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Saturday, 5 May 2012

I found this book for free on the web via the excellent Moneysavingexpert website.

This book broadly argues that whilst stock market investing promises high returns – either via funds or directly the truth is that in reality the returns for the normal investor have been disappointing. There are a few reasons for this: -

  1. Fees – individual investors have to pay an array of fees. These include bid/offer spreads, stamp duty, professional fees for brokers and advisors, dealing costs, etc. It is not easy to assertain these costs as they are not really clearly disclosed.
  2. Psychological Costs – individuals make mistakes on when they trade often being sucked into rising markets and selling when the pain of falling markets is too low.
  3. Surviorship Bias- this is a direct cost, but more the reported returns of stock exchanges to include only the winners. Because the losers dissappear they are not included in the average returns(as the data can only include shares that exist at the beginning and end of a period being considered). A similar argument applies to funds as poorly performing funds are closed.

The author believes these costs will total about 6% per year, the costs being broadly similar whether an individual invests in funds or individual shares. The funds seem to be based on “actively managed funds” rather than passive funds which track an index, these in theory offer lower costs.

The author reconsiders another form of investing which is simply to use money held in cash accounts such as building society rates. He believes that the returns from equities are usually based on money market rates rather than the rates available to high street savers. The savers rates are often loss leaders and often exceed money market rates by a significant margin.

For those who wish to invest in shares the advise is to drive costs as low as possible and avoid the urge to churn a portfolio too often. The author also seems to advise that investors ought to have some sort of strategy and stick to it. These ventures into the territory of looking at charts and trying to spot trends, the author only seems to consider this anecdotally and it is a weak part of the book in my opinion. I don't believe there is much evidence that this kind of analysis works.

The final section of the book looks briefly at the future of the industry where the author sees the investment industry entering a period of disintermediation – predicting a decline in IFAs, fund managers and an era of lower costs.  


Pete Comley said...

Thank you for the review of the book. You may want to add to readers that they can now download an updated version of the book (v1.1) from http://monkeywithapin.com. It is still free!
Pete Comley