From “Not Good at Math” to Confident Investor

Here's How

In America, it is Thanksgiving week, the shopping season, and that time in the year when my students study investments, common investment strategies, and asset allocation.

Everybody brings different interests and intellectual strengths to money.

In a semester, I’ve had a tennis player from SoCal, a budding psychologist, a history major, a sports management major, and even a couple of econ majors. Some love the idea of an investment. Some want to know how to budget. Many students enter class stating, “I am not very good at math.”

What I know: anybody can succeed.

An investment book should be just as accessible.

Broad appeal informs my recommendation for the investment that everybody need:

Give a loved one the latest version of Burton Malkiel’s “A Random Walk Down Wall Street.”

The writing is clear story-telling around content in which the writing follows peer-reviewed evidence. Malkiel has written about investments for years. Readability is an A+ for the newbie, and the conclusions are essential for financial planners.

Malkiel on Stock-Picking

Pros and financial economists know that making stock picks does not regularly produce returns that outperform those of a comparable market index. That is good news for you and me.

When we want to invest our savings, choose among low-cost mutual funds and exchange-traded funds. It is easy to learn about their characteristics, risks, and prospects. Investopedia and Morningstar are two good sources. Paid subscribers DM with me.

The reason stock-picking isn’t really necessary makes a lot of sense when you think about it.

Stock pickers are all working off the same public information, which is abundant and easy to access. Most pros learned the basics in business school or a company training program where core valuation principles are taught.

So how could anyone consistently beat someone else in a trade by being a better stock picker? For every buyer, there’s a seller. Investment strategies aren’t one-of-a-kind either. If a pro had a secret weapon, they wouldn’t share it with clients. And if that secret did get out, it would just get copied until any chance of extra profit disappears.

The Malkiel Approach

The good news is Malkiel has laid out a path for an investment walk anyone can follow: invest savings in the appropriate index fund, retain some money for investment enjoyment, and avoid the guaranteed loss of returns imposed by actively managed investment management fees.

My take on the script:

1. Invest in an index fund. Preferably a total market index fund, like VTI. You will diversify your risk as much as possible and incur very low expenses, which means more investment dollars in your pocket.

2. Investing a small percentage (5 - 10%) of savings in individual stocks for fun is fine. When choosing among companies in the same industry, select the one with a lower PEG ratio and a higher expected 5-year earnings growth rate. A price that is lower relative to earnings forecasted and the prospect of growing earnings over a longer period signals better prospects that may help with the downside risk of an investment.

3. Consider the vibe. Read the credibly informative financial press, e.g., the Wall Street Journal, Barrons, etc. The content of the press a company receives may speak to reputation risk, an announcement about prospects, or news that a company’s operations have gone south. Investors will react to the information instantaneously, but a negative general tone about a company or sector may be important in the near term.

There is much more in the full text to value. It is a year-end gift and the investment everybody needs.