My Note
My highlights
116 highlights from Kindle. These are the lines I stopped at.
SUCCESSFUL INVESTING IS ALL about common sense. As Warren Buffett, the Oracle of Omaha, has said, it is simple, but it is not easy.
the winning strategy for investing in stocks is to own all of the nation’s publicly held businesses at very low cost.
Buy a fund that holds this all-market portfolio, and hold it forever.
It eliminates the risk of picking individual stocks, the risk of emphasizing certain market sectors, and the risk of manager selection. Only stock market risk remains. (That risk is quite large enough, thank you!)
The index fund eliminates the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.
It is a book about why long-term investing serves you far better than short-term speculation; about the value of diversification; about the powerful role of investment costs; about the perils of relying on a fund’s past performance and ignoring the principle of reversion (or regression) to the mean (RTM) in investing; and about how financial markets work.
When you understand how our financial markets actually work, you will see that the index fund is indeed the only investment that essentially guarantees that you will capture your fair share of the returns that business earns.
The magic of compounding investment returns. The tyranny of compounding investment costs.
As investors, all of us as a group earn the stock market’s return.
In the casino, the house always wins. In horse racing, the track always wins. In the Powerball lottery, the state always wins. Investing is no different. In the game of investing, the financial croupiers always win, and investors as a group lose.
Get out of the casino and stay out!
Simply buy a Standard & Poor’s 500 Index fund or a total stock market index fund. Then, once you have bought your stocks, get out of the casino—and stay out. Just hold the market portfolio forever. And that’s what the traditional index fund does.
But it is not easy to follow its discipline.
our truly mutual, fund-shareholder-owned structure and our index fund strategy—will enrich you over the long term.
Go back to square one, and do so immediately. Get rid of all your brokers. Get rid of all your money managers. Get rid of all your consultants.
They followed the old uncle’s wise advice, returning to their original passive but productive strategy, holding all the stocks of corporate America, and standing pat. That is exactly what an index fund does.
Warren Buffett puts the moral of his story this way: For investors as a whole, returns decrease as motion increases.
I would add that the parable reflects the profound conflict of interest between those who work in the investment business and those who invest in stocks and bonds.
The way to wealth for those in the business is to persuade their clients, “Don’t just stand there. Do something.” But the way to wealth for their clients in the aggregate is to follow the opposite maxim: “Don’t do something. Just stand there.” For that is the only way to avoid playing the loser’s game of trying to beat the market.
The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that shareholders—as a group, the owners of our businesses—receive.
When greed holds sway, very high P/Es are likely. When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are typically very low.
Back and forth, over and over again, swings in the emotions of investors are reflected in speculative return.
“It is dangerous . . . to apply to the future inductive arguments based on past experience.”
any past stock market returns that have included a high speculative stock return component are deeply flawed guides to what lies ahead.
I divide stock market returns into two parts: (1) investment return (enterprise), consisting of the initial dividend yield on stocks plus their subsequent earnings growth (together, they form the essence of what we call “intrinsic value”), and (2) speculative return, the impact of changing price/earnings multiples on stock prices.
This pattern is reversion to the mean writ large. RTM can be thought of as the tendency for those P/Es to return to their long-term norms over time.
Combining investment return and speculative return: total stock market returns.
The message is clear: In the long run, stock returns depend almost entirely on the reality of the investment returns earned by our corporations. The perception of investors, reflected by the speculative returns, counts for little.
Accurately forecasting short-term swings in investor emotions is not possible. But forecasting the long-term economics of investing has carried remarkably high odds of success.
But, largely because the arithmetic of investing is so basic, I have been able to forecast the long-term economics of investing with remarkably high odds of success.
Why? Simply because it is investment returns—the earnings and dividends generated by American businesses—that are almost entirely responsible for the returns delivered in our stock market over the long term.
The stock market is a giant distraction to the business of investing.
The expectations market is about speculation. The real market is about investing. The stock market, then, is a giant distraction to the business of investing.
Too often, the market causes investors to focus on transitory and volatile short-term expectations, rather than on what is really important—the gradual accumulation of the returns earned by corporate businesses.
My advice to investors: ignore the short-term sound and fury of the emotions reflected in our financial markets, and focus on the productive long-term economics of our corporate businesses.
The way to investment success is to get out of the expectations market of stock prices and cast your lot with the real market of business.
“In the short run the stock market is a voting machine . . . in the long run it is a weighing machine.”
The true investor . . . will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.
