More Straight Talk on Investing. John J. Brennan

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СКАЧАТЬ when there was considerable hoopla over the so-called Nifty Fifty—“one-decision stocks” that you could supposedly buy and hold forever. At the time, the 10 largest publicly traded U.S. companies were IBM, AT&T, General Motors, Eastman Kodak, Esso, Sears, Texaco, Xerox, General Electric, and Gulf. They were seen as one-decision stocks because they were world leaders with sustainable business advantages and seemingly would always dominate the market. I remember my parents, who had very little experience with investing, giving me a single share of Eastman Kodak stock for my 16th birthday in 1970 and assuring me I would be able to hold it forever and reap the rewards.

      The Nifty Fifty craze lasted until the 1973–1974 bear market dragged the one-decision stocks down with all the rest. As of December 2020, none of those former market titans rank among the 20 largest-capitalization stocks in the United States; three are among the 50 largest. Six of these companies experienced bankruptcy or a merger. Only two outperformed the broad market over the 51-year period.

      As for Kodak, it posted a 10.8% loss per year from 1970 to 2020. (Kodak filed for bankruptcy in 2012, and since relisting in 2013, it has lost 76% of its value.) The Standard & Poor's (S&P) 500 Index's return for that period was 10.7%.

      To put it in dollar terms, the $60 gift of Kodak stock was worth 18 cents at the end of 2020. The same investment in the S&P 500 Index was worth nearly $10,250 (assuming the reinvestment of all dividends and no taxes assessed).

In addition to a warning of fads, this case study highlights the great risk of holding single stocks. It may appear easy to select the future winner, but as we'll see, it is anything but.

Be Observant: Keep Learning About Investing

      As common sense might dictate, successful investors need to keep absorbing new information. In any endeavor, whether it's parenting, a profession, or athletics, you must keep learning to stay up to speed.

      Your efforts don't need to be time-consuming. Devote a little bit of regular attention (or a regular bit of a little attention) to the markets and to your own investments. Read, on occasion, reputable websites or publications that cover business and investing news. I say periodic attention because it's misleading—and downright hazardous to your wealth—to slavishly follow the movements of the markets or the fortunes of particular segments or companies on a daily, weekly, monthly, or even annual basis.

      What you want to accomplish is threefold:

      1 To deepen your understanding of what happens to your investments.

      2 To protect yourself in case of developments that threaten your investments.

      3 To keep abreast of new opportunities.

      New investment opportunities will surface from time to time. You can distinguish the significant ones from the ephemeral ones by taking a close look at the trade-offs. Should you be willing—as some investors were in the 1990s—to give up the diversification of a broadly based mutual fund in order to seek a higher return by sinking all of your money into one hot-performing technology stock? No way, and I'll explain why in Chapter 6. Should you be willing to give up the safety of a passbook savings account at the bank for a higher-yielding money market fund that invests in high-quality, short-term commercial debt, as millions of investors have done in the last few decades? Sure.

Missing valuable new investment opportunities can hurt you—sometimes a little, sometimes a lot. The rise of money market funds in the late 1970s is a perfect case in point. In retrospect, money market funds revolutionized the financial industry because they offered market interest rates on very liquid, high-quality securities. Investors who continued to keep their short-term savings in non-interest-bearing checking accounts after money market funds became available missed an important opportunity to create more wealth for themselves.

      With any new, innovative financial product, however, there's no need to rush in until it is determined that the solution is truly enduring. As my good friend Burt Malkiel once said: “Never buy anything from someone who is out of breath.” As I mentioned in the Acknowledgments, if you wish to become a student of investing, I suggest you read Malkiel's A Random Walk Down Wall Street. This classic popularized the theory that stock prices take a random and unpredictable path, and thus predicting future, short-term price movements is futile. In his book, Malkiel says “a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.” (I had the pleasure of serving on Vanguard's Board of Directors with Burt for nearly 18 years. He is a great investment mind and was a valued Trustee during his 28-year tenure.)

      Malkiel's random walk theory is an important underpinning of another important innovation: Index mutual funds, which were largely an institutional investment strategy until the mid-to-late 1990s. Indexing is an investment strategy in which a fund seeks to match the performance of a market index (e.g., the S&P 500 Index) by holding all the securities in the index or a carefully chosen sample of them. That may sound less than exciting until you realize that index funds have a tremendous cost advantage that can mean greater returns for their investors. The trade-off is that with an index fund, you will never “beat the market.” It took decades for the merits of index funds to gain traction, but by now millions of investors have realized that the certainty of keeping up with the market is a very worthwhile trade-off for the possibility of beating it. Investors who have forgone investing in index funds have done so to their detriment. I'll discuss the index funds and actively managed funds later in this book.

      So, there you have it. I've introduced you to the four priorities of confident investors. In the next chapter, I'll cover another important factor: trust.

      In a Nutshell

      You can invest successfully and confidently if you establish four priorities:

       Do your homework. Develop an understanding of investment basics, such as the concept of the risk/reward trade-off.

       Develop good habits. Become a disciplined saver. Be a buy-and-hold investor. Resist the temptation to keep score too often.

       Avoid fads. Refrain from abandoning good habits in order to embrace the latest investment sensations. You can wipe out the gains of many years of patient investing by falling for a scheme or “sure thing.”

       Keep learning about investing. Stay abreast of new opportunities and protect yourself from developments that threaten your investments.

2 You Gotta Have Trust

      It all starts with trust. To succeed as an investor, you first must trust yourself to make sound decisions. Second, you must trust the world's economies and the financial markets to be your allies in building wealth over the long term. Third, you must trust in time and the power of compounding—the way that “money makes money.” Finally, you must trust in the firms and financial professionals who serve as your partners in your investing journey.

      When I was nearly finished with the first edition of this book in the summer of 2002, the broad issue of investor trust and confidence was a staple topic of newspapers and newscasts. Not only had the stock markets taken a proverbial drubbing during the previous few years, startling revelations about misdeeds at companies, including Enron, Tyco, WorldCom, Xerox, and Qwest, resulted in huge investor losses and shook the capitalist system to its core. All, or nearly all, of the value of these once-admired companies was wiped away when СКАЧАТЬ