Hi Guys,
To be perfectly transparent, I’ll immediately announce that this post might immediately bifurcate the MFO readership. It was designed to specifically help novice investors; it is likely far too simplistic to guide our market savvy, grizzled investors. The veteran MFO ranks might choose to stop at this juncture.
Over the last few weeks I have been alerted to the rather low knowledge base and sophistication of at least a small number of MFO readers and lurkers. It is somewhat painful to feel their market innocence. Without further education in this arena, these neophytes are doomed to the financial swampland and possible ruin.
Lurking and possibly asking a few questions will inform a little, but that is an unorganized and inefficient way to gain understanding. There are easier routes to the requisite learning that is not unduly costly or time consuming. In this post, I offer a couple of suggestions.
First, Warren Buffet himself provides some very good news with this quote: “Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
So even if you are at the first-grader level in terms of investment sharpness, it will take just a little effort to reach a second grader standing. That modest level of proficiency will be sufficient for survival according to a large cohort of passive Index investor proponents. For example, Allan Roth has authored a book titled “How a Second Grader Beats Wall Street:”. Roth further supports his assessments with a Second Grader portfolio that is scored at the following Market Watch Lazy-man website:
http://www.marketwatch.com/lazyportfolioAll of the portfolios presented in the Lazy-man listing are worthy of consideration for novice investors. But the rookie investor should still seek to comprehend the whys of the investing process.
There are many truly great books that will provide the necessary background and fundamentals to solidly ground a learning investor. I own and have completely absorbed scores of them. Two terrific examples are John Bogle’s very practical “Common Sense on Mutual Funds” and Burton Malkiel’s classic “A Random Walk Down Wall Street” which is often freshened with its many updates.
However, these excellent introductions to investing are dense in data and lengthy in page count. They easily could intimidate an inspiring investor. Fortunately, simplified and much shortened versions of these fine books have been published. I recommend both Bogle’s “The Little Book of Common Sense Investing” and Malkiel’s “The Random Walk Guide to Investing”. Either book can be purchased for under 20 dollars and each is only about 200 insightful pages in length. These are breezy reads.
I also like Richard Ferri’s 142 page book “Serious Money”. Ferri offers this book for free from several Internet sources. He takes a strong advocacy position for Index investing as do the other two recommended short books. In that sense, they are not balanced expositions of all available options. That’s not a bad place to start the education process.
I hesitate to encourage further shortcuts, but many superior reviews of these references are readily accessible on the Web. One nice review of Bogle’s work from the Bogleheads guide that extracts succinct Bogle observations can be found at the following Ranjit Kulkarni Blog address:
http://ranjitkulkarni.com/2011/12/04/the-bogleheads-guide-to-investing/That’s a pile of passive investment wisdom in a brief format. The quotes are terrific.
The recommended reading list only extols the virtues of passive-side investing. I make no recommendations for the more complex requirements of active investing. That is a multi-dimensional discipline that is evasive and difficult to master, especially since it is a dynamic art in constant evolution.
Note that I said “art” and not “science”. Active investing demands disciplined nuances and money management skills. Also, it requires personal emotional and behavioral controls that are not easy to describe. A very deep understanding of market mechanisms and interactions are mandatory. Experience is a contributing factor towards success. Active investing is definitely not for everyone, especially novice investors.
Novice investors should walk cautiously first, before ever attempting to sprint with the active crowd. They will quickly fall victim to the many traps that await active investing. Remember that even seasoned mutual fund managers overwhelmingly fail to outperform Index products over short 3-year periods. Neophyte investors have little chance for persistency in this quixotic marketplace.
I’ll end with this novice alert: You need to invest in learning about the marketplace and how it works before you imprudently lose your money investing ignorantly. You must master the rules and the odds of the game you need to play to protect your retirement. The learning price tag, in both time and money, is not especially high if it is done in an organized manner.
Best Regards.
Comments
We discussed this on another thread, sorta. There have to be some websites, but people find it so boring to read. So videos better maybe.
Hi VintageFreak,
I do rate passive Index investing as a complete, self-contained investment philosophy. It is but one of many. All of them have fundamental financial and investing axioms and practical rules embedded within them.
