Customer Reviews

What Wall Street Doesn't Want You to Know : How You Can Build Real Wealth Investing in Index Funds

5 star:		(20)
4 star:		(4)
3 star:		(0)
2 star:		(2)
1 star:		(1)

 

 

Larry Swedroe presents in 357 pages a broad overview of much of the recent research and discourse presented by rational observers of Wall Street. For the individual investor the author cuts through the hype of Wall Street and forcefully feeds a diet of statistics and research in support of low-cost index funds. For investment advisors this book can be used as an introduction to much of the recent research on stocks and investing. Fans of the writings of John Bogle (Common Sense on Mutual Funds), Jonathan Clements (Wall Street Journal columnist), and Burton Malkiel (A Random Walk Down Wall Street) will particularly enjoy the many reinforcing concepts presented in this text.

Larry correctly argues that to maximize the investor's chances for success the investor should take into account his or her time horizon, allocate assets among categories accordingly, and then diversify using low-cost and (where appropriate) tax efficient index funds or tax-managed mutual funds. Through successive chapters he notes: (1) markets are efficient; (2) active managers of investment accounts cannot add value over the long term, considering the burdens of their fees and taxes; (3)market timing is not a strategy that works over the long term; (4) investors in stocks and stock mutual funds decrease their risk level as their time horizon is extended to 20 years or more; and (5) investor behavior, driven by the emotions of fear and greed, often interfere with good long-term investment results. The real gems of the book are saved for the last chapter, when he brings it all together with some asset allocation recommendations. The appendices should not be overlooked, especially his brief discussions of: (A) selling when a low tax basis is present; (B) why investors should generally avoid variable annuities; and (C) the all-too-common hype today that high net worth investors are better off owning individual stocks than stock mutual funds.

I agree with the comments by other reviewers that DFA is hyped too much. Individual investors who choose to go it alone, without a registered investment advisor, should probably confine most of their index fund search efforts to passive index funds offered by Vanguard (and perhaps a few other select fund companies), and not worry about missing out on the DFA offerings. Larry's discussion of value stocks vs. growth stocks could be a little more focused and reasoned, but the statistics presented on choosing value stock mutual funds are interesting.

This is a good text for those investors desiring an overview of the rational behind passive (index fund) investing. John Bogle's book, Common Sense on Mutual Funds, is a better book for the beginning investor, as it more patiently presents the basic concepts of investing. This book should be considered as one of the next books to read by investors. Larry Swedroe's book gives investors the insight to see beyond the hype of Wall Street. After reading Larry's book (and perhaps others), the investor should then turn to Bruce Temkin's recent text, The Terrible Truth About Investing, especially if the investor thinks he or she has learned all there is to know.

I wholeheartedly recommend Larry Swedroe's new book as an essential addition to every rational investor's library.

In addition to the fact that I, too, felt that I was enduring a commercial for DFA, I was annoyed by the fact that this book is nothing more than a rehash of The Only Guide to a Winning Investment Strategy You'll Ever Need: Index Mutual Funds and Beyond - The Way Smart Money Invests Today, Swedroe's May, 1998 book. He introduces a small number of new studies and illustrations, but if you've read the first book, there's no reason to look at this one.

I echo most of the positive comments of the other reviewers--there is lots of good and convincing information here. However, to underscore and amplify indexfunds.com's concern, some aspects were a bit chilling, in terms of Swedroe's overall credibility. By the end of the book I felt as if subtle pressure not only to buy DFA funds, which are only available from certain fee-only financial advisors, was being brought to bear, but also pressure to employ a consultant regardless of whether I wanted these particular funds or not. The advice to do so seemed to me to fly in the face of the implication that the strategy isn't that hard, as well as the recommendation to avoid load funds due to excessive fees, as Swedroe mentions that an advisor may charge a 1-2% fee! I still liked the book and the advice, but the massive promotion of DFA and the implication that the investor may still need a fee-only advisor left me with an unfortunate (unfortunate given how much I liked the main gist of the book) nagging feeling that the entire work was an elaborate scheme to get me as a customer for one of the firms that sells DFA funds.

