Wednesday, July 8, 2009

My interest in investing

My current interest in investing started in 2007 when I read an article from San Francisco Magazine called, "The Best Investment Advice You'll Never Get". It starts with a story:
As Google’s historic August 2004 IPO approached, the company’s senior vice president, Jonathan Rosenberg, realized he was about to spawn hundreds of impetuous young multimillionaires. They would, he feared, become the prey of Wall Street brokers, financial advisers, and wealth managers, all offering their own get-even-richer investment schemes. ... [T]o protect Google’s staff, he proposed a series of in-house investment teach-ins... One by one, some of the most revered names in investment theory were brought in to school a class of brilliant engineers, programmers, and cybergeeks on the fine art of personal investing, something few of them had thought much about.
John Bogle and Burton Malkiel gave talks on the statistical superiority of indexed mutual funds and their low fees. Like income taxes, the friction provided by the transaction costs of frequent stock trades or the commission fees of actively managed mutual funds can easily reduce the total value of your investment portfolio by half. You may wind up with more money than you started out with (as investing is not a zero-sum game) but far less than you could have had with a balanced portfolio of index funds.

The simplicity and nonconformity of such thinking appeals to me.

But given that investors using such strategies lost a lot of money in 2008 (knocking out gains from the past five to ten years in some cases), is this still a valid approach? And if so, is it the best approach?

John Bogle was recently quoted as saying:
I read all the time that investors need to move beyond a buy-and-hold strategy, but this strikes me as being a dumb idea. What is the advantage of swapping stock with other people? The stock market system is based on the idea of pitting the interests of one investor against another, knowing that only one will win. People say it's a stock-picker's market but, if your stock picker is good, then mine is bad. It's all a gimmick.
There are other approaches beyond picking stocks and investing in index funds with fixed allocation percentages. At this stage, I still have more questions than answers. In this blog, I will document my attempts to understand economics and learn how to invest.

No comments: