Finished “The Only Guide To A Winning Investment Strategy You’ll Ever Need” on Thursday. If you’re not working in a bank and you didn’t pay attention during Finance during school, you’ll appreciate this book. I wanted to have a deeper understanding of stocks, bonds, mutual funds, and all the related financial jargon. This book did the trick. I tried summing up the book a couple posts ago, but I think that Jonathan Clements does it best in the WSJ:

“The case for indexing rests on a piece of unassailable logic. Investors, as a group, cannot outperform the stock market, because together they are the market. In fact, once costs are figured in, investors collectively are destined to lag behind the market average.” (source)

Various quotes and tidbits I want to remember/record:

Re: trying to pick the top stocks/mutual funds vs. investing in an index fund: “Jonathan Clements, a columnist for the Wall Street Journal, said it best: ‘I believe the search for top-performing stock funds is an intellectually discredited exercise that will come to be viewed as one of the great financial follies of the late twenthieth century.” (pg. 38)

Re: market timing: “During the 3,541 trading days of 1980-1993, an investor who built and held a portfolio consisting of the S & P 500 would have realized annualized returns of 15.5 percent per annum. If, in an attempt to time the market, an investor missed out on just the best 10 days, the annualized return dropped to 11.9 percent. This investor, by being absent from less than 0.3 percent of the trading days, would have lost over 23% of the returns available for the entire period. If the same investor had had the misfortune of missing out on the best 40 days (or about 1 percent of the total trading days), his or her annualized returns would have dropped to 5.5 percent, a loss of almost two-thirds of the passive investor’s returns. Another way of looking at this is that the returns of the investor who missed out on just the best 40 days could have been matched by owning risk-free certificates of deposit at a local bank.” (pg. 69)

Re: volatility and average annual return: “… These two examples point out the powerful impact that volatility can have on a portfolio and the relative unimportance of ‘average annual rates of return.’ Investors can’t spend average rates of return. What should be of greatest concern to investors is the compound growth rate of an invested dollar. Next time you read an ad for a mutual fund, check to see if they are disclosing the average annual return or the compound growth rate of each invested dollar. The latter is the real gauge of a fund’s performance and the only way to compare that performance to any other’s.” (pg. 138)

check out the sample portfolios on page 160, the Asset Allocation Time Horizon Guideline on page 174, review the chapter on rebalancing and style drift (page 193).

summary in chapter 11:
” · Markets are generally highly efficient!
· While it is not impossible to outperform an efficient market, the odds of it being done, even by professionals, are very low.
· Because past performance is not a reliable predictor of future performance, it is impossible to forecast which money managers and market gurus will be the lucky few.
· The question of whether or not markets are efficient is an interesting academic question. However, the real question facing investors is whether the correct strategy is active or passive management. I’ve given clear evidence that even when market ineffciencies may exist, markets are not so inefficient that active managers can overcome the costs of their efforts and the taxes generated by their trading activity.
· With institutions now controlling a market share approaching 90% of all trading, the competition among professionals is too tough, thereby making active management nonproductive.
· Efforts to time the market are doomed to fail, because so much of the action occurs over very brief time frames.
· The use of active managers causes an investor to lose control of the asset allocation decision, the single most important determinant of the expected return and risk of a portfolio. Active managers expose investors to style drift, which can have unanticipated and nasty consequences.
· Most of what is published by trade publications and the rating services and aired by so-called financial experts is really nothing more than investment pandering. To attach anything other than entertainment value to such reports can be dangerous to your economic health. These experts are all part of the 6% solution — the loser’s game — hyped by Wall Street because it is in its best interest, not yours.” (pg 226)

Further reading:

Capital Ideas and Against the Gods by Peter Bernstein
The Portable MBA in Investing edited by Peter Bernstein
Bogle on Mutual Funds by John Bogle
Investment Policy by Charles Ellis
A Random Walk Down Wall Street by Burton Malkiel
Investment Strategies for the Twenty-first Century by Frank Armstrong (available on the internet)