Premise of the book
Odds on: The Making of an Evidence based Investor walks you through the life of a Wall Street broker. From an unpaid internship to a multi-million dollar start-up, the author shares his insights on the world of investing in the stock market.
About the author
As a life-long investor, Matt Hall grew tired of working for “corrupt” Wall Street executives that were more interested in making themselves rich instead of their clients, and so he started his own advisory firm, the Hill Investment Group.
Just like his firm’s philosophy, this book is all about demonstrating a new approach to investing: one based on facts and evidence. There is no speculation here.
Keys takeaways of Odds On: the making of an evidence based investor.
This book is a joy to read, it reads like a novel and you can easily breeze through it in an afternoon without ever feeling overwhelmed with information. For a book about the stock market, it is surprisingly easy to read yet packed with content. Here are my top 10 takeaways from odds on, the making of an evidence based investor by Matt Hall:
1. Brokers are not your friends. Some brokers disguise themselves as financial advisors to gain your trust, but some exploit that trust by charging high fees and focusing mostly on their commission.
2. Brokers don’t know any more about financial markets than you do. The requirements to be a licensed broker are pretty low. What’s worse is that most firms are profit-seeking, which means firms are training their new recruits to be salesmen instead of advisors.
3. Active management underperforms passive investing strategies. Don’t be fooled by your bank/broker/advisor, nobody can consistently beat the market over large period of time. It’s just humble arithmetics as this book beautifully demonstrates.
4. Financial markets are efficient(ish). The author highlights a crucial point here on the efficient market hypothesis: we may never know whether markets are 100% efficient, but we do know that markets are efficient enough to ensure that we can never consistently pick winning stocks. In other words: there is no point reading the news or an investment newsletter: the market already knows it!
5. People who beat the market are the exception to the rule, not the norm. Warren Buffett has often been lauded as the greatest investor of all time however he remains an anomaly. The odds of beating the market once are lower than the odds of winning on a coin flip. This means that to beat the market over a 30-year investment horizon, you need to correctly guess coin flips 30 times in a row. As you may see, it is possible but extremely unlikely.
6. Why risk your life savings? There are thousands of stocks and actively managed investment firms around the world. Are you really willing to risk your entire life savings on the belief that these few stocks (or funds) will outperform the market? You don’t have to, historical evidence demonstrate that index funds perform better than individual investors, why not buy index funds and avoid the risks?
7. Financial literacy matters – Investors tend to perform better if they’ve been educated on financial markets. Financial literacy does not make you better at picking stocks, it helps you avoid investing based on emotions (e.g. by not panic-selling everything during a stock market crash).
8. Diversification can increase returns – I’m sure you’ve heard that you shouldn’t put all your eggs in the same basket. But did you know that diversification also helps increase investment returns? This is thanks to the process of rebalancing.
9. You can increase your odds of beating the market by following the evidence. Over a hundred years of stock market data has shown us that small stocks and value stocks tend to outperform the market over the long run. More specifically, certain types of value and small stocks drive most of the gains. Get exposures to these specific stocks and you may well just beat the market over the long term.
10. Teaming up with a financial advisor can increase performance. A study from the vanguard group found that hiring a financial advisor can increase an investor’s portfolio returns by 3% over time. Half of those gains come from behavioral coaching to ensure you don’t make a wrong financial decision. The remaining half of the gains comes from having a professionally managed investment plan that:
(i) ensures your cash is invested in the most cost-effective products (some firms can offer cheaper management fees than ETFs) and;
(ii) ensures your investments are fairly distributed among asset classes whereby periodical rebalancing can secure additional gains.
The verdict
Odds on: The making of an evidence based investor is a great book. It covers a lot of the main faults of Wall Street and provides a fresh view on how to best put your money to work. This book is a joy to read and its content will ensure you never get ripped off by money-hungry Wall Street brokers again.