September 2003

The Successful Investor Today: 14 Simple Truths You Must Know When You Invest
By Larry E. Swedroe

St. Martin's Press, Truman Talley Books; 352 pages; $25.95; ISBN: 0312309791
Reviewed by William Bregman, CPA/PFS, CFP

When Larry Swedroe spoke at the NYSSCPA’s recent Personal Financial Planning conference, his topic, “Rational Investing in Irrational Times,” raised the question: Are times ever rational? Though they may never be, in his new book Swedroe asserts that our investing habits can and should be so, and he proceeds to divulge his thoughts on the matter.

Simple truth number one, “Active investing is a loser’s game,” goes to the heart of Swedroe’s investment philosophy. This assertion begins with a belief in the efficient markets hypothesis, which claims that all knowledge is public and is therefore currently incorporated into stock prices. Even if an actively managed fund outperformed a passive one, the excess would be eaten up by fees and transaction costs. In a taxable account, taxes caused by portfolio turnover would reduce returns. Swedroe quotes studies that find little consistency in top-rated funds or managers from year to year. Past performance is no guarantee of future returns. Swedroe makes the point that if skilled professionals cannot outperform the market, it is unlikely that unpracticed individuals can. He also takes to task investment firms, finding they spend too much time on sales and too much money in fees. He recommends fee-only planners, to avoid conflicts of interest between sales and fees. He also notes the conflicts of interest inherent in media that sell advertising space to mutual funds.

Despite all this, The Successful Investor Today’s real value is the author’s wholehearted belief that passive investing, combined with asset allocation among broad asset classes, including international securities, produces less risky, smoother, and greater returns over the long run. He combines a technician’s love of numbers with an easy narrative style. Although different from Irrational Exuberance, Robert J. Shiller’s critical scrutiny of stock market activity published in 2000, the two books are connected in my mind because both are effective antidotes to popular delusions about the markets and the economy.

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