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August 8 - August 20, 2019
However, as we’ll discuss, it’s the top 0.01 percent of all households, a mere 12,500, that run our society. Members of this group are worth at least $125 million.
make a more accurate balance sheet, which I do about once a year.
This spread between replacement value and liquidation value may be high for real property—
It’s that way with houses, cars, art, and jewelry. In contrast, the cost to trade listed securities is typically only a small fraction of a percent—which, along with their liquidity, makes them more appealing stores of wealth.
Wealth, which I use synonymously with the accountants’ term net worth, shows how rich you are now, whereas income measures how much money your wealth, labor, and ingenuity are currently generating.
It’s that increase in net worth from year to year that takes you up the ladder of wealth.
Balance sheets are snapshots that tell you where you are at a particular time. The income statement tells you what happens between two balance sheets.
This is net economic gain and, as an investor, it’s what you want to maximize.
For those who want to climb the ladder of wealth, it is helpful to appreciate the unusual arithmetic by which money grows. Compound interest, described in a phrase of disputed origin, is “the eighth wonder of the world.”
simple growth, arithmetic growth, or growth by addition.
compound, exponential, geometric, or multiplicative growth.
Over a sufficiently long time, compound growth at a small rate will vastly exceed any rate of arithmeti...
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How fast do ordinary investments grow? The best simple long-term choice has been a broad common-stock index fund.
“the rule of 72.”
If you are like me and want better health, you can invest time and money on medical care, diagnostic and preventive measures, and exercise and fitness.
For decades I have spent six to eight hours a week running, hiking, walking, playing tennis, and working out in a gym. I think of each hour spent on fitness as one day less that I’ll spend in a hospital.
Most people I’ve met haven’t thought through the comparative values to them of time, money, and health.
Americans supposedly spend an average of forty or more hours a week watching television. Those who do have plenty of “junk time,” which they can use instead for an exercise or fitness program. Five hours a week for this can add five years of healthy life.
it follows from the laws of arithmetic that the combined holdings of all the active investors also replicate the index.
Reducing risk through diversification is one reason to buy an index, but an even more important one is reducing the costs that investors bear.
Investors who don’t index pay on average an extra 1 percent a year in trading costs and another 1 percent to what Warren Buffett calls “helpers”—the money managers, salespeople, advisers, and fiduciaries that permeate all areas of investing.
From the gambling perspective, the return to an active investor is that of a passive investor plus the extra gain or loss from paying (on average) 2 percent a year to toss a fair coin in some (imaginary) casino.
academic studies of the historical returns of mutual funds show little evidence of such managerial skill on the part of mutual funds.
If you index, select a fund with annual expenses less than 0.2 percent.
Tax-exempt investors such as IRAs, 401(k)s, employee benefit plans, and foundations ought to consider swapping their active investments in equities into a broad no-load index fund, unless they have strong reasons to believe their current investments give them a significant edge.
In my experience, superior stock-picking ability is rare, which means almost everyone should make the switch.
The threat to a buy-and-hold program is the investor himself. Following his stocks and listening to stories and advice about them can lead to trading actively, producing on average the inferior results about which I’ve warned. Buying an index avoids this trap.
“Look, there is a $100 bill on the ground.” Without a glance down or a break in stride, Fama replied, “No, there isn’t. If there were, someone would have picked it up already.”
What appears random for one state of knowledge may not be if we are given more information.
The EMH is a theory that can never be logically proved. All you can argue is that it is a good or not-so-good description of reality. However, it can be disproven merely by providing examples where it fails, and the more numerous and substantive the examples, the more poorly it describes reality.
Doing better than the market is not the same as beating it. The first is often simply luck; the second is finding a statistically significant edge that makes sense, then profiting from it.
SPACs. These “special purpose acquisition corporations”
For those who still believe that the market always prices securities properly, here’s a profit opportunity that arose because investors couldn’t even do arithmetic.
Like members of the Flat-Earth Society, efficient market believers have no problem with the 3Com-PALM example.
Now let’s see how markets really operate, so we can understand how better to invest.
Lol
Much information starts out known only to a limited number of people, then spreads to a wider group in stages. This spreading could take from minutes to months, depending on the situation.
Each of us is financially rational only in a limited way.
Our portrait of real markets tells us what it takes to beat the market.
Don’t gamble unless you are highly confident you have the edge. As Buffett says, “Only swing at the fat pitches.”
Find a superior method of analysis.
When you have identified an opportunity, invest ahead of the crowd.
Most market participants have no demonstrable advantage. For them, just as the cards in blackjack or the numbers at roulette seem to appear at random, the market appears to be completely efficient.
To beat the market, focus on investments well within your knowledge and ability to evaluate, your “circle of competence.”
Finally, don’t bet on an investment unless you can demonstrate by logic, and if appropriate by track record, that you have an edge.
Investors who chase returns, buying asset classes on the way up and selling on the way down, have had poor historical results.
Assuming that the risks and returns for asset classes in the twenty-first century will be similar to what they were in the twentieth, long-term passive investors are likely to do best in common stocks and income-producing commercial real estate, though the data is sketchier for the latter.
This investor’s costly preference for realized income rather than total return (economic income) is common.
The investor who is willing to do a little thinking, along with the investing work that follows, has many ideas to check.
I prefer to think in terms of the inverse of P/E, or earnings divided by price, sometimes known as E/P but perhaps better described as earnings yield.
Stories sell stocks:
