From time to time in this column, I have recommended the books of Larry Swedroe. I like his writing because we share the same investment philosophy.
By ELLIOT RAPHAELSON
Tribune Media Services
He has written a new book, “Think, Act and Invest Like Warren Buffett” (McGraw Hill). Although the book is only 134 pages, it contains an abundance of excellent advice, and I recommend it highly. It has also been recommended by Burton Malkiel and William Bernstein, who have a great deal of investment expertise and whose books are also excellent.
At the beginning of the book, Swedroe cites some of Buffett’s investment philosophy, including these pithy maxims: “The most important quality for an investor is temperament, not intellect,” and “Investment is simple, but not easy.” Swedroe points out that while it is simple to invest like Buffett (with a well-designed plan), it is not easy to stick to it. Emotions such as fear, panic and greed are not easy to control, and when investors allow such emotions to take over, “even well-designed plans end up in the trash heap.”
Swedroe also points out that although the most investors consider Buffett one of the greatest investors alive, the majority do exactly the opposite of what he recommends.
I strongly concur with the following of Buffett’s advice and opinions:
—“By periodically investing in an index fund, the know-nothing investor can actually outperform most investment professionals.”
—“Most investors … will find that the best way to own common stocks is through an index fund that charges minimal fees.” Buffett believes that indexing works because investors don’t have to time the market or select individual common stocks or actively traded mutual funds.
—Active strategies result in higher fees as well as higher commissions.
—Investors do not benefit from forecasts of so-called economic and market experts. You should ignore forecasts because they tell you nothing about where the market is heading.
In a particularly worthwhile chapter, Swedroe discusses risk and asset allocation decisions. He argues that two “alternative investments” worth considering are real estate and commodities. A convenient way to invest in real estate is by owning an index fund such as Vanguard’s REIT Index Fund. (I have invested in this fund for several years with good results.) As for commodities, Swedroe feels that they help diversify a portfolio since they do not move in lockstep with common stocks and bonds. He recommends investing in commodity indexes through mutual funds or ETFs.
The book contains an excellent chapter explaining the keys to a well-designed portfolio, with many helpful examples.
Not everyone should be his own financial planner, and Swedroe devotes one chapter to helping readers decide whether they should hire a financial adviser and, if so, how to select one. Swedroe cites three criteria: a fiduciary standard of care; advice based on science, not opinions; and investment planning integrated into an overall financial plan.
Swedroe closes the book with “30 rules of Prudent Investment,” a few of which bear special note:
“The more complex the investment, the faster you should run away.”
“A well-designed plan is necessary for successful investing, but you must have the discipline to stay the course, rebalance and tax-manage as needed.”
“The safest port in a sea of uncertainty is diversification.”
“Stock investing is a positive sum game; expenses make outperforming the market a negative sum game.”
“Never work with a commission-based investment advisor.”
This book reinforces my core belief about investing success. Develop an investment plan consistent with the risks you are willing to take. Build a diversified portfolio consisting primarily of low-cost index funds of bonds, common stocks and alternative investments. Rebalance once a year. Don’t make changes based on the latest fads and forecasts by so-called experts.
Follow this approach, and you will do better than the vast majority of investors. I have followed this philosophy for over 20 years, and I have never regretted it.
Elliot Raphaelson welcomes your questions and comments at email@example.com.