The money myth: a classic introduction to the modern world of finance and investing

273 Pages·2012·5.047 MB·English

by  Davidson, Alexander

14.1 CMYK
Alexander Davidson is a senior editor ‘For those who wonder where the financial system is taking us but T ‘A must-read counterblast to the investment industry’s marketing We all know that money is important:
H
for Thomson Reuters GRC, where cannot resist the temptation to get involved themselves, Alexander E millions. It gives invaluable City insider knowledge.’ the world could not function without
he specialises in financial services Davidson’s book takes the reader on an invigorating romp of M Tony Levene, personal investment author and journalist it. Yet at the same time we all have a
regulation and compliance. He is author markets and the whole panorama of the financial status quo.’ blind faith in the money myth. This myth
of many financial books, including three Gavin Oldham, Chief Executive, The Share Centre O tells us that you can trust a company,
acclaimed Times newspaper guides to THE a stockbroker, the regulator and the
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how the financial markets work. Before ‘An informed guide for the not-yet-fully-seasoned investor.’ claims of ethical standards. The City and
becoming a journalist he was a City share Jane Wilson, CEO, Chartered Institute of Public Relations E MONEY MYTH its institutions encourage us to tolerate
dealer, until publication of his bestselling Y investment risk and conflict of interests
‘Succinct, up to the minute, and well focused on the current
first book, The City Share Pushers, which and to have confidence in the dream that

market and the issues which trouble everyone in the market,
was subject of a Channel 4 documentary. M you’ll get back more than you’ve paid in.
including investors.’
He is a well known commentator on
Joanna Page, Partner, Litigation, Allen & Overy Y
financial markets. The Money Myth will help you understand
T the markets as they really are. Delivering
‘This wise little book takes the reader on a journey into the
H you from the murky shadows of the
mysterious caves of finance and investment, to discover the
financial industry, it gives you timeless
monsters and puppeteers who control the market.’
investment wisdom.
Catherine Osborne, Professor of Philosophy at the
University of East Anglia
Above all, The Money Myth will show you
how to survive as an investor.
Financial markets use persuasion, propaganda and salesmanship
to survive. They smooth over weaknesses and highlight their
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strengths to seduce us into parting with our money. Investment
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products wrapped in euphemism and sold with hyperbole will E
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often hide complexity and unclear risk. A
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A Classic Introduction
D
As an investor, you can’t hope to change what goes on behind
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the scenes, but you can learn how to ask the right questions and R

