Book Review: 20/20 Money by Hanson

This is a book that I think every investor should read through first before any investment. It provides inside views of various market pitfalls that lead to poor decision making.

He highlights that human memories are wired for the short term and is very easily affected by emotion and some other external factors. Therefore, he suggests us do not trust our memory but only believe what you actually see with support of facts. As markets are full of “noise”, you will be very easily misled and make wrong decision.

Also, to be a successful investor, Hanson advises us that we should feel comfortable alone and fight that herding mechanism in us. Follow the herd will lead us for horrible investment.

Further, as media are actually only reporting history, in order to attract readers, data are distorted when they got reported. Therefore, reading whatever business news in our daily newspaper is actually history and has been factored in stock prices. Does not being mislead just by reading news headlines.

For actual investment, he recommends to focus on portfolio return rather than individual stock’s return. As long as your portfolio is performing well, keep it on. He objects regular trading as cost will eat up your return.

He further proposes to buy when there is bear market on the basis that (1) bull market is always come after, and, (2) bull market is lasting longer than bear market historically. He puts forward that we only sell when market is dropping more than 20% or, otherwise, we might miss out any money making opportunity.

Actually, I have been practicing one of his ideas for years. That is, stay away from the crowd and believe in only what I see. Reason being, from my own investment experience, people are easily misinformed without proper understanding. Therefore, educate yourself will definitely enhance your investment judgment.