Index investing and literature on value investing?

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FBeyer
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Index investing and literature on value investing?

Post by FBeyer »

It quickly becomes clear that books like:
The Little Book that Still Beats the Market, The Intelligent Investor and The Dhando Investor are 'classics' when it comes to value investing, but just how useful are these books really if one is looking to build a portfolio of index funds?

I realize that all knowledge is ultimately useful, but
Q: on a prioritized scale, what should a budding index investor know after reading:
The Four Pillars of Investing, The Intelligent Asset Allocator, and the national tax laws?

In other words: are there four or five books that are tremendously useful for someone who wants to invest with mutual or index funds?

Does anyone here actually buy specific stocks given the metrics from value investing literature or are 'we' mostly index investors?

BRUTE
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Re: Index investing and literature on value investing?

Post by BRUTE »

brute advises anyone to read "A Random Walk Down Wall Street" if they are interested in index investing, but aren't really sure how/why it works.
reading about one's taxes is always good, if one wants to optimize them.

IlliniDave
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Re: Index investing and literature on value investing?

Post by IlliniDave »

All About Asset Allocation by Rick Ferri, The Bogleheads' Guide to Investing and The Bogleheads' Guide to Retirement Planning are all pretty good, basic approaches. They emphasize the how-to more than the why.

By the way, index funds are mutual funds.

I haven't read all the national tax laws. Bernstein puts a lot of focus in his work about the potential downside of things, and on financial history as illustrative of the inherent nature of boom/bust cycles. In general I find him interesting to read but a bit too conservative for my liking. From reading his stuff you should understand the the concept of investment risks, how sensitivity to risk changes through a lifetime, and a basic framework for portfolio construction. My main takeaway from him was that his books is where I learned that the reason we make money on an investment is because we risk losing our money with the investment in rough proportion to the potential reward, and you can't really have the former without the latter. If I was very wealthy (several million or up) I'd probably pay more attention to him because to me his emphasis seems to be mostly on preserving wealth through time.

The thing about index investing is that it is not a single recipe. Index funds and a buy/hold philosophy are just a set of tools for investing in the stock and bond markets that will allow you to minimize the amount of money "Wall Street" and the IRS skim off what your money earns when you put it at risk.

FBeyer
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Re: Index investing and literature on value investing?

Post by FBeyer »

IlliniDave wrote:All About Asset Allocation by Rick Ferri, The Bogleheads' Guide to Investing and The Bogleheads' Guide to Retirement Planning are all pretty good, basic approaches. They emphasize the how-to more than the why.
...
I haven't read all the national tax laws. Bernstein puts a lot of focus in his work about the potential downside of things... and a basic framework for portfolio construction. My main takeaway from him... his emphasis seems to be mostly on preserving wealth through time.

The thing about index investing is that it is not a single recipe. Index funds and a buy/hold philosophy are just a set of tools for investing in the stock and bond markets that will allow you to minimize the amount of money "Wall Street" and the IRS skim off what your money earns when you put it at risk.
Thank you for the book recommendations.
Can you expand on what Ferri's book teaches that Bernstein's doesn't? And why does the Boglehead's guide expand on that knowledge base?
Since you write that all three are pretty good basic approaches I get the impressions that some of them might be superfluous once one has digested the others. Is that the case?

What about Bernstein makes you think he's more about preserving than building wealth? His arrows on his efficient frontiers? I guess I'm missing something since my takeaway from his books were more along the lines of: secure wealth growth is best attained by not-losing rather than actively trying to win.

I understand that index investing is a means to an end, specifically for a small fish investor to diversify across the entire small cap value index, say, without the need for million of dollars to do so. Every index fund has its own policy that needs to be read with a magnifying glass before they get your money. So the idea with indexing is to replace the careful technical analysis of separate stocks, with a careful analysis of how your intended index fund intends to invest (and charge you) the money. So I guess what I really need to know is, what are the pitfalls of index investing and how much do they differ from the classical investing textbooks like The Intelligent Investor and The Little Book That Beat The Market.

Given that Danish investment funds happily charge 3%, and a 10% high-water mark fee, while the IRS takes at minimum 27% up to 47% beyond income above 7100$ I'll say that taxation and fees are currently the biggest hurdle when building a portfolio I can actually live off of. Unless I can scrape together 100 years worth of expenses for my portfolio...

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jennypenny
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Re: Index investing and literature on value investing?

Post by jennypenny »

FBeyer wrote:
IlliniDave wrote:All About Asset Allocation by Rick Ferri, The Bogleheads' Guide to Investing and The Bogleheads' Guide to Retirement Planning are all pretty good, basic approaches. They emphasize the how-to more than the why.
Thank you for the book recommendations.
Can you expand on what Ferri's book teaches that Bernstein's doesn't? And why does the Boglehead's guide expand on that knowledge base?
Since you write that all three are pretty good basic approaches I get the impressions that some of them might be superfluous once one has digested the others. Is that the case?
There are good summaries of those books on the Bogleheads Wiki ... https://www.bogleheads.org/wiki/Categor ... nd_authors

IlliniDave
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Re: Index investing and literature on value investing?

Post by IlliniDave »

FBeyer, your words "my takeaway from his books were more along the lines of: secure wealth growth is best attained by not-losing" sums up his approach pretty well. He runs an investment firm that caters to clients with a net worth of $10M minimum, and those people are essentially playing a different game with their money than the middle class person trying to scrape up just enough to retire on. Basically, in his philosophy, I won't be able to retire significantly early as I'd need to size for 2% "SWR" maximum (essentially so much money that really your only concern at that point is inflation).

