The Clash of the Cultures: Investment vs. Speculation - Ten Simple Rules for Investment Success

Watched an episode of WealthTrack interview with John C. Bogle and decided to perform the action point, which is to read his book: The Clash of the Cultures: Investment vs. Speculation.

 

 

His book reflects the thinking of this great man. The last chapter of this book is a summary of his investment philosophy which he advocated throughout his whole life.

 

Ten Simple Rules for Investment Success

1. Remember reversion to the mean
2. Time is your friend, Impulse is your enemy
3. Buy right and hold tight
4. Have realistic expectations: The bagel and the doughnut
5. Forget the needle, buy the haystack
6. Minimise the croupier's take
7. There's no escaping risk
8. Beware of fighting the last war
9. The hedgehog bests the fox
10. Stay the course!

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1. Remember reversion to the mean
• The message is that selecting your fund for tomorrow by picking a winner from yesterday is an exercise fraught with peril
• Basically, Benjamin Graham's principle of voting machine & weighing machine 
2. Time is your friend, Impulse is your enemy
• Enjoy the miracle of compound interest
• Greatest sins of investing is to be captivated by the siren song of the market, which can lure you into buying stocks when they are soaring and into selling stocks when they are plunging (Market timing is IMPOSSIBLE)
• When you think long term, you'll be less likely to allow transitory changes in stock prices to alter your investment programme
3. Buy right and hold tight
Proper allocation of assets: Stocks vs. Bonds
Start with 50/50 stock/bond balance, then raise stock allocation based on time horizon, risk appetite, amount of capital, need for current income


4. Have realistic expectations: The bagel and the doughnut
• Two different kind of baked goods, symbol of two distinctively different elements of stock market returns
• Bagel: Investment return - dividend yield plus earnings growth (nutritious, crusty, hard-boiled)
• Doughnut: Speculative return - Wrought by material change in price that investors are willing to pay for each dollar of earnings; changes from soft-sweetness of optimism to acid sourness of pessimism (flaky)
5. Forget the needle, buy the haystack
• Statistics describe past performance, yet have no predictive power to forecast future returns
• By owning entire stock market, eliminate Stock risk, Style risk, Manager risk, only exposing yourself to Market risk
• Ultimate diversifier of for the stock allocation of a portfolio
6. Minimise the croupier's take
• After heavy costs of financial intermediation (commissions, spreads, management fees, taxes, etc.) are deducted, beating the stock market is inevitably a loser's game for investors as a group
• Beware of compounding cost
  Never forget either the magic of long-term compounding of returns, nor the tyranny of long-term compounding of costs.
7. There's no escaping risk
• Money in savings account will get eroded over time by inflation; a risk that almost guarantees that you will fail to reach your capital allocation goals
• Put money in the stock market, let public corporations help you earn profits on your capital
8. Beware of fighting the last war
• Making investment decisions based on the lessons of the recent or remote past
9. The hedgehog bests the fox
• The fox knows many things, but the hedgehog knows one great thing: Long-term investment success is based on simplicity, low-cost, diversifies broadly, buys and hold, keeps expenses to the bare-bones minimum
10. Stay the course!
• There is no secret
• Investment is simple, but it is not easy
• Requires discipline, patience, steadfastness, and most uncommon of all gifts, common sense