As investors, you have all been on the receiving end of sales pitches from brokers, friends and investment advisors about stocks that they claim will deliver spectacular returns. These stories not only sound persuasive and reasonable but are also backed up by evidence—anecdotal, in some cases, and statistical, in others—that the strategies work. When you try to implement them for your investments, though, you seldom can match their success on paper. All too often, you end up with buyer’s remorse, poorer for the experience and promising yourselves that you will not fall for the allure of these stories again. All too often, you forget the lessons of past mistakes and are easy prey for the next big stock story. While there are literally hundreds of schemes to beat the market in circulation, they are all variants of about a dozen basic themes that have been around for as long as there have been stocks to buy and sell. These broad themes are modified, given new names and marketed as new and different investment strategies by salespeople to a new generation of investors. There must be something in these stories that appeals to investor instincts and to human weaknesses – greed, fear and hubris, to name but three – to give them the staying power that they do. This book is an exploration of the appeal of these stories, why so many investors fall for them and fail with them, and what it may take to win with each of them.
As you will see, with each story, there is a kernel of truth that makes it believable and a base in financial theory that allows proponents to claim to have a solid rationale. Each chapter begins with an examination of the basis for each investment story and the theory that would justify its adoption. Why bother with the theory? Not only will it give you perspective on what makes each story work, but it will also allow you to identify potential weaknesses with the story.
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