Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make...

Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today | Larry E. Swedroe | Great book, great advice

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Rational Investing...

	Rational Investing in Irrational Times: How to Avoid the Costly Mistakes Even Smart People Make Today Larry E. Swedroe Truman Talley Books, 2002 - 352 pages average customer review:based on 22 reviews view larger image
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highly recommended

It's well known that the technology world is changing at a rapid pace due in part to innovations in computers, the Internet, telecommunications, and biotechnology. It is less well known that the financial world is in a far different place than it was just a few years ago as witnessed by the bursting dot.com and NASDAQ bubbles in March 2000. But even when financial markets change-especially when the change is irrational-investors need to return and hold fast to the basic principles of prudent investing.

Rational Investing in Irrational Times is a timely new handbook for every investor today. Using a question and answer format, rising star Larry Swedroe identifies the many mistakes even the smartest investors make whether markets are strong or troublesome. He attributes almost all current mistakes and losses to investors' human vulnerability (a tendency to stray from proven investment principles), a lack of investing experience, faulty investment strategies, or errors of portfolio development. Unlike most investment books, the author further shows how investment performance can be greatly improved by building a globally diversified portfolio of passive index funds and/or Exchange Traded Funds consisting of multiple asset classes. Apart from offering a winning strategy, Rational Investing in Irrational Times presents an efficient and proven way to avoid the most common (and costly) mistakes investors make.

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Asset Allocate with Index Securities

Modern portfolio theory (MPT) has an aggressive advocate in Larry E. Swedroe's RATIONAL INVESTING IN IRRATIONAL TIMES. Investors are advised to stick with index funds, tax managed funds, or exchange traded funds (ETF) and allocate across a range of asset classes. This investment strategy may be a little dull, Swedroe concedes, but his evidence for its soundness is compelling. This book is organized around 52 mistakes that investors make many of which might be avoided by adopting the author's strategy. Many of these mistakes are familiar to readers of the current crop of investment literature: Stay away from hedge funds, IPO's, market timing strategies, market gurus, yeserday's winners ("recency"), the misuse of margin, and high turnover portfolios. Recognize that many mistakes result from our own behavioral patterns including overconfidence in our skills, failing to sell our losers ("regret avoidance"), mistaking skill for luck, failing to rebalance over time to our basic plan, over-concentration in a company we think we know, etc. Much of this familiar territory. Where Swedroe distinguishes himself is in his relentless focus on a few key ideas that are logically developed and supported by recognized academic research. Financial markets are too efficient in their assimilation of new information for an active manager to consistently outperform a benchmark index. Lucky streaks are common but not proof to the contrary. News is by definition a surprise (viz., randomly occuring and unpredictable) and the evidence is strong that it is a "persistently important factor in stock performance". Active management will not anticipate the unexpected. Achieving "incremental advantage" over the market is therefore virtually impossible. Trading costs, tax issues, and the opportunity cost of having to hold cash in actively managed mutual funds are additional factors that make them structurally deficient. Separate studies by Mark Carhart and Russ Wermers support the underperformance of mutual funds relative to appropriate benchmarks. Meanwhile, the best way to reduce the portfolio risk of bad news in an uncertain world is to diversify. If your ouija board is warped, diversification might be a prudent strategy. The research of Fama and French, Ibbotson and Kaplan, and Brinson, Hood, and Beebower all reach a somewhat surprising conclusion: Far and away the most important factor in equity returns is not stock selection or timing. It is asset allocation based on market capitalization (size) and value (book to market, BtM). It is far more important to be in small cap value stocks or international growth than Industry Leader X over Competitor Y. Using indexed securities is an efficient way to deploy your assets to these broad asset categories. To be sure, Swedroe's argument for indexed securities over individual stocks and most actively managed mutual funds runs counter to an entrenched financial services establishment that is based on exclusive analyst recommendations, punditry, and televised stock news sizzle. Nonetheless every investor will profit by implementing some of the ideas in this book.

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Great book, great advice

This book contains dozens of descriptions of classic investment blunders that even experienced investors make. I found that this book is not a classic Investment How-to, but rather a list of what to watch out for, how to spot snake-oil, and how to approach investing with a balanced index fund strategy that will beat virtually all professional money managers (especially after taxes and other expenses are considered). Numerous examples, studies, and professionally backed research is used to make hard-hitting points stick and shatter many myths that abound in the financial industry. Combine this book with Larry Swedroe's other works and you have a complete set of facts to make a winning portfolio that will survive and prosper in any market.

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Good Advice, Something for Everyone

Okay, so the book is long and towards the end I already got the picture. However with 52 mistakes in the book (one for every week of the year), you are bound to find at least a few that you're prone to. Some of them might even surprise you, because it points to something you didn't think about.

One of the mistakes that stood out was # 29 "Do you confuse before-the-fact strategy with after-the-fact outcome?" Basically you might have pursued a good sound strategy, but because of the nature of chance, it did not work out for you. So you ditch the strategy and try something else. The fact that it did not work out (outcome) should not cause you to think the original strategy was not good.

The other important thing I learned is that great companies are not always great stocks (#19). And as the price rises, the risk premium falls, and low risk premiums give low future expected returns (#20). High priced stocks of great companies have a low risk premium, high price risk and are priced for perfection. Therefore if anything upsets the apple cart, they fall by more than just the business risk, they also fall because their risk premium just increased. Seems counterintuitive as most people assume that a great company has a great stock that should keep on going up, i.e. low risk premium is also means low price risk (which is not the case).

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Some Info Worth Knowing

In this book, Swedroe provides lots of data to prove that following the Modern Portfolio Theory and the Efficient Market Theory is the only way to beat the market indexes when investing in the markets. Whether you wish to agree with this premise or not, he does provide some useful information, specifically on the benefits of investing in "passively-managed, tax-managed, index funds." The information about the effect of taxes on a portfolio makes it worth reading if nothing else.

For the serious investor, this is a book, along with a handful of others, that you should read simply as a foundation of knowledge upon which to build your investment strategy.

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reviews: page 1, 2, 3, 4, 5

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