This is one of the best books on investing I've read (I've been at this several years, and read several dozen). It seems better argued than John Bogle's Common Sense on Mutual Funds, which isn't bad. Especially helpful was the author's demonstration that index investing isn't the same as investing in the S&P 500. One wants to invest in value, mid-cap, international, and other indices, and Swedroe tells you how and in what proportion. The book's subtle is "the only guide to a winning investment strategy you'll ever need." It sounds grand, but for the average investor (this includes most who think they aren't average) it's probably true. I especially appreciated his advice not to go to the funds, even index funds, for bonds. He doesn't seem to be pushing a product.

But there's something puzzling about the book. If it's one of the best books on investing I've read, it's certainly the best book on investing I've ever read based upon a wrong theory. That theory is Modern Portfolio Theory/Efficient Market Theory. Because he believes it, Swedroe says that value funds (stocks) are cheaper because they are riskier, which he actually argues. One sees the great virtue of the book here: he gives evidence and argument, not just assertion. Still, that all value stocks are distressed stocks is hard to believe, and the claim that risk has nothing to do with volatility is hard to swallow. Instead of saying that the market is all knowing, which is why it is so hard to beat the market, especially given transaction costs, why doesn't he just say something like "in the short run (less than five years), markets are manic-depressive, irrational, but in a way that is very hard to exploit, since there is no clear pattern. If it's hard to know which way a rational market is going to go (random walk theory), how much harder it is to make sense of an irrational market." Everything he says about indexing would still be right, and he wouldn't have to work so

hard to show it's all really rational. (Still, I appreciated his explanation of why Warren Buffett has beat the market: he doesn't just buy good companies; he runs them.)

One other thing. A serious book like this should have an index.

After working with countless investors throughout my career, I have grouped them into primarily two categories - amateur investors and serious investors. Amateur investors will continue to succumb to Wall Street's hype of picking individual stocks and actively managed mutual funds in an effort to beat the market. This should come as no surprise, as this is how Wall Street makes its living, and the industry will spend billions of dollars in advertising revenue to entice them to continue this pursuit. As a result, the amateur investor who is more attuned to the speculative nature of investing will have little use for this book.

However, if you are a serious investor who is committed to maximizing your returns for the long haul, this book is a must read. Mr. Swedroe first details the fallacy of pursuing top-performing stocks and mutual funds, and why this activity is in fact detrimental to building wealth. He then explains the various risk/reward dimensions of various asset classes, and most importantly shows the reader HOW to build a diversified portfolio by combining these asset classes of passively managed (index) funds with their tolerance for risk in relation to an investment time horizon.

When it comes to investing, it has been said that the only difference between genius and stupidity is that genius has its limits. The incredible volatility of the stock market has forced many investors to deal with the conflicting emotions of fear and greed in this context. For investors who have finally chosen to remove themselves from Wall Street's losing ways and instead build a simple and sophisticated portfolio for the long haul, Swedroe's book is pure genius.

The author has become the pied piper of passive portfolio management. His efforts at revealing the genius of passive investing (indexing) continues to impact thousands of investors who tune in to his work. Swedroe's new book is certain to have a major impact in the ongoing indexing revolution that, despite its recent popularity, is only now beginning to reach the average investor.

That Larry Swedroe would find it necessary to write a follow-up to his excellent first book, "The Only Guide to a Winning Investment Strategy You'll Ever Need," says something about the average investor in this country. Or maybe Larry just likes to write investment books. In any case, "What Wall Street Doesn't Want You to Know" is the slap up side the head that many investors need to break away from the pull of the Wall Street marketing machine.

If you aren't convinced of indexing's (or, more appropriately, "asset class" investing's) superiority after reading this book, you cannot be cured. Mr. Swedroe has thoroughly researched and referenced the most definitive works on market theory, mutual fund performance, and financial economics currently available. And he presents the information in a way that most serious investors can understand or at least use as a basis to seek honest, unbiased, and straightforward advice.

I highly recommend this book to investors who have tired of the unfulfilled promises of stockbrokers, actively-managed mutual funds, and other Wall Street creations or who are already enlightened enough to avoid the "dark side" in the first place.

Jeff Troutner

The writing style is OK, but not great. Basically this book boils down to repeating over and over again: index funds are the way to go. He presents study after study showing this. I agree with the conclusion, but a couple of his points I think are misleading; mostly, however, they're just not very exciting. Instead of this book, I'd recommend 2 books that are much better written: A Random Walk Down Wall Street covers about the same info, but is more entertaining to read; or Making the Most of Your Money, which covers the same info plus tons of other useful topics.