In my original post, I did acknowledge the existence of alternate philosophies, most of which endorse active components. One problem is that there is such a wide variety of active investment concepts that they would be difficult to fully characterize in a logical, orderly manner.
I suppose day-trading with a target to be market neutral at the close of each trading day and the long term “stay the course” passive investment philosophies serve as bookend examples of a broad spectrum of candidate philosophies.
A dominating second consideration in my post is that it is directed towards rookie investors, short on knowledge and even shorter on experience. Exposing these innocent investors to the complexity and subtleties of most active investment strategies would be unkind, unfathomable, and ultimately unrewarding.
Can you imagine the confusion if you required that a neophyte investor read and understand David Dreman’s classic “Contrarian Investment Strategies: The Next Generation”? Or the confusion if Edwards and Magee’s landmark “Technical Analysis of Stock Trends”, now in its tenth edition, were assigned study material? Nothing would be accomplished except a loss to instructor credibility.
The passive Index approach is the simplest form of investing; financial education should start with that easy to describe discipline. If you are planning to enlarge a person’s mathematical skills you are likely to start with algebra lessons and not complexity theory.
If the books I suggested do not whet the students’ appetite or they do not pledge a commitment to ponder 200 pages of easy text, then they are doomed to fail in the investment game. Sorry, but that’s the likely outcome.
Okay, I understand that young folks today need and demand their video in heavy doses. A few weeks ago I referenced an informative and entertaining video that was produced in England by one of its emerging mutual fund advisor firms. Here is a repost of that Link:
A boatload of investing wisdom is presented is this roughly one hour film. Use it as a training resource.
Yes, it is yet another commercial for passive Index products. But it is a very well done film and includes short pieces from many famous American Index proponents. Please access it. It is a superior investment educational tool.
I recognize that my recommendations are not the end of an investment learning program, but they will promote a fast departure from the starting gate. There is considerable merit to keeping it simple to keep the enthusiasm at a high level.
You clearly asked about a video series that presented more fundamental financial and investment concepts. Some of these can be accessed as part of university classes. They tend to be difficult for a novice.
But Khan Academy has specialized in the production of educational material for us common folk. They have a series that deals with financial and investment matters. The lecture series really does start at the ground level so it might be quite boring for reasonably well informed seasoned investors. Here is a Link to one of their investment series:
http://www.khanacademy.org/science/core-finance/stock-and-bonds/valuation-and-investing/v/price-and-market-capitalization
The lecturer uses a colored chalkboard technique as a teaching aid. The format is more like a friend talking to you instead of a formal presentation. I hope your family will investigate and take advantage of this fine introductory material.
Enjoy, and teach your children (and your wife) well.
Let me know if the Khan Academy satisfies your clan educational aspirations.
Best Wishes.
This first book, published in 1996; will contain outdated numbers for reference, but the human habits and variables which allow one to be wise or unwise with money habits remains in place.
"The Millionaire Next Door"
This book allows for a better understanding of what makes one "tick". How habits are formed and may be reworked for positive benefit.
The Power of Habit
Most here would agree that investing is as much about "one's habits and emotions; the "head games"; as it is about the ability to be educated about and retain the "other" aspects of investing, eh?
Take care,
Catch
... You can lead the horses to water but they might not drink. (: (: I am a novice. There are probably more here. But, I do hope you realize yesterday's post was a spoof. See Investor's comment.
http://www.mutualfundobserver.com/discuss/index.php?p=/discussion/7432/modern-portfolio-2013#Item_1
... And, I think it's always a good idea to remind the students of their low knowledge base.
Hi Mindy,
I was not referring to you or your recent exchange with Investor. I had not seen that exchange when I posted on novice investors. There is no attempt by me to push anyone to become a more informed investor. The profit potential is self-evident and is push enough.
As a self-proclaimed novice, did you find my suggestions useful? I hope so.
Best Wishes.
Yes, I started reading yours last night. There's too much for one sitting. And Catch and Vintage Freak's suggestions will be instructive too. Thanks you for asking.
http://www.ritholtz.com/blog/top-10-investor-errors/