Library Learning

Langston Hughes was honored in the library yesterday. He was billed as a Jazz poet who flowered during the so-called Harlem renaissance.  I read his biography in Wikipedia before going to the tribute. There were 2 poets (a black couple) who performed during the presentation. They are the local purveyors of ‘slam’ poetry contests in the area. Earlier I did not feel like going after my workout in the gym. But I was glad to have gone after witnessing the performance. The show is part of the coming Chautauqua Festival. I signed up for the festival as well.

It was interesting to see the performances of poetry reading. In Singapore, most of the artistic performances are technical – my definition of artistic performances that require some sort of musical instrument. I guess mastering an instrument is easy after spending a lot of time practicing. But poets seem to grow organically – by allowing their creative impulses to express themselves. There seems to be more inventiveness and artistic expression. It’s like the people can’t wait to express themselves in whatever form they feel it best.

Tonight there is another seminar in the library. It’s the last of a series with the theme ‘The Paradox of Affluence.’ I attend the seminars (with a video recording of the lecture) but did not participate in the discussion. I feel tired after attending all these free seminars that it feels like going to school. I like coming to these free events like in Singapore because it is a cost effective way to develop one self. For instance, I have never heard of a famous black poet except for jazz artists like Mile Davis, Duke Ellington, Louis Armstrong and so on.   

It has been a educational few months for me. Self learning techniques include borrowing books and watching free videos in You Tube; to complete one’s education. It’s been my pattern more or less for the past years to learn from free sources. But I need more experiential learning to really improve oneself. The only outlet here is my Toastmasters experience where I get to exert myself. In real life, I invest in stocks, for example to learn the lessons from the finance books I have been reading. Completing the journey with actual experiences is a good way to put the finishing touches to self learning.

Unfortunately I exhaust myself a lot. Last weekend I speed read 3 books, 3 magazines and 2 DVD movies. I made a shortcut and read by looking at the table of contents, reading the first and last chapter and skim over the rest. I did not have time to write, plant vegetables or fruits and travel in the nearby towns which I had planned to do. I have this need to immerse myself as fast as possible to the local culture. Most of the books I am rushing to finish are all on finance. I want to profit from the current economic situation by making investments in property and stocks. Need to make sure that it would not be a disaster.

Behavioral Finance

 It’s clear that people generally succeed due to their behavior. There may be various degrees of success depending on their endeavor. For instance, investing in the stock market is often a losing venture as the average person trades too frequently. This results in high transaction costs as well as the tendency to buy high and sell low. This is the insight from behavioral economic research. Another flaw is overconfidence where average people think that they know more than the ‘market’ and so they can pick good stocks. These are all behavioral flaws that often result in losses in the stock market.

Observers make the conclusion that the average person cannot beat the market. This results in market ‘inefficiency’ wherein the professional investor like Warren Buffet exploits. This effort some people say result in an efficient market where equilibrium is achieved with the interplay between prey and predator. It’s not a convincing argument as studies have shown that stock are volatile and a stock’s true value will only come about after some time. Hence, the market is not efficient despite the efforts of professional investors.

Stock volatility cannot be attributed to new information about the stock such as dividends or company earnings or other new information.So a person’s behavior is the determinant of his success in the stock market. It is not a question of intelligence or stock expertise but his ability to be ‘rational’ without being influenced by market ‘noise’. Rational behavior is rewarded with the fact that market prices rise over time. In fact it does not matter what stock one would pick.

Throwing a dart or flipping a coin is also a feasible method in choosing a good stock. It’s because the market is ‘efficient’ since it’s a reflection of the mood of the millions of investors who are speculating in the market. The ‘wisdom of the crowd’ results in a random walk through an efficient arena. The constant rise of market prices over the long term can also be explained by the ‘irrational’ behavior of investors.

What does it mean? Random walk means prices are unpredictable and cannot be forecast because the market is efficient. Non-random walk means prices are predictable (for ‘value’ stocks with low P/E ratios) and inefficient which allow professional investors to exploit. So buying individual stocks does indicate that one does not believe in the random walk. On the other hand, buying index funds indicates that one believe in random walk because one cannot really spot the best stock to buy. In both situations, the underlying belief is that stock prices will rise over the long term.

