By Jack D. Schwager
Debunking widely believed investment myths
Subject
Themes
Investors are their own worst enemy. Long before any theory of markets is tested, the plainest evidence for this comes from timing: most people buy after prices have already risen and sell after they have already fallen, so badly that even investors who choose consistently winning managers often end up losing money, simply because they pile in and out at the wrong moments. That single observation sets the tone for a sustained argument that much of what passes for received wisdom in investing, from trusting expert forecasters to believing markets price everything correctly to treating leverage as inherently dangerous, collapses once it is tested against the historical record.
Investors are their own worst enemy. Long before any theory of markets is tested, the plainest evidence for this comes from timing: most people buy after prices have already risen and sell after they have already fallen, so badly that even investors who choose consistently winning managers often end…
Published in October 2012, this argument arrives at a specific moment in financial history: four years after the 2008 crisis exposed the limits of mathematical risk models, and in the midst of a prolonged debate within economics over how seriously to take the efficient market hypothesis that had…
The efficient market hypothesis holds that asset prices already reflect all known information, so no amount of analysis can consistently beat the market except by luck. It underlies risk measurement, portfolio optimisation, option pricing, and the broad academic case for simple index investing. The…
Nearly every investment decision starts with the same instinct: find what has performed well recently and buy it. Fund advertisements lead with strong three- and five-year returns, rating services score funds most highly after good runs, and screening software filters out anything that has lagged…
More money has been lost through mismeasuring risk than through failing to measure it at all. A speedometer that reads twenty-five percent low is more dangerous than having no speedometer, because it lulls the driver into false confidence rather than prompting caution. Risk measurement in investing…
Shown two unlabelled performance charts spanning 22 years, most people identify the smoother, less volatile line as the more conservative investment. That line turns out to be the HFR Fund of Funds index, a diversified basket of hedge funds, while the wilder line is the S&P 500 Total Return index.…
Sound portfolio construction repeatedly asks investors to act against their instincts, and three examples show why the instinctive choice so often loses to the counterintuitive one. The first concerns how many holdings are enough. Academic research is frequently read as showing that diversification…
On March 4, 2009, Jon Stewart plays a reel of CNBC's worst calls: Jim Cramer insisting Bear Stearns is fine six days before it collapses, a Power Lunch host distinguishing Lehman from Bear Stearns three months before Lehman folds, Cramer predicting Bank of America will hit $60 before it trades under…
Past high-return sectors and strategies underperform going forward for identifiable reasons: the fundamentals that drove strong performance shift, supply lags behind past profitability, popular strategies become overcrowded, and speculative buying pushes prices past fair value. For long-only mutual…
A wide survey of hedge fund strategies follows: equity hedge and market neutral funds that pair long and short stock positions, long-bias and short-bias variants, sector specialists, merger arbitrage funds that profit from the spread between a target's price and the announced acquisition price,…
The list of 32 investment observations closes with its final nine points. Managed accounts, in which the investor rather than the manager controls the assets, offer protection that no amount of due diligence on a conventional fund can match. Academic studies concluding that diversification benefits…
By Jack D. Schwager
Subject
Themes
Investors are their own worst enemy. Long before any theory of markets is tested, the plainest evidence for this comes from timing: most people buy after prices have already risen and sell after they have already fallen, so badly that even investors who choose consistently winning managers often end up losing money, simply because they pile in and out at the wrong moments. That single observation sets the tone for a sustained argument that much of what passes for received wisdom in investing, from trusting expert forecasters to believing markets price everything correctly to treating leverage as inherently dangerous, collapses once it is tested against the historical record.