Book Review: A Random Walk Down Wall Street

First published forty years ago, A Random Walk Down Wall Street by Burton G. Malkiel is one of those books – much like Benjamin Graham’s The Intelligent Investor – more referred to than actually read.

Malkiel’s central thesis – that equity markets are so efficient at pricing stocks relative to their risk that the vast majority of investors would do best to buy an index mutual fund rather than invest in individual stocks or buy an actively managed mutual fund – has utterly demolished the other side in the battle of investment ideas, even if the war of investment ideas rages on in the world, oblivious to the total intellectual victory of one side.

Since a majority of individual equity investors – in addition to institutional investors – do not yet embrace in practice the Random Walk’s Efficient Market Hypothesis, more should probably read this book to realize that the battle has already been decided.

Lately it does feel as if the tide is turning – as both more individuals and more institutions realize that although some individuals and some managers may ‘beat the market’ some of the time, few managers beat the market often enough to justify their fees. And further, that even if some managers did regularly beat the market in the past, it’s quite difficult to know in advance which ones will beat the market in the future. The resulting logical choice that more and more people make – despite the extraordinary marketing efforts of the Financial Infotainment Industrial Complex – is to purchase index funds.

 A Random Walk‘s impact

How important is Burton Malkiel and his book? One measure of his book’s impact is the index mutual fund industry.

At the publication of the first edition of A Random Walk in 1973, the ‘index fund’ did not yet exist, and instead was something Malkiel mused about:

“What we need is a no-load, minimum management-fee mutual fund that simply buys the hundreds of stocks making up the broad stock-market averages and does no trading from security to security in an attempt to catch the winners. Whenever below-average performance on the part of any mutual fund is noticed, fund spokesmen are quick to point out, ‘You can’t buy the averages.’ Its time the public could”

Shortly thereafter, John Bogle at Vanguard proposed the creation of the S&P 500 index, which became available to the general public in 1976. Malkiel became a director at Vanguard fund and may take considerable credit for the intellectual authorship of this superior idea.

The Tide is Turning

After reading Malkiel’s A Random Walk, I was fascinated to learn about the following shifts in the mutual fund landscape in favor of indexing:

For eight years in a row leading up to 2013, domestic (US) actively managed equity funds experienced net outflows, while domestic index funds experienced inflows.

rise_of_index_investing
Steady Growth of Index Fund Investing. Source: icifactbook.org

Of the $167 Billion in net new money invested in mutual funds1 in 2013, $114 Billion went to index mutual funds.

As a result of these trends, equity index funds, as a share of all equity mutual funds, has hit a high of 18.4% in 2013, up in a steady increase almost every year from just 9.5% in 2000.

Malkiel’s book does not explain all of this shift, nor did it cause it, but it has provided the popular intellectual justification behind the investment of hundreds of Billions of dollars per year. That’s a pretty cool legacy that should at least be added to his Wikipedia page or something.

Great writing

Malkiel carefully navigates that difficult ridge line between technical writing that includes academic research, including probabilities and statistical methods, and fundamental security analysis – upon which he bases his ideas – and popular interpretations and advice for the average investor.

While stock prices may be random, his writing is anything but random. He’s careful and logical and subtly funny too.

I expected the academic case for the Efficient Market Hypothesis – for which A Random Walk is most famous – but I am pleasantly surprised at how practical, accessible and prescriptive the rest of the book is on constructing an individual’s investment portfolio.

How to value stocks – two ways

Malkiel posits two ways to determine the value for any stock.

Fundamental valueBenjamin Graham in The Intelligent Investor taught us the theory and technique for determining the fundamental value of securities.

In plainest terms, you have to determine all of the future cash flows of a security, and then apply the discounted cash flows formula to determine the present value of all future cash flows. The sum of all discounted cash flows equals the fundamental value of a security.

The great thing about this technique is that you can know the actual worth of a stock, for example.2

Furthermore, asset prices periodically revert back to fundamental values, so if you can do this technique you can know in a sense where prices are headed, at some point in the future.

