Jason Zweig recommends the best books on

Personal Finance
The Wall Street Journal personal finance columnist explains why there's truth in the old adage
that investors get the returns they deserve, and recommends books that might help you avoid
being taken for a ride.

1 2 3 4 5
Common Sense Why Smart Against the Gods Where Are the How to Lie with
on Mutual Funds People Make Big by Peter L Customers’ Statistics
by John C. Bogle Money Mistakes Bernstein Yachts? by Darrell Huff
by Gary Belsky & by Fred Schwed
Thomas Gilovich

Bill Gross of PIMCO, the world’s largest bond fund, has
written articles saying the US treasuries market is a Ponzi
scheme. The stock market has been through a terrifying
plunge. Traditionally we learned that our own home, at
least, was a safe place to invest our money – but a lot of us
Jason Zweig
have lost on that as well. What’s to be done right now in Jason Zweig is an
terms of personal investing? What should our approach investing and personal
finance columnist for
be? the Wall Street Journal.
It certainly is a frightening time. People had come to regard the entire He is the author of The
Little Book of Safe
world around them as an ATM. The bond market was making double Money: How to
digits every year. The stock market provided a double-digit return. Conquer Killer
Markets, Con Artists
Your house would go up at a double-digit rate. You didn’t even have to and Yourself
be smart; no matter what you did, no matter what happened, you
would just keep compounding your wealth at 10% or better every year.
Because 10% is a round number, it had a strong effect on people’s
perceptions and they came to regard it as a right, as a given. Anything

i. somebody is going to be dipping into your wallet and pulling money out – often without .” People who had gotten to the point of believing that high returns were a given didn’t deserve to earn them. There’s an old expression on Wall Street that I’m very fond of. Ideally it takes both. they probably shouldn’t. they don’t trust regulators. The reason you get the returns you deserve is because if you put the time and effort into proper research – and into forming realistic expectations – then you’re a lot less likely to get wiped out or be caught by surprise. of course. It shows who has your interests at heart. Of course. and what the various self-interests are.you put your money into would go up at least 10% a year for the rest of human history. Mr Bogle is talking his own book. or an enormous amount of emotional equanimity. he’s pitching his own speciality. which is: “You get the returns you deserve. Your first book is John Bogle’s Common Sense on Mutual Funds. That never was true. frankly. you can get an enormous education from this book. They exist to transfer capital from people who have an excess of it to people who have a more immediate need for it. it might be somebody selling bundles of crappy mortgages. Sometimes those are great growing companies that will take that capital and put it to very productive use. They don’t exist to make people rich. Is this basically advocating that index fund investing is the only way to go? Yes. They don’t trust their brokers. So what do we do? Do these books you’ve chosen offer a clue? There are a few basic principles that people should keep in mind. And. The real lesson for people from what happened over the past 10 years should be that investing done properly requires either a considerable amount of homework and research. of all the people you are likely to encounter when you invest. comprehensive introduction to how the financial markets work. It just took a while to be proven false. people feel they have lost their moorings. They’re adrift. because the markets don’t exist for our convenience.e. they don’t trust anybody. as people say on Wall Street. It’s a wonderful. But as long as you bear that in mind. You have to be prepared for anything and you have to be very humble about the abilities of the experts and yourself to predict what’s about to happen. It’s a wonderful book. Every step of the way. At other times. Now that it has been proven false. and you’re going to lose 95% of what you put in. they don’t trust exchanges.

