Book Review: The Laws of Wealth by Dr. Daniel Crosby
The Laws of Wealth: Psychology and the Secret to Investing Success by Dr. Daniel Crosby isn’t a book that I’d normally pick up off the shelf¹. However, after having deeply respected his work on investor behaviour and following him on Twitter for many years, it was time to read his work in more than 140-word bursts.
Crosby is part of what I think of as the second wave of behavioural² finance, and isn’t here to simply list the many ways we humans act irrationally, end up sabotaging ourselves and calling it a day, or, as he puts it:
No shrink worth $200 an hour would label you pathological and show you the door, yet that is largely what behavioral finance has given the investing public: a surfeit of pathology and a dearth of solutions.
Rather, this book is designed to first articulate the behavioural quirks that make us human, and immediately offer rules to follow to circumvent our worst tendencies. Rules like “You Control What Matters Most,” “If You’re Excited, It’s a Bad Idea,” “You Are Not Special,” and “Diversification Means Always Having To Say You’re Sorry” make up the first half of the book, and you could comfortably stop with them and – provided you actually follow the rules – see immediate improvement in your behaviour.
In the second part of the book, Crosby builds on those rules and introduces the decision-making framework of Rule Based Behavioral Investing, or RBI for the baseball-inclined, through application of the Four Cs:
- Consistency: frees us from the pull of ego, emotion and loss aversion, while focusing our efforts on uniform execution
- Clarity: we prioritize evidence-based factors and are not pulled down the seductive path of worrying about the frightening, but unlikely or the exciting, but useless
- Courageousness: we automate the process of contrarianism: doing what the brain knows to be best but the heart and the stomach have trouble accomplishing
- Conviction: helps us walk the line between hubris and fear by creating portfolios that are diverse enough to be humble and focused enough to offer a shot at long-term outperformance
My only beef with Laws of Wealth, other than a disdain for the Oxford Comma is, admittedly, one of semantics. In “Rule #2: You Cannot Do This Alone,” Crosby consistently conflates the role of financial advisor with the role of investment manager. Managing a portfolio is not the same discipline as providing nuanced financial advice, even though they are frequently offered by the same person, and – here in Canada, at least – at a significantly higher cost than when offered separately. Fortunately, by the end of the chapter we agree on something important:
Our natural tendencies will be toward excess complexity and flashy marketing, seeking out those who lead with bold claims of esoteric knowledge. What will add much greater richness is a partner who balances deep knowledge with deep rapport. Someone we will listen to when we are scared and who will save us from ourselves.
If you get nothing else from this book, get that.
Who should read it?
The Laws of Wealth is written for an audience who already have the Investing 101 basics down, and uses fairly technical terminology that isn’t going to resonate with everyone. If you don’t understand the basics or the terminology, start with The Value of Simple by John Robertson before digging into The Laws of Wealth.
This book isn’t for you if you’re looking for secret investing sauce or a model portfolio. It’s not exotic or groundbreaking; in fact, Crosby himself calls the investing rules that make up Part Two “arduous, boring, and commonsensical.” Exactly what investing should be!
If simple, common sense, rules-based investing sounds like something you’d like to apply to your own portfolio, or a standard you’d like to evaluate prospective (or current) portfolio managers against but lack the framework for doing so, this book is for you.
If you only have time to read one chapter:
Definitely read “The Four Cs of Rule-Based Behavioral Investing,” since it’s the entire book summarized in a short 38-pages.
If you only have time to read one two paragraph(s):
It is unrealistically nihilistic to assume that there is nothing that can be known about stocks that can give you a probabilistic edge in making financial decisions. Conversely, it is unrealistically optimistic to assume that anyone, no matter how worldly or educated, is able to predict the future with any useful degree of certainty.
The middle ground between these two approaches must scrupulously avoid conjecture about the future, rely on systems rather than biased human judgement and be diversified enough to show appropriate humility. It is an approach that says, ‘I can know some things, but I’ll never know everything,’ and while it’s likely to make you some money, it will never land you a spot on CNBC.
(“Rule#7. Forecasting Is For Weathermen,” pages 77-78)
If you only have time to read one two sentence(s):
Exceptional investing over a lifetime cannot be predicated on luck. It must be grounded in a systematic approach that is applied in good times and bad and is never abandoned just because what is popular in the moment may not conform to longer-term best practices.
(“The State of Money Management” p. 113)
¹Which is all about my own hang-ups over the narrow monetary definition of the world “wealth” and nothing else. I am what I am.
²Yes, I’m going to spell it “behavioural” except when I spell it “behavioral.” Sorrynotsorry