Many investors – including probably the majority of mutual fund portfolio managers, Wall Street analysts, and stock-picking hedge fund managers – employ fundamental valuation techniques when selecting stocks. Certain bottom-up investors, also known as value investors, believe that they can achieve impressive results using fundamental valuation techniques.

warren_buffett_fundamental_investor
This guy has practiced fundamental investing pretty successfully

Graham’s most famous student Warren Buffet seems to have done pretty well using this technique.

The terrible thing about this technique is that:

a)    Its incredibly hard – ok it’s impossible – to actually know what all future cash flows of a stock will be – so we end up adopting models of the future that include substantial guesswork about earnings growth (or shrinkage);

b)   The appropriate mathematical discount rate for determining the present value of all future cash flows is also always an estimate, introducing a further element of imprecision to what appeared at first to be a precise process, and;

c)    Market prices can remain widely divergent – above and below – from fundamental value for long periods of time. “The market can remain irrational longer than you can remain solvent” is an old Wall Street phrase that captures just this type of problem with fundamental analysis. It’s an unfortunate but true statement that sentiment and irrational factors – the eternal struggle between fear and greed – and technical factors such as the ebb and flow of investment funds – can set the price of stocks far away from fundamental value for long periods of time.

So fundamental value techniques, explained by Malkiel as well as critiqued by Malkiel, are a commonly used technique but not a panacea for stock market investing.

Investor Sentiment – Malkiel credits Economist John Maynard Keynes as an early proponent of the truism that the combined madness and wisdom crowds – also known as investor sentiment – can carry along the price of individual stocks as well as the general level of the market, irrespective of fundamental value. Believers in the theory of investor sentiment may invest with the idea that they can anticipate future interest in a stock or in the market by understanding investing crowd psychology.

When it comes time to sell, the price of a stock will be buoyed by other believers in the ‘story’ of the stock or the market, willing to buy in at the same or higher prices. Even for fundamental value investors, an owner in equities has to depend to some extent on the future participation of others in order to receive value in the secondary market for any shares sold.

This is sometime described by the shorthand phrase ‘The Greater Fool’ theory of investing. Meaning, I don’t necessarily need to know anything about a stock’s fundamentals as long as a Greater Fool than me is willing to buy my shares when I want to sell.

The great thing about ‘investor sentiment’ investing – which by the way I would posit 99.5% of all individual investors depend on much more than fundamental value investing – is that you don’t need to do much homework or heavy math. Just get a ‘feel’ for the direction of the market or the ‘story’ of the stock, and away you go. Again, this is basically how everyone invests in stocks in practice.

I mean, do you know any non-professional stock investors who model out all future cash flows and then apply an appropriate discount to obtain a present value? No? Me neither.

The problem with investing largely on this theory, however, should be obvious for a number of reasons:

a)    While irrational exuberance (and its evil twin “irrational lugubriousness”3) can dominate for some time, it’s a ridiculously blind way to invest. We all do it of course, but we’re blind. And we should acknowledge our blindness in advance.

b)   Bubbles grow out of Greater Fool theory investing, and the end of bubbles is always ugly and painful.

c)    Sentiment can and does change much faster than fundamentals, adding unwarranted volatility to markets as well as possibly to unwarranted activity in our own investing. We humans change our minds twice a day before breakfast and four times on Thursdays. That kind of volatility of sentiment tends to hurt our investment portfolios.

financial_bubbles
Financial bubbles arise from ‘investor sentiment’ investing

So which way of investing is right? Neither!

As investors we often adhere – at least in theory – to one of these two methods.4 But neither tends to serve us well, or well enough, to achieve an edge over any other investors.

Malkiel advances the Solomonaic wisdom5 that both theories are right, and both are wrong.

