Investment Blunders of the Rich and Famous...and What You Can Learn From Them

Overview

The most common investor mistakes — and how you can avoid them!

  • Lessons from the spectacular failures of the world's most prominent investors!
  • Practical techniques for avoiding overconfidence, hubris, greed, shortsightedness, and other investment blunders.
  • By John Nofsinger, author of Investment Madness: How Psychology Affects Your Investing...and What to Do About It.
Every investor — even the world's most ...
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Upper Saddle River, NJ 2002 Hard cover New. Sewn binding. Cloth over boards. 336 p. Financial Times (Prentice Hall).

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Overview

The most common investor mistakes — and how you can avoid them!

  • Lessons from the spectacular failures of the world's most prominent investors!
  • Practical techniques for avoiding overconfidence, hubris, greed, shortsightedness, and other investment blunders.
  • By John Nofsinger, author of Investment Madness: How Psychology Affects Your Investing...and What to Do About It.
Every investor — even the world's most prominent and respected investors — are subject to the foibles of human psychology. Now, John Nofsinger, identifies the most common investor mistakes through the prism of the world's most public investment catastrophes. Using other people's money and other people's disasters, Investment Blunders teaches a wide range of critical lessons every investor must learn. John Nofsinger shows how to avoid the overconfidence displayed by John Meriwether and David Mullins, and by Nobel laureates Myron Scholes and Robert Merton, the founders of the failed Long Term Capital Management hedge fund. He demonstrates how to avoid the hubris that nearly destroyed KKR in its bidding war over RJR Nabisco; how to identify and control the greed that sank Michael Milken and many of his contemporaries; and how to keep sight of the fundamentals, avoiding the disastrous investments that led to the 1980s' S&L crisis. Read each Blunder, and you will learn of a common error that you can avoid in the future.

John Nofsinger is a finance professor at Washington State University. Together with Richard W. Sias, his 1997 paper Herding and Feedback Trading by Institutional Investors was awarded "Best of theBest" and "Best Paper in Investments" by the Financial Management Association. He has also done advanced research for the New York Stock Exchange and the Association for Investment Management and Research. He has published Investment Madness: How Psychology Affects Your Investing...and What to Do About It, with Financial Times Prentice Hall, and best-selling textbook, The Psychology of Investing, with Prentice Hall.

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Product Details

  • ISBN-13: 9780130668417
  • Publisher: Pearson Education
  • Publication date: 6/11/2002
  • Series: Financial Times Prentice Hall Books
  • Edition number: 1
  • Pages: 336
  • Product dimensions: 6.34 (w) x 9.26 (h) x 1.09 (d)

Read an Excerpt

Preface

How can I become a better investor?

This one question is the source of an entire financial advice industry. Magazines, newspapers, books, TV shows, radio shows, and Internet sites are dedicated to the topic. With all this advice, why aren't we better investors?

Many of these sources of advice manipulate our hopes, dreams, and fears in order to get us to pay attention to their show or buy their magazine. It works. We are often drawn to bad advice simply because it is packaged in an exciting way. I have known financial advisors who were terrible at investing, but had many clients because they had a lot of flash and were great marketers. I have also known financial advisors very good at investing whose client base grew slowly because they didn't play on prospective clients' emotions. There is a lot of good advice out there, but it is not always from the sources that draw our attention.

Indeed, the investment industry plays to our emotions as well. Mutual funds focus their advertising on high recent returns. Investment newsletter writers use fear and hope to sell subscriptions. Investment authors offer the way to easy money. It is no wonder that investors develop misconceptions and form bad habits.

I wrote this book to help investors understand the sources of the mistakes they are being led into. Many mistakes are made that have only minor influences on wealth. However, occasionally an investor will fall into a major investment blunder that will seriously affect their life for many years. By reading this book, you should be able to avoid experiencing that blunder (or another one!). As you read the book, you may find that someadvice you have received is bad. If that is the case, then you may have read this book just in time to avoid your own blunder.

The chapters in this book are grouped into three parts. The first part details many of the problems that investors commonly inflict on themselves. The topic of money (especially losing it!) can bring out strong emotions in people. These emotions can lead to poor choices and further financial problems. In addition, the way the human brain functions frequently leads investors to conclusions that are simply wrong. For example, people think they see patterns and trends in stock prices that are really random, or chaotic. These chapters discuss these emotions and the tricks of the mind. In addition, they illustrate the problems and foolish risks they lead you into.

