A Wealth of Common Sense – Ben Carlson
A Wealth of Common Sense – by Ben Carlson
Recommendation: 9/10. Date read: 7/21/20.
One of the best investment books that I’ve read in years. Carlson is one of my favorite minds in finance and he also hosts one of my favorite podcasts. In this book he emphasizes how simplicity beats complexity in most investment plans. Many of the complex investment strategies in finance only serve to create the illusion of intelligence and control. Carlson discusses the value of long-term thinking, market myths, diversification, and the importance of self-awareness. As he explains, “Less is always more and trying to implement a more interesting or clever portfolio strategy is akin to threading the needle. Sure, it can work, but trying harder and increasing the number of decisions you make only increases the odds that you’ll make a mistake.” If I had to gift a single book on investing for someone to start off with or to help remind you to maintain perspective and patience in your investments, this would be the one.
See my notes below or Amazon for details and reviews.
My Notes:
Perspective:
“How you frame the world around you determines how certain events will affect your reactions to outside factors than can impact your financial decisions.” BC
Perspective allows you to ignore headlines, gurus, and acting on impulsive emotions that hinder good decision-making.
Reduce external pressure: “Investing doesn’t have to be about beating others or beating the market. It’s about not beating yourself.” BC
Patience:
“Speculation is an effort, probably unsuccessful to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.” Fred Schwed
If you want to be a successful investor, learn how to harness the power of long-term thinking, cut down on unforced errors by reducing complexity), and find the patience to allow compound interest to run its course.
One of the biggest advantages individuals have over professional investors is the ability to be patient. There’s no one to impress and no one’s judging you against your peers.
“Having the correct temperament is far more important than intellect over time.” BC
“Charlie and I always knew we would become very wealthy, but we weren’t in a hurry. Even if you’re a slightly above average investor who spends less than you earn, over a lifetime you cannot help but get very wealthy—if you’re patient.” Warren Buffett
Emotions drive the stock market over days, weeks, years. Fundamentals drive the stock market over decades.
Complexity versus simplicity:
“Less is always more and trying to implement a more interesting or clever portfolio strategy is akin to threading the needle. Sure, it can work, but trying harder and increasing the number of decisions you make only increases the odds that you’ll make a mistake.” BC
Best answer to a complex system is not necessarily a complex response. In portfolio management, best method is based on simplicity, transparency, and reduced level of activities.
Fragmentation benefits players in archaic industries who seek sophistication to justify their existence (see Nassim Taleb, Antifragile). Similar concept applies to the real estate industry.
“The interesting thing about very intelligent and successful people is that they’re usually the ones who have figured out that making things simple is the correct path to success. Because they understand how things work, they are able to appreciate and utilize simplicity.” BC
Self-awareness:
“When ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Warren Buffett
“If you can get good at destroying your own wrong ideas, that is a great gift.” Charlie Munger
Also applies to product: “Most people will get much more out of destroying their own wrong ideas than trying to come up with new ones all the time.” BC
“There are many ways to make money, but when it really comes down to it, the easiest way to lose money is because of psychological and behavioral issues.” BC
Strategy:
“Low-cost passive strategies suit the overwhelming number of individual and institutional investors without the time, resources, and ability to make high-quality decisions.” David Swensen
The point of dollar cost averaging is admitting you don’t have the ability or emotional control to time the market.
Low-quality companies can become bargains. High-quality companies can become overpriced. Great companies don’t always make for great stocks. Terrible companies can become solid investments at the right price point. Value stocks outperform the market (historically) between 2-5%.
Chances of picking an individual winning stock is small while your odds of picking a loser are huge. Survivor bias leads us to think otherwise.
“Instead of concentrating on the central issue of creating sensible long-term asset allocation targets, investors too frequently focus on the unproductive divisions of security selection and market timing.” David Swensen
Asset allocation accounts for 90% of a portfolio’s long-term gains. Market timing and ability to select individual securities account for only 10%.
Diversification allows you to hedge against ‘what if I’m wrong?’
“Remember, there is nothing special about index funds. The biggest advantage they have over the majority of active mutual funds is the fact that they are disciplined.” BC
“Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s easy to beat most folks.” Bear Bryant
Tax inefficient assets (bonds, REITs, high dividend-paying stocks) should go in tax-deferred retirement accounts. Stock index funds and ETFs are more tax efficient and make more sense to include in taxable accounts.
Conscientiousness:
Great investors are conscientious: “Conscientious-minded people tend to save more money because they don’t make impulse purchases or spend too much money on things they don’t need. In fact, those who exhibit this trait tend to accumulate more wealth than less conscientious people, even after accounting for things like education, income, and cognitive abilities.” BC
“Investment philosophy is really about temperament, not raw intellect. In fact, proper temperament will beat high IQ all day.” Michael Mauboussin
Top priority is to become a diligent saver. Save more than you make.
Factors that lead to poor decision making:
Complex problem
Incomplete information or information changes
Goals change or compete with one another
High stress or high stakes
High interaction with others to make a decision
Timing the market:
Peter Lynch studied 30-year period from 1965 to 1995…
If you invested every single year at the lowest day in the market, your return would have been 11.7% annually
If you invested every single year at the highest day in the market, your return would have been 10.6%
If you invested every single year on the first day of the year, your return would have been 11.0%.
Dollar cost averaging with a long time horizon is much less stressful and generates solid returns.
Generally stocks are up 3 out of every 4 years. In five years, it jumps to 90%. In 20 years, US stocks have shown positive returns of all 20-year periods in history.
“Investment wisdom begins with the realization that long-term returns are the only ones that matter.” William Bernstein