Success can be achieved if one can control his behavior and hold these stocks for at least 10 years. Hence, it does not matter whether one believes in the efficient market or not if one will invest for the long run following a buy and hold strategy. The key behavior that must be cultivated is actually not related to investing. It is savings. This is the key ingredient in order to have money to invest. In order to save, one must cultivate a thrifty behavior where one does not spend to his heart’s desire and live a simple and frugal lifestyle. Maybe this is the key ingredient or behavior that makes legendary investors. As the saying goes, one’s lifestyle will portray whether one succeeds or not in his activities.

Efficient Market

‘The Myth of the Rational Market’ is a great book that explains recent economic theories in an easy to understand manner. A good supplement to Benoit Mandelbrot’s book ‘The Mis-Behavior of Markets’. Justin Fox’s book wisely avoids the equations and technical jargon that would have made the book unsatisfying. Finally I understood what it meant to believe or not to believe the theory of an efficient market. I had a fuzzy idea and did not realize the nuances and subtlety of this theory or its influence in my investment decisions. I did not believe it although I thought I did – such confusion! If one agrees with the theory then one does not accept the ability of great investors like Warren Buffet and George Soros.



But the theory is now discarded with the reality of recent events. I always thought that the common wisdom was to invest in index funds which indirectly subscribes to this theory. The theory basically states that prices in the stock market are random and reflects the latest information. It does not account for the behavior of the herd or stock speculators who blindly sell due to rumors or noise generated by shows like MSNBC. Generally one cannot beat the market by timing it. One should invest in the long term as stocks generally rise in the long run. One would have a difficult time choosing individual stocks unless one follows the advice of the Benjamin Graham – Warren Buffet school of thought.



Hence, buying stock even if one chooses so-called value stock is a big risk. Prices do not follow historical trends. Benoit Mandelbrot does not agree as his fractal theory seems to say that future price movements reflect ‘traces’ of past performance. I guess fractal theory and the efficient market theory aim to provide a general theoretical structure to explain the stock market. On the other hand, people like Warren Buffet and George Soros believe that the market is inefficient which allows them to buy undervalued stocks and profit in the long term. Their belief can be said to follow the other school of thought – the behavioral economists that say that people are subject to cognitive biases. These cognitive biases result in an inefficient market.

A belief in the inefficient market means that investing in the stock market entails great financial risk as compared to a belief in an efficient market. So one should develop a ‘rational’ mind to get rid of any cognitive bias or overconfidence that one may have when investing in the market. George Soros tries to provide a philosophical framework (based on Karl Popper’s ideas) that would allow one to invest by essentially proving a bet wrong. It’s his view that the market exhibits ‘reflexive’ phenomenon (i.e. reacting to participant’s views), similar to John Maynard Keynes thought that the market is like a gigantic beauty pageant where people vote on the best looking stock.

So how does one become a successful investor? One cannot even attempt to understand the mind of the market but one cannot beat success. Value investing seems to provide the best answer. Choosing under valued stock with criteria’s like P/E ratios below 20, choosing business with good long term strategies and good products, an excellent management team, having a global business model with large capitalization is one approach. So I guess I can now say with confidence that I believe the market is not efficient, it’s driven by cognitive bias and herd mentality. Stock prices are not random and do not reflect all available information. I guess this belief does not rely on mathematical economic theories but on a basic understanding of human nature.

Nevertheless, people like Warren Buffet do advise inexperienced investors to buy index funds as the best way to invest in the stock market. This does not mean he believes in the efficient market theory but on the realistic understanding that the stock market does rise over time (or over the long run) and the market is the most innovative engine that fuels the American economy. This means that investing in the stock market is not a great risk but a great investment if done conservatively. But one needs to make allowances for aberrations like the recent crisis and avoid cognitive bias which results in selling when prices are low (or buying when prices are high). Buying and holding index funds like ETFs seems to be the most conservative option for most people.

Buying Cheap

Last weekend we went to an outlet shop where branded products are sold at a discount. I did not buy anything myself but my wife and kids did. I just paid for the stuff. It was also the last day of the financial seminar at the library. It was a good session. Although I knew already about the topics perhaps about 90% from the books I read, it was the exchange of viewpoints that I liked. The discussion was interesting and it showed the real everyday situation faced by the participants. I realized that most people have limited financial literacy and I guess I can consider myself a bit advanced.


