The Little Book of Common Sense Investing

Introduction

Don't allow a winner's game to become a loser's game.

Index funds mean betting on the growth of the market as a whole. This reduces the amount of risks since no picking of stocks is required.

Investors are average. Their performance revolves around that and returns to it over time. Sometimes they are better, sometimes worse. But somebody's win in the stock market of picking and selling is somebody else's loss.

Beating the stock market is a zero sum game.

The stock market as it exists today is a casino where lots of people have gamblers fallacy. They believe that whatever ritual they do has a real effect on random events. It doesn't.

The only way to win is by not playing in the casino. But invest in the old meaning of the term, by financing companies to grow. The more companies one finances the better because the risk is spread. Finance companies and then stick with them to let them grow.

Book Recommendation: Capitalism, Socialism and Democracy - Joseph E. Schumpeter

Eternal Principles => Economical, Efficient, Honest

Book Recommendation: Common Sense - Thomas Paine

Chapter 1 - A Parable

For Investors as a whole, returns decrease as motion increases.

The cost of "playing" the financial market is directly deducted from the possible sum that one could earn from investing their money. Selling as little as possible and having the least activity possible for the longest time is the best investment strategy. The most boring, wins.

One caveat: some companies are more productive than others and some ventures are more worthy of investment since they generate wealth in the sense that David Deutsch meant the word. Companies that generate the ability of humanity to transform matter are the companies I would like to primarily invest in. Because those are the people really generating all those returns and the economic growth of countries in the first place. If there would be a way to find people that do this and then large scale have a portfolio based on that idea, it might, even long term, beat the 7% market rate. And the reason for it is that the economy is not a static game, their are things added to the balance that can be amplified by the input of investors. Investment as a way to decisively grow companies is missing from the strategy described in this book.

Chapter 2 - Rational Exuberance

It is dangerous to apply to the future inductive arguments based on past experience.

Stock Market Returns are made up of two parts - investment return and speculative return. All speculative returns are temporary and illusory they regress to the mean.

Investment are determined by companies not by feelings about stocks about companies.

There are two different markets. Expectation and the real market. Buy into the real market. I.e. buy diversified well performing stocks and then sit on them for years.

Chapter 3 - Cast Your Lot With Business

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.

Chapter 4 - How Most Investors Turn a Winner's Game into a Loser's Game

There is a critical flaw in this argument:

Investors, as a group must necessarily earn precisely the market return, before the costs of investing are deducted.

The flaw is that the total amount of the market return is influenced by the choices of investors as a group. If everybody were investing in worthless companies, the market return overall would be much much lower than if they invested only in very productive companies. The thing about investing as a means of building great companies is lost on the argument. Because the "market" as such doesn't exist as a concept loose from investment, it changes and adapts to investment, hence the compound rate of growth is different in different time periods. Investment therefore should be made not to maximize wealth in the monetary sense, and equally should not be spread entirely but instead put into those companies that do the craziest things for the economy. Investing in Amazon would have been a good choice, a much better choice than any index fund would ever be, simply because Amazon turned into an amazing company. If everybody where to heed the investment advice in here, only existing companies would ever get investment and funding. Stagnation would ensue eventually and the logic of the growing market would fall flat.

It's amazing how difficult it is for a man to understand something if he's paid a small fortune not to understand it.

Chapter 5 - Focus on the Lowest-Cost Funds

The more the managers take, the less the investors make.

The fund with the lowest costs wins in the long run, because performance varies while costs don't in the long run.

Chapter 6 - Dividend Are the Investor's (Best?) Friend

Chapter 7 - The Grand Illusion

Timing matters in fund investing too and most people get it wrong.

The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing.

Chapter 8 - Taxes Are Costs, Too

Inflation is a problem. Taxes are paid now, in today's dollars, while wins are valued as future dollars.

Chapter 9 - When the Good Times No Longer Roll

Chapter 10 - Selecting Long-Term Winners

Don't look for the needle — buy the haystack.

Over 45 years funds fail with ~80% chance.

2 out of 355 funds are better than market.

Chapter 11 - Reversion to the Mean

Relative returns of mutual funds are random.

Chapter 12 - Seeking Advice to Select Funds?

Chapter 13 - Profit from the Majesty of Simplicity and Parsimony

In the very long term, managed funds lose against simple index funds.

Chapter 14 - Bond Funds

Bonds should be part of a portfolio to counterweight risks in the stock market. While stock market contracts bond market expands.

There are bond index funds and they outcompete other bonds and bond fund strategies. Just like index funds do in stocks.

Chapter 15 - The Exchange Traded Fund (ETF)

ETFs are not index funds. They are tradeable pieces of index funds. And as such when traded they perform even more poorly than a normal stock when traded. Therefore ETFs are just a way to buy, never to sell index funds.

Most ETFs have strayed far from the concepts of buy-and-hold, diversification, and rock-bottom cost that are exemplified by the traditional index fund.

Chapter 16 - Index Funds That Promise to Beat the Market

Successful short-term Marketing strategies are rarely—if ever—optinal long-term investment strategies.

Chapter 17 - What Would Benjamin Graham Have Thought about Indexing?

Chapter 18 - Asset Allocation I: Stocks and Bonds

80% stocks to 20% bonds if high risk appetite and a lot of time, else 30% 70%

Chapter 19 - Asset Allocation II

100% Stock if you don't care for time.

Social security is an asset that has to be accounted for when allocating investments. One has to have more stocks even when old because of that.

Drawing 4% is somewhat safe without reducing the overall amount of investment.

Chapter 20 - Investment Advice That Meets the Test of Time

We know that investing entails risk. But we also know that not investing dooms us to financial failure.

The way to wealth is long term compounding.