Review of ‘A wealth of Common Sense’

Debashis Basu 11 December 2015

Keep things simple, avoid mistakes and invest for the long term

Ben Carlson has spent long years managing institutional portfolios for endowments, foundations and pension plans. He also runs the popular blog www.awealthofcommonsense.com. The blog is superb and this book has become a best-seller on Amazon. Carlson is the latest in the camp of investment practitioners who believe in keeping things simple and straight. The subtitle of the book is apt: ‘Why simplicity triumphs complexity in any investment plan’. As Carlson writes, “Conventional gives you much better return than exotic. Long-term process is more important than short-term outcomes. And perspective goes much further than tactics.” The most misunderstood part of investing is that while financial markets are “complex, emergent, adaptive systems,” as wonderfully explained in 20/20 Money by Michael Hanson (reviewed in Moneylife), to create wealth, you need to keep things simple and, indeed, stay away from complex strategies.

This is nothing new. For more than 100 years, ever since the stock markets started getting more organised, successful experts have pointed out the merits of simplicity. Phil Fisher, a successful investor and contemporary of Benjamin Graham, wrote a book in 1975 titled Conservative Investors Sleep Well. Warren Buffett has made money from a variety of products and special situations but his wealth was primarily created from companies selling everyday products like soft drinks (Coca Cola), fast food (McDonald’s) and shaving products (Gillette). He has become world’s richest man by keeping things ridiculously simple. But, as Carlson writes, “complexity tends to be the default option that gets used to persuade investors to buy unnecessary investment products while the vast majority of people really just need to understand more conventional options to succeed.”

The book has nine chapters. The first deals with the individual investor and his competitive advantage—or disadvantage—versus the institutional investor. I have a major disagreement with this. Carlson says don’t try to beat the professionals at their own game. But no investor is ever in competition with another investor. He is always in competition with himself and has all the behavioural biases all humans suffer from, including herding, loss-aversion, optimism, confirmation and so on. On the other side, professional investors have been found to make gross errors of judgement, time and again. The average mutual fund cannot beat the market averages in the United States. In India, small investors, who have avoided short-termism and stuck to quality stocks, have done very well for themselves. Investing is not a competitive sport.

The subsequent chapters cover: Negative Knowledge and the Traits Required To Be a Successful Investor; Defining Market and Portfolio Risk; Market Myths and Market History; Defining Your Investment Philosophy; Behavior on Wall Street; Asset Allocation; A Comprehensive Investment Plan and Financial Professionals. All these chapters are extremely useful and take investors through the essentials of investing.

The only issue I have is: What does this book offer which other books haven’t? To learn of mistakes like ‘looking to get rich in a hurry’ or ‘not having a plan in place’ or ‘going with the herd’ or ‘focusing exclusively on the short term’ are not exactly new. The chapter on market myths and market history offers “caveats, counter-intuitive results and no easy answers over the short to intermediate term. Over the long term, the markets are more consistent, but it requires a great deal of patience and discipline to remain a long-term investor when short-term instincts take over.” This should sound familiar to anyone who has read even a couple of classics on investing or a few good blogs.

The chapter on investing philosophy tells you to do systematic investing, choose low-cost funds and stay disciplined. How rare is all this? From marketing literature of mutual funds to investment blogs that have mushroomed, this is, after all, the main mantra of everyone. A chapter on behaviour on the Wall Street cannot possibly cover new ground, given that awareness about this sordid facet of investing is widespread, appearing many times in films and popular television serials.

I am, therefore, quite surprised by the rave reviews the book has got from hard-core practitioners like Wesley Gray who has done new research in value investing (his co-authored book, Quantitative Value, has been reviewed in Moneylife) or from Josh Brown, author of bestselling book Backstage Wall Street. It would be better if you read these two writers and also the books of Ken Fisher (all reviewed in Moneylife) and Dr William Bernstein.

Comments

User

Abhijit Joshi

10 years ago

Debashish,

Thanks for informing about this book. Your insights into wealth creation are truly helpful to all the readers.

Just something interesting discussion for all Moneylife community.
Warren Buffett's not so well known dimension is his insurance business, which he, on more than one occasion, has pointed out as the core to his strategy.If not mistaken from 1970s. It's the insurance float which provides him interest free money to buy entire businesses & open up income streams to buy more businesses / listed stocks in future. The scale of insurance floats affords him to be content with very reasonable returns & insulates from vagaries of stock markets. Its becoming like a rolling ice ball. He hasn't become this wealthy just by investing in listed securities, although that was starting point. Presently they contribute not so significant portion of Berkshire Hathaway's portfolio.

Regards

Abhijit