Comments on: A Review of “Wise Investing Made Simple” by Larry Swedroe http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/ A personal finance blog dedicated to discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance. Sat, 21 Nov 2009 13:00:57 -0800 http://wordpress.org/?v=abc hourly 1 By: ken http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-247327 ken Fri, 07 Mar 2008 06:56:35 +0000 http://allfinancialmatters.com/?p=2115#comment-247327 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. 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.

]]> By: Wise Investing Made Simple (Book Review) | On Financial Success http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-232651 Wise Investing Made Simple (Book Review) | On Financial Success Tue, 12 Feb 2008 17:29:50 +0000 http://allfinancialmatters.com/?p=2115#comment-232651 [...] Many thanks to JLP @ All Financial Matters who provided the book via a drawing. [...] [...] Many thanks to JLP @ All Financial Matters who provided the book via a drawing. [...]

]]> By: mab http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-166686 mab Tue, 06 Nov 2007 18:21:34 +0000 http://allfinancialmatters.com/?p=2115#comment-166686 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! 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!

]]> By: Andy http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-166440 Andy Tue, 06 Nov 2007 03:49:12 +0000 http://allfinancialmatters.com/?p=2115#comment-166440 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. 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.

]]> By: Aaron http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-166404 Aaron Tue, 06 Nov 2007 01:39:39 +0000 http://allfinancialmatters.com/?p=2115#comment-166404 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. 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.

]]> By: Dylan http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-166374 Dylan Mon, 05 Nov 2007 23:52:46 +0000 http://allfinancialmatters.com/?p=2115#comment-166374 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. 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.

]]> By: Chief Family Officer http://allfinancialmatters.com/2007/11/05/a-review-of-wise-investing-made-simple-by-larry-swedroe/comment-page-1/#comment-166278 Chief Family Officer Mon, 05 Nov 2007 17:59:18 +0000 http://allfinancialmatters.com/?p=2115#comment-166278 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. 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.

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