On the Bookshelf

Larry Swedroe and RC Balaban list 77 errors investors commonly make in their new book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them” (McGraw-Hill, 2012). The book is written as a series of lessons. This results in short, quick-to-read chapters that can be read in just about any order.

Each chapter is devoted to single type of mistake, though the mistakes themselves can be multifaceted. Mistake 22, “Do you confuse great companies with high-return investments?” is a good example. The authors say that value stocks are assigned lower valuations because investors discount their future earnings more than they discount future earnings for growth stocks. (Growth stocks are expected to show large increases in profits.) On the other hand, investors perceive that growth companies are more likely to match or beat projected earnings targets than value stocks are, which leads to more downside risk for growth stocks.

Swedroe and Balaban rely on a combination of their knowledge along with outside studies and third-party quotations to point out behavioral and investment errors. Given the breadth of topics covered, the authors deserve credit for giving adequate descriptions of each mistake and direction on how to avoid them.

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