“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”
HOW DO YOU CAST your lot with business? Simply by buying a portfolio that owns shares of every business in the United States and then holding it forever. This simple concept guarantees you will win the investment game played by most other investors who—as a group—are guaranteed to lose.
Please don’t equate simplicity with stupidity.
When there are multiple solutions to a problem, choose the simplest one.1 And so Occam’s razor came to represent a major principle of scientific inquiry.
By far the simplest way to own all of U.S. businesses is to hold the total stock market portfolio or its equivalent.
Occam’s razor: When there are multiple solutions to a problem, choose the simplest one.
it is now named the Dow Jones Wilshire Total Stock Market Index.3 It now includes some 3,599 stocks, including the 500 stocks in the S&P 500.
Because its component stocks also are weighted by their market capitalization, those remaining 3,099 stocks with smaller capitalizations account for only about 15 percent of its value.
Returns earned in the stock market must equal the gross returns earned by all investors in the market.
Owning the stock market over the long term is a winner’s game, but attempting to beat the stock market is a loser’s game.
A low-cost all-market fund, then, is guaranteed to outpace over time the returns earned by equity investors as a group. Once you recognize this fact, you can see that the index fund is guaranteed to win not only over time, but every year, and every month and week, even every minute of the day.
If the data do not prove that indexing wins, well, the data are wrong.
Over the short term, however, it doesn’t always look as if the S&P 500 (still the most common basis of comparison for mutual funds and pension plans) or the Total Stock Market Index is winning.
You should know that, in establishing a trust for his wife’s estate, Warren Buffett directed that 90 percent of its assets be invested in a low-cost S&P 500 Index fund.
Why? Because investors as a group must necessarily earn precisely the market return, before the costs of investing are deducted.
Before costs, beating the market is a zero-sum game. After costs, it is a loser’s game.
There are, then, these two certainties: (1) Beating the market before costs is a zero-sum game. (2) Beating the market after costs is a loser’s game.
We investors as a group get precisely what we don’t pay for. If we pay nothing, we get everything.
“Remember, O Stranger, arithmetic is the first of the sciences, and the mother of safety.”
Brandeis’s words hit me like the proverbial ton of bricks. Why? Because the relentless rules of the arithmetic of investing are so obvious.
“the uncanny ability to recognize the obvious.”)
It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it.
But as an investor, you must look after your self-interest. Only by facing the obvious realities of investing can an intelligent investor succeed.
Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy.
What you see in this example—and please don’t ever forget it!—is that over the long term, the miracle of compounding returns has been overwhelmed by the tyranny of compounding costs.
The low-cost index fund is there to guarantee that you will earn your fair share of whatever returns—positive or negative—our businesses earn and their stock prices and dividends deliver.
The More the Managers Take, the Less the Investors Make.
Fund performance comes and goes. Costs go on forever.
Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile produced higher total returns than the most expensive quintile.
Investors should make expense ratios a primary test in fund selection.
Start by focusing on funds in the cheapest or two cheapest quintiles, and you’ll be on the path to success.
If the managers take nothing, the investors receive everything: the market’s return.
single factor to select future superior performers and to avoid future inferior performers, that factor would be fund costs.
The more the managers and brokers take, the less the investors make.
Investor emotions plus fund industry promotions equals trouble.
But the intelligent investor will be well advised to heed not only the message in Chapter 4 about minimizing expenses, but the message in this chapter about removing emotions from the equation—that is, about investors improving their short-term, market-oriented behavior.
The beauty of the index fund, then, lies not only in its low expenses, but in its elimination of all those tempting fund choices that promise so much and deliver so little.
The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course.
the index fund can be held through thick and thin for an investment lifetime. Emotions need never enter the equation.
The wise Warren Buffett shares my view. Consider what I call his four E’s. “The greatest Enemies of the Equity investor are Expenses and Emotions.”
But there is yet another cost—too often ignored—that slashes even further the net returns that investors actually receive. I’m referring to taxes—federal, state, and local income taxes.
The traditional index fund follows precisely the opposite policy—buying and holding “forever.”
A paradox: While the index fund is remarkably tax-efficient in managing capital gains, it turns out to be relatively tax-inefficient in distributing dividend income. Why? Because its rock-bottom costs mean that nearly all of the dividends paid on the stocks held by the low-cost index fund flow directly into the hands of the index fund’s shareholders.
Selecting Long-Term Winners: Don’t Look for the Needle—Buy the Haystack.