Certainly both fundamental value and investor sentiment do determine market prices in a confusing, seemingly random, combination. The problem is that with most stocks we compete with hundreds, thousands, or tens of thousands of extremely smart and knowledgeable investors. With so much competition to achieve the best returns for our capital, we rarely have the chance to outguess others in a profitable way.

We try and try, but as Malkiel’s and others’ academic research has shown, precious few professionals can achieve a better result than the market as a whole. As individuals we have even less chance to outperform than the professionals.

‘Tis The Gift To Be Simple

tis the gift to be simple

Malkiel’s famous conclusion in A Random Walk is that most people would do best by trying to simply earn the market returns of the broad market – rather than attempt vainly to ‘beat’ the market.

As the old Shaker dance goes, ‘tis the gift to be simple, ‘tis a gift to be free. The modest, simple, low-cost index fund beats managed funds most of the time, and it also beats an overwhelming majority of actively managed funds over extended periods of time.

 

Since all mutual funds in aggregate are made up of the entire market, logically the aggregate returns of all mutual funds will reflect the aggregate returns of the entire market. Roughly half will ‘beat the market’ in any given year, and roughly half will underperform the market. However, past performance – as the clichéd disclosure goes – does not predict future results.

With each successive year you compare actively managed mutual funds to market returns, fewer and fewer actually ‘beat the market.’

In practice this is what academic studies confirm, except for the fact that actively managed mutual funds tend to lag, in aggregate, market returns by approximately the fees they charge. Which fees tend to range from 0.75 to 1.5% of assets.

Index mutual funds by contrast tend to charge 0.1% to 0.35% fees and so tend to underperform their respective markets by a much smaller amount.

Forty years later, hundreds of billions of dollars flow into index mutual funds annually, in large part due to Malkiel’s popular presentation of these simple ideas.

 

Final thoughts and caveats on index investing

S&P500 not entirely diversified

About one third of all indexed investment money currently resides in S&P 500 index mutual funds. The S&P 500 Index consists of the largest 500 US companies, which make up 75% of total stock market value in the United States. As such, this index serves pretty well as a proxy for market exposure, but investors should understand that it consists of only large companies and only US-based companies.

SP500_Share_of_index_money
S&P500 share of Index Funds. Source: ICIFactbook.org

Investors in the most popular index fund do not get the diversification of ‘mid-cap’ or ‘small cap’ companies, many of which may ‘beat the market’ in any given year or even long period of years. Furthermore, some research suggests that smaller capitalization stocks may outperform larger capitalization stocks in the long run. This may be because smaller companies appropriately offer higher returns because they are smaller and possibly inherently riskier. I don’t think the research is definitive on this point, but at the very least investors in the S&P 500 should know that they’re only getting exposure to 75% of the US stock market, and only the biggest companies.

Perhaps more importantly, investors in the S&P500 index forgo exposure to the majority of public companies – approximately 60% – that are not listed on the US stock exchanges. S&P500 index investors miss direct exposure to the public companies of Europe, Japan, Australia, Africa, Latin America, China, and India – any of which may ‘beat the market’ represented by large cap US companies. Of course, equity markets are linked and responsive to one another, and the largest US public companies have extraordinary exposure to non-US growth, but the effects are indirect. S&P 500 index investors should know they are not as geographically diverse as they could, and probably should be.

Author Lars Kroijer argues in his book Investing Demystified, persuasively I think, that the logical approach for someone who embraces the Efficient Market Hypothesis of A Random Walk is to invest in an ‘all world equities’ index. This product exists, and offers a cheap, maximally diversified way to wholly embrace Malkiel’s approach.

Market-weighting indexes have drawbacks

The next problem with the S&P 500 index is that it is designed as a market-weighted index, meaning investors get their money allocated to the component stocks of the index in their current market-capitalizations proportion.

Here’s the problem with that. If Apple Inc makes up 3% of the S&P 500 index, and investor sentiment pushes up the value of Apple shares when the iShoe gets announced, such that the weighting of Apple becomes 3.1% of the largest 500 companies in the US, then index funds are forced to buy more Apple, to remain in line with market-weightings.

