Use Caution with Classical Investment Books – A Tip from The Skilled Investor
Individual investors should exercise caution when applying the tactics of classical investment books to current markets. The more handcrafted, seat-of-the-pants, and individual actor approach to the securities markets in the pre-computer, pre-networking era has given way to different practices. What might have worked then may not work now. Do not to confuse valid investment principles with the tactics that were used to implement them in the past.
Securities markets and the financial services industry have changed dramatically in the past several decades. The markets and the industry have been transformed by:
real-time global trading
huge trading volume,
pervasive computer and networking infrastructure,
increased professionalism and an influx of technocrats,
proliferation of investment vehicles,
extremely rapid information dispersion,
automated market data analysis,
sophisticated computerized risk modeling,
invention of derivative securities, and
numerous other factors.
Many classical investment books from the more distant past have been republished and some have retained a significant following. Classical books, such as “Common Stocks and Uncommon Profits” by Philip A. Fisher and “Securities Analysis: Principles and Techniques” by Benjamin Graham and David L. Dodd, to list just two, remain interesting and instructive. However, these authors were writing in a time when the markets were quite different.
For example, scientific finance studies have verified that the value-based investment focus of Graham and Dodd remains valid in modern times. Well-constructed statistical studies indicate that on average over long periods, the markets do seem to provide better total returns to a value-based approach. The importance of value-based investing has been incorporated into investment theory. For example, the multi-factor market return models of scientific investment studies now incorporate a value-versus-growth factor.
While there is truth behind Graham and Dodd’s value-based approach, it is doubtful whether individual investors on their own can now profitably implement tactics that might have worked in the past. It is doubtful whether an individual who diligently analyzes stocks and self-manages his portfolio will obtain superior returns over the long run, when compared to a passive index fund strategy that has a skew toward value investing. Implementing a value strategy through very low-cost mutual funds and exchange-traded funds or ETFs is just more efficient.
Amateurs tend to do a very poor job of building diversified portfolios, and they incur higher investment costs in the process. Furthermore, portfolio self-assembly requires a very large personal time commitment and the opportunity cost of one’s time adds to costs. Compared to the “olden days,” the current securities market environment strongly favors investments by individual investors that are made through low cost mutual funds and ETFs, rather than through direct investments in individual equities.
For information on how poorly individual investors tend to do at portfolio management, see this article: “What is the cost to individual investors of sub-optimal portfolio diversification?”
For articles that will help you understand the requirements of personal portfolio diversification, see these articles: “Diversify Assets” (12 articles)
For articles on the opportunity cost of your personal time spent on investing activities, see these articles: “Personal Efficiency” (4 articles)
For articles on historical market returns and risk premiums, see these articles: “Returns and Risk Premiums” (10 articles)
Personal Financial Planning
- Roth IRA Contributions Versus Traditional IRA Contributions for Renters (Introduction: Roth IRA Contributions versus Traditional IRA Contributions for Renters
In a series of articles, The Skilled Investor compares different lifetime financial planning projections for Fran and Fred Frugal to illustrate the relative value of adopting different financial planning strategies. Fran and Fred, both ages 30, are a married working couple with $100,000 in combined annual [...])
- State Street Global Advisors S&P 500 Index Fund (SVSPX) wins the Best +10 Fund Authority Score (The table below in this article presents The Skilled Investor's Fund Authority Score and other information for the SSgA S & P 500 Index Fund (SVSPX). The Skilled Investor has also published an article about lower cost S&P 500 index mutual funds that you can read, which is entitled: Low Cost S&P 500 Index Mutual [...])
- Fund Authority Scores for Stock ETFs and Mutual Funds – Historical investment performance (
Fund Authority Scores rate stock mutual funds and ETFs on the most important economic factors affecting long term diversified equity investment fund performance. This article explains how historical fund performance is calculated.
<<-- Go to Part 1
Go to Part 3 -->>
Part 1 of this article discussed direct and hidden investment costs, the most heavily weighted factors [...])
