Even the self-proclaimed financial experts have difficulty selecting stocks that perform in a manner that makes investors some money or generates an acceptable return-on-investment. A new book, Market Sense and Nonsense: How the Markets Really Work and How They Don’t by Jack D. Schwager, illustrates that very fact in the opening chapter.
He examines “expert advice” given to viewers by some of the CNBC commentators such as Jim Cramer. Schwager writes, “But, regardless of Cramer’s investment skills and considerable market knowledge, the fact remains that, on average, viewers following his recommendations would have been better off throwing darts to pick stocks.”
At the end of Chapter One, on expert advice, the author includes “Investment Misconception #1: The average investor can benefit by listening to the recommendations made by the financial experts.” He continues by offering a sense of reality on how many times expert advice “fails to do better than a coin toss.”
Schwager is a recognized industry expert on futures and hedge funds. He uses his latest book to detail the many falsehoods and misconceptions of real-world investing. Then, he offers usable guidance for investors. Readers will get a view of the following insights among others:
• Markets are not efficient
• Market prices are not normally distributed
• Concentrating on funds with the strongest history of returns is not a reliable strategy
• The history of returns is not a reliable indicator of future performance
• Superior performance does not necessarily mean managerial skill
The book is written for those readers familiar with investing and uses the language of investors. A few of the topics of interest include:
• The disconnect between fundamental developments and price moves
• The Elves index
• Volatility as a risk measure
• Hidden risk
• Why return alone is meaningless
• Correlation defined
• Hedge funds 101
• Benefits of diversification
• Portfolio construction principles
Schwager also includes “Investment Misconceptions” and “Investment Insights” at the end of most of the chapters. He includes a list of “32 Investment Observations” that can prove helpful.
All-in-all, Schwager in Market Sense and Nonsense uses historical evidence and common sense to “explore the truth about cherished assumptions” of the many investment theories, models and investor errors. The book really answers the question of the existence of proven models for investing in the market.
As such, the book is filled with insights versus magic formulas. Schwager uses a lot of phrases such as "may be," "can be," "are often" and "not necessarily." He reinforces the need for investors to continually do their homework and study the markets before investing, versus "playing" the markets.