By JLP | November 5, 2007
A couple of weeks ago I hosted a giveway of several copies of Larry Swedroe’s Wise Investing Made Simple (Affiliate Link). Now I’m finally getting around to actually reviewing the book.
First off let me say that I like the way this book was written. Larry used short “tales” in order to make his point, which I thought was a nice touch compared to so many other investing books that are written in text book style. This book was refreshing to read from that perspective. I also found the book fairly easy to understand, which means most people can read it and get something out of it, no matter what their investing knowledge is.
Basically, the entire book can be reduced down to this idea:
Passive investing has been proven to be the best way to invest and active investing (trying to beat the market) is a waste of time.
It’s important to note that as a prinicpal and the director of research for the Buckingham Family of Financial Services, Larry’s bread and butter is passive management so I wouldn’t expect him to write about how great value investing is.
For the most part I agree with what Larry has to say. I think indexing, which is another word for passive investing, should be the core of any investor’s portfolio. Indexing done right is both simple and cost effective. That said, I’m not exactly ready to say that one can’t beat the market. I’m just not sold on this whole idea that the market is so efficient that investors can’t find stocks that are mispriced. Yes, the market is efficient with all available information but it leaves out future information. In other words, a stock may be down right now because it has problems with its business model. But, that doesn’t mean it will be down forever. Investors who have the desire to and are able to find such stocks (I’m not saying it’s easy to do) and invest in them at the right price can outperform the market.
I do agree with Larry that it is hard to outperform the market with mutual funds. Why? Because any mutual fund that performs well gets lots of attention from magazines and CNBC. This attention brings an influx of investor cash wanting to get a piece of the action. Once the new money comes in, the mutual fund manager must find a place to put it. If there’s not an attractive place to put the money, it will eaither sit in cash or be invested in less-than-desirable alternatives which will drag down returns. The worst thing that can happen to shareholders in a mutual fund that is outperforming the market is media attention.
One thing that bugged me about the book was the chapters titled “Stocks for the Long Run” and “Buy What You Know.” Both of these chapters attacked (for lack of a better word) the work of Jeremy Siegel and Peter Lynch, authors of two of my favorite books! LOL! In the chapter titled “Stocks for the Long Run,” Larry stated that stocks are risky no matter how long your time-frame is, which basically refutes the entire point of Siegel’s Stocks for the Long Run (Affiliate Link). Regarding Siegel’s book, Larry says at the bottom of page 75:
The problem with the advice you got from that book was that its advice relied on a limited sample – the history of U.S. stocks for a relatively short period. The sample was also biased in tha tit looked only at the returns from a winner. And there was never any guarantee that th efuture for U. S. Stocks would look like the past – that U. S. stocks would continue to provide great returns.
I’m not quite sure what Larry means by “relatively short period” because Siegel’s book looks at returns going all the way back to 1802. That seems pretty long-term to me.
In the chapter, “Buy What You Know,” Larry gives some hypotheticals of people using Peter Lynch’s “buy what you know” approach to investing, which is laid out in One Up on Wall Street (Affiliate Link), one of the very first books I read on investing. Naturally all of the hypotheticals show the investor’s due diligence as coming up short, which again makes the case for passive management that much stronger. It’s been a long time since I read Lynch’s book but I’m pretty sure there was more to his strategy than just buying what you know.
Despite some of my disagreements with some of Larry’s thoughts, I do like this book and I would recommend it for EVERYONE to read. I think most people would be better served by taking the passive management route to building wealth. I wish more and more 401(k) plans would use low-cost index funds rather than the high-cost actively-mangaged funds that they offer. Maybe employees should send a copy of Wise Investing Made Simple (Affiliate Link) to the person in charge of their 401(k) plan.