[Wise Investing Made Simple - Larry E.Swedroe]
I am putting what I understand from this book, by picking up meaningful sentences and restructuring it accordingly. I don't know if I am putting too many sentences here, but it's a good book that worths your time, so go borrow or buy and read it.
I drafted my originial summary last October accordingly to Chapters.
This book is pretty easy to read with good analogies.The author has strong belief in "passive investing by building a globally diversified portfolio". He builds his arguments around two central themes:
1. Efficient Market Hypothesis (EMH)
- Efficient market is a market in which trading systems fail to produce excess return and it is difficult to persistently exploit mispricings. Everything currently knowable is already incorporated into prices.
- Even the market is not perfectly efficient, it's close to. It is not impossible to uncover mispricings (incremental insight), but cost of efforts are likely to exceed the benefits.
- Successful trading strategies self-destruct because they are self-limiting
2. Risk and expected return should be positively related
- Value stocks are stocks of risky companies, hence it provide large and persistent premium over growth stocks to compensate the risk.
- High price reflects low perceived risk, and thus low future returns should be expected.
From these, he thinks that
- Active investing is loser's game. The odds of success by competing against the collective wisdom of the market are so low that it is imprudent to try. Of course there are survivors, but is it by skills or by chance? It's purely random. Outstanding performance does not persist. As an evidence, the top list of funds or top fund managers are different each time. Will you believe that there are coin-tossing gurus?
- Active investing is myth created by Wall Street because broker earns no matter you win or lose. Brokers make the overall game a negative sum game. They made active investing exciting but investing, however, was never meant to be exciting. It is meant to be about providing you the greatest odds of achieving your financial goals with he least amount of risk.
- Most market forecasts are based on economic forecasts and economists' forecasting skill is about as good as guessing. Investors should treat economic and market forecasts by so-called "experts" (gurus) as investment graffiti - the only value they have is as perhaps entertainment. And "You make more money selling the advice than following it." [Counter? Isn't him one of them?]
He also debunk the following myths:
a) Stocks in the long run will surely earn - Stocks are risky no matter the length of investment horizon. And that's exactly why its returns are high. [Counter? It is not about how long or how short, it is about timing. But then again, how do you know?]
b) Buy what you know - Familiarity breeds investment by creating an illusion of safety. People over confidently confuse familiarity with knowledge.
c) Buy what everyone knows - Mistake of confusing information with knowledge that you could use to generate above market returns. Trends tell little about future profits. Demand may rise but market can be over-supplied.
Whether you believe in passive investing or not, two important advices are:
* There is nothing new in investing, only the investment history you don't know.
* Never treat the highly unlikely as impossible.
Great examples are:
# The Nikkei index hit 40,000 in 1989 and now it's below 10,000.
{Fueled by low-interest mortgages, real estate prices in Japan had risen so high that by the end of the 1980s just the land under the Imperial Palace in Tokyo was nominally worth more than all the real estate in California. Then, in late 1989, the bubble burst and real estate prices plummeted, leaving Japan's financial institutions saddled with toxic mortgages and facing bankruptcy.}
Read more.
# In 1900 the Egyptian stock market was one of the largest in the world. Now it's no where. {It was public knowledge that when lumped together, the Cairo and Alexandria Bourses rated among the world's top five Stock Exchanges. Egypt's economy was at an all-time high and the number of companies traded in the Cairo Bourse alone had reached 228 with a combined capital of 91 million pounds.
But like the swing of a pendulum, the high state of euphoria disappeared overnight. Prudence having given way to high-risk speculation, what had started out with a real estate boom in Egypt, ended in what became known in the annals of speculative history as the Crash of 1907.
Some historians concede that the money panic of 1907 started in Alexandria, Egypt, with the failure in July of a large bank - Cassa di Sconto. Japan was hit next, then Germany, then Chile. By October, the fallout reached Europe and the United States. In Egypt, the overextended banks folded up one after the other. }
