. (AP) — Actor-comedian Tracy Morgan has settled his lawsuit against Wal-Mart over a highway crash that killed one man and left Morgan and two friends seriously injured.Associated Press
Long-serving FIFA President Sepp Blatter was set to be easily reelected to his post on Friday. Despite numerous accusations that the soccer governing body is rife with financial maleficence and bribery and despite its increasingly disastrous attempt to stage World Cup 2022 in Qatar, Blatter was…The Fiscal Times
The first step to successfully transition to a one-income family is to get your spouse on the same page. If your significant other isn’t on board, you may find your efforts are sabotaged by your spouse’s spending or resentment that could irreparably damage your relationship. If you think your…Money Talks News
May 27 -- Customer Growth Partners President Craig Johnson discusses Tiffany, Michael Kors and retail earnings. He speaks on “Bloomberg Markets.”Bloomberg Video
The rupee fell as signs the U.S. will raise interest rates drove a gauge of the dollar to a five-week high and amid speculation India’s central bank favors a weaker local currency to boost exports. Federal Reserve Chair Janet Yellen said in a May 22 speech that if the U.S. economy continues to…Bloomberg
Burger King is dominating fast food. The company recently surpassed Wendy's to become the...Business Insider
Abu Dhabi's Etihad Airway's contribution to the U.S. economy will almost double to $6.2 billion by 2020, it said on Wednesday, in an apparent counter to allegations that government subsidies gave it an unfair edge over competition. The airline will support the American economy with 23,400 jobs and…Reuters
Shares of Michael Kors fell by more than 23% on Wednesday after the company reported...Business Insider
CNBC's social media editors Steve Kopack and Eli Langer explain how a specific text message can cause an iPhone to automatically turn off and restart.CNBC Videos
Thieves stole 100,000 past tax returns from the IRS, says the agency. Here's what you need to do if you're one of the victims.Money
A Swedish company is claiming to have achieved the most efficient conversion of energy for its solar cells, but is this enough to revolutionize the industry?Oilprice.com
'Widows and orphans' stocks have high dividends and very low risk. See which three make the cut for the highest level of safety.TheStreet.com
The last month of trading has been good for offshore drillers like Transocean (RIG), Diamond Offshore Drilling (DO), Seadrill (SDRL) and Noble (NE). RBC's Robert Pinkard and team, however, warn investors not to buy the "head fake" in offshore drillers: The offshore drilling group is up 27% off its…Barrons.com
While sentiment on MLPs is improving, caution still remains, and stock selection will be the key going forward as the sector continues to heal.24/7 Wall St.
Per latest market buzz, Microsoft (MSFT) is the frontrunner in acquiring the Canadian handset manufacturer, BlackBerry Limited (BBRY).Zacks