Don’t look for the needle, buy the haystack.
“Reversion to the Mean”: Yesterday’s Winners, Tomorrow’s Losers
Listen to Nassim Nicholas Taleb, author of Fooled by Randomness: “Toss a coin; heads and the manager will make $10,000 over the year, tails and he will lose $10,000. We run [the contest] for the first year [for 10,000 managers]. At the end of the year, we expect 5,000 managers to be up $10,000 each, and 5,000 to be down $10,000. Now we run the game a second year.
Simplicity beats complexity.
this evidence suggests that, yet again, the simplicity of a broad-market, low-cost index fund, bought and then held forever, is likely to be the optimal strategy for the vast majority of investors.
The wise investor will select only those index funds that are available without sales loads, and those operating with the lowest costs. These costs—no surprise here!— directly relate to the net returns delivered to the shareholders of these funds.
Your index fund should not be your manager’s cash cow. It should be your own cash cow.
All index funds are not created equal. Intelligent investors will select the lowest-cost index funds
that are available from reputable fund organizations.
Avoid complexity and rely on simplicity and parsimony, and your investments should flourish.
“The greatest enemy of a good plan is the dream of a perfect plan.” Stick to the good plan.
Carl von Clausewitz, military theorist and Prussian general of the early nineteenth century: “The greatest enemy of a good plan is the dream of a perfect plan.”
Why? Because “[the majority of investors] do not have the time, or the determination, or the mental equipment to embark upon such investing as a quasi-business. They should therefore be satisfied with the reasonably good return obtainable from a defensive portfolio, and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.”
“A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth.”
My recommendations for investors in the accumulation phase of their lives, working to build their wealth, focused on a stock/bond mix of 80/20 for younger investors and 70/30 for older investors. For investors starting the postretirement distribution phase, 60/40 for younger investors, 50/50 for older investors.
For investors starting the postretirement distribution phase, 60/40 for younger investors, 50/50 for older investors. Bumps along the road.
There are two fundamental factors that determine how you should allocate your portfolio between stocks and bonds: (1) your ability to take risk and (2) your willingness to take risk.
In general, investors should not engage in tactical allocation.
At my age of 88, I’m comfortable with that allocation. But I confess that half of the time I worry that I have too much in equities, and the other half of the time that I don’t have enough in equities. Finally, we’re all just human beings, operating in a fog of ignorance and relying on our circumstances and our common sense to establish an appropriate asset allocation.
horizon, and considerable grit and guts—investors who have the courage to be unintimidated by periodic market crashes—clearly an allocation of 100 percent to the S&P 500 Index fund would nearly always be the better choice.
TDFs can be an excellent choice, not only for investors who are just getting started with their investment programs, but also for investors who decide to adopt a simple
strategy for funding their retirement. But as your assets accumulate and your personal balance sheet and investment goals become more complicated, it is worth considering the use of individual building blocks like low-cost stock and bond index funds to construct your portfolio.
Hear Warren Buffett: “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.”
We know that we must start to invest at the earliest possible moment, and continue to put money away regularly from then on.
we also know that not investing dooms us to financial failure.
We know that investing entails risk. But
We know the sources of returns in the stock and bond markets, and that’s the beginning of wisdom. We know that the risk of selecting individual securities, as well as the risk of selecting both fund managers and investment styles, can be eliminated by the total diversification offered by the traditional index fund. Only market risk remains. We know that costs matter, overpoweringly in the long run, and we know that we must minimize them. We know that taxes matter, and that they, too, must be minimized.
We know that neither beating the market nor successfully timing the market can be generalized without self-contradiction. What may work for the few cannot work for the many.
Finally, we know what we don’t know. We can never be certain how our world will look tomorrow, and we know far less about how it will look a decade hence. But with intelligent asset allocation and sensible investment choices, we can be prepared for the inevitable bumps along the road, and should glide right through them.
Not investing is a surefire way to fail to accumulate the wealth necessary to ensure a sound financial future. Compound interest is a miracle. Time is your friend. Give yourself all the time that you possibly can.
No matter what happens, stick to your program. Think long term. Patience and consistency are the most valuable assets for the intelligent investor. “Stay the course.”
The way to wealth, I repeat one final time, is not only to capitalize on the magic of long-term compounding of returns, but to avoid the tyranny of long-term compounding of costs.
“Don’t do something—just stand there!”
We all know how to lose weight and get in better shape: Eat less and exercise more . . . that is simple—but it is not easy. Investing is no different.