The first investing book I ever read was The Intelligent Investor, the one that is updated with Jason Zweig’s commentary. And since that time, I have read and learned more from Jason Zweig than anybody else alive. But it wasn’t until recently that I first read his book Your Money & Your Brain. I wasn’t avoiding reading it, but I guess because I’ve read so many of his articles, I figured I already know everything he has to say. That was a big mistake. This is an excellent book and if you haven’t gotten to it yet I suggest you move it way up the list. I want to share a few excerpts I really enjoyed.
This cracked me up. The guy who invented Modern Portfolio Theory basically saying, “eh, I’ll just do half bonds and half stocks.”
In the 1950s, a young researcher at the RAND corporation was pondering how much of his retirement fund to allocate to stocks and how much to bonds. An expert in linear programming, he knew that “I should have computed the historical co-variances of the asset class and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up and I wasn’t in it- or if it went way down and I was completely in it. My intention was to minimize my future regret. So i split my contributions 50/50 between bonds and equities.” The researcher’s name was Harry Markowitz. Several years earlier, he had written an article called “Portfolio Selection” for the Journal of Finance showing exactly how to calculate the tradeoff between risk and return. In 1990, Markowitz shared the Nobel Prize in economics, largely for the mathematical breakthrough that he had been incapable of applying to his own portfolio.
Zweig has an amazing way with words. Here he perfectly makes the analogy between investing mistakes and a sunburn.
In investing, there are two basic kinds of mistakes. The first is instantaneous and infuriating: You buy and the price tanks, or you sell and the price soars. You instantly know you did something wrong, and you immediately kick yourself.
The second kind of mistake is not obvious at first. While you’re lying on a towel at the beach, there is no single moment when you can look at your skin and see it turn from a healthy bronze glow to the neon red of a painful sunburn. A burn occurs so gradually that the transition is invisible. An investment mistake is often like a sunburn: It results from forgetfulness, carelessness, or creeping commitment to a choice that you may never have been happy about. But after the fact there’s no mistaking it, and it can burn like hell, and you’re sorry you did it.
Zweig’s honesty is very refreshing. And he does it in a way that’s not sanctimonious or self-serving, it’s 100% genuine.
In 1993, the mutual fund editor at Forbes magazine was contributing 5% of his salary, just half the allowable maximum, to his 401(k). When a friend asked why he didn’t put more into his 401(k), the editor shot back, “Because I can do better with my money than they can, that’s why.” Looking back more than a decade later, the former editor calculated how much this decision had cost him. I know the answer, because I was that editor. The cost of my overconfidence is more than a quarter of a million dollars- so far.
If you like reading Jason’s articles, you’re going to love this book.
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