Saturday, 5 May 2012
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: -
- 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.
- 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.
- 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.
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1 comments:
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!
Regards
Pete Comley
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