For an index fund. It’s expensive to research individual stocks. When you read this book. you have to pay for that. for some reason. has to do a fair amount of trading. because indexing really works. Each time.fully informing you. That fund manager will be buying and selling pretty frequently.” My own view is a little different from Mr Bogle’s. on the other hand. which come out of your . It buys all the stocks in a market index and just holds them. and avoid the worst ones. Each time he or she trades. And it happens at several levels. Typically. All of that costs substantial amounts of money – often. That’s at least a 10-fold difference in the frequency with which the stocks are traded. well into the millions of dollars a year. The second cost is that someone who is attempting to buy the best stocks. is pretty much a pure buy-and-hold vehicle. and to have a team of analysts doing it. it’s often more like 10-20 years at a time. brokerage charges are incurred. they’re no longer in the index – and that can be many. many. for a large fund. An index fund. I wouldn’t go so far as to say that you should never buy a fund that isn’t an index fund. Because any smartness that the fund manager has to get ahead of the market – that gain is lost in the fees that you have to pay him? Exactly. you need to have compelling reasons why you are departing from that strategy. But if you do. “Every step of the way. The first level is because he or she has all this brainpower. years. somebody is going to be dipping into your wallet and pulling money out – often without fully informing you. It’s an incredibly low cost way to manage money. you’ll have a much better sense of who is taking the money. the average fund that is run by an active portfolio manager will hold a stock for about 11 months at a time. and whether you should be willing to permit it. And it’s very hard for any other strategy to overcome that disadvantage. where it goes. It works because indexing is very. That’s not because professional money managers are stupid or dishonest. that triggers trading costs. very cheap. until. very.

Vanguard. “Wait a minute! I don’t want to own this fund anymore. It’s as if the manager spends months and months on research. if you decide you want to sell it. if I’m buying into this fund because I believe the people running it are extremely smart. If. But at index funds.pocket and add up over time. and you suddenly find yourself owning a fund run by someone you’ve never heard of. Vanguard is the largest provider of index funds to individual investors. he wouldn’t have written the same book. at the retail level. learns everything there is to know about the company. The third factor is taxes. may get fired. does his company. One problem is. That should lead people to question the value of this research process. At which point. how much could he have learned in the first place? Why was it worth paying him all that money? Those are questions that aren’t easy to answer. it’s time to take it out. We all have our biases. The second problem is this remarkable paradox: Investors are charged very substantial fees for all this research on stocks that the average fund manager doesn’t even bother hanging on to for more than 11 months. But life is very unpredictable. and at any given moment the genius who is the reason you bought the fund may decide to leave. There are also two philosophical questions that investors might want to ask themselves. you may say. may get hit by a bus. and anyone reading the book should bear Mr Bogle’s perspective in mind. . and then as soon as it goes in. puts the company into the portfolio. you may have to pay a tax bill to get out of a fund you don’t even want to own anymore. the costs of trading can equal or exceed the costs of management. For many funds. then presumably I want to own it as long as they run it. yes. even for people who do it for a living. In terms of Bogle talking his own book. because you don’t know who is going to take over to replace that person. trading costs are tiny. which can be a very valuable advantage. still completely dominate the index fund world? In the US. Chances are that if he had run a fund company that specialised in something other than index funds. I’ve never actually heard a good answer to that from a fund manager.” Then. You wouldn’t want to buy a fund run by somebody who is likely to leave before you’re ready to sell. after all that work. Index funds tend to generate lower tax bills for people who hold them over time. the fund manager changes his mind 11 months later.

he doesn’t try to disguise it or excuse it away. Do you want to give an example? A lot of the book is based on the research of Daniel Kahneman and Amos Tversky. IQ or levels of experience. regardless of education. Mr Bogle’s is obvious. the Belsky and Gilovich. and keeping in mind that who is on top is not necessarily who wins the championship in the end. Tell me about the next book. Why Smart People Make Big Money Mistakes. positive correlation that smarter people are predictably better investors. They come out of the fact that the limitations of the human mind aren’t correlated with intelligence. This is a wonderful book. Tom Gilovich is one of the leading cognitive psychologists in the world. There’s certainly not much good evidence that there’s a strong. It’s only at extraordinarily high levels of expertise that some people can avoid these common pitfalls. you would expect they would. two Israeli psychologists who did their best-known research in the 1970s. consistent. The same behavioural pitfalls trip everyone up. and in many cases they do. And the reasons are clear. It’s also about understanding the proper use of statistics. but it’s far from universal. This book seeks to explain a central puzzle in personal finance. “Why don’t smarter people consistently have better financial lives?” On average. They explored a number of persistent problems in human thinking. Anyone who is an informed sports fan knows perfectly well that there are a lot of analogies between sport and money management.But some biases are good for people. Gary Belsky is a sports journalist. being aware of the strategy behind the scenes. including the “law of small numbers”. You might think that being a sports journalist has nothing to do with financial decisions. although earlier he worked at Money magazine. There is even some evidence that intelligence and investment performance may be inversely linked. and it so happens that his advice is so beneficial for people that I think the bias is entirely appropriate. The authors have a wonderful collective voice. where I once worked. which is a . This book does a wonderful job of explaining the basic principles of behavioural finance and the ways that some predictable limitations of the human mind have very clear financial implications. Eek. There’s a few friends I might not mention that to. which is. and then each of them separately has a distinctive and informed voice. That’s not just because it all seems to be about who is ahead and who is behind. but you’d be wrong.

