The Laws of Wealth: Psychology and the Secret to Investing Success By Daniel Crosby
Really enjoyed
Started not necessarily in order in that I read behavioral investor before this. If you haven’t checked out behavioral investor-I suggest you do! Laws of wealth- I found to be very entertaining as well as a good source of great and useful information. I’ll definitely be adding this to list of books I give to clients 286 - People are over confident about their abilities: but the solution is not to underestimate oneself, but rather constantly stress test oneself so one has a clear idea of where one would excel at, and avoid being areas where one clearly wouldn't be able to excel
- Investment requires emotional-less state. Hence, it's much better for human to make such decision infrequently, and often make decision after prolonged period of thinking to minimize emotion getting into the play (remember regardless of how strong emotion is at the moment, it will be metabolized soon: be patient, things shall pass)
- What someone says is pointless: only focus on what they do. Thus, avoid being in a situation where you can hear what people express about their business. Only make decisions when you see the action
- Invest for YOU, not other people's rules: because you might have different needs than others, it's only natural that you'll invest differently than others: it's perfectly normal to not be a part of the herd. 286 Up there with Intelligent Investor and FTs Investing books in my opinion. A 'must read' for those interested in investing- not just in the stock market, I feel the principles can be applied more broadly.
Also, very nicely written, lots of brief examples and quotes to maintain interest in the book. 286 the first half of the book is an excellent exposé of the follies of investors. The second half however goes on and on and on about how to invest.
For the vast majority of investors, they would be best advised to buy an index fund, buy and hold.
Nothing less, and certainly nothing more. 286 Helpful. Easy to read. Great research and quotes really drive home the main thrust of the book. My main criticism would be that Crosby spends a lot of time justifying the need for a rules-based investment approach and I wish he would have spent a bit more time showing how they can be implemented in a practical way. 286
GOLD MEDALLIST IN THE AXIOM BUSINESS BOOK AWARDS 2017
From New York Times and USA Today bestselling author, Dr Daniel Crosby, comes the behavioral finance book all investors have been waiting for.
In The Laws of Wealth, psychologist and behavioral finance expert Daniel Crosby offers an accessible and applied take on a discipline that has long tended toward theory at the expense of the practical. Readers are treated to real, actionable guidance as the promise of behavioral finance is realised and practical applications for everyday investors are delivered.
Crosby presents a framework of timeless principles for managing your behavior and your investing process. He begins by outlining ten rules that are the hallmarks of good investor behavior, including 'Forecasting is for Weathermen' and 'If You're Excited, It's Probably a Bad Idea'. He then goes on to introduce a unique new taxonomy of behavioral investment risk that will enable investors and academics alike to understand behavioral risk in a newly coherent and complete way.
From here, attention turns to the four ways in which behavioral risk can be combatted and the five equity selection methods investors should harness to take advantage of behaviorally-induced opportunities in the stock market. Throughout, readers are treated to anecdotes, research and graphics that illustrate the lessons in memorable ways. And in highly valuable 'What now?' summaries at the end of each chapter, Crosby provides clear, concise direction on what investors should think, ask and do to benefit from the behavioral research.
Dr. Crosby's training as a clinical psychologist and work as an asset manager provide a unique vantage and result in a book that breaks new ground in behavioral finance. You need to follow the laws of wealth to manage your behavior and improve your investing process! The Laws of Wealth: Psychology and the Secret to Investing Success
Another great book by Daniel Crosby. I greatly enjoyed the Behavioral Investor and this was just as good. Although I don’t generally enjoy listing style books, this one is highly recommended.
Like a primate in formal wear, we are just as out of place when it comes to investing. In the first part of the book, Crosby gives us 10 rules to live by in behavioral investing:
1. You Control What Matters Most: Your own behavior is the greatest driver of investment returns. Studies show that investor behavior accounts for 1-4% annual underperformance. Managing your own behavior is the keystone of successful investing.
2. You Cannot Do This Alone: The best use of a financial advisor is as a behavioral coach rather than asset manager. People that receive financial advice tend to outperform by 2-3% annually which creates staggering differences in wealth over time.
3. Trouble is Opportunity: The wealth destroying impacts of bear markets are greatly magnified by our reactions to fear. The market feels most scary when it is actually most safe. The only hope for managing this fear is a systematic approach and the will to see it through.
4. If You’re Excited, It’s A Bad Idea: Emotions are the enemy of good investment decisions. Stories bypass reason, skip the brain, and head straight for the heart; stories are therefore the enemy of good investment decisions.
5. You Are Not Special: Investors who own their own mediocrity are better able to rely on rules and systems that work. “The key to successful investing is to recognize that we are just as susceptible to crippling behavioral biases as the next person.” – James O’Shaughnessy. Dangerous overconfidence is evident in both novice and professional investors.
6. Your Life Is The Best Benchmark: Social mimicry is ubiquitous. The behavior of those around us is far more influential and contagious than we would suppose. Investing isn’t about beating others at their game, it is about controlling yourself at your own game. Measuring performance against our own needs than against an index helps us achieve better outcomes. Goals based investors are less likely to panic and make ill-informed changes to portfolios.
