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Book Review: The 10 Biggest Investment Mistakes Canadians Make and How to Avoid Them

Nobleea is back! This time, he has written a review on one of the books that has changed his views on stock picking. Who is Nobleea? He is a regular reader, commenter, engineer, and personal finance enthusiast.

Since I started investing, I thought that my extensive reading of business news and stock tracking would allow me to get better than market returns. Besides, it’s glamourous! After beginning to read a lot of the PF blogs out there (such as the excellent one you’re reading now), I came across the couch potato investment theory.

Not fully convinced, but always eager to read new investment books, I came across the catchy title “The 10 Biggest Investment Mistakes Canadians Make and How to Avoid Them” by Ted Gadsby.

Who is the Author?

At the time of printing (2000), Ted Gadsby was President and CEO of CIBC Securities. I don’t know if he still works there, but the book definitely has a bias towards mutual funds. Granted at the time of writing, I don’t think ETFs or low cost index funds were widely available.

What is the book about?

The book starts off with an excellent discussion on what happens when human psychology meets finance. The brief introduction to Behavioural Finance mentions and explains the terminology and how it can impact your investments. The author discusses what he thinks are the Top 10 Investing mistakes that Canadians make. Some of the mistakes are pretty weak (probably just wanted to get 10 in total), and some are exceptionally good and salient.

The mistakes that are discussed:

  • Misunderstanding Risk
  • Timing the Market
  • Overusing Tactical Asset Allocation
  • Overestimating Active Management
  • Succumbing to Home Bias
  • Not Knowing What You Own
  • Not Knowing How You’re Doing
  • Underestimating the Power of Compounding
  • Underestimating the Impact of Tax
  • Overpaying for Guarantees

The Good and the Bad

There are some interesting riddles throughout the book which help to highlight how goofy and irrational we can act towards risk and money. For example:

  • If you toss a coin 20 times in a row, what are the odds of flipping five heads in a row? (The odds are a lot higher than most people would guess – 25%)
  • If there are 23 people in a room, what are the odds that 2 of the 23 people share the same birthday (out of 365)? (Again, much higher than most would guess, the odds are 51%)

The first chapter on behavioural finance is a must read. The discussion on mistake #2 Timing the Market is also excellent – the author uses statistics and historical data to show it’s nigh impossible to consistently beat the market for an individual investor.

While most of us try to use low cost index funds or ETFs as much as possible, some may not have the ability to do that with all their investments. I know the vast majority of my RRSPs are with Sunlife through my work plan so I have to use their mutual funds. The chapter on the Power of Compounding was pretty basic and probably well understood already by most. The chapter on Overpaying for Guarantees was probably not applicable for most (essentially discussed Seg funds).

What did I learn most from the book?

The odds that an individual investor will beat the market consistently over a long period of time are not good at all. Why, the odds aren’t even good for professional money managers, and the author presents a lot of data to prove that (most funds that are hot one or two years are absolute dogs the next few). The chapter on the impact of tax on your investment choices was good, though most who index their investments now already know about their inherent tax efficiency.

After seeing the historical numbers and statistics, I’m definitely convinced that indexing with low cost funds and ETFs is the way to go. If you still think that you’re a pretty good stock picker (and maybe you are), try and read through this book.

Want a free copy?

Unfortunately, I don’t have the connections that FT has, so there is no free copy. In fact, the book is out of print and hard to find. But I got a copy at my library and you might be able to as well.

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 4 comments… add one }
  • top investing strategy May 20, 2008, 7:31 am

    I go with your post. Not only Canadians, many others do the same mistakes.

  • Dividendgrowth May 20, 2008, 3:55 pm

    I totally agree with the poster above. Seems to me that most people that start in the markets seem to think that they could time it successfully and retire in 1 year.. Which is so far from the truth for most people..

  • Jordan Clark May 20, 2008, 5:06 pm

    Wow I can’t believe you reviewed this book, I also highly recommend it. I picked it up when I first started to learn about investing and it’s always left the biggest impression on me. I found it made some very big statements and actually backed them up.

    My only regret is I didn’t act on the book after the first time I read it. Indexing wasn’t well known at all then. I talked about it with my “financial advisor” but was told basically the exact opposite of the book, that basically they could time the market, mutual funds were a good investment, not being too aggressive even though I was 20 years old, and trust them because they’re the professionals.

    I left things in my advisor’s hands too long, had kids and didn’t have time to be involved with investing. Looking back now if I had just trusted my gut feeling and gone with an indexing strategy and followed the simple advise of this book my portfolio would have been much better off.

  • The Financial Blogger May 20, 2008, 6:25 pm

    I think the home bias factor is really important. I keep seeing people that hold the Quebec 10 or the TSX 10 biggest companies thinking that they are diversified… I guess that when you buy actually see the company buy their products, it helps people to think that they are real ;-)

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