Copyright © 2018 by Bradford Cornell. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data
Names: Cornell, Bradford, author. | Cornell, Shaun, 1979– author. | Cornell, Andrew, 1981– author.
Title: The conceptual foundations of investing : a short book of need-to-know essentials / Bradford Cornell, Shaun Cornell, Andrew Cornell.
Description: First Edition. | Hoboken : Wiley, 2018. | Includes index. |
Identifiers: LCCN 2018021871 (print) | LCCN 2018025246 (ebook) | ISBN 9781119516323 (Adobe PDF) | ISBN 9781119516316 (ePub) | ISBN 9781119516293 (hardback)
Subjects: LCSH: Investments. | Finance, Personal. | BISAC: BUSINESS & ECONOMICS / Finance.
Classification: LCC HG4521 (ebook) | LCC HG4521 .C6597 2018 (print) | DDC 332.6—dc23
LC record available at https://lccn.loc.gov/2018021871
Cover Design: Wiley
Cover Image: © Lava 4 images/Shutterstock
In the years following the development of the capital asset pricing model in 1964, research in finance has revolutionized the understanding of financial markets. The problem is that much of the research that produced that revolution is highly technical and mathematical, making it difficult for investors who are not experts to grasp the conceptual foundations on which the modern understanding of investing is based.
This book is designed to fill that gap. Its goal is to provide an understanding of the conceptual foundations of modern investment theory with a minimum of technical detail. For those interested in the more technical nuances, there are an excellent variety of textbooks used in business school classes worldwide from which to choose.
At the outset, it is important to recognize that the conceptual foundations to which we refer are not a series of tips for how to beat the market. In fact, one of the foundations, which we explain in detail, is that there can be no set of rules analogous to “Newton's laws” for beating the market. Ironically, Newton himself lost a fortune in the South Sea Bubble, leading him to state, “he could calculate the motions of the heavenly bodies, but not the madness of the people.” What the foundations do is help you understand how investment markets function and how to avoid a wide variety of mistakes that less sophisticated investors commonly make.
The book is also designed to help investors ask the right questions about investing. In a sense, it can be thought of as a self-protection manual. Because there are tens of trillions of dollars invested worldwide, there are immense incentives to profit by gaining control over those funds, earning fees by managing those funds, and charging commissions for transactions involving those funds. The desire to reach and influence investors supports a huge financial media – some of it reputable and some of it not. In addition, there is massive amount of investment marketing. In our view, to cope with this information avalanche, investors must understand the conceptual foundations of investing with sufficient clarity to ensure that they will not be misled. This book is designed to provide that clarity.
A word of warning. While we avoid the complex mathematics that characterizes much of modern finance, understanding the conceptual foundations of investing does require getting your hands dirty working with investment data in spreadsheets. To help the reader in that regard, the spreadsheets that contain all the data in the exhibits presented in the book are available at www.wiley.com/go/CornellCFOI (Password: CFI). In addition, it is impossible to avoid a few equations and mathematical concepts. We hope that our explanations help those who are not mathematically inclined through those parts of the book.
Many investors may say that they do not need a personal understanding of the conceptual foundations of investing because they rely on investment advisors. Such reliance just pushes the questions back one step. How do you choose an investment advisor? How do you determine whether the advisor is giving you appropriate advice? How do you evaluate whether the advisory costs are reasonable? Answering such questions requires an understanding of the conceptual foundations of investing.