Saturday, November 03, 2012

Market Sense and Nonsense

The book, Market Sense and Nonsense: How the Markets Really Work (and How They Don't) by Jack D. Schwager, is a great compilation of very useful and eye-opening information relating to investments and the stock market.

Using humor and extensive statistics, he debunks numerous myths about stocks and returns. For example, you would think that investment newsletters overall would if not beat stock market returns, then at least meet those returns. Unfortunately, Schwager's book shows that newsletters overall do worse than random investing (what he refers to as a "chimpanzee throwing darts at the stock market quote page").

Chapter 2, The Deficient Market Hypothesis, has a fascinating article about the Palm and 3Com Episode. Back in 2000, Palm was trading for $95 dollars a share, yet you could have bought 3Com for only $82 per share, which represented 1.5 shares of Palm (3Com owned 95% of Palm at the time). Plus you would own a bunch of other assets that 3Com had. So excluding Palm, 3Com was being valued at more than a NEGATIVE $60 a share. The author shares lots and lots of great stories like this.

The chapters cover risk, past returns, volatility, track records, and my favorite chapter on correlation. Did you know that there is a direct correlation between the number of hedge funds and wine consumption in the United States? Do you think the wine consumption caused the hedge fund growth or vice versa? No matter which one you choose, you would be surprised at the answer (you have to read that chapter to find out).

There are also several chapters on hedge funds and diversification. Anyone who invests should be aware of the issues covered in this book, whether you are a small investor who just wants to put money in a mutual fund, or a mid-size stock trader, to a large investor interested in finding a top-performing hedge fund. Market Sense and Nonsense will give you exactly what you need to watch out for to help you become a better investor.


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