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How to Learn About Finance

How to Learn About Finance


That’s one of the hardest questions I get.

I think back to when I was learning about finance—one of my Coast Guard shipmates had these things called “mutual funds,” so I found some free literature about mutual funds and started reading.

At the time, I was living in an economically unfortunate town in coastal Washington State. There was a used bookstore in town. I bought two books: A Random Walk Down Wall Street, by Burton Malkiel, and Bogle on Mutual Funds, by John Bogle. The first two books I read were books on indexing!  

After reading them, I knew with every cell in my body that the Efficient Market Hypothesis was wrong, and had to be disproved.

But those books were a good start. So sometimes when people ask me what books they should start with, I tell them about Malkiel and Bogle. Then I tell them that those books are all wrong. They look at me like I have a cabbage for a head.

Nowadays, when people ask me how they should learn about finance, I am kind of stuck. I actually went on Amazon and ordered all the lowbrow personal finance books: The Millionaire Next Door, Rich Dad, Poor Dad, the Tony Robbins book, the Dave Ramsey book.

I wanted to gain insight into what the “average” person was reading about investing, because I hope to one day finish a book on investing for average investors. I also don’t spend a lot of time writing for average investors… sometimes people complain that my Wall Street vocabulary can be a little dense.

I think those personal finance books have some good advice and some bad advice. But the one thing they all have in common is that they don’t really teach anything about finance. Maybe you form some good habits: you save 10% of your paycheck, you pick some mutual funds. But you don’t learn the theory behind any of it.

Do people want to learn the theory behind it? Or do they just want to be told what to do?


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People want things to be easy: “Just do these 7 easy things and you’ll wind up a millionaire!”

Unfortunately, investing is never easy. Not even for the pros. Certainly not for me.

Also, markets have a property called nonstationarity, which asserts that the markets change over time, and a strategy that works today probably won’t work in the future.

That means that simple investing rules of thumb, like your allocation to bonds should be your age, will probably get people in trouble at some point.

The tragedy is that investing requires thinking, and thinking is hard, which is the whole premise of Daniel Kahneman’s book, Thinking Fast and Slow. People don’t like to think. They want to outsource their thinking to someone else.

For example, I cannot fix a car engine. Since I don’t know anything about it, I get help. The money I pay is a stupid tax for not knowing anything about fixing cars.

Getting help with investing also costs money, but at least with your car, you will probably get it fixed. There is no guarantee that your financial advice will be good.

Furthermore, you might get great advice and lose money—that happens a lot.

Or, you might get terrible advice and make money—that also happens.

The sad reality is that there are no simple rules, and your financial advisor is little-to-no help. We are all condemned to this existence where we have to make actual asset allocation decisions on a real-time basis. Get them wrong, and you retire with very little.

So the answer to the question: “What should I read to learn about finance?” is…

”Good luck, dude.”

There Is Another Way

Still, a financial advisor can help—just maybe not in the way you think.

You can’t expect that your financial advisor (like perhaps, someone from Edward Jones) is sophisticated enough to outsmart algorithmic traders and quant hedge funds.

But they can help with behavioral coaching.

An individual investor is his own worst enemy. He is excited by higher prices and demoralized by lower prices. He buys on the highs and sells on the lows. A financial advisor can help by keeping him invested, and not selling on the lows.

Half the country barfed it in 2009. They vastly underperformed the people who held on for dear life.

When it’s just you and the Vanguard website and the computer in the dark, and you’re down 30-50%, and you have no help, what do you do? A financial advisor, even a dumb one, can tell you everything is going to be okay. And the returns keep compounding.

Book Recommendations

One more thing. A lot of MBA programs have reputations for being content-lite, but I learned a buttload in my MBA program.

So, buy textbooks. Buy financial institutions and markets books. Buy corporate finance books. Buy bond books. Buy international markets books. Buy portfolio management books. Or actually get an MBA, if it makes sense for you.

Or you can read 400 pages of platitudes from a motivational speaker. Your volleyball.

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Discussion

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0 comments

jack goldman
July 28, 2017, 5:31 p.m.

Easiest plan, 25%  each in S&P index fund, 30 year Treasury bonds, currency, and gold bullion, rebalanced once a year. The Harry Browne approach. Best portfolio is also the worst portfolio. One million in each sector is best plan. One dollar in each plan is worst plan. Income matters more than any other factor. No one knows the future. Best to save $1,000 to $10,000 per month. Average person can not and does not do this. Average people are broke. Seventy per cent of the world have a net worth under $10,000. Ninety per cent have a net worth under $100,000. Only .6% of the world has a net worth over $1,000,000. Worse yet, that $1,000,000 is only worth $50,000 in US silver dollars. Inflation is a fraud. Few people have any money to invest. Very few. The rich know how to invest because they have millions to invest. The average person does not invest and can’t really get ahead. No one cares about the average investor except how to fleece them with high commissions. The markets average 9% a year and the average investor gets 2%. Never invest in stocks if an average person. Just buy rental real estate and collect the rent with full control and no fleecing. Stocks enrich Wall Street and Main Street loses.

