Use the News and Lose: Survivor Bias and the Worst Books of All Time

We all love a winner!  It is so natural to admire those who have been the best at what they do.  It is the essence of celebrity, and it is fun.

As the basis for investing, admiring the recent winners is fraught with peril.

Background

I enjoy reading the work of Geoffrey James.  In my own business we spend most of our effort on analysis and trading and not enough on telling our story.  The James columns help us a little on that front.  So I am a regular reader and a fan.  He often uses the popular "list" formula.  Today's topic was the ten worst investment books of all time.

The article is outrageous and provocative.  How could he have read the worst books?  Why would he bother?  How would he even know about them?   Still, we are tempted to look at his list and see whether our own candidates are among the losers!

I found both irony and controversy in his list.  I am not going to argue with his top choice, Leadership Secrets of Attila the Hun, NOT added to our recommended readings.  There are a couple of other controversial entries, but here are two good lessons.

1. James includes Dow, 30,000 by 2008.  There is no analysis of the content.  Apparently it is on the list because the forecast was incorrect.  (I have not read the book, so I have no opinion on the merits).  He could have included other books calling for Dow 36000 or even Dow 40,000.  These all make me feel like a piker for my ongoing Dow 20K analysis!  Meanwhile, if the market had moved higher, would the crash books be on the "worst list" instead?  What will the "worst list" look like in ten years?
2. #3 on the list is the still-popular In Search of Excellence.  Here is James's takedown:

Why It’s On the List: Based on a study of forty-three of America’s best-run companies from a diverse array of business sectors, describes eight basic principles of management - action-stimulating, people-oriented, profit-maximizing practices - that made these organizations successful. Unfortunately, the “excellent” companies featured in the book mostly went smack down the toilet not long after it was first published.  Curiously, it’s still considered a classic, which goes to show you that P.T. Barnum was right: a sucker IS born every minute.

I objected to this book at the time of publication.  It played upon all of the behavioral economics issues, not well known at the time.  Astute readers will immediately see the parallel with my recent analysis of the Hindenburg Omen.  If you start with a known conclusion and then look for the apparent causes, your analysis cannot be refuted with the evidence then at hand.  It is a flawed approach with a popular but meaningless result.

Investment Lesson

The survivor bias is a big challenge for investors.  You do not see the results from unsuccessful mutual funds.  They are gone.

We celebrate the results of the recently-successful, perhaps being fooled by randomness.  When we start with the known result, we inaccurately infer causation.

Current examples include the investment advice of those who profited from the housing crisis.  Michael Burry, a hero in The Big Short (reviewed here), no longer accepts your investments, but is sharing his thoughts.  If you agree with him, it should be on the basis of logic and method, not because he was right about 2008.  Good luck in buying farmland with water.

What are your own nominees for the worst business books of all time?  (James includes investment books in the list).

I find a touch of irony in his list.  It involves some of the same survivor bias for which he criticizes Peters.

Whatever we think, his choice of Attila the Hun will probably stand the test of time!

Comments

[Jeff]

"Too Big to Fail" by Sorkin has to be one of the worst books ever. The guy hasn't a clue about finance and will do anything to be in the same room as those schmucks.

[Mike C]

Brett,

Can you expand on why you felt this was the "worst" book? I have not read the book yet, but I have read some of his essays and blog, and reading the book was on my to do list.

[Brett Alexander]

Anybody read "The Fourth Turning"? In my humble opinion the worst book that I have ever read that has at least a pretty significant loyal following.

[Proteus]

Here's a couple:
Collins "Good To Great", mentioned in the comments at James site. Just copy the review of "In Search of Excellence".
Masonson's "All About Market Timing" (investing). An otherwise decent book spoiled by data mining masquerading as research.
I am withholding judgment on Shilling's "Deflation" and Prechter's "Conquer the Crash" for a few more years. We shall see.

[oldprof]

Geoffrey -- Thanks for stopping and commenting. Being outrageous and provocative on occasion is very helpful:)

Jeff

[Geoffrey James]

You're right. It was a little unfair to include books that made wrong predictions. Actually, the original draft included one of my own books, for just that reason. I took it out because I'm negotiating a book deal and didn't want to raise any unnecessary questions!