but it certainly improves your odds. In fact. “Am I about to commit this kind of cognitive error that I just learned about?” There was quite a nice review on Amazon. But these biases of the human mind are very deep rooted. all it really is is a little burst of randomness and. You don’t stand much chance of being able to avoid them unless you understand them – and one of the best ways to get to understand them is by reading a really good book about them like this one. in certain situations you may be able to say to yourself. very beautifully in the book. which I believe looks at the concept of risk all the way from ancient Greek times to the present. and you’ll no longer be prone to it. That’s the ideal. But you can at least see it in yourself after the fact. it’s very hard for anyone to ignore the urge to conclude that the team is hot or on a roll. I wouldn’t want to give people the impression that all you have to do is read about it. it’s not actually that big a deal statistically. The same thing happens in financial markets. This is the kind of idea they explore over and over again. “You’ll never spend money the same way after reading this book”. all else being equal. Anybody can come away from reading it better equipped to spot these kinds of pitfalls in himself or herself. Even psychologists who have studied these problems for a lifetime still go out and commit those errors of thinking themselves. there’s no reason to assume that it will persist. and with luck. of course. From a short streak. and as someone who has written books like this myself. Against the Gods. You can see why somebody who is interested in sport might pick up on this – because if a team in baseball or basketball wins three games in a row. people will conclude the future is more knowable. that is what you hope for as an author. and that it’s representative of how the investment is going to continue to perform. to win three games in a row. Tell me .tendency of people to extract sweeping conclusions from very small samples of data. Because once you know about a pitfall. Your next book is about the history of risk.com saying. It’s still no guarantee. Yes. though it’s easier said than done. you’ll be looking out for it? Yes. when. Even the worst team in the entire sport is capable of doing that on any three days.

and it was something Peter warned about throughout his long life [Bernstein died in 2009 aged 90]. So he’s focused on financial events or risk generally? . Without risk. But it’s one of my favourite books of all time. broad renaissance thinker. Does it help your mindset in terms of investing? Yes. by Dava Sobel or some of the Mark Kurlansky books like Cod or Salt. What he does in this book is bring risk to life as an idea in a much richer way than anyone had ever thought to do before.about it and how it ties in to investing. and risk can be extraordinarily dangerous if you don’t understand it. there is no return. The historical and psychological perspectives that he gives are just so valuable to anyone trying to be more mindful and more thoughtful as an investor. Of course that was one of the lessons of the financial crisis. It’s a very serious. by providing an intellectual history of risk. Peter’s book is very much in the key of those wonderful explorations of a single idea. In the book. It’s not for casual readers. or not fully understanding what risk means. Risk is central to investing and personal finance. It’s a great intellectual voyage and a terrific book. Peter Bernstein was one of the most remarkable people I’ve ever known. For anyone who has read a book like Longitude. What investors have often failed to understand is that it goes both ways. You have to be literate. He had an extraordinary mind. he was a wonderful person and a profound. It’s telling you everything you could possibly want to know about a topic which turns out to be even more important to you than you realised. and you have to care enough about the subject to stick with it. Investments can’t provide returns unless they carry risk. is to show where people have gone wrong in the past – by not fully appreciating how risky investments can be. because one of the great things that Peter does in the book. he explores risk at every conceivable level – what it is mathematically and what it is psychologically. how people have thought to measure it and also to control it. very elegant. It’s probably the best and most interesting high-level book on investing I can think of. how it has played out historically. beautifully written book that people should take the time to relish and understand. it does take some work.

