1. “[At a horse racing track people make] bets and the odds change based on what’s bet. That’s what happens in the stock market.” Charlie Munger. http://www.ritholtz.com/blog/2012/02/a-lesson-on-elementary-worldly-wisdom-as-it-relates-to-investment-management-business/ Betting on a horse which is the favorite or a longshot may or not be a good bet. What matters is whether the bet is *mispriced* in your favor. Stocks are exactly the same. The stock market is *often* efficient, but it is not *always* efficient. The will be rare times when an investor who is patient, highly observant and acting within their circle of competence (a “know-something investor”) can find a mispriced bet. When such mispricing can be identified, the investor should bet in a significant way.
2. “Most people who try [to become know- something investors] don’t do well at it. But the trouble is that if even 90% are no good, everyone looks around and says, ‘I’m the 10%.’” Charlie Munger. http://www.scribd.com/doc/143910311/The-Best-of-Charlie-Munger-1994-2011 The number of people who are capable of finding the mispricing and who have the emotional intelligence to beat the market is very small. The odds are high that you are not one of those people and should instead buy a low-cost index fund.
3. “The case for indexing isn’t based on the efficient market hypothesis. It’s based on the simple arithmetic of the cost matters hypothesis. In many areas of the market, there will be a loser for every winner so, on average, investors will get the return of that market less fees.” John Bogle. http://www.financial-planning.com/fp_issues/42_9/john-bogle-index-fund-interview-2680620-1.html?pg=2 Perhaps the easiest thing one can do in investing is improve performance by lowering fees. What is not to like about doing things that are easy? No one says it better than Bogle: “What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact.” Compounding is arguably the most powerful force in the universe, so ignore it at your peril.
4. “[With] closet indexing, you’re paying a manager a fortune and he has 85% of his assets invested parallel to the indexes. If you have such a system, you’re being played for a sucker.” Charlie Munger. http://wealthymatters.com/2011/02/12/charlie-mungers-quotes-mungerisms/ Mutual funds have learned people will withdraw money if they underperform what is known as their “benchmark”. To preserve their fees mutual funds too often closet index and you end up getting the results of an index fund but are paying high fees. Just say “no” to closet indexing.
5. “The mutual fund industry is not an investment management industry. It’s a marketing industry.” David Swensen. http://david-swensen.com/2009/04/02/swensen-mutual-fund-is-marketing-industry/ Mutual funds spend a lot of money convincing you that they can beat the market even though that data says it rarely happens. And they spend even more convincing HR departments at companies to force their employees to select buy their high fee funds. Few things in investing are more galling than a high-fee manager chosen by your employer to administer a 401(k) telling you that they will charge a fee if you choose a low-fee competitor.
6. “Advisors add value by providing the discipline required for successful investing. They add value in areas like tax efficiency, risk management, estate planning and retirement planning.” John Bogle http://www.financial-planning.com/fp_issues/42_9/john-bogle-index-fund-interview-2680620-1.html?zkPrintable=1&nopagination=1 John Bogle. Look for conflicts of interest. For example, when you are dealing with a broker remember that you are often a counterparty, not a “client.”
7. “The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.” Jesse Livermore. http://www.jesse-livermore.com/speculation-definition.html Guessing what you think, other people think, other people think [repeat] a commodity is worth at any given is a game for suckers. Predicting the behavior of a mob humans better than the market is not likely to be a skill you have. Trust me on this.
8. “A 401(k) is a thrift plan trying to be a retirement plan. It was never designed to be a retirement. To be a retirement plan, you have to keep putting money in….” John Bogle. http://abcnews.go.com/Business/vanguards-jack-bogle-financial-train-wreck-looms/story?id=17137130&page=2#.UciIw2bn-70 The best way to have a comfortable retirement is to save a lot of your income. Investing helps increase your savings, but it is not enough by itself. SAVE!
9. “Any time luck contributes to outcomes, you will have reversion to the mean.” http://www.wired.com/wiredscience/2012/11/luck-and-skill-untangled-qa-with-michael-mauboussin/ Michael Mauboussin. As the price of an investment wiggles up and down you will inevitably “chase performance” unless you are a disciplined investor performance and will end up “selling low and buying high”. Less than 10% of people who try can do beat the market successfully and the odds are that you are not one of the 10%.
10. “Instead of concentrating on the central issue of creating sensible long-term asset-allocation targets, investors too frequently focus on the unproductive diversions of security selection and market timing.” http://socialize.morningstar.com/NewSocialize/asp/FullConv.asp?forumId=F100000015&lastConvSeq=43500 David Swensen. Asset allocation is process consisting of choosing the categories you will invest in (e.g., stocks, bonds, money market funds and REITs) and is vastly more important than choosing stocks or when to get in and out of the market. Some type of assets like bonds you should hold in part because they can help you not be as irrational (they lower behavioral risk).
11. “I am a better investor because I am a businessman and a better businessman because I am an investor.” Warren Buffett. http://everythingwarrenbuffett.blogspot.com/2009/03/motley-fool-buffetts-words-of-wisdom.html If you don’t know much about business, then the odds that you will be a successful investor are vanishingly small. A share of stock is a proportional interest in that business. The more you understand the business the more you will understand the stock.
12. “By periodically investing in an index fund…the know-nothing investor can actually out-perform most investment professionals. Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Warren Buffett. http://www.fool.com/investing/mutual-funds/2008/11/04/follow-the-smart-money.aspx This one is self-explanatory.