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A Review of “Wise Investing Made Simple” by Larry Swedroe

By JLP | November 5, 2007

(Affiliate Link)

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.

Topics: Books, Index Funds, Investing | 8 Comments »


8 Responses to “A Review of “Wise Investing Made Simple” by Larry Swedroe”

  1. Chief Family Officer Says:
    November 5th, 2007 at 12:59 pm

    It’s been a long time since I read One up on Wall Street, too, but I recall Peter Lynch going into PE ratio and other behind-the-scenes data, which is why I’ve never tried value investing myself. Heck, if the advice had solely been buy what you know, I’d have bought shares of the stores I was buying my trendy clothes, shoes and music from back in high school and college, right after I’d read the book (hm, that would have been stores like GAP and Tower Records, guess I wouldn’t have done all that well). It’s precisely because there was a lot more to it that I never did that.

  2. Dylan Says:
    November 5th, 2007 at 6:52 pm

    People can and do beat the market, but whether it can be done deliberately is a completely different idea. Even if you believe the market to be not all that efficient, that does not change the fact that beating it is a negative-sum-game.

    Not only do you have to identify a company that is mispriced, but it must be mispriced by enough of a margin for you to capitalize on it after your costs. Even if you can do that successfully, your job is only half over. Now you have to figure out when to sell out of the position. Let’s say you did it successfully, can you do it again, and again, and again?

    In the short-term, stock prices are driven by news. News is random, and you can no more predict the news than you can predict stock prices. If you take a longer-term position in a company because you believe it to be mispriced and think you can time your exit, you should consider the consequences if you were wrong or if other knew something that you didn’t. Spending an extended amount of time overweight in a losing position can be extremely difficult to recover from in a game where the odds are already against you.

    People like to believe that if you try hard enough and work smart enough, that you can beat the market. But if everyone (the market) is doing that, they all cannot beat themselves. It’s like saying, if you study really, really hard, anyone can graduate at the top of their class; they all can’t be at the top.

  3. Aaron Says:
    November 5th, 2007 at 8:39 pm

    I don’t think an investor should be TOO passive. The buying and selling and being too active is clearly a killer to returns, but being too passive can hurt as well. An investor has to at least pay attention to his or her portfolio and make sure that the story hasn’t changed since the time they invested.

  4. Andy Says:
    November 5th, 2007 at 10:49 pm

    I looked into the source of the returns going back to 1802. Some periods have as few as FIVE stocks used to calculate returns. The entire period from 1802-1925 also has a fair amount of survivorship bias, in that the only stock returns that they looked were from successful companies. In total if you account for that then the result is that cash, bonds, and stocks all have approximately the same 5%/yr return over that period, except that stocks are obviously must more risky.

  5. mab Says:
    November 6th, 2007 at 1:21 pm

    I see a lot of people arguing against passive investing lately. They usually make arguments that rely on people like Buffet or Lynch that show you can beat the market and that the market is not efficient.

    Clearly the market is not efficient all the time, as successful value investors like Graham and Buffet have shown. But I think this misses the point somewhat. I don’t think it’s a question of market efficiency on the whole, but rather market efficiency compared with investor ability.

    I think for the majority of the investing population, the markets are much more efficient than the individual investor could ever be, and so index investing is the better option. But there will always be those who can beat the market. The trick is knowing and accepting when you are not one of them.
    Great article, JLP!

  6. Wise Investing Made Simple (Book Review) | On Financial Success Says:
    February 12th, 2008 at 11:29 am

    [...] Many thanks to JLP @ All Financial Matters who provided the book via a drawing. [...]

  7. ken Says:
    March 7th, 2008 at 12:56 am

    Even the “Buffet, Graham” arguement does not hold up. First, Ben Graham practiced financial techniques when information was not easily dispersed to the market place; 1930-1960′s. But in 1976, Ben Graham no longer believed in financial analysis as a means of determining undervalued securities. He publicly stated that index investing was better because information was more easily dispersed to the market. Second, Buffet has a series of companies that are not public and information is not distributed like a public company. Any analogy stating “Buffet proves you can do it” is an apples-to-oranges comparison. But even then he has not outperformed an all equity portfolio of DFA funds for a 5yr and 10yr period (end 2005). The Buffet under performance also came with a 50% greater standard deviation. If we were to match the the standard deviation of Berkshire w/ a DFA portfolio then Berkshire would not only lose in the 10yr period but also for a 20 yr period. Investing with any other vehicles than DFA is not wise. But then again, the rest of us benefit from those that do not.

  8. Javier Segalla Says:
    November 2nd, 2010 at 10:02 pm

    Terrific content, just what I was trying to find.

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