Sam Chisholm
July 27, 2017, 5:45 p.m.

Some really great stuff to start with(since I remember starting out and it seemed like just yesterday even though it’s been 20 years)  are not always books actually, but here goes:

Investing and Macro:
John Hussman’s Weekly Market Comment(Free)
Jeremy Grantham’s Quarterly Letters(Free)
Warren Buffett’s Shareholder Letters Single Volume 1965-2016($3 on Kindle)
Meb Faber’s Books (Shareholder Yield and GAA specifically)
F Wall Street by Joe Ponzio(more shareholder yield)
Seth Klarman’s Margin of Safety(you can find it out there in PDF format)
Intelligent Investor by Benjamin Graham( 2003 Zweig edition)

Trading:
C. Van Tharpe’s - Trade your way to Financial Freedom and Beyond the Matrix
C. Van Tharpe’s Book on position sizing if you can find it($250)
Both Stock Market Wizards books by Jack Schwager

Jeff Watts
July 27, 2017, 4:39 p.m.

Jared: Millionaire Teacher! Andrew Hallam

Finance, Investing, Money Management, Wealth management, Common Sense. Which is which?

For those of any age, but particularly young people in their 20’s and 30’s, the best book I’ve found for teaching the basics of financial literacy is:

“Millionaire Teacher” by Andrew Hallam - the 9 rules of wealth you should have learned in school

Takes a short weekend to read, but lifetime of benefit. Read most of the others including many you mentioned, for a newbie to finance, money, investments - this is the best I’ve found to start with…

Jeff

Michael Tannery
July 27, 2017, 12:34 p.m.

While maybe not the investing book - I send “Why Didn’t They Teach Me This in School?” by Cary Siegel to every client’s child when they graduate from High School and then send it to them again when they graduate from college.

Without a basic foundation nothing will work.

Michael Tannery

Gordon Foreman
July 27, 2017, 11:25 a.m.

Jared, As you noted, there are no shortcuts. I am a self-taught investor over a period of 30 years or so. And I must note that the tuition has been extremely high at times. However, I don’t believe that any amount of book learning can make us good investors. And paper trading can be helpful, but unless you really have money on the line, riding on a trading decision you made, you can’t know how you are going to react to either good or bad results.
My dad gave each of my two sons (his grandsons) $5,000 under a uniform gift to minors tax provision back in the early 90s, and I put it all in a science and technology mutual fund. I chickened out along in the middle of 1998 and changed it to money market funds when each account had around $43,000 in it. If I had hung in there another 18 months, it would have been more than double that, but I could easily have held too long and ended even lower than it did. In any case, along with scholarships and summer jobs, they both graduated from college without any debt.
One of the benefits of actually investing and trading is that you notice things that would otherwise pass unnoticed, and these small insights accumulate over time. Eventually you reach a point where you see opportunities. For example, I would suggest that a fairly low-risk trade right now would be to split a trading account into two halves, and put 25% into Google and 25% into Apple. Take the other half and short equal dollar amounts of Amazon, Facebook, and Netflix.
My logic is as follows: These five companies have been bid up greatly by index fund investing, but trade at hugely different P/E ratios. Google and Apple are at reasonable P/E ratios, whereas the other three are astronomical. When the market is again body-slammed, Google and Apple will come out the far side much better off than Amazon, Netflix and Facebook, meaning the investor will have money to invest at a time when stocks are CHEAP.
One lesson I learned in 2008 is that a stock market crash is not nearly as scary when you have cash available to invest. My paranoia kicked in before things got really bad, and I cashed out nearly half my positions. My accounts dropped some in their overall value, but nothing like the market in general, and rather than agonizing every day about how my stocks were being destroyed, I was watching stocks I wanted to own get cheaper and cheaper.
I did not get in at the bottom, and failed to pull the trigger at all on a couple of stocks that I shouldn’t have let get away, but I remember that my level of fear and angst was much different (i.e. less) than most others at the time. Thus, I like to always have a position or two in my portfolio that will rise sharply should the market crash. That’s my starting over money.

Richard Davis
July 27, 2017, 9:55 a.m.

Jared -

I would change one verb in your recommendations. Everywhere you have said “BUY books on ...” should be changed to “READ books on ...”

My shelves hold a lot of good intentions. Reading a bad book is probably better than ignoring a good one.

Dan Ross
July 27, 2017, 9:39 a.m.

It seems to me that the first question is, what do you mean about the term finance.  You have roughly equated it with investing.  To me, finance is about a lot more than that.  When I first started getting serious about my money, way back in the 70’s, I read a great book by a woman.  Her name was Vanita Van Caspel.  It truly introduced me to the whole spectrum of managing my money.  Investing was one aspect of that.  Perhaps one of the best insights was her discussion of insurance.  That saved me a ton of money which I later invested.

So your article pertains to investing, not finance.  And I am sure you will get some push back from Bogelheads!

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