Review: A Wealth of Common Sense

Ben Carlson is an investment writer who consistently has something important to say and expresses it in an engaging way.  Each morning I eagerly await his new post in my email, and he is one of the financial writers that I follow most closely on Twitter. I am in awe at the volume and quality of his writing.

Ben is Director of Institutional Asset Management at Ritholtz Wealth Management.  He has authored both the book reviewed here, A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan, and also Organizational Alpha: How to Add Value in Institutional Asset Management. Ben Carlson has been recognized in numerous awards, including being chosen in 2017 for Investment News 40 Under 40. You can read more about his background on his website.

Ben Carlson and Michael Batnick, also of Ritholz Wealth Management, have a weekly podcast that goes by the unusual title Animal Spirits.  The style of the podcast is very different from that of this book, and from his daily investment posts.  I may review the podcast at some future date. I suspect many came to Ben Carlson's considerable social presence after reading one of his books, but for me it was the opposite: I first started reading his blog and twitter posts. I decided it was finally time to seek out his best known book and to do a review on it.

Sometimes books have clever titles and sometimes they use descriptive titles.  This title is both. Essentially the book emphasizes the point that a clear investment plan, patience over the long term, and sound investment choices will yield good long term returns.  Success is largely dependent on making good common sense choices, and reigning in our emotions.

Essential Ideas

In the introduction to the book he summarizes simple and effective investment advice in the following points.

• Think and act for the long term.
• Ignore the noise.
• Buy low, sell high.
• Keep your emotions in check.
• Don't put all of your eggs in one basket.
• Stay the course.

As he emphasizes, the challenge is not so much to know those points, essentially common sense, but rather how to follow them.

In clear engaging language he outlines some of the traits listed below that you must reign in.  Here are the key messages, but read the book to get the details.

1. Looking to get rich in a hurry.
2. Not having a plan in place.
3. Going with the herd, instead of thinking for yourself.
4. Focusing exclusively on the short term.
5. Focusing only on those areas that are completely out of your control.
6. Taking the markets personally.
7. Not admitting your limitations.

He goes on to provide the flip side - what are the traits of a successful investor?

1. Emotional intelligence.
2. Patience.
3. Calm during times of stress.
4. The ability to say 'I don't know.'
5. Understand history.
6. Discipline.

What I Like

Ben Carlson devotes considerable attention to dealing with our emotional sides. As he says in the chapter on contrasting individual and institutional investors.

"One of the biggest mistakes investors make is letting their emotions get in the way of making intelligent investment decisions."

The following chapter is entirely devoted to the traits required to be a successful investor. That chapter opens with this great quote from Charlie Munger:

"If you can get good at destroying your own wrong ideas, that is a great gift."

-Charlie Munger

By clearly laying out the key traits of unsuccessful and successful investors, the author has set a superb foundation, with much of the book weaving the details around those points and the evidence for them.  I find that this approach works really well.

Ben Carlson appropriately stresses that in order to get more reward, indeed to get enough reward to overcome inflation, you need to take on some risk. I like the emphasis he places on market history as part of your investment education. That historical emphasis is also one of the Four Pillars of Investing of Dr. William J. Bernstein (see my review of that book here). Chapter 4 of A Wealth of Common Sense on market myths and history is one of my favourites. Many of these deal with timing attempts (read the book!), but I will share his fifth myth, which I think is something important that simplistic advice often overlooks: Myth 5 Stocks and bonds always move in different directions (see also Myth 7 which deals with risk inherent in stocks and bonds).

A Wealth of Common Sense is more scholarly (in a good way!) than many investment books.  Each chapter has an extensive list of resources to support the points made, ranging over books, articles and websites.  The author clearly reads widely and with an open mind, and that shines through in almost every page of this book.

In a book that pays attention to the evidence supporting ideas presented, sometimes it is easy to loose track of the key ideas.  Ben Carlson guards agains this by including for each chapter a Key Takeaways section, a few bulleted points that emphasize the key ideas of the chapter.

As would be expected,  Ben Carlson stresses the importance of development of an informed financial and investment plan.  A part of this is defining yourself as an investor (Chapter 5 has a section with this heading). As he says "...there is never going to be a one-size-fits-all investment philosophy for every person." He suggests that asking yourself questions such as does your investment philosophy match your personality and individual circumstances, and what constraints do the conditions of your life place on that philosophy.

The book contains many superb pithy quotations, such as the following in a section on The Benefits of Doing Nothing.

"Lethargy, bordering on sloth, should remain the cornerstone of an investment style."

