Tuesday, March 11, 2014

[Book Review] Successful Investing Is a Process, Chapter 1

Back on 21st December 2013, I was trawling through the interweb, and I came across an interesting post by The Capital Spectator. His post was about his best financial book picks of 2013. Curious, I went to check out some of the titles, but this one stuck out for me. Not only is it one of the 5 books that he published in his first part of his book bits, but it is also the first title that he listed as well. Whether it is in ranked order or in no particular preference, I did not find any other his other book recommendations to my liking. Mostly, they were tangent topics, with less empirical lessons and more vague ones.

Without further ado, let me tell you about this book!

Successful Investing Is a Process: Structuring Efficient Portfolios for Outperformance 

What really impressed me were actually the philosophy of the book and the comments by the people listed on the back cover. Charles Ellis' book with Malkiel "The Elements of Investing" is by far the best and simplest book that every person should read. It should be a compulsory reading in basic financial literacy in high school (upper secondary). Rob Arnott is a truly respectable man that convinced me that the idea of market cap weighted indices are silly, as well as being a proponent of tactical asset allocation. The other people on the cover have interesting CVs as well, but the kind words by these 2 financial heavy weights made me very interested in what knowledge the book had to offer.

I went online to Amazon.com, I bought the book and I got it shipped over to my grandparent's place in Oregon. My family picked it up and brought it back for me when they went back for a vacation and to visit them. That's right, my present from my family that went all the way to the US for vacation wasn't even a book. It was courier service for a book that I had already bought, haha.

So instead of doing an entire book review, I've decided to do short chapter reviews instead. Firstly, whilst working full-time, studying for my CFA part-time and having a life, I don't have extended periods of time to just sit down and digest the book. Secondly, by reviewing chapter by chapter, it ensures that I don't miss any important points that are noteworthy. Thirdly, it is just too mentally draining to read the entire book, haha.

Chapter 1: The Economics of Active Management

Never before in my life after reading an article between active and passive management do I feel more compelled and surer than ever that fees and commissions in the financial industry is a drag to your returns.

Before reading this chapter, I had the notion that active management is a coin flip between under and out performing the benchmark index. However, after reading this chapter and hearing his very simple examples and explanations, my views has changed markedly.

Basically, would you prefer with certainty that you would almost always get the index returns, or would you generally like to underperform the benchmark, with some years of outperformance?

His pie example is a perfect way of envisioning how much less of "the slice of the pie" that you are getting, due to expensive fees by managers who may or may not provide you with superior returns.

I must admit, after reading this chapter, I feel a lot more inclined to low-cost expense ETFs, compared to the more expensive mutual funds that I currently employ. From my previous post, you can see that I spent the better half of last night researching about foreign ETF strategies since they offer a much larger and comprehensive range of products.

This first chapter was not difficult and explained things I already knew, but he explained them so well and flawlessly that I now look at this subject in quite a new light. Maybe bright white instead of paler yellow.

I can't wait to start the second chapter, but I'm trying to pace myself out and make sure that I also do other important things, like studying for my CFA, haha!

No comments:

Post a Comment

Observe the house rules.