Many investors turn to investment professionals to get advice on which stocks to buy and when to buy them. There are many analysts, economists, advisers, and other experts who are willing to sell advice. This advice can come to you in the media, through newsletters, or over the Internet. If you are paying for this advice then you had better read Chapter 5, "Profits from the Prophets?" which examines whether you can make profits from these prophets.

The second part of the book describes many of the problems investors face because of the drive to do better than everyone else. Even if you do not feel the need to get the best return, you probably want to at least beat the market (and many of your friends and colleagues). The focus on beating the market causes investors to do things that are harmful to their wealth. Investors try to second-guess the market by timing it. Investors also chase the mutual funds with the top performance over the past month, quarter, or year. The desire to make more money than your neighbor makes you vulnerable to the "get rich quick" scheme. These schemes are named after your desire, not your outcome, because nobody gets rich.

The third part of the book shows that the professionals can make enormous blunders too. They suffer from the same human weaknesses as the rest of us. Even very smart people can blow it. Read the fascinating tales of how respected traders, Nobel Prize Laureates in economics, portfolio managers, and others lost billion of dollars. Read about billions in losses that nearly crashed the world financial system, or losses that bankrupted one of the richest counties in California. Learn of rogue traders that bet the bank on their trades—and lost. While the book describes investment blunders of all types, these dramatic blunders boggle the mind.

How can you avoid making a blunder with your own money while also meeting your investment goals? The last chapter of this book relates a process and strategy for overcoming these problems. It details a disciplined approach to investing that will lead you to your financial goals.

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Table of Contents

Preface.
Acknowledgments.
1. Other People's Problems.
Do-It-Yourself Investing. Investor Performance. Effect of a Blunder. Endnotes.

I. SELF-INFLICTED COMMON PROBLEMS.


2. Behavioral Finance.
Your Psychological Biases. Emotions. Simplification. The Investment Environment. Summary. Endnotes.

3. Patterns and Predictions.
Gambler's Fallacy. Streaks. Investors and Trends. From Dogs to Fools. Mining Fool's Gold. High-Tech Data Mining. Foresight and Hindsight. Summary. Endnotes.

4. Mood, Optimism, and Investing.
Moods and Expectations. Sunshine. The Bias of Optimism. Optimism, Exuberance, And Blunders. Rampant Optimism and Pessimism. Summary. Endnotes.

5. Profits from the Prophets?
Analysts. The Biases of Analysts. Dartboard. Barron's Annual Roundtable. Value Line. Newsletters. Insiders. Economists. Summary. Endnotes.

6. Foolish Risks.
The Right Risks. Fall of a Titan. Your 401(k) Plan. Active Risk Management. How Much Diversification? Picking Portfolios. Endnotes.

II. TRYING TO BEAT THE MARKET.


7. Timing the Market.
All Types of Market Timing. Tools of the Trade. Professional Timing. The Timing Newsletter. Timing in Bull and Bear Markets. Individual Investors and Market. Timing. Market Timing and Risk. Summary. Endnotes.

8. Mutual Funds: Performance.
Mutual Fund Managers are Superior. Investors. Mutual Fund Investors Underperform the Market. Paradox Resolved. Do Winners Repeat? Mutual Fund Ads. Chasing Winners. Tournaments and Temptations. Star Power. Summary. Endnotes.

9. Mutual Funds: Carrying the Load.
Mutual Fund Fees. LOADING UP. QUID PRO QUO. A FEE BY ANY OTHER NAME. What Mutual Funds Give, theTax Man Takes Away. Out of Sight and Out of Mind. Endnotes.

10. The Social Investor.
The Friends You Keep. Being Social. Talking Stocks. Investment Analysis. Media. Summary. Endnotes.

11. Get Rich Quick.
The Pyramid. A Pyramid in Albania. The Caritas Pyramid in Romania. A Pyramid in Russia. Pyramids in the United States. Gifting As A Pyramid. The Internet, an Effective Pyramid Medium. Summary. Endnotes.

III. COLOSSAL BLUNDERS.


12. The Eggheads Crack.
In the Beginning. The Hedged Bet. The Hedge Fund. Long-Term Capital Management. LTCM'S TRADING. Leverage. Overconfidence. Imitation May Be Flattering, But£. The Beginning of the End. The Fear Of A Crisis. Summary. Endnotes.