–Warren Buffett

I find that the book concludes strongly, with the Exhibit approach in Chapter 6, including gems like the mutual fund graveyard and picking one active fund is hard, followed by Chapter 7 on asset allocation, and then Chapter 8 on a comprehensive investment plan.  Chapter 7 provides a solid foundation in evidence, history and principles guiding an appropriate asset allocation for your own personal situation. Chapter 8 includes coverage of lifecycle investing, and the different situations for investors at different stages in life.

The penultimate chapter looks at the key question of if you should seek professional advice, and how to interact with your financial advisor. His key takeaways for this chapter include advice such as "look for self-awareness and humility, not certainty or guarantees" and "outsourcing to a financial advisor is intelligent behaviour if you don't have the time, expertise, or emotional control to implement an ongoing financial plan."

The book provides good balance, with sage advice such as the following:

"Your investment plan should be designed specifically... for you – build the one you know you will follow. You have to be brutally honest with yourself about your ability to handle risk."

A Few Reservations

This is not so much a reservation as a caveat that this is not a simplistic 'how to' investment book.  Don't expect it to lead you into precisely what you should do with your investment portfolio. But perhaps that reservation is really a strength – as investors we need to educate ourselves and develop personally appropriate financial and investment plans. While he does not guide you in precise financial products, the author (in  Chapter 5) does offer a checklist of the traits of a good fund (applicable to both mutual funds and exchange traded funds). He suggests that you should seek low cost, rules-based and transparent, evidence supported, liquid investments.

While I liked a lot of the structure of the book, for me at least, I found that Chapter 1, The Individual Investor versus the Institutional Investor, was not the most engaging way to start the text.  I would have started with either Chapter 2, on the traits of successful investors, or possibly with the content of Chapter 3 on long term performance and the link of risk and return.

For Canadians, this book is of course written from a U. S. perspective.  Nevertheless, the vast majority of the points made are applicable in different countries and economies. I will be reviewing a few Canadian authored investment books in the coming weeks.

Concluding Thoughts

How is investing like walking into a restaurant? Read the beginning of Chapter 6 to find out! Along the way you will learn some valuable insights about the investment industry.

Most good books are common sense, and this is no exception. The book is full of concisely presented evidence as well though.  For example, in the decade ending in 2013 there were a total of 6911 mutual funds opened, but over the same period 3066 funds were merged, and 3105 were liquidated. Survivorship bias is indeed a thing.

A message that I fear many investors will need to keep in mind during the coming decade is the following:

"The only true guarantee we have in the markets is that things will go wrong and people's perception of risk will be in a constant state of change. Risk is actually more predictable than returns."

At the outset of the Conclusion chapter he mentions that someone offered him the following advice as he was writing the book to imagine that his grandmother came to him for investment advice, asking for 10 things that she could understand and that were important.  Maybe that explains a lot of why this book is as good as it is! You will need to get the book to see the full list, but number one is "Less is more" and the second is "Focus on what you can control."

The investing great Warren Buffett once said:

"Hang out with people better than you, and you cannot help but improve.'

–Warren Buffett

I strongly encourage you to 'hang out' with Ben Carlson through reading this book! Ben Carlson has 'hung out' with a lot of investment giants, and this book is our shortcut to reaping some of the benefits of that. And since more hanging out with good people is always a good idea, the book ends with a book list of great choices to move onto after this book.

The 224 page book, published in 2015 by Bloomberg/Wiley, is widely available through bookstores and libraries, or can be purchased through Amazon. It comes in hardcover (ISBN 978-1119024927), softcover and Kindle eBook formats.

Downtown Josh Brown, of The Reformed Broker fame, praises the book and Ben Carlson through these words:

"True investing wisdom—born out of experience and success—cannot be faked; it must be earned. This is precisely the type of wisdom that comes oozing out of every chapter in A Wealth Of Common Sense." 

I totally agree. This book would be in my top 5 investment books for an individual investor. Why not make it part of your summer personal finance and investment reading list?

This posting is intended for education only and should not be considered investment advice. The reader is responsible for their own financial decisions.  The writer is not a professional financial planner or investment advisor. For major financial decisions it is always wise to consult skilled professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Disclosure:  No compensation by any company, organization or individual has been offered, requested or received for writing this column. We do however belong to affiliate programs for some of the links that you find in our articles, details available upon request.

Books for Review: I will not promise a positive, or even any, review, but if you wish to submit your investment book for me to consider, contact me rhawkes (at) chignecto.ca. I am particularly interested in Canadian books.