The_iShoe
Admit it. You would totally buy the iShoe

This type of forced buying acts to further push up shares of Apple. A self-reinforcing market mechanism – when buying forces more buying – creates a troubling feedback loop that probably pushes the stock away from fundamental value and possibly creates opportunities for non-indexed money to take advantage of index money.

Its not terribly hard to see how the largest capitalization stocks could be pushed to prices higher than fundamentally warranted as a result of too much S&P 500 index money for example, which would tend to dampen returns for investors in the largest capitalization stocks.6

As Malkiel describes repeatedly throughout A Random Walk, certain smart investments cease to be as smart when everybody does them. The success of the S&P 500 index mutual funds in particular may make future investing in the S&P 500 index less attractive for the purposes of achieving broad market returns.

In this case a simple solution is to diversify into a broader market index like the Wilshire 5000, or the kind of total world equities index advocated by Kroijer.

a random walk

Please see related post, All Bankers Anonymous book reviews in one place!

Please see related book reviews:

The Intelligent Investor Benjamin Graham

The Signal and The Noise by Nate Silver

Investing Demystified by Lars Kroijer

And related posts:

Nate Silver on the Efficient Market Hypothesis

Lars Kroijer on Agnosticism over Edge

 

 

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  1. Defined by the report as “new fund sales less redemptions combined with net exchanges”
  2.  Or annuities, private companies, bonds, longevity insurance, oil and gas leases, or income-generating real estate. If a financial instrument has cash flow, this is the way to value it. By the way, as a side note, how do I know gold isn’t a real investment? No cash flow.
  3. Thank you. Thank you very much. In the future, when I am Fed Chairman, I will just whip that phrase out during a Great Recession to show how the market is excessively pessimistic and stocks are about to soar. Then later I will have it trademarked. Who wouldn’t buy my next book titled ‘irrational lugubriousness?’ It has a nice ring to it.
  4.  In practice, as I mentioned before, 99.5% of all individuals just punt with the investor sentiment method.
  5. By that I mean: Split the baby in half, leaving nobody happy.
  6. That, Alanis, is a much better example of irony than the proverbial black fly in the Chardonnay, which is really just an example of something that’s kind of a bummer.

Guest Post: The Simplest Investment Approach, Ever

Editor’s Note: Lars Kroijer is a former hedge fund manager, and the author of two books. He previously posted here on the advantage of conceding ‘edge’ in personal investing. I appreciate his debunking the value of high-cost financial services.

 

You probably can’t outperform the market – here is how you should invest once you accept that

As investors we are bombarded with stock tips about the next Apple or Google, read articles on how India or biotech investing are the next hot thing, or are told how some star investment manager’s outstanding performance is set to continue.  The implicit message is that only the uninformed few fail to heed this advice and those that do end up poorer as a result.  We wouldn’t want that to be us!

do_you_have_an_investing_edge
Do YOU have an edge investing? Doubtful.

What if we started with a very different premise?  The premise that markets are actually quite efficient.  Even if some people are able to outperform the markets, most people are not among them.  In financial jargon, most people do not have edge over the financial markets; they can’t consistently outperform the market by picking different securities / sectors / geographies from the market as a whole, especially after costs.  Nor are they able to pick which of the thousands of fund managers have the ability to do it for them.  Accepting, embracing, and acting on this absence of edge should in my view be a key moment in most investor’s lives.

The absence of edge does not mean that you should avoid investing.  Doing so would exclude you from potentially exciting long term returns in the equity markets, or benefitting from the security of highly rated government bonds.  Also, what else were you going to do – leave your money under the mattress or in a bank at zero interest?  Instead we should assume that the current market prices of securities capture all available information and analysis, and that the price reflects that security’s future risk/return profile.  In equities we should then pick the broadest possible selection of stocks because just like we don’t know which one stock will outperform, we don’t know which sector or geography will outperform.

