What Investors Really Want


At a dinner party some years ago, a fellow guest, an engineer who has learned that I am a professor of finance, wanted to know where he can buy Japanese Yen. Why do you want to buy Japanese Yen? I asked. Because its value is sure go up he said, and proceeded to list the American budget deficit, its trade deficit, and other indicators of the advantage of the Japanese Yen over the American dollar.

I wanted to tell my fellow guest quickly and gently that while his thinking is quite normal, it is not very smart. Buying and selling Japanese Yen, American stocks, French bonds, and all other investments, I said, is not like playing tennis against a practice wall, where you can watch the ball hit the wall and place yourself at just the right spot to hit it back when it bounces. It is like playing tennis against an opponent you’ve never met before. One will be the winner, but will it be you? Are you faster than your opponent? Will your opponent fool you by pretending to hit the ball to the left side, only to hit it to the right?

Think for a moment, I said to my fellow guest. You are on one side of the net, thinking that the Yen would go up. Your opponent is on the other side of the net, thinking that it would go down. One of you must be the slow one. Have you considered the possibility that the Yen seller might be Goldman Sachs, Barclays, Bank of Tokyo – Mitsubishi UFJ, or another of many traders in the Yen market who have offices in both Tokyo and New York and know more about both the Japanese and American economies than you can learn from your morning’s Wall Street Journal?

Yet there is more to investing and tennis than faulty thinking. My fellow guest wanted to make money on his Yen trade, but he also wanted to feel the thrill of winning when the Yen zooms. He wanted to express himself as a player in financial markets, not one who stands at the market’s sideline. And he wanted to be a member of the investing community, the community of people who observe financial markets, trade in them, and share their experiences with one another.

This book is about what we want from our investments. It is about how we think about our investments, how we feel about them, and how investment markets drive us crazy as we try to cajole them into giving us what we want. This book is about normal investors like you, like me, and like my fellow guest. We are intelligent people, neither irrational nor insane. We are normal smart at times and normal stupid at others. But we do not have computers for brains and we want benefits computers cannot comprehend.

We want high returns from our investments, but we want much more. We want to nurture hope for riches and banish fear of poverty. We want to win, be #1, and beat the market. We want to feel pride when our investments bring gains and avoid regret when they inflict losses. We want the status and esteem conveyed by hedge funds, the warm glow and virtue conveyed by socially responsible funds, the patriotism conveyed by investing in our own country, and the loyalty conveyed by investing in the companies that employ us. We want good advice from financial advisers, magazines and the Internet. We want to be free from government regulations yet be protected by regulators. We want financial markets to be fair but we search for an edge that would let us win, sometimes fair and at other times not. We want to leave a legacy for our children when we are gone. And we want to leave nothing for the tax man. The sum of our wants and behaviors as we herd together or go our separate ways makes financial markets go up or down, sometimes inflating bubbles and at other times popping them.

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