09-04-2025
- Business
- Wall Street Journal
‘The Humble Investor' and ‘How Not to Invest': Money Matters
Three decades ago, several academic economists recognized that finance isn't physics and its questions can't be answered with an equation, no matter how many esoteric inputs are involved. Since then, we've begun to accept that finance is about what fallible human beings should and shouldn't do with their money. What to do and what not to do—what else is there to know? At times like these, with the S&P 500 flirting with bear-market territory, how you answer these questions can make a big difference.
Daniel Rasmussen's 'The Humble Investor: How to Find a Winning Edge in a Surprising World' begins with a thoughtful bit of time travel back to when economists were certain they had figured out how to precisely value stocks, only to have markets prove them embarrassingly wrong. Mr. Rasmussen suggests that investing is not a game of analysis but rather of meta-analysis: 'It doesn't matter what you think; it matters what you think relative to what everyone else in the market thinks.' Studying how other people think about markets, he argues, can give us an edge.
Mr. Rasmussen runs a hedge fund and writes in an understandable and unadorned way, with the occasional exception when his quantitative approach requires dense detail. He starts out by describing the first efforts to rigorously determine the value—not only the price—of stocks. He explains how the Depression-era dividend-discount model, for example, promised precision but failed because the inputs were subjective.
Successive financial frameworks such as modern portfolio theory and the capital-asset pricing model have advanced the field, yet all fail on some level because none properly accounts for the human factor. Mr. Rasmussen focuses on this aspect. He counsels against overconfidence—in the valuation of a stock or in our own behavioral foibles—and argues that we can 'turn humility about our own abilities into an edge in markets.'