One thing about Ferri's book is that he shows a lot of data on asset correlation. It's pretty much a how-to manual that talks a little about all the different asset types, their correlations, how they have played together in a portfolio, and tax considerations (for US), value premiums, etc. Without sitting down to compare the books next to each other, it's hard to say for sure if there is anything in Ferri's book that Bernstein does not cover one way or the other. Maybe you can find a copy in a library and judge for yourself if you think the book has merit in addition to Bernstein's books.

Ferri and Bernstein are both guys I like to read a lot. Both participate on the forums over at bogleheads.org, and if you threw your questions out there you'd probably get more comprehensive answers than I've given. It's been a 2-3 years since I've read anything on portfolio construction and I've never been strong with rote memory skills. The community there is familiar with the work of both guys.

Tyler9000
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Re: Index investing and literature on value investing?

Post by Tyler9000 »

Thanks for the Ferri recommendation. I'll have to read that.

While it's not specifically about index investing, I always recommend "Fail Safe Investing" by Harry Browne. In it, he lays out seventeen "rules for investing" that apply particularly well to indexers. He also outlines the theory behind the Permanent Portfolio. Even if the PP isn't for you, his thought process is insightful and will make you think about how to similarly justify your own portfolio beyond back tests and predictions of the future.

FBeyer
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Re: Index investing and literature on value investing?

Post by FBeyer »

IlliniDave wrote:FBeyer, your words "my takeaway from his books were more along the lines of: secure wealth growth is best attained by not-losing" sums up his approach pretty well. He runs an investment firm that caters to clients with a net worth of $10M minimum, and those people are essentially playing a different game with their money than the middle class person...
But!
Playing not-to-lose is a completely normal approach in environments where amateurs often interact with skilled people. It is a standard approach to attaining goals in mixed environments. I honestly don't think the idea is presented because his clients are filthy rich, but because it's a sensible strategy for any small term investor. It's the only sensible way to start out it seems. When you've gotten your feet wet, you can start worrying about OMG GAINS-gains, rather than your 4% CAGR.

IlliniDave
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Re: Index investing and literature on value investing?

Post by IlliniDave »

FBeyer, if you're buying mutual funds, index or otherwise, you're hiring experts to interact with the other experts in the markets. Look at a typical "life strategy" or "target retirement" fund, or even the old "age in bonds" rule-of-thumb. The most aggressive/risky allocations are for the younger investors becoming ever more conservative later in life when there's much more to lose and less time to make up for it. Not talking about "OMG" gains, just the simple idea that in order for investments to grow it means taking risk over time (risk is where the return comes from, time is where compounding comes in).

A quote from Dr. Bernstein is, "When you've won the game, why keep playing?". I plan to retire before I've completely won the game by his definition, so I can't just stop playing (and even if I could, I'm not sure I'd want to--I enjoy investing and would probably retain it as a hobby). That is why I say his way is too conservative for me. Not necessarily the investment mechanics, but the approach of piling up wealth until you've got north of 50X then retiring from the game. That would cost me maybe 10 years of my life.

Certainly every investor as an individual needs to examine his own ability to stomach risk (risk tolerance) and deploy his investments accordingly. Some investors are happy holding all equities, even leveraged. Others won't be able to sleep at night with even 50% equities. The psychology of investing (behavioral investing I think they call it) is a whole field of study unto itself. So it's assumed the whole notion of higher risk when young giving way to lower risk as age and wealth increase is to be tailored to the individual. What would be unacceptably high risk to investor A might be relatively conservative to investor B.

BTW, if you can find a low-risk, reliable/automatic 4% return in today's environment I'd suggest jumping on it!

Noided

Re: Index investing and literature on value investing?

Post by Noided »

Tyler9000 wrote:Thanks for the Ferri recommendation. I'll have to read that.

While it's not specifically about index investing, I always recommend "Fail Safe Investing" by Harry Browne. In it, he lays out seventeen "rules for investing" that apply particularly well to indexers. He also outlines the theory behind the Permanent Portfolio. Even if the PP isn't for you, his thought process is insightful and will make you think about how to similarly justify your own portfolio beyond back tests and predictions of the future.
Do you recommend "Fail Safe Investing" over the more recent "Permanent Portfolio" book by Craig Rowland?

Tyler9000
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Re: Index investing and literature on value investing?

Post by Tyler9000 »

IMHO, the Rowland book is a better manual for the Permanent Portfolio. It goes into a lot of detail and covers topics (like ETFs and legal issues with overseas bank accounts) that did not exist in Harry Browne's time.

"Fail Safe Investing" is an excellent book even if you're not into the PP. Much of it is simply really good advice that you will wish someone told you when you were younger.

FBeyer
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Re: Index investing and literature on value investing?

Post by FBeyer »

IlliniDave wrote:...
BTW, if you can find a low-risk, reliable/automatic 4% return in today's environment I'd suggest jumping on it!
I would never try to find anything in today's environment, no matter what date today is.

I'm looking to learn how to build a portfolio that will provide me with a somewhat non-hyped return in good times, and a lot less pain in bad times. I'm looking at the 10-15 year horizon in regards to the convergence of return, not last year.

But until I put money down, it's still all academic, hence my need for more information of the pitfalls and theory of stable portfolio construction.

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