13. An Orange Squeezed.
The Rise of Robert Citron. Citron In Demand. The Repo Man. The Economy Changes. The Squeeze. A Rescue? The Aftermath. Summary. Endnotes.

14. Betting the Bank.
Barings Bank. Nicholas Leeson. Arbitrage and Futures Contracts. An Error in Singapore. Double£Or Double Again. Margin Calls. The Shake Down. Toshihide Iguchi and Daiwa Bank. Kent Ahrens and First Capital. Joseph Jett and Kidder Peabody. Summary. Endnotes.

15. Investing to Win and Avoid the Blunders.
Getting on the Right Track. Financial Goals. (Your Destination). Investment Return. Asset Allocation. Implementation. Index Mutual Funds. Indexing With Exchange. Traded Funds. Implementation in the Real World. Continuing Process. Summary. Endnotes.

Appendix.
Index.

Read More Show Less

Preface

Preface

How can I become a better investor?

This one question is the source of an entire financial advice industry. Magazines, newspapers, books, TV shows, radio shows, and Internet sites are dedicated to the topic. With all this advice, why aren't we better investors?

Many of these sources of advice manipulate our hopes, dreams, and fears in order to get us to pay attention to their show or buy their magazine. It works. We are often drawn to bad advice simply because it is packaged in an exciting way. I have known financial advisors who were terrible at investing, but had many clients because they had a lot of flash and were great marketers. I have also known financial advisors very good at investing whose client base grew slowly because they didn't play on prospective clients' emotions. There is a lot of good advice out there, but it is not always from the sources that draw our attention.

Indeed, the investment industry plays to our emotions as well. Mutual funds focus their advertising on high recent returns. Investment newsletter writers use fear and hope to sell subscriptions. Investment authors offer the way to easy money. It is no wonder that investors develop misconceptions and form bad habits.

I wrote this book to help investors understand the sources of the mistakes they are being led into. Many mistakes are made that have only minor influences on wealth. However, occasionally an investor will fall into a major investment blunder that will seriously affect their life for many years. By reading this book, you should be able to avoid experiencing that blunder (or another one!). As you read the book, you may find that some oadvice you have received is bad. If that is the case, then you may have read this book just in time to avoid your own blunder.

The chapters in this book are grouped into three parts. The first part details many of the problems that investors commonly inflict on themselves. The topic of money (especially losing it!) can bring out strong emotions in people. These emotions can lead to poor choices and further financial problems. In addition, the way the human brain functions frequently leads investors to conclusions that are simply wrong. For example, people think they see patterns and trends in stock prices that are really random, or chaotic. These chapters discuss these emotions and the tricks of the mind. In addition, they illustrate the problems and foolish risks they lead you into.

Many investors turn to investment professionals to get advice on which stocks to buy and when to buy them. There are many analysts, economists, advisers, and other experts who are willing to sell advice. This advice can come to you in the media, through newsletters, or over the Internet. If you are paying for this advice then you had better read Chapter 5, "Profits from the Prophets?" which examines whether you can make profits from these prophets.

The second part of the book describes many of the problems investors face because of the drive to do better than everyone else. Even if you do not feel the need to get the best return, you probably want to at least beat the market (and many of your friends and colleagues). The focus on beating the market causes investors to do things that are harmful to their wealth. Investors try to second-guess the market by timing it. Investors also chase the mutual funds with the top performance over the past month, quarter, or year. The desire to make more money than your neighbor makes you vulnerable to the "get rich quick" scheme. These schemes are named after your desire, not your outcome, because nobody gets rich.

The third part of the book shows that the professionals can make enormous blunders too. They suffer from the same human weaknesses as the rest of us. Even very smart people can blow it. Read the fascinating tales of how respected traders, Nobel Prize Laureates in economics, portfolio managers, and others lost billion of dollars. Read about billions in losses that nearly crashed the world financial system, or losses that bankrupted one of the richest counties in California. Learn of rogue traders that bet the bank on their trades—and lost. While the book describes investment blunders of all types, these dramatic blunders boggle the mind.

How can you avoid making a blunder with your own money while also meeting your investment goals? The last chapter of this book relates a process and strategy for overcoming these problems. It details a disciplined approach to investing that will lead you to your financial goals.

Read More Show Less

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