The Smartest Investment Book You’ll Ever Read – by Daniel R Dolin

The Smartest Investment Book You’ll Ever Read is a cheeky book title that definitely grabbed our attention. In essence, the author has renamed Active investing as “Hyperactive investing” which sounds pretty bad, and renamed Passive investing as “Smart investing”. Passive makes it sound like you have no control or influence over the outcome, but Smart makes it feel right. The book goes through heaps and heaps of reasons as to why Smart investing is the way to go, and you really can’t argue with these statistics.

“The proven way to beat the ‘Pros’ and take control of your financial future”

The Smartest Investment Book You’ll Ever Read (dot point) Summary

Active vs Passive Management

Part 1 Become a Smart Investor Change Your Investment Life Forever

Chapter 1 – Unbelievable Chimp Story

Financial Times London ran a contest pitting a 5-year-old against a top financial analyst vs one who chose upon the movement of the planets.

They got to pick from the top 100 stocks in the world. The 5-year-old won easily the professional lost 46% and the financial astrologer only lost 5 %. The 5-year-old celebrated at Mc’Donalds.

• The book is about a lot of case studies claiming how little active management actually win

Chapter 2 Unbelievably True Story

• The vast majority is handled by active managers

-Active managing is dumb, passive is smart!

• Active managers believe they beat the market by ‘stock picking’ and ‘market timing’. To forecast whether the market is at a peak or valley and profit from it. Stock picking is choosing stocks that outperform the market
• There is no evidence to suggest that they beat the market. Some do but only the amount by statistical chance.

Chapter 5 – Smart Investing Makes Sense

A good portfolio

• 1 index funds that represent USA stock in broadest terms
• An index that represents international stock in broadest terms
• An index that represents a bond market in broadest terms.

Part 2 Your Broker or Advisor is Keeping You From Being a Smart Investor

Chapter 6 – Brokers Make Money When They Are Hyperactive

• All brokers have the goal of beating the ‘benchmark index’
• If they do not beat the index they are proving to have negative value.
• They do not regularly disclose that 90% of actively managed funds fail to equal or beat benchmark indexes over the long term.
• Hyperactive managers lead the market in one category – stress
• Cost more in fees, 1-1.5% per year vs 0.35% and trade more.
• Trading funds are good for hyperactive investors as they have trading fees
• Much less stressful and expensive to be a smart investor

Chapter 8 – Why Investors Pursue Hyperactive Investing

Marketing – hot shot movies, media

Gambling

The desire to Seek Order – Human tendency to find order where it does not exist. Thus to confuse luck with skill. Widespread vocab in the financial world

Chapter 9 – Activity Myth

• People confuse activity with progress and passivity with the lack of initiative

Chapter 10 – Brokers Aren’t On Your Side

• Make proper asset allocation your new investment goal as opposed to stock picking and market timing.

Chapter 13 – What do you think of these odds?

Professor Oneal’s study in 1993, looked at the performance of all 494 actively managed funds that had as their goal of beating the S&P 500 index for the years 1993 to 1998 and 1998 to 2003

• Managers of these funds amongst the best and brightest … These funds charge more than 8 times the index funds.

Findings – Only 46% beat the actively managed funds in the same period and only 8% beat the index in the second 5 years period.

• Another finding, there is no relationship between fund performs and its fees.
• 2 % beat the market, equal to that of statistical chance