see through the sales jargon. The Money Myth shows you how D
to the Modern World of
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to take control of your investments.
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FINANCE/INVESTING S
O Finance and Investing
ISBN 978-0-273-75520-3
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Visit our website at 9 780273 755203
www.pearson-books.com
Jacket design by Two Associates
Jacket images: Shutterstock ALEXANDER DAVIDSON Visit our website at
www.pearson-books.com
CVR_MONEYMYTHS_55203_CVR.indd 1 05/03/2012 11:15
‘A must-read counterblast to the investment industry’s marketing millions.
It gives invaluable City insider knowledge.’
Tony Levene, personal investment author, journalist and scambuster
‘Alexander Davidson acts an informed guide for the not-yet-fully-seasoned
investor. In a wide ranging exploration of the factors that drive share-
holder value, he shines his torch beyond company financial results to look
at reputation, risk and most of all the interdependent relationships of those
working within the square mile and its supporting industries.’
Jane Wilson, Chief Executive Officer,
Chartered Institute of Public Relations
‘Ideal bedtime reading for the novice investor, this book demystifies the jargon
of financial markets, alerts the neophyte to the many pitfalls and honeytraps
and debunks many of the best-known myths about how to make money.’
Professor Laurence Copeland, Cardiff Business School
‘This wise little book takes the reader on a journey into the mysterious
caves of finance and investment, to discover the monsters and puppeteers
who control the market and either make our money or lose it for us. By
linking the current field of financial markets with the age old myths and
philosophy of classical antiquity, Davidson helps us to see perennial patterns
in human society, the opportunities for greed and manipulation, and the
ways in which we in our small boats sail past hazards that tempt us on every
side. These timeless truths are put to good use in charting the specific terri-
tory of the current financial seas.’
Catherine Osborne, Professor of Philosophy, University of East Anglia
‘It takes confidence to take on the market and put your money where
your mouth is. And as The Money Myth makes clear, it is human emotions
such as confidence that will in large part determine your fate. This book is
engaging and well written, covering the basics of investing as well as some
fascinating perspectives on the City.’
Anthony J. Evans, Associate Professor of Economics,
ESCP Europe Business School
‘I was delighted to read a business book which highlights the critical impor-
tance of risk management and the value of effective insurance. Airmic
research shows that risk is an essential board agenda item and many of the
most dramatic corporate failures over the last decade have been evidenced
by poor risk oversight by the board. The Money Myth provides excellent
insights into many of these essential management disciplines.’
John Hurrell, CEO, Airmic
‘This shrewd handbook reveals how regulation and compliance, among
other things, can drive share prices as well as City behaviour, and how you
should take account of such factors as an investor.’
Joanna Page, partner, head of the corporate and
commercial litigation group, Allen & Overy
‘Alexander Davidson opens his new book with a “Wealth Warning” but
at least there is no call to issue a health warning – this is no rogue trad-
er’s manifesto but a soberly argued guide to the labyrinthine maze that is
today’s globalised world of investment opportunities. His text is moreover
enlivened and enlightened unusually by references to Classical myths, such
as that of Er at the end of Plato’s Republic. These are not mere window-
dressing. His occasional use of ancient mythology is intended to illuminate
the workings of human nature, as expressed in financial markets.’
Paul Cartledge, A.G. Leventis Professor of Greek Culture, Cambridge
University, and Honorary PhD (Economics), University of Thessaly, Greece
‘Recent history has shown us how easily reputations can be damaged.
Technological advancement poses enormous opportunity for growth but
also introduces reputational risks. It was great to see Alexander Davidson
cover these important dimensions and his book will help investors who
want to understand the potential impact of risk management practices, for
better and for worse, on their shares and other savings.’
Ryan Rubin, UK security and privacy director, Protiviti
‘There is plenty for private investors to ponder over in this punchy and
easy-to-read book. Alexander Davidson is forthright in his opinions and his
analysis is sound. You don’t need to be a classics scholar – in fact, you don’t
need to know much about investing to gain a stack of knowledge from this
insight. I welcome any book that helps to demystify the stock market and
encourages the public to gain a share of the wealth that the City offers.’
Rodney Hobson, financial journalist and author
‘For those who wonder where the financial system is taking us but cannot
resist the temptation to get involved themselves, Alexander Davidson’s book
takes the reader on an invigorating romp of markets and the whole panorama
of the financial status quo. Woven throughout is the imagery of Greek mythol-
ogy which also bears much of the same characteristics of moths being drawn
into flames, but the Greeks were not – and indeed are not – so fortunate as