- 2006 and 2007 Personal Income Tax Rates for the 50 States and DC (
2006 and 2007 personal income tax rates for the 50 states and D.C.
The Skilled Investor has made available for downloading a spreadsheet that contains graduated personal income tax rates and other personal income tax rate information for the 50 states and the District of Columbia.
If you want to know about specific U.S. state personal graduated [...])
- 22 Ways to Avoid Financial Advisor and Investment Counselor Frauds and Scams (Avoiding financial advisor and investment counselor frauds and scams - Overview
The best way to avoid being defrauded or scammed by a financial or investment advisor is to investigate carefully several different advisers before hiring one of them.
If you carefully choose a financial adviser or investment counselor, you have a far greater chance of finding one [...])
- Efficient Market Pricing in the Investment Securities Markets (
Efficient market pricing is the theory that all known information is already reflected in current securities prices.
Efficient securities market pricing has become very widely accepted within the investment community. The preponderance of evidence is that securities markets are efficient and tend to reflect available information. Whether you believe markets are efficient is very important to [...])
- Understand Your Projected Expenses Over Your Lifetime (Do-It-Yourself Financial Planning - Understand your projected expenses over your lifetime
Increased savings through conscious expenditure reduction is the largest and most controllable factor in long-term personal finance success.
Anyone interested in improving personal financial planning must understand that tracking expenses accurately and comprehensively is very important. Exactly how your expenses are tracked is not so important, [...])
- Default under the Citibank Credit Card Contract (PIRATES OF THE CREDIT SEA - Part 6: Default under the Citibank credit card contract
This final article in this series discusses the seven conditions of default under the Citibank / ATT Universal card agreement.
It also expresses my opinions about contractual relationships in general and about the Citibank / AT&T Universal credit card contract in particular.
- The Value and Opportunity Cost of Your Personal Investment Management Time (
Your time is valuable, and it should be included in calculations about your investment returns.
Whether you add or subtract value from your assets when you spend time on investment activities should also be evaluated. Some investors spend significant time on the wrong strategies. Instead of adding value, their efforts reduce their investment portfolio performance and [...])
- Pay Lower Investment Expenses To Get Higher Investment Returns (
Pay Lower Investment Expenses To Get Higher Investment Returns - Part 1
Excessive investment costs are a plague on your personal financial planning.
Excessive investment expenses are one of the most significant barriers to lifelong family financial security. While financial services industry sales people tell you that you need to pay more to get more, the correct [...])
- Determine the Savings You Need for Your Lifetime Financial Goals (You cannot invest without savings. How much savings are enough? ... too little? ... too much?
Currently, the U.S. is experiencing a savings crisis. The net personal savings rate is zero or slightly negative, despite a healthy and growing economy. This situation is a prescription for millions upon millions of future personal financial disasters. (See: [...])
- Choose Lower Mutual Fund and ETF Management Fees (Choose mutual funds and ETFs with MUCH LOWER investment management expenses
Investment fund management fees can only be justified by individual investors, if higher net returns more than compensate for these fees. Sadly, this is most often not the case with actively managed equity and bond mutual funds and exchange-traded funds (ETFs). In addition, you have [...])
- Fidelity Contrafund (FCNTX) gains a +5 Fund Authority Score (
The diversified investment fund strategy of the Fidelity Contrafund (FCNTX)
According to its prospectus filing on the U.S. Securities and Exchange Commission EDGAR system, the investment strategy of the Fidelity Contrafund is to invest primarily in common stocks and particularly in the "securities of companies whose value Fidelity Management & Research Company believes is not fully [...])
- I Write to the President of CitiBank Customer Service (PIRATES OF THE CREDIT SEA -- Part 5: I write to the President of CitiBank Customer Service
My saga to recover my credit card treasure continues. Previous articles have covered the particulars of my situation, and I will not repeat them.
In summary, for fifteen years I have always done my best to conform to my AT&T [...])
- Nationwide S&P 500 Index Fund – Class A Shares (GRMAX) fetch a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])