And what is broader than an index that track equities from all over the world in the proportion of value that market forces have already put on them?  With a world equity index tracker we maximize diversification and minimize exposure to any one geography, sector, or currency.  And since we simply track an index (like the MSCI All Country World, etc.) it is very cheap to put together for a product provider like Vanguard, iShares, etc., and thus cheap to us.  If an all equity exposure is too risky, you can combine this world equity portfolio with government bonds in the proportions that suit your risk profile.  The lower the risk desired, the more bonds you want.

global_etf_investing
How much of the world equity market to invest in? All of it

So my key takeaways to most investors can be summarized as follows:

  1. You almost certainly do not have edge in the financial markets.  That’s ok.  Most people don’t, but you should plan and act accordingly.
  2. There is an easy and cheaply constructed portfolio which is close to optimal.  It combines the highest rated government bonds in your currency with the most diversified possible world equity portfolio.  Get close to that in the right proportions, which depend mainly on your risk tolerance, stick to it and in my view you are doing better than 95% of all investors.  That’s it – two securities: one being an index tracker of world equities and the other a security that represent government bonds of maturity and currency that match your need.  Both equity and bond exposure perhaps via an ETF.  Simple perhaps, but you capture an incredible diversification of exposures via the equities and the portfolio is at your risk appetite when you incorporate the bonds in a proportion that suit your risk.  You can add other government and diversified corporate bonds if you have appetite for a bit more complexity in your portfolio, but the portfolio is very powerful even without those.
  3. Your specific circumstances do matter a great deal.  Think hard about your risk appetite and optimizing your tax situation.  But also pay attention to your non-investment assets and liabilities – many people already have a disproportionate exposure to their domestic economy through their house and some sector via their jobs.  Don’t add to this concentration risk with your investment portfolio.
  4. Be a huge stickler for costs, don’t trade a lot, and keep your investments for the very long run.  The portfolio above should only be implemented via extremely cheap index tracking products that charge 0.25% per year or less.

Follow these steps and I think you will have a personal portfolio strategy that lets you sleep well at night, knowing that you have created a powerful and diversified portfolio cheaply, tailored to your risk appetite.  To emphasize the point of costs, suppose you are a frugal saver who diligently put aside 10% of $50,000 annual income from the age of 25 to 67 that you invest in world equities.  Further assume markets return 5% real per year in line with historical returns (ignoring taxes).  Considering a typically 2% annual cost difference between an index tracking product and an actively managed fund (potentially in addition to the cost of an advisor), as you get ready to retire at age 67 the difference in the savings pot is staggering.  You are left better off by perhaps $250,000 in today’s money simply by investing with an index fund as opposed to an active manager.

porsche_savings_from_low_cost_mutual_funds
Can index funds save you enough to afford this?

If you think you have great edge in the market and think you could easily make up this 2% annual cost difference then by all means pick an active manager or your own stocks.  If not, then the sooner you shift out of the expensive investment products or active stock picking and into cheap index tracking products the better off you will be.  To put things in perspective consider that these additional and unnecessary fees for just one saver over their investing lives could buy 6 Porsches.  And paradoxically this is money paid to the finance industry from a saver who could typically not afford to drive a Porsche.

 

Lars Kroijer is the author of Investing Demystified – How to Invest Without Speculation and Sleepless Nights from Financial Times Publishing.  He founded and ran Holte Capital, a London based hedge fund in 2002.  You can follow him on Twitter @larskroijer.

Please also see related posts:

Agnosticism Over Edge Can Earn You 7 Porsches

Book Review of Investing Demystified

Podcast Part I – Lars Kroijer on Global Diversification

Postcast Part II – Lars Kroijer on Having Edge

Lars on CNBC discussing his book Money Mavericks

 

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The Efficient Market Hypothesis: The 7 Levels of Nate Silver

Nate_SilverOne of the most important, but controversial, ideas of investing is the ‘efficient market’ hypothesis.

