42 of 43 people found the following review helpful
The most important book on investment so far this century,
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This review is from: The Long and the Short of it: A Guide to Finance and Investment for Normally Intelligent People Who Aren't in the Industry (Paperback)
This book starts by gives some information about different asset classes such as bonds, equity and property. It explains the pros, and the cons of paying someone else to manage your investments.
It then discusses modern finance theory and, in particular the Efficient Market Hypothesis (EMH), which is the cornerstone of most finance theory. Kay believes that this is not true in some important respects, and gives some evidence for this. He explains how systematic deviations from the EMH can lead to enhanced returns. This is a contentious position, but has a lot of support, not least from some extremely successful investors, notably the Graham school, the leading exponent of which is none other than Warren Buffett.
The book then gives a brief guide to understanding companies' financial statements from a valuation point of view.
He then discusses risk and reward in portfolios and the Curious Case of Robb Caledonian, which is fascinating and illuminating. He then discusses the Capital Asset Pricing Model and the challenge to it from the Equity Risk Premium Puzzle. This is hard and advanced stuff, made palatable only by Kay's limpid prose.
There then follow three chapters of practical advice about how to go about investing to maximise returns over a normal timescale. These are absolutely excellent and certainly worth the price of the book alone.
Finally there is a discussion of what went wrong in the 2008/9 'credit crunch'. Kay lays some of the blame at the feet of the Efficient Market Hypothesis and 'rational expectations' or 'subjective expected utility' as he calls it. There is some excellent stuff in this chapter. A couple of choice quotes: "The cleverest people have intellectual capabilities that would win them success in many other walks of life. Yet the most successful people are, as always, distinguished by who them know rather than what they know. What they know is not very much, and is largely the relaying of conventional opinions whose validity they have little opportunity or inclination, to assess." Another: "There are also in the City some of the most selfish people outside prisons, who believe that no justification for their activities is required beyond the money they make from them."
This is by far the best guide to investment I have ever read. It's central message is that it is not only fairly easy to manage one's own portfolio so as to get a better risk adjusted return than a professional, it is practically impossible to fail to do so.