Kahneman's book Thinking, fast and slow is a consistent long-term performer – high on the list of best-selling non-fiction paperbacks for 116 weeks, currently ranking fifth.
Further, The undoing project by Michael Lewis – number five of the combined print and e-book bestsellers – tells the story behind the pioneering studies of Kahneman and fellow psychologist Amos Tversky into the psychology of economic or financial decision-making. Lewis' book is a newcomer to the bestseller list, having featured for three weeks.
The fact that the subject of behavioural economics can become a near chart-topping best seller underlines the increasingly widespread recognition that our behavioural traits can play a crucial role in our investment success – or failure. Expect to read much more about behavioural economics in 2017.
A new year provides, of course, a prompt to read and think about how to improve our personal finances including our investment portfolios.
The best publications in this genre tend to provide pointers about how to accumulate wealth slowly and progressively through an understanding of the fundamental principles of sound saving and investment practices. These are the opposite of the relentless and potentially wealth-destroying, get-rich-quick offerings.
Here are a few books to consider adding to your 2017 reading list:
- Thinking, fast and slow by Daniel Kahneman: A winner of the Nobel Prize for economics, Kahneman points to the many flaws in financial decision-making – including overconfidence and excessive loss aversion (inhibiting appropriate risk-taking and encouraging a short-term focus) – that can have costly consequences for an investor. His views underline the benefits of having an appropriately-diversified portfolio while avoiding the potential traps of market-timing, stock-picking and making emotionally-charged investment decisions. "Much of the discussion in this book is about the biases of intuition," he writes.
- The only investment guide you'll ever need by Andrew Tobias: While his fellow personal finance authors are unlikely to agree with his book's title, Tobias's veteran work – it has been in publication for 40 years – has plenty to offer investors. His over-arching message is to take a common-sense approach to looking after your investments and other personal finances. For instance, only buy investments you can understand, stay away from investments that seem too good to be true, and don't carry credit card debt. It's good basic stuff worth repeating again and again.
- The behaviour gap – Simple ways to stop doing dumb things with money by Carl Richards: This is an entertaining, easy-to-read guide by a financial planner turned personal finance columnist to keeping our negative behavioural traits under control when saving, investing and spending. His tips include: adopt strategies to avoid buying shares at high prices and selling low, don't spend money on things that don't really matter, identify your real financial goals and simplify your financial life.
- The millionaire next door by Thomas Stanley and William Danko: Long-term research by late academics Stanley and Danko suggests that "prodigious accumulators of wealth" are typically content to progressively build their wealth while being inconspicuous in their spending. In other words, these wealth accumulators are not in a hurry to make their money by taking excessive risks or in a hurry to spend their money.
- A random walk down Wall Street: The time-tested strategy for successful investing by Burton Malkiel: The basic theme behind this classic is Malkiel's argument that investors – individuals and professionals – cannot not expect to consistently outperform the market. Given that belief, Malkiel, a Princeton University economics professor, is a firm believer in investing in market-tracking index funds (including ETFs), dollar-cost averaging (regularly investing set amounts), appropriate portfolio diversification, periodic portfolio rebalancing, low-cost investing and how investors should understand the risks of irrational behaviour.
- The little book of commonsense investing by Jack Bogle: As Bogle writes, "successful investing is all about common-sense". Don't try to pick the best time to buy and sell stocks – consistent success with market-timing is rarely achieved; diversify to minimise risks (and spread opportunities); recognise the value of compounding, long-term returns; and keep investment costs as low as possible. "The more the managers and brokers take, the less investors make," Vanguard's founder emphasises.
These books reinforce critical messages for investors. These include: get your investment basics right (including your goals and portfolio asset allocation), periodically rebalance your portfolio, don't try to time the market, minimise investment costs, and beware of the risks of trying to pick winning stocks and fund managers.
And a foremost consideration of most of these authors is that investors should be aware of the dangers of trusting their gut feelings by allowing their emotions to dictate investment decisions.
Finally, save regularly – enjoying the rewards of long-time compounding – and keep your spending under control. Conspicuous consumption should not be taken as a sign of wealth – quite often it means the opposite.
Head of Market Strategy and Communications at Vanguard.
18 January 2017