7. Forecasting Is For Weathermen: The research is unequivocal, forecasts don’t work, especially expert forecasts. Further, Wall Street analysts are not paid for the accuracy of their forecasts and often have perverse incentives to mislead investors.
8. Excess Is Never Permanent: As James O’Shaughnessy says, “the most ironclad rule of the stock market is the idea of reversion to the mean.” We are wired to expect consistency, but the extreme performers tend to revert to the mean. Periods of exceptionally high returns are followed by periods of low returns and vice versa.
9. Diversification Means Always Having To Say You’re Sorry: Concentration is the fastest way to crazy wealth, but it is also the fastest way to losing wealth. Diversification is a form of regret minimization. The research is unequivocal, you will regret losses more than you will regret missing out on gains. Diversification goes a long way to decreasing volatility while we aim to meet our financial goals. Just as an airbag is a useless expense until you get in an accident, bonds are a drag on performance until they aren’t.
10. Risk Is Not A Squiggly Line: Risk is, first and foremost, the likelihood of losing money. We can define risk as the possibility that we will not be able to afford the financial lives we desire. Bonds and cash, actually considered safe by most volatility based measures, actually fail to keep up with inflation most of the time. Considered with an appropriate timeline stocks provide a great deal of reward with little risk in the meaningful sense of the word. Skillful risk control is the hallmark of a successful investor. Not overpaying for an asset is the safest move you can make.
In the second half of the book, Crosby lays out the principles of rule based investing, a process for being a successful investor keeping our behavior in mind. Like a casino - if we can tilt probability in our favor and stick with it, we will be greatly rewarded in the end. Casinos don’t win by exploiting a huge advantage, they win through good behavior and exploitation of small edges in probability.
Following a good process is the key. What works are strategies that are diversified, low-fee, low turnover, and account for behavioral biases. The rules based investing process can be remembered with four C’s:
• Consistency: A simple formula is better than you at selecting investments. The truth is that quant models represent a ceiling in performance rather than a floor to which we can add.
• Clarity: Simplicity is the ultimate sophistication. Complexity doesn’t add to performance.
• Courageousness: It pays to be different. A system aimed at correcting our most basic human impulses must guide us toward courage in two very specific ways: it must lead us to take non-consensus views and should keep us invested almost all of the time.
• Conviction: A basket of 25-50 stocks offers the potential for outperformance as well as real differentiation from the index. The benefits of diversification quickly begin to erode after the 20 stock point. Joel Greenblatt shows that 93% of the diversification benefit is achieved with just 16 stocks.
Crosby also gives us the 5 P’s of stock selection that are based on outperformance through an understanding of human psychology:
• Price (Never Overpay): Price impacts perceived quality. The tendency to conflate price with quality leads us to overpay for all sorts of things, including stocks. In investing, the opposite is true, the more you pay, the less you get. Period. Crosby says that value investing is the single greatest thing you can do to ensure an appropriate return and manage risk.
• Properties (Buy Quality): Price should always be considered relative to quality. Joseph Piotroski found that 57% of value stocks underperformed the market at 1-2 year intervals. Piotroski’s F score can enable us to determine quality by looking at nine measures of quality. Return on Invested Capital (Greenblatt) is probably the simplest of quality metrics.
• Pitfalls (Consider Risks): We tend to think of bear markets as risky, but risk actually builds up during the good times and is actualized during the bad times. Crosby encourages us to conduct a pre-mortem, imagining what might derail our hoped for performance ahead of time.
• People (Follow the Leaders): In-person interviews with management are useless and give false confidence. Crosby encourages us to look at managements actions through share buybacks, insider trades, and dividends.
• Push (Go With the Flow): Momentum has been shown to work since 1801 and in more than 40 countries and dozens of asset classes.
Croby’s theory of investing is best summarized by automating a process of buying a concentrated basket of attractively priced, high quality companies that are enjoying a recent catalyst.
