Heads I Win, Tails I Win: Why Smart Investors Fail...

Spencer Jakab, “Heads I Win, Tails I Win: Why Smart Investors Fail And How To Tilt The Odds In Your Favor,”  Random House, 2016, 262 pp.

Another investment advice book of the “A Random Walk Down Wall Street” genre.  This one by investing columnist Spencer Jakab documenting how most investors have no idea how much money they are shelling out in expenses when placing their portfolios with investment managers.  Even in the best funds, expenses will eat you up; your returns for the average person will come no-where-near the average returns touted in the glossy brochures because of the expenses managed funds impose and the panic-reactions of most people to market downturns when they retreat from the market in a panic and later return when prices are much higher. 

Additionally, what is amazing in this era of do-it-yourself defined contribution pension funds, we are expected to determine how much to invest and where to invest.  Much like being your own plumber, a skill possible for you to learn but unlikely that you will do so.  Author Jakab has watched his readers, family, friends, and colleagues, make the same investing mistakes again and again.  His book illustrates:

My Notes:

Pg. 31:  One of the basic premises of the book is that market timing is futile and costly; leaving the investment alone is the key to successful investment. To emphasize this point, the author describes a fictional investor who, beginning in 1970, saved $2,000 a year, doubling that contribution each decade, but only investing in the S&P 500 at market peaks, the allegedly worst time to invest.  This would include investing in late 1972, August 1987, December 1999, and October 2007.  As awful as that investing strategy sounds, this investor would have $1.1 million to show for it by 2014.  Calculating those returns is tricky since it doesn’t involve a lump sum or constant amounts.  On an annualized basis it comes to 5.5 percent.

Another way of making this point is provided by Putnam Investments that examined the period from 2000 through 2014 and calculated what would happen if an investor were to be out of the market completely for the market’s ten best days.  A $10,000 investment at the outset would be worth $22,118 if left untouched in an index fund through that period of two bull and two bear markets.  But just missing the ten best days would see the ending sum cut in half.  Missing twenty would see it slashed by two-thirds to $7,297.  In other words, around one-half of one percent of the days during that span were responsible for the entire return.

(Another critical point is the need to automatically rebalance: Low cost Target Retirement Funds are an excellent device to accomplish this).  It was particularly difficult to rebalance in a period such as 1995 through 1999 when stocks turned in gains of 28.2 percent compounded, their best five-year stretch in history. (p. 64).

Pg. 89:  The price-to-earnings ratio is an important ratio.  The Standard & Poor’s 500 index and its predecessors have fetched an average P/E multiple of 15.5 times the earnings that those companies produced over the preceding twelve months going back to the late nineteenth century.  That has moved in a broad range from as low as 5 times to north of 40 times.

Pg. 241: A nineteenth-century journalist stated, ‘Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.’