I say important, because it provides a great starting point for approaching investing and markets humbly, as well as for approaching the Financial Infotainment Industrial Complex with a healthy dose of skepticism.  Most investors would be better off if they understood and believed in the efficient market hypothesis.

I say controversial because extreme – or rigid – versions of the efficient market hypothesis can be either disproven or mocked or shown to be untrue in a variety of ways.

Why is this on my mind?

In the next few days I’ll be posting a podcast interview I did a few months ago with author Lars Kroijer, whose book Investing Demystified builds on the basic idea that very few of us actually have an ‘edge’ in the markets. As a result, we would be better off adopting a simple, low-cost approach to our investments.

Reviewing that podcast interview reminded me of my favorite presentation of the efficient market hypothesis, from Nate Silver’s The Signal and The Noise.

Silver doesn’t accept the discredited rigid definition of the efficient market hypothesis, but rather builds a series of increasingly accurate versions through steps 1 through 7.  I read this portion of the Silver book to Kroijer, so I thought I’d just post the transcript of our interview here, as a preview to the upcoming podcasts:

——————————

Michael:          My favorite version of the efficient-market hypothesis was written by Nate Silver in The Signal and the Noise. Have you read that book?

Lars:                No.

Michael:          Do you know who he is?

Lars:                The New York Times guy? [More recently, ESPN, of course]

Michael:          Yeah and Fivethirtyeight.com where he does political forecasting. He’s an interesting thinker and I really recommend the book. But he has a statement of the efficient-market hypothesis that matches his view of the world, which is a probabilistic view in which you end up saying things much less certainly about the future, but maybe more accurately, because the future itself is uncertain. He has seven levels of the efficient-market hypothesis, which I just want to read to you, because it’s really fun.

Level 1:  “No investor can beat the market.”

Okay, that’s very strong, very simple.

Level 2:  “No investor can beat the stock market over the long run.”

That’s a bit, more qualified.

Level 3:  “No investor can beat the stock market over the long run, relative to his level of risk.”

Okay, that’s more sophisticated.

Level 4:  “No investor can beat the stock market over the long run, relative to his level of risk, and accounting for transaction costs.”

Okay, makes sense.

Level 5:  “No investor can beat the stock market over the long run, relative to his level of risk, and accounting for transaction costs, unless he has inside information.”

Makes sense.  The second-to-last one is:

Level 6:  “Few investors can beat the stock market, over the long run, relative to their level of risk, and accounting for the transaction costs, unless they have inside information.”

Finally, the most complete version of the efficient-market hypothesis, which makes sense to me.

Level 7: “It is hard to tell how many investors beat the stock market, over the long run, because the data is very noisy. But we know that most cannot, relative to their level of risk, since trading produces no net excess return, but entails transaction costs. So unless you have inside information, you’re probably better off investing in an index fund.”

Lars:                I like that.

Michael:          He’s a good writer and he has an awesome way of talking about how do we understand the future in a probabilistic way. It’s a sophisticated way of talking about the different levels of extreme efficient-market hypothesis, versus a more – probably correct – nuanced way.

Lars:                I think unfortunately the way it’s sort of been very roughly done in theory, it’s sort of been discredited.

Michael:          If you go to the extreme version, you can discredit it, I think.

Lars:                So no one will really look at it today. It’s not something widely discussed. One of the reasons being is that not many people are really all that interested in discussing it widely. I like what he’s talking about.

 

Please see related post book review of The Signal and The Noise, by Nate Silver

The Signal and The Noise

Please see related post book review of Investing Demystified, by Lars Kroijer

Investing Demystified

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Book Review: Investing Demystified by Lars Kroijer


Can we invest our own personal portfolio in a sophisticated way, to maximize our risk-adjusted returns, without incurring high costs or having to be financial experts ourselves?

In his book Investing Demystified: How To Invest Without Speculation And Sleepless Nights, Lars Kroijer says yes.

