Winston Churchill once warned, “Those who fail to learn from history are doomed to repeat it.” This timeless lesson sits at the heart of award-winning author and Ivey Business School professor Stephen Foerster’s new book, Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor.
Offering lessons for investors of any age and stage, Foerster’s book takes readers on a captivating journey through history, weaving together entertaining stories with invaluable investment insights — keenly demonstrating how the past offers more than lessons on what occurred, it equips us to navigate what's ahead.
As Trailblazers, Heroes, and Crooks hits the shelves, Impact caught up with Foerster to unpack the highlights, from crafting an investment philosophy to spotting financial pitfalls and reaching your goals.
Why do you think it’s important to tell the stories that have shaped modern finance and investing as you have done in your last two books?
My writing has evolved over time. My first two books were textbooks. Students liked the books, but I had a captive audience. Textbooks are essentially lecturers. Like with Ivey’s case method, I feel we learn better through stories. My previous book with Andrew Lo, In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest, was partly stories about the history of contributors to Modern Portfolio Theory starting with Harry Markowitz in the early-1950s.
My most recent book, Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor is strictly fun stories. They are not always specifically about investing, for example: Cristiano Ronaldo moves Coke bottles at a press conference, Muhammad Ali is the underdog against George Foreman in the “Rumble in the Jungle,” The New York Mets pay Bobby Bonilla $30 million to not play baseball, and 18 minutes of cockpit drama onboard an Aeroflot flight develop after an autopilot goes wrong. But each story has investment-related takeaways. As Mark Twain purportedly said, “History doesn't repeat itself, but it often rhymes.” We can learn from history so that we don’t have to repeat the mistakes of others.
Your book says the key to long-term investing success relies on developing a sound investment philosophy. Why is this so important for both novice and experienced investors?
An investment philosophy is an informed set of investment beliefs and principles that guide decision-making. Novices often plunge into investing without really understanding sound investment principles and concepts, such as the importance of diversification, the difficulty of consistently earning returns in excess of the market, the riskiness of investments, and common investment mistakes. In short, they don’t have an investment philosophy and don’t recognize common investing biases. Sometimes, even experienced investors don’t give much thought to their investment philosophy, or revisit whether their investment beliefs have changed.
We have a fascination with so-called “bad guys,” or crooks. What kind of crooks do investors need to look out for, and how do they play off our emotions and biases?
My book features some well-known “crooks,” such as Bernie Madoff, but also lesser-known ones, like Anthony “Tino” De Angelis, who almost caused the implosion of American Express. From these cases, and many more, are several key takeaways investors should consider:
- Be skeptical of low-risk, high-return investment promises;
- If something seems too good to be true, like the promise of an exceptionally rosy Sharpe ratio, it often is;
- Look for red flags in investment advisors, including overstated credentials and lack of transparency;
- Due diligence is important;
- Risk is more than just volatility and includes the risk of fraud; and,
- Be aware of behavioural biases like overoptimism.
Can you explain the importance of balancing fear and greed, and why achieving long-term value is often greater than the lure of short-term profits?
One chapter, “Hetty Green, the Queen of Value Investing,” is set in New York City in 1907. We meet Hetty Green, our trailblazer, who became known as the world’s richest woman (and greatest miser). We discover her value investing approach pre-dated Ben Graham, who’s considered the first proponent of value investing, and his famous disciple, Warren Buffett. Like Buffett, Green bought when prices and product demand were low and sold when there was a buying frenzy. We also learn how she helped save New York City from financial ruin during the Panic of 1907.
Buffett made one of the greatest investments of all time in American Express in the 1960s when the company’s survival was in doubt. He stood by American Express management when he felt they were doing the right thing – even though it hurt short-term profits – because he felt it would improve long-term value. In the end, Buffett was right. Through the stories of these well-known investors, key lessons emerge, such as:
- It can sometimes pay to be a contrarian investor – buying when no one wants something;
- It pays to be a disciplined investor;
- Investor greed gets in the way of sound analysis;
- Long-term value trumps short-term profits; and,
- It pays to be fearful when others are greedy and vice versa. Stocks may become overvalued when everyone invests in them, and undervalued when no one wants them.
How should investors manage their investment risk?
The short answer is: diversify and avoid mistakes. The book includes stories about each of these.
One of my chapters, “Why Swiss Bankers Bet on Young Lives,” is set in France and Switzerland in 1759. Our trailblazer is Swiss banker Jacob Bouthillier de Beaumont. He cleverly figured out how to turn a French life insurance product into a profitable investment vehicle that effectively bets on the lives of young Swiss girls. It’s one of the earliest investment examples of the power of diversification.
In another chapter, “A Tennis Book and the Index Revolution,” we learn about best-selling author Simon (Si) Ramo, who wrote Extraordinary Tennis for the Ordinary Player. Inspired by this book, Charles (Charley) Ellis then wrote Winning the Loser’s Game, which applied Ramo’s learnings to investing. In both tennis and investments, mistakes are extremely impactful. Therefore, the key to success is to avoid making mistakes. As it pertains to investments, one strategy to avoid mistakes is to simply buy-and-hold an index fund.
You have said people don’t always act rationally when it comes to investing. What are some examples of irrational investing that investors should avoid?
Throughout my career, I’ve often observed we don’t always act rationally when investing. The book shares several examples. Those wondering if they are irrational investors should reflect on the following questions:
- Do you get excited and look at investment opportunities through rose-colored glasses? When evaluating a stock, don’t focus solely on reasons to buy, consider why you might not want to.
- Are you overconfident in your stock-picking abilities? Overconfidence often leads to excessive trading, which in turn often leads to underperformance.
- Do you invest in a company simply because it makes cutting-edge products, ignoring how expensive the stock is? A good company isn’t the same as a good investment.
- Just like Sir Isaac Newton, who had one of the earliest cases of fear of missing out (FOMO) investing, do you convince yourself to buy a stock now because if you don’t and the price rises, you’ll regret it later?
Do you have any final thoughts on how investors should go about achieving their financial goals?
We all have important life goals, such as saving for education, buying a house or cottage, and retiring comfortably. Those life goals can easily be translated into financial goals. We then ultimately only have three levers to meet those financial goals:
- How much we regularly save and invest;
- How long we have to save and invest; and,
- What returns we expect to get from those savings and investments.
Every sound portfolio should start with a mix of bonds and stocks, the so-called traditional investments. It’s important to understand how bonds, stocks, and other investments differ in terms of expected returns and risks because there’s a tradeoff: to achieve a higher expected return you need to take on more risk. And the more you save and invest, and the longer you save and invest, then the less risk you’ll need to take because you won’t need as high of an expected return. Trailblazers, Heroes, and Crooks will give you a better appreciation for investing risk and return.
Read more about Foerster’s new book, Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor on Ivey News, or get your copy today at select bookstores or on amazon.ca.
