Sunday, July 5, 2015
Carlson, A Wealth of Common Sense
Carlson’s advice applies to all kinds of investors. He is not saying, for instance, that value trumps growth or that passive mutual funds are preferable to actively managed funds. There’s no perfect portfolio, except in hindsight.
Some of his advice addresses ways in which we can avoid sabotaging ourselves. One suggestion: “Setting up a systematic process imposes discipline on your lesser self. You will still have to make discretionary decisions many times over the years, but just know that you are by far the easiest person to fool. Understand why you should or shouldn’t do something based on your knowledge of yourself and use a plan to create a hurdle that makes it difficult to make poor decisions.” (p. 152)
This piece of advice stems from Carlson’s overarching model of investing: “Philosophy [your core investing beliefs] leads to an investment strategy which leads to portfolio construction which is all worthless if you don’t have a process in place that allows you to follow each of these steps.” (p. 89) Read that sentence again. Whether you are managing a $1,000 or a $10 million portfolio, odds are that you are missing one or more pieces of the puzzle.
Carlson exposes thirteen market myths, including “stocks are riskier than bonds,” “a yield on an investment makes it safer,” “commodities are a good long-term investment,” and “housing is a good long-term investment.” Re the last: “Think of housing as more of an asset that forces you to build equity over time than an investment that is likely to compound your savings.” (p. 82)
He explores asset allocation, arguing that “it is by far the most important portfolio decision you will make. Stock picking is for home-run hitters who will likely strike out. Asset allocation is for those who wish to safely get on base time after time with a high probability for success.” (p. 146)
A Wealth of Common Sense should provide value to investors at all levels of experience and net worth. It forces the reader to re-think how he goes about investing and how he can stay true to his principles, through good markets and bad.