Seasoned investor Michael Dever recently released Jackass Investing – Don’t do it. Profit from it. I have the honor of reviewing the book. For the sake of time, I am providing a review of one of the Myths (chapters) presented in the book.
Risk is a major issue when it comes to investing. If you’ve ever consulted with an ‘investment professional’ you were most likely asked about your level of risk aversion. What does risk really mean though when we’re talking about investing? Obviously, you’d probably say, “The likelihood that I’m going to lose my investment money!” Right…Yet, how do you answer the question of how likely/unlikely you will be to lose your investment?
In a thorough, readable and example filled chapter, Mr. Dever illustrates that often times what depicted as ‘risk’ in the investment world is based on statistical assumptions. Often times these assumptions are built upon historical analysis that attempts to identify correlations that can be leveraged for gain. In the midst of this ‘rear-view-mirror’ investing method, an important factor is lost; what is the return driver behind the strategy and what could change to invalidate the assumptions made?
It’s a breath of fresh air to read Mr. Dever’s observations about the use of statistical analysis to define risk apart from fact based business sense. Within the realm of investing and outside of investing, the actual drivers that enable events, relationships and outcomes to occur are often not fully understood. The lack of understanding is not so much from a lack of ability or information, but a lack desire and/or misplaced confidence.
I’ve heard more than once in conversation the point made that “If you’re an excellent statistician you can probably make a lot of money investing.” Some truth does exist in that statement, but investing is not card counting. Yes, exploitable patterns may exist that are historically seen as having a high probability of reoccurring. The question that needs to be answered prior to buying into such relationship is “What’s the root cause?” Without understanding the investment and business-sense, the risk inherent within an investment/trading strategy cannot be properly understood.
I highly recommend Mr. Dever’s book, Jackass Investing – Don’t do it. Profit from it. New and seasoned investors will find many nuggets of knowledge to help ensure they don’t end up being a jackass with their investments.
It is available in Hardcover, PDF, Kindle and Nook format at JackassInvesting.com.