“20/20 Money: See the Markets Clearly and Invest Better Than the Pros” is written by Michael J. Hanson (Fisher Investments Press).
The book goes through a lot of theory on neuroscience, human behaviour, biology, etc. and tries to apply them to the investing. While these can be interesting, I would much rather get to the takeaways immediately. For example, one does not need to read 20 pages of theory to see that investors are driven by emotion. So after a while, I have to speed read to extract the nuggets. Some good points captured below.
- Small-cap stocks tend to outperform at the beginning of bull markets and big caps outperform near the end. Instead of using an arbitrary number to determine whether something is a big cap or a small cap, calculate the weighted average market cap of the whole market. Anything bigger than the weighted average is a big cap, and the rest are small caps. The 2009 weighted average market cap of the S&P500 is $78.8b.
- Stock markets tend to perform better in the 3rd and 4th year of a U.S. presidential term.
- When it comes to forecasting stocks in the short term, reality can matter much less than what is expected to happen.
- When it comes to economic and market data, always consider relative expectations. Judge for yourself what it should be, then compare with what everyone else thinks will be.
- In portfolio management, the most important thing is forecasting the general market direction correctly. 70% of returns are due to the asset class decision (i.e. stocks, bonds, or cash), 20% due to sub-asset class decisions (e.g. coutnry, sector, capitalization), and only 10% due to individual security selection.
- Market timing is important, aim to get it mostly right. Alan Greenspan said the market was “irrationally exuberant” in 1996, but the market shot up until 2000.
- Even if you forecast that the market will be down a little (e.g. 0 to -20%), you should be 100% in equities because the opportunity cost of missing out on stock rallies is most dangerous in long-term investing.
- You cannot forecast more than 12 to 18 months into the future.
- If you didn’t mange to call a bear market upfront, ride it out.
- Stock markets usually recover long before economic data. If you stay on the sidelines and ‘wait for signs of recovery’, you will miss out on the bull market recovery.
- Success in investing requires the temperament to control the urges that get other people into trouble in investing.
- Time is by far the most important of all assets. Ditch the bad books and articles and move on, you don’t need to finish what you started.
- When looking at the chart of the stock market (e.g. S&P 500 Total Return Index), use logarithmic scale so that percentage changes in the index look the same no matter the time period.