Kroijer was a hedge fund manager who argues forcefully against hedge funds, because of their high costs as well as because most active managers claim an ‘edge’ on markets which they are unlikely to really have.

A priest’s guide to atheism

As he says in his introduction, the irony of his position is not lost on him.  It “may seem like a priest writing the guide to atheism.”

As “Anonymous Banker” of course I am personally all in favor of finance folks criticizing, from their experience, the financial industry’s areas of high cost/low value-added.

We need the Lars Kroijers of the world to tell us that “simple is better,” “low cost is better,” “retail investors should avoid complex financial products,” and a better solution exists.

The author says that he designed his book as the grey Volkswagen, rather than the red Ferrari, of investing.[1]

Volkswagen_style_investing
Sensible, unsexy, rational: The Volkswagen way to invest

 

 

60-Second Version of Investing Demystified.

Kroijer helpfully offers a “60-second version” of his book – the 4 take-aways to remember:

  1. We as individuals do not have an ‘edge’ in financial markets.  We should invest accordingly.
  2. We can construct a cheap and simple optimized portfolio using world-equity tracking indexes and the highest-rated government bonds.  We can then choose whether to add a level of complexity by deciding about a) What % of the portfolio should be in our ‘risky’ equities bucket, and b) Whether adding some corporate bonds or risky governments bonds also makes sense
  3. We need to think carefully about personal a) risk appetite b) Tax consequences c) non-investment assets and liabilities such as real estate, income, and debt
  4. We should pay attention to investment and transaction costs as these matter a whole lot in the long run

I like Kroijer’s 4 lessons because they are correct, simple, easy-to-remember guides to personal portfolio construction that eschew hype.  His VW will get you from here to there with minimal cost, minimal risk, and maximum performance.

I also like that Kroijer’s personal background and professional experience make his advice free of national bias.  What he says about personal portfolio construction applies equally to a Belgian, a Brazilian or a Bostonian.

International perspective advantage

One advantage Kroijer brings to the typical discussion of optimal, low-cost, low-maintenance personal investing is that he’s a Dane by birth, a Londoner by choice and profession, and a citizen of the world.  As a result, he solves the personal portfolio puzzle differently than your average American who has a US-centric view of the investing universe.  He’s unmoored from a parochial investment approach.

This matters because:

  • Your dominant currency may not be the US Dollar.
  • Your tax regime may not be the US tax regime.
  • Riskless bonds in your portfolio may not necessarily come denominated in your home currency, or from your own national government.
  • The best, low-cost diversified mutual fund from Kroijer’s perspective is not a Russell 5000 index tracker therefore, but rather a whole-world equity market tracker.  Only through a ‘whole-world’ index tracker, Kroijer argues, can you achieve the optimal point of an efficient frontier portfolio.

Recommendation

I would recommend this book to a friend who has a traditional “Left Brain” orientation with an accounting, engineering, or mathematical background, but who may never have studied personal finance up to this point.  For that person, Kroijer’s vocabulary and engagement with portfolio theory will be quite gentle, because Kroijer never actually goes too far with technical explanations.

For the creative or non-technically inclined, however, Kroijer’s grey Volkswagen approach – and especially the peeks under the hood at the financial theory – may leave them a bit cold.

The practical, diffident, Dane isn’t flashy, and he isn’t trying to entertain.  He’s just rational, right, and could help you get wealthy.

Please see related post:

Lars Kroijer on agnosticism over ‘edge’

Audio interview with Lars Kroijer Part I – On Global Diversification

and related post: Audio interview with Lars Kroijer Part II – On having an ‘edge’ in markets

and an Amazon link to his other book, Money Mavericks, Confessions of a Hedge Fund Manager

Please also see related post: all Bankers Anonymous book reviews in one place.

 


[1] The jacket cover confirms his sensible/boring/diffident approach, as the grey cover with block letters is unconvincingly enlivened with awkward rainbow-colored arrows all pointing in the same direction.  It’s not the red Ferrari of jacket covers either.

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