Financial Literacy Courses – A Bad Idea?

In an interview on CBC The 180,  Daniel Munro, Associate Director, Public Policy at The Conference Board of Canada, and an ethics lecturer at the University of Ottawa, asks the question: Do mandated high school financial literacy courses do more harm than good? I urge you to listen to the podcast of the entire episode, and read the piece he wrote for Macleans on the same topic, but essentially he bases his argument on three points.

1. As usually structured, such courses give an incorrect view that making good financial choices is all that is important (neglecting circumstances). 
2. The evidence suggests that the positive impact of mandatory financial literacy courses is short lived.
3. There may be misplaced over-confidence from taking a single financial literacy course, actually contributing to bad financial choices made later in life.

In March I argued that we need more financial literacy, and I stand by that assertion. I am glad to see that in various parts of Canada there are new initiatives to support enhanced financial literacy.

However, I think that Daniel Munro's interview is a wake up call to make sure that we have the right sort of financial literacy education. Also, we must do the research to make sure that financial literacy courses are actually contributing to improved long term outcomes.  Let us look at the three points from the Daniel Munro interview.

(1)  He argues that courses, at least as currently formulated in the grade 10 course about to become mandatory in Ontario, place too much emphasis on just one element of financial decisions, making good choices.  While clearly good choices matter, he argues that this emphasis in the absence of a consideration of circumstances, is at best incomplete.  Circumstances of many types, including family circumstances and obligations, costs of living in your region, educational opportunities, natural abilities, and much more, all contribute to the right financial decision in a situation. In his Macleans piece Daniel Munro states the case clearly and powerfully as follows:

"...fairness and responsibility argue that while people ought to be responsible for what results from their choices, they should not be responsible for what results from circumstances that are beyond their control..."

(2)   With respect to the long term impact of mandated financial literacy courses, he points out in the Macleans piece that research evidence supports the idea that financial literacy course impact is limited.  He mentions a meta analysis of 168 research papers covering more than 200 studies on effectiveness of financial literacy courses.   While I have not read that analysis in detail, I am familiar with this report by Shawn Cole, Anna Paulson, and Gauri Kartini Shastry that looked at the effectiveness of mandated financial literacy courses in the US, where in some states there is a history of sufficient length to study such effects. The report is a white paper of the Harvard Business School, and is entitled High School Curriculum and Financial Outcomes: The Impact of Mandated Personal Finance and Mathematics Courses. I quote from part of the abstract of the paper that gives a clear indication of the results:

"Financial literacy and cognitive capabilities are convincingly linked to the quality of financial decision-making. Yet, there is little evidence that education intended to improve financial decision-making is successful...this paper answers the question 'Can good financial behavior be taught in high school?' It can, though not via traditional personal finance courses, which we find have no effect on financial outcomes."

Interestingly, the paper goes on to show that more mathematics education can lead to enhanced long term improvements in financial decision making and investment participation.

(3)   We all know that over-confidence can be dangerous, and this certainly applies to financial decision making.  Daniel Munro cites a 2014 study by Marc Kramer that found that

"...confidence in ones‘ own (financial) literacy is negatively associated with asking for help, while actual expertise does not relate to advice-seeking"

While I firmly believe that finance and investment education is a positive, his remarks remind us that part of that education must be a clear understanding of the limitations of understanding, and the value of seeking advice.  As mentioned in my previous post,  I prefer a spiral approach to financial education, starting in elementary school and extending throughout life.

I believe that mathematics education has a longer impact than financial literacy courses due to two factors.  Mathematics education tends to be taught in a very active learning mode: most mathematics educators realize that you learn math by doing math (including discovering some relationships on your own), not by having it explained to you.  There is an important lesson here for financial literacy teachers.

The second reason is that mathematics education emphasizes concepts and techniques with broad application, and through those applications it keeps getting used regularly. I think that a similar approach is necessary for successful financial literacy courses, and "one of" financial literacy efforts will be doomed to failure.

I have been working for some time on a future post that will present my ideas for a different kind of university based financial education course.  That will stress active learning, quantitative reasoning, and the link between financial decisions and positive public policy. Sign up to follow this blog and you will receive each new post directly to your email, complete with all hyperlinks (and no advertisements!).

I would love to hear your opinions, either through the comment section or through an exchange on Twitter.

 The writer is not a financial planner or investment advisor, and reading this column should not be interpreted as obtaining individual financial planning or investment advice.  While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader.

Added note: I have added material to the original posting based on his Macleans article, and the linked studies therein, that I did not know about at the time of the original posting.