James N. Whiddon is a free market populist who wants to empower individual investors to resist the wiles of Wall Street. In The Investing Revolutionaries: How the World’s Greatest Investors Take on Wall Street and Win in Any Market (McGraw-Hill, 2009) this Dallas financial planner and radio talk show host offers a straightforward approach to investing—build a diversified portfolio of passively managed asset-class mutual funds. Although this advice does not break new ground, many investors may be reading it for the first time. And The Investing Revolutionaries is a very good read indeed, even for someone who does not share all of the author’s opinions.
Whiddon draws from interviews he conducted on his syndicated radio show “The Investing Revolution.” His guests were a veritable who’s who in the financial world, so it’s not surprising that this book is engaging. Jeremy Siegel explains once again why gold is such a poor long-term investment (a dollar invested in gold in 1802 would be worth, after inflation, $2.55 today whereas a dollar invested in the stock market with dividends reinvested all along the way would have grown to three-quarters of a million dollars today, again after inflation). Arthur C. Brooks expands on his thesis that we could increase the GDP if people gave more to charity. Richard Thaler compares how contestants behave on the TV show Deal or No Deal to how investors make decisions about their portfolios.
In addition to Thaler’s study, Whiddon shares the insights of Barry Schwartz, Jason Zweig, Peter DeMarzo, Peter Bernstein, Ori Brafman, Gary Becker, and Tim Harford on investor behavior. In The Paradox of Choice, for instance, Schwarz looks at how consumers respond when confronted with a dizzying array of choices (for instance, too many 401(k) investing options). Schwartz, referencing the distinction from Herbert Simon’s 1957 book Models of Man: Social and Rational, says that people fall into two personality types—the maximizer, who wants the best, and the satisficer, who is looking for something that’s “good enough.” The maximizer has to examine all the choices to determine which is best; the satisficer can stop looking once he finds something that meets his standards. Maximizers are tormented souls, especially if the results of their decisions are not as good as they expected. Whiddon applies this distinction to investing. “A maximizer is going to play Wall Street’s games—picking stocks, timing the market, and chasing returns—all in the interest of beating the market. A satisficer, however, knows that there’s really only one decision to be made: owning the market. Once that decision is made and the satisficer investor holds a superdiversified portfolio, the work is largely done.” (p. 178)
In the light of market turmoil over the past decade many people have pronounced buy and hold dead. And as previously diversified asset classes started to move in lockstep in the most recent market meltdown, the diversification mantra was also called into question. Whiddon, however, believes that the financial crisis was just “a blip on the radar.” “[T]he reality is that the stock market simply does not have a tendency to go down and stay down for extended periods of time. Whether you are considering decades, years, or even monthly time frames, micro- and macroeconomic cycles ultimately bring favorable results to faithful free market disciples.” (pp. 108-109)