The Conceptual Foundations of Investing

1RETURNS

This is a book about the conceptual foundations of investing. That does not mean concepts for beating the market. In fact, one of the conceptual foundations that we will return to throughout the book is that there cannot be a trick for beating the market. If there were, and if the trick became well known, who would sell when the trick said buy? The best that can be hoped for is that a strategy for beating the market may work for a while as long as it is not widely known and adopted. Of course, no one would write a book about such a strategy; they would start an investment firm.

That does not mean that understanding the conceptual foundations of investing will not improve an investor's performance. There are a host of investment mistakes that can be avoided by such an understanding. One example involves the trade-off between risk and return. The trade-off seems to imply that if you bear more risk you will have higher long-run average returns. That conclusion is false. It is possible to bear a great deal of risk and get no benefit in terms of higher average return. Understanding the conceptual foundations of finance makes it clear why this is so and, thereby, helps an investor avoid bearing uncompensated risks.

Another choice every investor has to make is between active and passive investing. Making that choice wisely requires understanding the conceptual foundations of investing.

There are numerous other examples we could offer but we are getting ahead of ourselves. ...