Review of "The Long and the Short of It: A Guide to Finance and Investment for Normally Intelligent People Who Aren’t in the Industry" by John Kay

This is simply the best book I know for the new investor. The author is a well-known economist, who writes well and seeks to share his knowledge.

Summary

Saving and investing matter for all except the very poorest in our society.
There are serious problems getting impartial advice, so people need to learn for themselves.
This book is my recommendation as the best place to start.

21 December 2020

I have been investing since my mid-20s. Since then, I must have read dozens of books on the subject.

The challenge I often face is a friend or relative asking me to recommend something they can read to begin learning about investing. What single book should I recommend?

For many years, my standard choice was “The Intelligent Investor” by Ben Graham. However, to most readers that book feels somewhat outdated and rather austere.

In early 2017, I read a favourable review of this book in the Financial Times. While I did not feel any personal need to read the book, I decided to get it to see if it lived up to its description.

If it did, it might replace “The Intelligent Investor” as my standard recommendation for a new investor to read. It did.

The author

Jon Kay is an economist whose articles I have read for many years. As well as a Wikipedia biography, he also has a personal website. Accordingly, I will not repeat what is written there.

Overview of the book

The book comprises just 269 pages + 19 pages of Glossary, Bookshelves and Bookmarks, and Bibliography.

I have reproduced the table of contents below as the easiest way of giving an overall view of what the book is about.

1: SENSE AND THE CITY

Can you be your own investment manager?

From gentlemen to players

2: BASICS OF INVESTMENT

Before you begin

Review financial risks outside your investment portfolio

Investment choices

Realistic expectations through conventional investment strategies

Table 1: Distribution of assets by long-horizon funds, 2015
Table 2: Average returns to retail investors, 1995 – 2015
Table 3: Performance of UK retail funds 2005 – 2015

3: INVESTMENT OPTIONS

Sense about shares

Basics of bonds

Pillars of property

Facts about funds

4: EFFICIENT MARKETS

Efficient markets and asset values

Illuminating but not true

Information asymmetry

Strategic trading, moral hazard and market manipulation

Investment strategies for imperfectly efficient markets

5: THE MIND OF THE MARKET

Market psychology

When the market loses its mind

The power of conventional thinking

6: IN SEARCH OF FUNDAMENTAL VALUE

Accounting for earnings

Table 4: CAPE (Cyclically Adjusted Price: Earnings) ratio in different equity markets (July 2015)

Creative accounting

Cash is king

Fundamental analysis

Competitive advantage

7: RISK AND REWARD

Risk and uncertainty

Subjective expected utility

Think probabilities

Comparing distributions

Table 5: The cumulative frequency distribution from tossing a coin

My ship came in

Diminishing marginal utility

Mind your portfolio

Table 6: Value of alternative portfolios depending on the fate of the shipbuilding nationalisation bill of 1976

The capital asset pricing model

8: A WORLD OF UNKNOWNS

Unknown unknowns

Narratives and patterns

Mirages, systems and hot hands

Table 7: Percentage of funds in each performance quintile, 2004 – 2009, with above-median performance in 2009 – 2014
Table 8: Percentage of funds in each performance quintile, 2004 – 2009, surviving to 2014

Models and their limits

Forecasts and their limits

Approaches to risk

9: MODERN DEVELOPMENTS IN FINANCIAL MARKETS

Derivatives

When bonds were no longer boring

Alternative assets

Structured products

10: THE CONVENTIONAL INVESTOR

Establish your portfolio

Table 9: Save now, spend later

Pay less

Table 10: Available UK retail investment funds, at end-2015
Table 11: Relative performance of UK retail investment funds, 2005 – 2015
Table 12: Relative performance of UK retail investment funds in non-UK asset categories, 2005 – 2015
Table 13: Percentage of sterling-denominated open-ended funds outperforming relevant index (at December 2015)

The conventional investor’s portfolio

11: THE INTELLIGENT INVESTOR’S STRATEGY

Developing a strategy

Reviewing your goals

Diversification is the key to managing risk

The illusory security of cash and bonds

Contrary thinking

Market timing

Asset allocation

12: INTELLIGENT INVESTMENT

Diversify

Fund selection

Property

Stock picking

Stock selection

14: THE CUSTOMERS’ YACHTS

Why the book matters

Very simply, this is the best introductory book on investment that I know.

A little while after I read it, I lent it to my son-in-law who is a university graduate but who does not have a financial background. He found it illuminating. More recently, I have bought a copy for my younger daughter but am not aware whether she has read it yet.

In July 2020 I created “My short reading list on investing” to recommend just five books about investing, as well as explaining on that page why everyone needs to take an interest in the subject.

I put this book into the list, obviously in first place as the book that I recommended everyone to begin with.

If you care about your long-term finances and are not already an experienced investor, you should read it. Indeed, even if you are already experienced, you should read it to benchmark what it says against your personal practices to consider whether any changes are warranted.