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Favourite Takeaways – The Elements of Investing (Part 1 of 3)

The authors of this book are famous, but if you haven’t heard of them or you’re new to investing, that’s OK.  That means this book is meant for you.

Burton Malkiel’s A Random Walk Down Wall Street is a classic that has been published many times over.  Charles Ellis is a financial icon, who has been managing millions if not billions of money for decades.

With The Elements of Investing you’ve got a quick read, from world famous authors, with straightforward investing facts, do-it-yourself guidance that can be readily applied, and strong recommendations for every investor, young and old.  This book is targeted for beginners to learn from and experts to be reminded of, and in my opinion is a must read for any investor.   

Unlike one of my other favourite books, The Single Best Investment, this book focuses on indexing and not dividend-investing as a strategy to achieve financial freedom, and rightly so.  Indexing is a proven recipe for most investors who can use low-cost indexed products to achieve market returns that will undoubtedly beat every actively managed mutual fund over the long-run.  Malkiel and Ellis reinforce this point many times over in their book.

As someone who uses a two-pronged strategy to work towards my retirement dreams, dividend-investing and indexing, I found this book an outstanding overview to cement my beliefs of passive management without getting too technical nor dry from academics who could get very technical on this stuff if they wanted to.

Overall, this was an enjoyable read even though this book has a distinct U.S. stock market bias.  Canadian investors will also benefit from this book because the language is direct regardless what market you’re talking about, and is very informative about boring broad-market investments in the form of ETFs will win the race for you.  We’re primarily talking about you Vanguard :)

I had so many takeaways from this book, there will be two more posts for it.   I’ll start with one this week, so you can sink your teeth into it, and I’ll post at least one more next week.  Without further delay, here is Part 1 of 3.  Enjoy!

“It doesn’t matter whether you make a return of 2 percent , 5 percent or even 10 percent on your investments if you have nothing to invest.”

“Being a sensible saver is good for you, but deprivation is not.   So don’t try to save too much.  You’re looking for ways to save that you can use over and over again by making these new ways your new good habits.”

“There are few, if any, absolute rules in saving and investing, but here’s ours:  Never, never, never take on credit card debt.”

“Credit card debt is the exact opposite of a great investment.”

“The secret of getting rich slowly, but surely, is the miracle of compound interest.   Benjamin Franklin provides us with an actual rather than a hypothetical case.  When Franklin died in 1790, he left a gift of $5,000 to each of his two favourite cities, Boston and Philadelphia.  After 200 years, in 1991, they received the balance – which had compounded to approximately $20 million for each city.”  As Franklin himself liked to describe the benefits of compounding, “Money makes money.  And the money that money makes, makes money.”

“Luck in picking the right time to invest is all well and good, but time is much more important than timing.”

“The secret to saving is being rational.  Being rational is simple, but by no means easy, because we’re all so human and are hard wired to be flawed as savers and investors.”

“Even if you failed to save enough on a regular schedule earlier in your life – the first fundamental rule for achieving financial security – it’s never too late to start.”

“Great coaches all agree with a simple summary of how to succeed in athletics:  Plan your play and play your plan.  That’s why you’ll want to develop a clear and simple financial plan and stay the course.”

“It is difficult for most investors to believe that the stock market is actually smarter or better informed than they are.  Most financial professionals still do not accept the premise – perhaps because they earn lucrative fees and believe they can pick and choose the best stocks and beat the market.”

“Over 10-year periods, broad stock market index funds have regularly outperformed two-thirds or more of the actively managed mutual funds.”

“Only a few managers beat the market.  Since 1970, you can count on the fingers of one hand the number of managers who have managed to beat the market by any meaningful amount.”

“For over 40 years, (Warren) Buffett’s company, Berkshire Hathaway, has earned a rate of return for his stockholders twice as large as the stock market as a whole.  But that record was not achieved by his ability to purchase “undervalued” stocks, as it is often portrayed in the press.  Buffett buys companies and holds them.”

“The odds that you can find an actively managed mutual fund that will perform that much better than an index fund are virtually zero.”

“Enron, Chrysler, and General Motors are not isolated examples.  Surprisingly, many large and seemingly stable industrial companies have gone belly up.  Protect yourself:  Every investor should always diversify.”

 

What do you think about any of this information from Malkiel and Ellis?   Does it reasonate with you and if so, how?

Anything you try and live by here, in your journey to financial freedom? 

Your turn readers, let me know! :)

Filed in: Authors & Books, Index Investing

16 Responses to "Favourite Takeaways – The Elements of Investing (Part 1 of 3)"

  1. 101 Centavos says:

    I likes this review. Plan your play and play your plan. Diversify. Hold on for the ride. This one goes on the book wish list.

  2. MOA,

    Sounds like pretty timeless advice to me. Diversify your investments and plan on holding for the long haul. Stay away from mutual funds and high fees and rely on the power of compounding interest. Start as early as possible, even if it’s later than you hoped.

    I’m trying to check every single piece of advice off my list!

    Take care.

  3. Great tidbits, Mark. I’m looking forward to parts 2 and 3. :)

    I like this one: “Credit card debt is the exact opposite of a great investment.”

  4. Nice introduction to the series!

    I haven’t read the book but it does look interesting to say the least.

    With regards to the last few paragraphs, I think a lot investors want to “at least try” to beat the markets. I think it’s one of those key motivational factors involved with a lot of DIY investors; it’s part of their investment DNA that just can’t be changed.

    Let’s face it, it’s also easy to say how index funds beat most “actively managed” accounts – it’s because most of them are invested in mutual funds. I’m sure there’s a crap load of DIY investors that have a dividend-oriented approach to investing whose accounts will perform much better than average in the long-run.

    From a personal standpoint, I like the mixed approach to investing and now that I feel comfortable with my personal war chest of divvy stocks, I’m starting to employ an indexed based investment strategy.

    With that being said, I also think that many index investors are able to employ a moderately active investment strategy to ensure above-average returns.

    Looking forward to the remaining part of the series!

    Cheers
    TWC

    • @TWC,

      Thanks!

      I think you’re right: many DIY investors who have long-term dividend-investing approach have likely outperformed the “average” investor or the market because buying and holding dividend-paying stocks, you have no fees. I recall in Andrew’s Millionaire Teacher book, 100% equity portfolio from 1973 to 2004 would have returned over 11% annually. That’s pretty darn good!

      I think indexing makes great sense, for investors with a very long-time horizon, who want to ride the tide as you say, and not give away their money with money management fees in the process.

      From a personal standpoint, I like my dual-pronged approach to investing but this doesn’t work for everyone and I can respect that.

      As always, thanks for your comments!

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