which my husband likes to point out is really not worth it – the chance of crashing is one in 11 million. Even now. was. but it’s very clear. but on the plane they’ll sweat and grab the armrest in terror as the plane takes off and lands. I believe this is still the funniest book ever written about Wall Street. Of course statistically speaking. They’ll have a few cigarettes.” what happens when investors decide that a particular financial asset is attractive or unattractive. “We have the right plan for your money. they’ll have a beer or a glass of wine to calm their nerves. for many years. while they never gave a second thought to the cigarettes or the alcohol or the fact that by driving they were taking their life into their hands. As does the Belsky and Gilovich book. The author. “Oh it reads as if it were written yesterday” – when if you actually read the book it doesn’t. then they’ll get in their car and drive to the airport. It’s remarkable how well the book has held up. Fred Schwed. because it helps you think probabilistically. That’s right. which is a very important skill. get a little nervous. what happens when money managers tell customers.The book is centred on the history of financial risk. He wrote beautifully. and Peter explores that beautifully. So even if you’re not someone who cares enormously about investing and personal finance. It’s about process rather than events. There are a lot of old books about which people say. but it also talks a lot about probability and the mathematics of taking risk. Like many people I sometimes get nervous on airplanes. Your next book is Where are the Customers’ Yachts?. when you read the book. they’re in vastly more danger on that drive to the airport than they will be on the airplane. a broker. This is such a fun book. There are any number of people who. This book is different. he doesn’t talk in specifics about the Pennsylvania Railroad or Radio . that his real love was for writing. which is based on the author’s experiences on Wall Street in the 1920s. And his observations remain true? Parts of it read as if he wrote it in 2008 or 2009. as humans we’re very bad at assessing risks that way. some 70 years after it was written. you could get a great deal out of it. He doesn’t name a lot of names. knowing they’re about to take an airplane. It’s about what happens when stockbrokers approach their clients with a wonderful opportunity. Yes.

. He mentions some of them in passing. “This one belongs to this broker. I know of no books that are both this funny and this informative. Rhode Island one day with some of his friends. the funnier it gets. very cynical. the book has this phenomenal freshness. but he’s talking about process more than events. who was a cartoonist for the New Yorker. at every step along the way. if that. is pretty hilarious. In my footnotes. They were giving him a tour of the harbour and pointing out the magnificent yachts that were moored there. a wonderful story that Fred Schwed ever so slightly garbled. At which point Travers asks “Where are the customers’ yachts?” It’s a wonderful quip. because it’ll tell you just as much. He was in Newport. It’s one of the most wonderful anecdotes in Wall Street folklore. I don’t know of any book that is this funny and I know of very few books that are this informative about Wall Street. saying. biting humour and it’s an absolute pleasure. Even the title. who was one of the great speculators on Wall Street in the 19th century. Where are the Customers’ Yachts?. It really does read as if it were written based on today’s headlines. It also has these delightful illustrations by Peter Arno. which of course still holds. and human nature never changes. What makes the book so much fun to read is that it isn’t angry. He was one of the sharpest minds on Wall Street. The entire book is just an elaboration of the various ways the financial system has of picking people’s pocket. I make an ever so slight correction to a bit of folklore that is the source of the title. and you don’t have the patience for a more serious. pick this one up. almost bitterly so. but it’ll make you laugh. Can you explain what it means? This is a moment where I should say that I wrote the introduction to the latest edition of this book (though I don’t receive royalties or hold any other financial stake in its success). It’s a very sophisticated kind of humour. And the best thing of all about the book is that it is laugh-out-loud funny. It’s full of this mordant. So if you want to know how the system works.Corporation of America. sober look. And because processes are generated by human beings.” “This one belongs to that banker” et cetera. and the more times you read it. The point he is making is that the brokers got rich and owned big boats and it didn’t seem as if any of their customers had big boats. that would probably take the typical person three to four hours to read. The title comes from an anecdote that originated from a man named William Travers.