Crosby notes that these investing principles are timeless for the same reason that even though people know better they will still overeat, cheat on their spouses and fear sharks more than Big Macs. After all, we aren’t a fat nation because we are short on gyms or nutritional information. 286 When considering what drives investment returns, investors are wont to fantasize about everything except the very thing that matters most — their behaviour. Some imagine what life would be like if they had bought Tesla (or Apple, or Name-Your-Skyrocketing-Stock) on the day of its initial public offering. Others wonder what it would have been like to perfectly time an exit before the Great Recession. ... Despite the unequivocal truth that investor behavior is a better predictor of wealth creation than fund selection or market timing, no one dreams about not panicking, making regular contributions and maintaining a long-term focus
Great behaviour finance book which focuses on investments and the stock market. Unfortunately, painfully repetitive. 286 Just read the first few chapters. I can't help but feel some of the examples the author uses are not very convincing. For example, in the first chapter of part one, the author says that it's easier to predict the return of stocks over a long time horizon. The author shows a table that suggests the range of return for stocks can be around +53.9%~-43.% over 1 year, but can be +14.75~+5.9% over 25 years. However, it seems unlikely that the worst return of stocks over 25 year is +5.9%. Because some of the companies might go bankrupt, the worst return should be near -100%! There must be some implicit assumption about this data, e.g., maybe the result was computed based only on the companies that exists for over 25 years, or maybe it's computed based on average return of the entire stock market. The author does not seem to explain these assumptions more clearly. It doesn't help that the author follows the discussion with the observation that the average share of common stocks in a American company were held longer in the past, but now are being traded more frequently. This seems to imply that it is a good idea to hold the stocks of individual companies longer, which is probably problematic considering many of these companies might go bankrupt. In the chapter of Rule#1, the author claims that it is a unequivocal truth that investor behavior is a better predictor of wealth creation than fund selection or market timing. However, I feel this statement could only be true when certain specific definitions are being assumed. For example, market timing can certainly be a good predictor to wealth creation if you compare the investors who successfully time the market over many consecutive years (perhaps by luck) against the investors who are unsuccessful. And it's totally unclear what kind of investor behavior is a good predictor to wealth creation here. 286 When you invest in stocks, you’re always weighing up risks against a possible return. But what if there is a whole area of risk that you’re not aware even exists? Investors are used to being cautious about the risks of the market as a whole, such as a stock market crash or the health of a particular company. But one of the greatest risks to our investments comes not from the stock market, but from ourselves.
Behavioral risk, or the vulnerabilities of the investor herself, is one of the key factors to grapple with when investing. Like it or not, we are irrational. We get overwhelmed by information and can become panicky or overemotional. While we may fancy ourselves intuitive and astute, our judgment can be clouded by slick sales pitches and clever marketing.
This might sound dire, but don’t despair! In these blinks, we’ll tackle investor fallibility head-on by identifying potential pitfalls. We’ll also explore practical strategies for making smart and insightful investment decisions.
One of the main risks to investors comes not from the stock market but from their own behavior. We are often emotional, irrational, and prone to grandiose thinking. We need to learn how to recognize these weaknesses and take steps to combat them by getting outside advice and investing systematically according to our personal goals.
286 This doesn’t look like it’s going to be a particularly interesting book. But it is in fact interesting and entertaining, and deals with some of my favourite investing subjects with such infectious aplomb that I’ve found myself quoting sections to friends and colleagues and becoming something of a bore.
But the fact that most of the people I know are unlikely to read this and it is unlikely to be a publishing phenomenon on a par with Harry Potter or even the 1949 investing classic The Intelligent Investor, suits me just fine. If everyone read it, as indeed they should, then the book’s claim to hold the ‘Secret to investing success’ would be out and no longer be a secret.
As Dr Daniel Crosby is quick to remind us, the stock market is a zero sum game. So no matter how good you are at it, if everyone else is better than you, you will lose money. But what if everyone else is just as good as you at investing?
That is where this book comes in. By concentrating on the science of psychology, Dr Daniel Crosby shows us how we can manage our behaviour using Rules Based Investing (RBI). By controlling our behaviour, we can beat everyone else at this game. There are some pretty simple ideas in here that make a lot of sense, and the beauty is that they can be used whether you dabble in the stock market yourself, have your own financial advisor or if you invest via mutual funds.
There are some truly staggering figures in here that show how poor behaviour impacts long term returns. Some of this is regularly highlighted by our experts, such as the folly of trying to time the market. How can it be that the highest returning stock fund from 2000 to 2010 had investors that lost 10% of their money during their time invested in the fund? Not only is timing the market not necessarily going to help you beat the market, but also makes it more likely you will lose money.
My favourite chapter deals with one of my pet hates and that is the definition the financial services regulators have of Risk. All over this website you will encounter warnings of each fund’s potential to lose you money; yet at the same time if you read the objectives and investment policy of the funds on our platform, excepting cash funds, they will rightly advise you that investments in the fund should be regarded as a long-term investment.
When I get to retire I want to have a pension pot that allows me to live a comfortable lifestyle with a few treats thrown in. The Junior ISA I have for my daughter I hope will allow her to pay for a deposit on her first property so she can benefit from the apparently inexorable rise in property prices.
If my goals for these savings are realised I could not care less if during the interim period the value of those savings has gone up and down.
Despite this, the risk profile of the funds I own are weighted towards the riskiest. If I kept my money in cash I would be taking no risk at all. Yet the risk is that I won’t have enough money to retire, or that my daughter won’t have the helping hand on to the property ladder that my parents gave me.
Defining risk is one of the most important behavioural lessons this book can give you. There are also loads of real life comparisons that show how our normal behaviour which helps us survive and prosper as humans can be counter-productive in “Wall Street Bizarro World”. One of my favourites involves a series of dates with a potential lifetime partner which is all going very well until the fifth date when the object of your desires turns out to be a duff. Do you go on a sixth date?
This book’s concentration on your own behaviour, something that only the reader can control, makes it accessible to anyone, no matter their current wealth or investment experience. 286