This book is an excellent follow-up to Larry's first successful title on index investing, The Only Guide to a Winning Investment Strategy You'll Ever Need. As in his first book, the author copiously quotes and analyzes the tenants of Modern Portfolio Theory and debunks, in clear and crisp prose, many of the myths perpetuated daily by the financial media. The systematic, academic approach to dissembling the myth that active managers can outperform the market leaves little doubt that Wall Street's success is not perpetuated by financial truths, but rather through marketing savvy. Practices which highlight to this point include selection of the index that makes the manager's returns look the best over time, regardless of whether the index is an appropriate comparison of the manager's holdings; depiction of returns on a "gross" basis as opposed to showing the same returns net of management fees, trading costs, cost of cash, and market impact; and perhaps the largest and least-discussed factor inhibiting real returns - taxes. See if you can find any of these factors mentioned or accounted for the next time you see Peter Lynch chatting you up in a 30-second sound bite!

The book goes on to provide many useful morsels of investment wisdom such as explaining risk and how risk figures into asset allocation. It concludes with some sample allocations for readers to consider. One criticism would be that we would like to see more index product examples quoted from sources other than Dimensional Fund Advisors (DFA) and their proprietary products that can only be purchased through Registered Investment Advisors (RIA) such as the author's firm. If you can keep this in mind as you study the author's superior research and analysis of the benefits of passive investment over stock picking, you will come away with the unquestionable conclusion that it is certainly time to raise the petard against the drivel that is fed to the American mutual fund investor on a daily basis through television and the financial press.

OK, right up front, I've read Larry Swedroe's first book as well and it was terrific. This, his second book, is even better. In fact, my only criticism is where was this book when I first started investing/saving? Seriously, if you had to read just two key investment books before jumping into managing your own financial assets, this would likely be my first choice. The second choice would be William Bernstein's The Intelligent Asset Allocator. These are both must read books.

Most of us don't have the time or the discipline to read and to understand all the dynamics (risks) of the financial markets. And this includes filtering out all the noise coming from the brokerage/mutual fund industry hubris, snake oil and mis-leading information that is sent to us almost daily about the wonders of actively managed funds (and the joys of picking individual stocks).

To our good fortune, Larry Swedroe has done a fantastic job of de-bunking and stripping away the industry's self-serving methods/messages that have led so many investors astray especially during these heady days of the new economy (meltdown).

Now to the book. You can read it several times and in any order if you like. Every chapter stands alone as valuable and insightful. Many of you will probably want to summarize or highlight the key points ....well, he's done that for you which is another strength of the book. But one of my favorite chapters is Timing the Market Is a Loser's Game. In fact, there are a couple of nuggets of wisdom that you'll find fascinating. Hint...stay focused in the market (for the long term), good or bad...because you (and no one else) has ever been able to consistently predict which periods will be the biggest ups or the largest downs.

Finally, when you get to Chapter 10, you are now ready to put your knowledge to work but with a plan. Again, Chapter 10 alone is worth the price of the book. In fact, it's like getting a super smart financial planning session and overview all on tape and easily replayed. For some of you, start with Chapter 10 and then start browsing the other chapters if you need the EVIDENCE and the history of the "other" side of the story.

As I have said earlier, I wish this book had been written years ago. Anybody who is remotely serious about financial independence and security for the welfare of their family and love ones, should read this book. And, if you like it, tell your friends and family about it. They'll thank you.

Larry Swedroe makes clear how many of us have little understanding of how the investment industry subtracts from our returns to add up their own huge profits and outlandish payrolls. His Chapters tell the story:

1. Past performance is not a predictor of future performance. 2. Markets are efficient and active managers are highly unlikely to add value. 3. Investors are shifting to passive management. 4. Neither fund managers nor individuals can consistently identify mispriced securities. 5. Timing the market is a losers game. 6. Exposure to risk factors determines investment returns. 7. Focus on the long-term. Not the short-term. 8. Active management imposes a large negative impact on after-tax returns. 9. Human behavior is an important determinant of investment performance.

If you disagree with any of the above statements, you need to read this book to learn the facts. It is meticulously researched and documented with 220 references. Highly recommended.