Most of my knowledge is from books but I have had training in college plus actual experience. This classifies me perhaps above the usual everyday person. Yesterday I watched Michael Moore’s documentary ‘Capitalism – A Love Story.’ It’s a great film that allows you to understand the today’s problems. An interesting part was about a report from Citigroup about the ‘plutonomy’. It was a new term for me. It applies to the income inequality where the top 1-5% controls the majority of wealth. I found the report and downloaded it. It’s an interesting concept but cold and frightful as expressed in Moore’s film.



According to the report, the average person places his wealth in real estate. The wealthy elite prefer equities. It also identifies the location of the ‘plutonomy’ residing to USA, UK and Canada. The situation exists where there are common factors: financial innovation, technological breakthrough, foreign migration and cooperative government. The people who can capitalize on this situation are the very wealthy and the managerial aristocracy. Being financially literate allows you to enter into the rare filled atmosphere. I guess this is what Alvin Toffler wrote about in his book ‘Revolutionary Wealth.’ It is just so unequal to the majority.

In the good side are egalitarian countries like Japan, France, Switzerland and other European cultures except Italy. The report was written in 2005 – before the financial crisis of 2008-2009 and the election of Barack Obama. I wonder if there is any change in the report’s findings especially with the increasing role of government due to the bailout. Moore’s film seems to indicate that radical change is coming. There is no choice considering the financial mess. Tax the rich and give to the poor seem to be the rallying cry. The recent passage of the health care bill is a possible indication. There is too much more to do if one hopes to achieve Franklin Roosevelt’s dream of having a 2nd bill of rights.

I always thought that the US is the best place to grow and achieve one’s dream. But is this possible with the ‘plutonomy’? Most people would prefer to live in egalitarian countries like France or Japan but unfortunately these are more ‘closed’ countries that do not have the progressive immigration policies like US and Singapore. But I think Singapore strives to be more egalitarian than the US. It’s an interesting concept and Moore’s films have again educated a lot of people. One needs to be exposed to films, books and seminars to understand all the present day financial complexity. Further changes lie ahead with coming legislation to monitor the financial industry.

Paying Insurance

My two teenage kids recently passed their drivers test. They are now eligible to drive a car on their own. At first I thought it was a good thing as their parents don’t need to drive them to school. I added both my sons to the car insurance. But when I saw the bill, I had second thoughts. Insurance is play on your fears and the way you would assess the possible risks. As my kids are of legal age and have passed the exam, one is reasonably assured that they have a normal chance of having no accident than the next person. But the problem is that one should account for the other drivers in road. The other drivers are likely to cause the accident as well. So naturally a parent would opt for insurance.



This is the point reached in a parent’s life when he or she should start pushing the kids to start working. At least to get a part time job to help pay the bills. All sort of expenses seem to be raining down like insurance premiums, taxes, anti-identity theft protection and so on. Taxes one cannot escape but insurance entails a choice. This involves one’s skills in probability and risk assessment. Previously I would have risked it with my usual recklessness but now one is more cautious in old age. So the key is to increase one’s income. Hence, all the more reason to increase one’s financial literacy.


Last night I checked the investment and financial books I have read so far. I checked my online book catalog and found I have read about 32 books on this subject. This would make it about 10 percent of the total books I have read so far since I started cataloging the books that I read. I also counted the number of books related to writing which reached a total of 15 books or about 5 percent of the total books I have read so far. My thinking is that writing would provide another source of income in the future once I have attained the skill and confidence. This is the twin strategies for me: investing and writing. Of course, I can also look for a part time job on weekends for the short to medium term.

As of today, roughly the topics of the books I read so far follows below. Literature, popular entertainment or fiction books account for about 40%. This covers American (North and South), Asian and European writers in every conceivable genre.

• Literature :................. 132 = 40%
• History/Biography :....... 104 = 32%
• Investment/ Finance :..... 32 = 10%
• Business :..................... 23 = 7%
• Self Help :..................... 21 = 6%
• Writing:......................... 15 = 5%

• Total :....................... 327 = 100%

Non-fiction covers topics from history, biography, business, investment, finance, writing and self-help books account for the majority at 60%. The biggest bulk is history and biography. So I guess I can say that I have not been feeding my head with mindless mush in the recent years. I wonder what this says about me. Hopefully not an out of touch bookish nerd or a snobbish pretentious academic but maybe more of a practical person who likes to read a lot and hopefully make a career out of it. The reading knowledge I pray should help me assess risk more realistically in investment or in insurance or in life. Reading I guess is a form of insurance against ignorance.