British investors in that the latter now have Alexander Davidson as a guide.’
Gavin Oldham, Chief Executive, The Share Centre
The Money Myth
A classic introduction to the modern world of
finance and investing
Alexander Davidson
PEARSON EDUCATION LIMITED
Edinburgh Gate
Harlow CM20 2JE
Tel: [phone]
Fax: [phone]
Website: www.pearson.com/uk
First published in Great Britain in 2012
© Alexander Davidson 2012
The right of Alexander Davidson to be identified as author of this work has been asserted
by him in accordance with the Copyright, Designs and Patents Act 1988.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-75520-3
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Publication Data
Davidson, Alexander, 1957–
The money myth : a classic introduction to the modern world of finance and investing /
Alexander Davidson.
p. cm.
Includes index.
ISBN 978-0-273-75520-3 (limp)
1. Investments. 2. Finance. I. Title.
HG4521.D129 2012
332--dc23
2012002451
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise, without either the prior written permission of the
publisher or a licence permitting restricted copying in the United Kingdom issued by the
Copyright Licensing Agency Ltd, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
This book may not be lent, resold, hired out or otherwise disposed of by way of trade in
any form of binding or cover other than that in which it is published, without the prior
consent of the publisher.
All trademarks used herein are the property of their respective owners. The use of any
trademark in this text does not vest in the author or publisher any trademark ownership
rights in such trademarks, nor does the use of such trademarks imply any affiliation with
or endorsement of this book by such owners.
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12
Typeset in 10pt Galliard by 30
Printed and bound in Great Britain by Ashford Colour Press Ltd, Gosport, Hants
Contents
Dedication vii
Acknowledgements ix
Introduction 1
Part One The investor’s journey 7
Chapter 1 The rational stock market investor 9
Chapter 2 Magic numbers 21
Chapter 3 Safe havens 31
Chapter 4 Charm trap 37
Part Two Trading to win 47
Chapter 5 The disciplined share trader 49
Chapter 6 Bear market toolkit 59
Chapter 7 Charting dreams 67
Chapter 8 Technical indicator secrets 83
Part Three The professionals at work 91
Chapter 9 Investment banking power 93
Chapter 10 The super traders 101
Chapter 11 Derivatives chaos 107
Chapter 12 Currency markets miasma 113
Part Four Your money 119
Chapter 13 Bank tricks 121
Chapter 14 Collective investments unmasked 131
Chapter 15 Pensions crisis 141
Part Five Safety first 151
Chapter 16 Insurance comfort 153
Chapter 17 Risks without frontiers 163
Chapter 18 The price of reputation 171
Chapter 19 Blow-up 179
vi Contents
Part Six Rules or ruin 187
Chapter 20 Decline and fall 189
Chapter 21 New rules, new City 195
Chapter 22 Face-lift for the Old Lady 201
Chapter 23 Corporate heartbeat 207
Part Seven Behind the façade 215
Chapter 24 The day of the whistle-blower 217
Chapter 25 Media manoeuvres 221
Chapter 26 The power of perception 229
A final word 237
Appendix 1 Twelve wake-up investment rules 239
Appendix 2 Twelve regulatory trends 243
Appendix 3 Investment software checklist 245
Appendix 4 Useful web sites 247
Appendix 5 Further resources 253
Index 255
Dedication
I am dedicating this small book to a group that had a major impact on
me, and which inspired me, even many years later, to use classical mythol-
ogy to explain financial markets. This is the classics department at St
Benedict’s School, Ealing, 1972–76, its teachers, Denis Costello, the late
Gill Harrison, Andy Hardman, Basil Nickerson and Vaughan Irons, and my
fellow sixth-form pupils, Derek Barretto, Simon Kolka, and Anthony Agius.
Wealth warning
You will find in this book my experience of financial markets. The views
expressed are entirely my own and do not necessarily coincide with those
of any parties for whom I work or have worked. The text is for educational
purposes only. Do not use it as a definitive source. Above all, this book is
no substitute for investment advice. Some of the coverage in the book will
date, but the essential truths remain the same.

Acknowledgements
My thanks to the Association of Investment Companies for some help
on understanding some finer points on its industry. I am obliged to
ShareScope for providing, at my request, some of its excellent charts for this
book. May I also offer thanks to Denis Peters, director, corporate commu-
nications, at Euroclear, for helping on the section in Chapter 10 concerning
back office infrastructure. I am grateful to Professor Catherine Osborne
at the University of East Anglia for giving me some useful perspectives on
relevant ancient philosophy, which have helped to inform various parts of
this book, but were particularly useful for Chapters 19, 25 and 26. I would
like to thank Chris Cudmore, my editor at FT Pearson, for giving me the
chance to write this book on a subject important to me. Last but not least,
I thank Aigulia, my wife, and Acelia, my daughter, for maintaining the
home while I was busy on this latest project.
Alexander Davidson
Abbreviations
When I use the name of an organisation for the first time in a chapter, I spell
it out in full. Subsequently, I usually abbreviate it. For example, you will find
the Financial Services Authority referred to subsequently as the FSA.