Book Log – Investment Fables

Investment Fables: Exposing the Myths of “Can’t Miss” Investment Strategies by Aswath Damodaran

Aswath Damodaran is a professor at NYU. He writes very accessible books on investing and valuation, and makes several of them available for free on the internet as well as streaming videos of his lectures. This book is not available online, but it’s part of the Motley Fool Hidden Gems recommended reading list. There were all sorts of good tidbits of information here and he does a good job of demonstrating why a lot of stupid strategies are, in fact, stupid. At the same time, he points out ways in which the strategies could be modified to be effective. For example, instead of just investing in low P/E stocks, look for low P/E stocks with a few other character traits that will help you to avoid stocks that are low for a reason.

There was one bit that bothered me so much that I dog-eared the page. From page 439, which relates to aribitrage strategies:

Third, even if the information is correct and investors, on average, form expectations properly, there might still be investors who are willing to trade a prices that do not reflect these expectations. Thus, an investor who assesses the value of a stock to be $50 might still be willing to buy at $60, because he or she believes that it can be sold to someone else for $75 later. Investors who see this irrationality and are willing to bet on it or against it may be able to make higher returns in the long term. This presumably is what successful investors like Warren Buffett and Peter Lynch bring to the process.

I was fine with it up until the last sentence. What on earth was he talking about? Both Buffett and Lynch were famous for not buying something for more than it was worth and hoping someone else will buy it still higher. They ridicule other people for doing it.

I can only assume this is a typo, because the rest of the book is spot on.


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Their synopsis:

Bringing truth to podcasting, and all who choose to listen. Derek and Swoopy are your hosts, filling your pod and your brain with skeptical insight and conversation, sometimes heated, on a plethora of topics that are ripe for critical examination.

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