a few weeks later. because they consume a lot of products that Wall Street generates – investment research. you can push back against what you’ve been told and use your own scepticism as a shield against people who may be trying to mislead you. don’t like statistics.” It’s just a wonderful little tool people can use to make themselves smarter. For someone who cares about investing or personal finance. it’s important to be an intelligent consumer of statistical information. The book weight five ounces and is less than 150 pages long – you could read it on a long commuter train ride. on average. Very often. because they themselves have customers. Your last book is How to Lie with Statistics by Darrell Huff. Now I understand how I’ve been taken advantage of. They may both have yachts. It’s called “How to Talk Back to a Statistic” – which I just love. Hedge funds are customers in one sense. But it’s absolutely delightful.Do hedge fund managers count as Wall Street customers? Because these days they are extremely rich as well. It’s a wonderful introduction to critical thinking about statistics. but there’s not much doubt about whose. “Thank you so much for recommending that book. This is the one book that I universally recommend to people that always surprises them. I get emails from people saying. for people who have never taken a class in statistics. And it’s those hedge fund customers that are the ones without the yachts? Put it this way: the hedge fund managers will tend to have bigger yachts than most of their customers. because numbers are used all the time to mislead consumers. and the last chapter in particular is terrific. will be bigger. and may even think that statistics aren’t relevant to their decision- making. This is another terrific book. What he does – in a very entertaining and easily understandable way – is walk you through the techniques that people who have something to sell will use to blind you with science and use statistics as a weapon against you. But hedge funds are also middlemen. particularly consumers of financial information. It’s light-hearted and a lot of fun to read. . he gives you five rules on how. as a consumer of information. trading services and a variety of lending and other sorts of products. The book is called How to Lie with Statistics for a reason. In it.

But with credit cards or with getting a mortgage. You won’t be completely immunised from ever being the victim. from personal experience. even for a short distance. that the real bill is likely to be triple that. a few minutes later. and believing that you’re paying a penny less. telling me how low the APR is – when everyone knows a credit card is an outrageously expensive way to borrow money.84.84. it’s often quite hard to calculate. there are presumably numerous pitfalls along the way – but with anything involving interest rates. One thing both the credit card companies and mortgage lenders have taken enormous advantage of over the last few years is that people are not very good at making financial judgments about time. I was in Connecticut and I paid $3. even if you are sensitised. If you read the Darrell Huff book and the Belsky-Gilovich book together. you see this kind of thing going on all the time. You see it everywhere. You’re essentially paying a penny more on every gallon. compared to “buy one get one free”. People are much more likely to buy if you say “buy one get one free”. because those are the big numbers. and pain later. I said $3. the 9/10 of a cent doesn’t count. There have been studies done showing you get an entirely different response from shoppers if you say 50% off.85” – but the gas station wants me to believe I paid $3. When I got home. Anyone can get tripped up in the way pricing is used against us. the Manolo Blahniks. you will be a lot more aware of the ways the market plays and manipulates you. It’s so misleading and I don’t understand why these things are even allowed. I filled up our car with gas yesterday. “I didn’t pay $3.84. advertising a daily rate of $19. But it really adds up when you fill up your entire gas tank. they were encouraging me to get a “Freedom” credit card. but not great at maths. my wife asked if I got gas and how much I paid. In my bank yesterday. but you would be a lot more sensitised. Then.95 – when I know. The very essence of a credit card transaction is that you get pleasure now. the video game or clothing product you happen to want – you consume it now and have that .One of the things I’ve really noticed living in the US is that figures really are used to mislead. I said to myself.84 and 9/10 cents a gallon. You get the pleasure of having the consumer good that you want – the iPad. You have the U-Haul trucks. Once you become sensitised to it. I paid $3.

The problem is that for many people. and just overwhelms it. The thrill of getting a cheap rate upfront makes people’s minds up for them. later lasts forever. OK. There are hundreds of thousands of people declaring bankruptcy right now because they incurred debts they could never pay back. They’re told it won’t last. The temptation of pleasure now encourages you to buy something you can’t afford now or later and you have to spend the rest of your life paying for it. In your mind. I’ll go for pleasure now. but the immediate pleasure kick is more powerful in the brain. at least historically.   Interview by Sophie Roell How to Invest © FIVE BOOKS 2017 . you say. and a few years down the road they find they’ve made a commitment they can’t keep. People are given an upfront rate.immediate pleasure – and the pain of paying for it doesn’t come till much later. “Pleasure now? Or pain later? Well. and I’ll deal with the pain later”. Something similar happens with teaser rates for mortgages. in many cases. but the disclosure of that tends to be pretty minimal. You should be able to anticipate the pain.