Think, Act, and Invest Like Warren Buffett is Larry Swedroe's 12th book (and his shortest) to help investor's reach their financial goals. These are valuable excerpts:
"The sad truth is that, while Buffett is widely admired, the majority of investors not only fail to consider his advice but also tend to do exactly the opposite of what he recommends."
"Remember, Wall Street benefits from the higher fees and greater commissions generated by active strategies."
"We have long felt that the only value of stock forecasters is to make fortune-tellers look good." -- Warren Buffett
"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees." -- Warren Buffett
"Whenever I am asked about my forecast for the economy or the market, my answer is always the same: 'My crystal ball is cloudy.'"
"Inactivity strikes us as intelligent behavior." -- Warren Buffett
Rebalancing, or the process of restoring a portfolio to its original compositions, is integral to the winning investment strategy."
"The market price already reflects all publicly available information."
"Because surprises are unpredictable and instantly incorporated into prices, you are best served by ignoring the news."
"If I sell now, how will I know when it is safe to buy again? This is the big problem for those who sell during crises."
"While the surfer can wait a day or two for the ocean to calm down, there is never a green flag saying it is safe to invest."
"Investing is simple, but not easy." -- Warren Buffett
"Emotions, such as fear and panic in bear markets and greed an envy in bull markets, cause even well-developed plans to end up in the trash heap."
"In order to be successful you must have a 'system,' a plan that determines your asset allocation based on your unique ability, willingness, and need to take risk."
"Given the tens of thousands of professionals (and millions of individuals) engaging in the effort to beat the market, we should expect some to randomly succeed even over long periods of time."
"Fortunately, there is a large body of evidence on the inability of active management to deliver alpha: performance above appropriate risk-adjusted benchmarks."
"Intelligence does not translate into higher returns. The Mensa (the high IQ society) investment club under-performed the S&P 500 Index by almost 13 percent per year for 15 years."
"Investors are unaware of how poorly they are doing. A study on the subject found investors over-estimated their own performance by an astounding 11.5 percent a year."
"Morningstar found that expense ratios were a better predictor than its star rating."
"Evidence is overwhelming that passive investing is the winner's game. Active management is the loser's game because the odds of winning are so low that it is not prudent to try."
"To get to the net returns (before tax), we must subtract all costs: operating expenses, trading costs, bid-offer spreads, brokerage commissions, market impact cost, and the cost of cash."
"The old and wise saying holds true: 'Those who fail to plan, plan to fail.'"
"You cannot properly evaluate any single investment without considering how its addition affects the risk and expected return of your portfolio, and thus the odds of achieving the plan's objectives."
"Keep in mind that your investment horizon extends well beyond your planned retirement date. And it may even extend beyond your death if you are investing on behalf of your heirs."
'Have you saved enough? If so, why continue taking risk? Far too many investors fail to understand that the strategy to get rich is entirely different from the strategy to stay rich."
"It is important to develop a contingency plan in case your portfolio fails to deliver the returns that your plan anticipated."
"A written IPS (Investment Policy Statement) serves as a guidepost and helps provide the discipline needed to adhere to a strategy over time."
"When we are young, human capital is at its highest point. It is also often the largest asset individuals have when they are young."
"Unfortunately, far too many people follow Peter Lynch's advise to "buy what you know." The result is that they invest heavily in the stocks of their employers."
"A good rule of thumb is to have a reserve to cover six months of ordinary expenses."
"It is important not to take more risk than your stomach can handle. And besides, life is too short not to enjoy it."
"Your first decision is to determine how much of an allocation you will have to riskier stocks versus bonds."
"The higher expected returns of small-cap and value stocks are not a free lunch; they are compensation for accepting incremental risk."
"Since diversification is the only free lunch in investing, you might as well eat a lot of it."
"Bonds have two risk factors: term (number of years to maturity) and default (credit). The longer the term to maturity and the lower the credit rating, the greater the risk and expected returns."
"The central role of bonds in a portfolio should be to dampen the risk of the overall portfolio to an acceptable level."
"A common element of alternative investments (beyond stocks and bonds) is that Wall Street typically makes a lot of money as the purveyors of these products. The good news is that, with the exception of real estate and commodities, the academic research demonstrates that you should not even consider owning any of the other alternatives."
"Taxable investors should have a preference for holding stocks (versus bonds) in taxable account."
"Before investing any taxable dollars, investors should always first fund their Roth IRA and deductible retirement accounts. -- The one exception is the need to provide liquidity for unanticipated funding requirements."
"The risks of individual stock ownership can be easily diversified away by owning index funds that basically own all the stocks in an entire asset class/index."
"Investing in individual companies and only one or a few asset classes has more in common with speculating than it does with investing."
"Even when individuals invest in mutual funds, they typically do not diversify effectively because they make the mistake of thinking that diversification is about the number of funds they own."
"The lowly postage stamp does only one thing, but it does it exceedingly well: it sticks to its letter until it reaches its destination. You must also stick to your investment plan until you achieve your investment goals."
"The rebalancing process is simple, though not easy. This is because emotions can get in the way."
"Another benefit of rebalancing is that over time it will produce a bonus. The reason is that when you rebalance you will be buying at lower lows and selling at higher highs."
"Rebalancing may cause transaction fees to be incurred, and it may also have tax implications."
"A strategy to consider is to have distributions paid in cash, rather than automatically reinvested, and use the cash to rebalance."
"Consider delaying rebalancing if it generates significant short-term capital gains.-- Wait until the gains qualify as long-term"
"Portfolios should be checked regularly (at least quarterly) to determine if there are opportunities to harvest losses."
"Shares of a fund should not be purchased just prior to the date of record for dividend payments to shareholders."
"You should consider working only with a (advisory) firm whose investment strategy and advice is based on the science of investing, not on opinions."
"Remember that while good advice doesn't have to be expensive, bad advice almost always will cost you dearly, no matter how little you pay for it."
"Investors following an active management strategy spend much of their precious leisure time watching the latest business news, studying the latest charts, reading financial trade publications and so on."
"Investing was never meant to be exciting."
"Never invest in any security unless you full understand the nature of all of the risks."
"The more complex the investment, the faster you should run away. -- Simple is better."
"If the security has a high yield, you can be sure the risks are high even if you cannot see them."
"A well-designed plan is necessary for successful investing, but you must also have the discipline to stay the course, rebalance, and tax manage as needed."
"Do not treat the highly improbable as impossible or the highly likely as certain."
"The consequences of decisions should dominate the probability of outcomes."
"The safest port in a sea of uncertainty is diversification."
"Before acting on seemingly valuable information, ask yourself why you believe that information is not already incorporated into prices."
"Getting caught up in the mania of the 'new thing' is why 'the surest way to create a small fortune is to start out with a large one' is a cliche."
"If it sounds too good to be true, it is."
"Never work with a commission-based investment advisor."
"Hope is not an investment strategy. Base your decisions on the evidence from peer-reviewed academic journals."
There is nothing new in investing, just the investment history you do not know."
"My fondest wish is that this book has led you to the winner's game in both investing and, far more important, life."
Thank you, Larry Swedroe.
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