Investment Review
Selwyn Gerber writes: This book will debunk the classical myths about investing showing how and why active management is a losing game. On the other hand, smart index investing, combined with patience and the willingness to ignore day to day fluctuations in stock prices, is a sure fire strategy for long term success.
This work was written to act as beacon to those who find themselves befuddled with the uncertainty of modern times. It endeavors to replace the gobbledygook of the financial pages with a time-tested, simple, straight-forward recipe for successful investing that has stood the test of time. RVW investing is not about getting rich quick, as any such strategy can just as easily make one poor even quicker. RVW investing is about investing for the long term with logic and peace of mind so you can enjoy life and sleep restfully for years to come. If you are already yawning, and ready for bed, you can learn all you need to know by understanding the following six principles.
Most investors spend countless frustrating hours and often rack up big losses attempting to predict and understand exactly how markets work. They attempt to buy and sell the right securities, at the right time. While a select few develop great skill at riding the waves, so to speak, most get battered about and end up mystified by the market’s secrets. Then they look to gurus and “experts” to tell them where to invest, often times to no avail.
“Passive investing is a misnomer. Index investors eschew market timing and stock picking not out of laziness or passivity, but because those activities usually reduce returns and increase risks, a better name for it would be “Intelligent Investing.”
- David M. Blitzer
Chairman of the S&P 500 Index Committee
The radical truth we are here to convey is that investing success does not require that you understand how markets work. All you need to know is that markets work. Markets emerge from the economic activity of all their participants. Buyers and Sellers determine among themselves the price at which they are willing to transact. Prices will always move according to people’s expectations of supply and demand. Sometimes their expectations are based on rational objective criteria, and other times emotions of greed and fear take hold. What is critical to understand is that, in the short term, markets will either under or over estimate the value of any particular security. This is so either because of imperfect information about the true value of the security at any given time, or conditions exist that spur emotional decisions. Over the long term, however, markets will reflect the true value of the underlying securities as information becomes known and the swings caused by transitory emotions cancel each other out. And over the long-term, risk is reduced.
A stock’s price is theoretically equal to the value of the underlying value of the company it represents. There are a large number of fundamental metrics such as price to earnings ratio (P/E), growth rate, and price to sales ratios that are used to evaluate the stock and attempt to ascertain proper pricing at any given time. Since market conditions and expectations of the future color the market’s pricing of an asset, these fundamental metrics are hardly of objective value. The most important thing to know is that as a company grows its earnings, the true value of the company increases. By extension, when the economy grows, the total value of the market increases. Once you understand that, over the long run, an investment in the market is an investment in the overall growth of the economy, you will begin to see the forest from the trees.
The conventional wisdom suggests that smart people generate good stock picks. Therefore, the more research a person does, the better his investing results will be. Likewise, a person will expect that the best returns will come from hiring the best managers to do the hard work for them. It is true that there are some extremely talented individuals who have done quite well at the stock picking game. That being said, the data is clear, for the vast majority of those attempting to play, stock picking is a loser’s game.
For many years the Wall Street Journal ran a “Dartboard Portfolio” in which, as the name indicates, the stocks were randomly selected by throwing darts at the stock listings. That portfolio regularly outperformed the “experts”.
Literally hundreds of studies have been conducted comparing active managers’ performance over a ten year period against the market’s performance over the same interval.
Tags: Finances