mutual funds

Larry Swedroe presents in 357 pages a broad overview of much of the recent research and discourse presented by rational observers of Wall Street. For the individual investor the author cuts through the hype of Wall Street and forcefully feeds a diet of statistics and research in support of low-cost index funds. For investment advisors this book can be used as an introduction to much of the recent research on stocks and investing. Fans of the writings of John Bogle (Common Sense on Mutual Funds), Jonathan Clements (Wall Street Journal columnist), and Burton Malkiel (A Random Walk Down Wall Street) will particularly enjoy the many reinforcing concepts presented in this text.

Larry correctly argues that to maximize the investor's chances for success the investor should take into account his or her time horizon, allocate assets among categories accordingly, and then diversify using low-cost and (where appropriate) tax efficient index funds or tax-managed mutual funds. Through successive chapters he notes: (1) markets are efficient; (2) active managers of investment accounts cannot add value over the long term, considering the burdens of their fees and taxes; (3)market timing is not a strategy that works over the long term; (4) investors in stocks and stock mutual funds decrease their risk level as their time horizon is extended to 20 years or more; and (5) investor behavior, driven by the emotions of fear and greed, often interfere with good long-term investment results. The real gems of the book are saved for the last chapter, when he brings it all together with some asset allocation recommendations. The appendices should not be overlooked, especially his brief discussions of: (A) selling when a low tax basis is present; (B) why investors should generally avoid variable annuities; and (C) the all-too-common hype today that high net worth investors are better off owning individual stocks than stock mutual funds.

I agree with the comments by other reviewers that DFA is hyped too much. Individual investors who choose to go it alone, without a registered investment advisor, should probably confine most of their index fund search efforts to passive index funds offered by Vanguard (and perhaps a few other select fund companies), and not worry about missing out on the DFA offerings. Larry's discussion of value stocks vs. growth stocks could be a little more focused and reasoned, but the statistics presented on choosing value stock mutual funds are interesting.

This is a good text for those investors desiring an overview of the rational behind passive (index fund) investing. John Bogle's book, Common Sense on Mutual Funds, is a better book for the beginning investor, as it more patiently presents the basic concepts of investing. This book should be considered as one of the next books to read by investors. Larry Swedroe's book gives investors the insight to see beyond the hype of Wall Street. After reading Larry's book (and perhaps others), the investor should then turn to Bruce Temkin's recent text, The Terrible Truth About Investing, especially if the investor thinks he or she has learned all there is to know.

I wholeheartedly recommend Larry Swedroe's new book as an essential addition to every rational investor's library.

This is one of the best books on investing I've read (I've been at this several years, and read several dozen). It seems better argued than John Bogle's Common Sense on Mutual Funds, which isn't bad. Especially helpful was the author's demonstration that index investing isn't the same as investing in the S&P 500. One wants to invest in value, mid-cap, international, and other indices, and Swedroe tells you how and in what proportion. The book's subtle is "the only guide to a winning investment strategy you'll ever need." It sounds grand, but for the average investor (this includes most who think they aren't average) it's probably true. I especially appreciated his advice not to go to the funds, even index funds, for bonds. He doesn't seem to be pushing a product.

But there's something puzzling about the book. If it's one of the best books on investing I've read, it's certainly the best book on investing I've ever read based upon a wrong theory. That theory is Modern Portfolio Theory/Efficient Market Theory. Because he believes it, Swedroe says that value funds (stocks) are cheaper because they are riskier, which he actually argues. One sees the great virtue of the book here: he gives evidence and argument, not just assertion. Still, that all value stocks are distressed stocks is hard to believe, and the claim that risk has nothing to do with volatility is hard to swallow. Instead of saying that the market is all knowing, which is why it is so hard to beat the market, especially given transaction costs, why doesn't he just say something like "in the short run (less than five years), markets are manic-depressive, irrational, but in a way that is very hard to exploit, since there is no clear pattern. If it's hard to know which way a rational market is going to go (random walk theory), how much harder it is to make sense of an irrational market." Everything he says about indexing would still be right, and he wouldn't have to work so

hard to show it's all really rational. (Still, I appreciated his explanation of why Warren Buffett has beat the market: he doesn't just buy good companies; he runs them.)

One other thing. A serious book like this should have an index.

Investors should recall that a 1990 Nobel Prize was awarded to three financial economists whose ideas helped legitimize what is known as 'modern portfolio theory' (MPT). MPT points to an investment strategy that author Larry E. Swedroe says is at variance with the interests and advice of the popular financial establishment (hence Swedroe's contentious title). For followers of MPT, stock and bond market prices represent, very efficiently, all that is known and expected by investors of a security. There is no evidence that markets systematically misprice securities. So, the market prices securities to their value. Markets work. A corollary is that no individual money manager will be able to consistently know more than the market. Wall Street's managed (active) efforts to exploit perceived market pricing inefficiencies fall short. Active managers are undone by higher fees and the taxes that trading profits generate. This is Swedroe's main argument with Wall Street. Stock selection does not work consistently or economically. Active management is flawed by its underestimation of market efficiency and its operating expenses. Bottom line: Money managers don't beat the indexes. Swedroe quotes Benjamin Graham, an icon for stock-pickers, near the end of his career apparently siding with the market efficiency school. Indeed academic research supports the idea that the most important factor in market returns is not stock selection but exposure to key asset classes (e.g., large or small company stocks, "growth" or "value" stocks, international or domestic stocks). Swedroe argues for passively 'managed' index mutual funds and exchange traded funds (ETF) on the basis of their lower expenses and the market's efficiency. Investors should have a globally diversified portfolio of "low correlating" assets because of the unpredictability of certain asset classes moving in and out of favor. Investors seeking greater returns may find them with small capitalization and "value" stocks. Swedroe identifies a key tenet of MPT in Chapter 10, namely, how diversification works to increase the average compound return of individual investments within the portfolio. A little more detail might have been useful in this section. WHAT WALL STREET DOESN'T WANT YOU TO KNOW is a helpful if somewhat repetitive introduction to the basic ideas of modern portfolio theory. The author revisits this material even more persuasively in his later book, RATIONAL INVESTING IN IRRATIONAL TIMES.