Elements of Investing (Ellis & Malkiel)

Discussion in 'Share Investing Strategies, Theories & Education' started by Nodrog, 3rd May, 2017.

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  1. Nodrog

    Nodrog Well-Known Member

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    A couple of the wisest and most knowledgible men in the world of investing talking about what they've learnt in their long lifetimes. The information comes from their book "Elements of Investing". Index fans will love this (@Redwing, @Ross Forrester you there). It's based on the asset allocation model not Dividend Investing but there's some huge lessons in this video for every investor. It takes a little while to get going but it really is well worth taking the time to watch. Thanks to @Il Falco for finding this gem.

     
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  2. Ross Forrester

    Ross Forrester Well-Known Member Business Member

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    Cheers @austing - it is over an hour so I will have to slot it i somewhere

    I line the idea of listening to a burton talk though
     
  3. Anne11

    Anne11 Well-Known Member

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    I put the speed to 1.5 so it took me much less than an hour to listen to.
     
  4. Redwing

    Redwing Well-Known Member

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  5. The Falcon

    The Falcon Well-Known Member

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    Ellis and Malkiel bring up the super important and often overlooked area of behavioural finance. This is so bloody important. Investor performance is more important than Investment performance.
     
    Last edited: 4th May, 2017
  6. Nodrog

    Nodrog Well-Known Member

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    Couldn't agree more. Sensible investing can be really quite simple. Behavioural issues on the other hand are often the investor's biggest enemy. Caused me grief especially earlier on. Still far from perfect but I keep working on it.

    Best take the time to understand these behavioural aspects early on. They will save you a lot of grief especially when the market is going through the fires of hell. But even before reaching that point there are many behavioural battles to overcome.
    Never been a fan of Montgomery even going back to his clime days and earlier on when he was selling his investing system from memory.
     
  7. iggster

    iggster Active Member

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    Thanks for posting this gem. The Q&A was really interesting especially the tax harvesting item. AFAIK you can't offset your capital losses against income in Australia but you can carry it forward. Anyone can feel free to correct me as I am not an accountant.
     
  8. Anthony Brew

    Anthony Brew Well-Known Member

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    wow. far better than I could have expected.
    Thanks for posting.
     
  9. Redwing

    Redwing Well-Known Member

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    Can be offset against capital gains
     
  10. Nodrog

    Nodrog Well-Known Member

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    SUMMARY OF "ELEMENTS OF INVESTING" (Malkiel & Ellis)

    OK couldn't resist. Albeit a committed dividend investor due to Australia's unique investing environment in particular I purchased the above book (only $16 for kindle edition) the preceding video was based on. An excellent simple and short book for beginners and experienced investors alike. Here's some comments and a summary. @Redwing, @Ross Forrester and other Index fans here will enjoy this except for the revised bond section toward end of summary.

    It's a basic book as expected and some might think it aimed toward beginners. But the reality is the data supports what these wise old heads say so the message is just as important for experienced investors who as we know get off track due to behavioural factors. This is reinforced by related comments in the book's introduction:
    "How surprising to us that everything of importance on such a heady topic can be reduced to rules you can count on one hand. Yes, investing can be that simple if your brain remains unclouded with taxing complexities. These rules will truly make a difference . Our promise: Reading this book will be the best time you could spend to put yourself on the right path to long-term financial security. Then, over your lifetime, you can pick this book up again to scan its lessons and remind yourself what is elemental if you want to turn a loser’s game into one you can really win."

    Only a rare few Mgrs will beat the Index but impossible to pick them in advance. Buffet is more than just a fund mgr in adding value.

    Prefer Total Stock Market index to S&P 500 as important to own SMALL CAPS for growth.

    Owning International (including Emerging Markets) important.

    Confession from authors (nobody's perfect). Ellis and Malkiel have all their "retirement" savings in index funds BUT Ellis has owned BRK for 35 years (checks its share price daily) and Malkiel delights in buying individual stocks and has a significant commitment to China. He enjoys the game of trying to pick winners and believes “China” is a major story for his grandchildren.

    Diversify across asset classes: shares, bonds (changed in this updated edition, see later comment), property, commodities and gold. But don't own real estate, (other than own home), commodities and gold directly but through related companies in the index.

    Diversify across markets: US, International developed and Emerging Markets.

    Diversify across time = DCA.

    Rebalance annually (or perhaps > 10% out of balance?): keeps risk at original pre-defined level (SANF); equates to selling high, buying low; may enhance performance especially in volatile markets (eg US lost decade was quite profitable due to DCA in particular and annual rebalance).

    There was basic discussion on the extremely important area of behavioural investing issues (eg timing, overconfidence) but essentially solved by buying low fee index fund and DCA (no matter what mood the market is in). Diversification reduces anxiety.

    Maintain a cash reserve.

    Focus on what you can control - low fees and any tax minimisation strategies.

    Focus on major investment categories. Avoid “exotics” like venture capital, private equity, and hedge funds.

    Asset allocation (shares / bond split). Ellis prefers more shares as growth still needed in retirement (living longer, inflation etc):
    Age Group / Percent in Stocks / Percent in Bonds: 20 to 30s 100 / 0; 40s 90–100/10–0; 50s 75–85/25–15; 60s 70–80/30–20; 70s 40–60/60–40; 80s and beyond 30–50/70–50.

    Sample Portfolio (prefer broad market indexes as includes small caps and emerging markets):
    1. Total world stock market + Total US bond market OR
    2. Total US market + Total world (ex-US) market + Total US bonds market.

    Book being revised edition (2013 vs 2009) authors feel bonds now offer way too low returns and higher risk going forward for a considerable time. So other then cash reserve replace bonds with following:
    1. Foreign bonds in countries that have much better fiscal balances than we have in the United States can be attractive today. An example would be Australia, where high-quality bond yields are in the high single digits. Australia has a low debt/GDP ratio (about 25 percent), a relatively young population, and abundant natural resources, making its future economic prospects bright. Its currency has been appreciating against the U.S. dollar. High-quality Australian bonds were available at yields of around 8 percent in early 2012 (well that was then).
    2. Diversified portfolios of high-quality emerging market bonds.
    3. Substitute a portfolio of blue-chip stocks with generous dividends for an equivalent high-quality U.S. bond portfolio (he he, go dividends:)). Many excellent U.S. common stocks have dividend yields that compare very favorably with the bonds issued by the same companies—and their dividends are likely to rise steadily in the future.

    "Finally all wives and all husbands should be sure they both know all the facts about their investments. And because we are each different in our emotions about investments, markets, and money, families should strive again and again to share their thoughts and feelings so they can understand each other and make decisions together."
     
    Last edited: 5th May, 2017
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  11. Anne11

    Anne11 Well-Known Member

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    Thanks a million @austing!
     
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  12. iggster

    iggster Active Member

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    Yeah that's what I meant about losses being brought forward. An interesting tactic which is worth considering although, as indicated by some, the limited number of alternative equivalent products might make it more obvious (drop out STW, plug in IOZ say). Easier with a bigger universe of products like in the US market. Hmm. does the ATO scan these forums? :(
     
  13. iggster

    iggster Active Member

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    Actually, thanks a billion! That was a lot of work. 10/10 and an elephant stamp!:)
     
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  14. Nodrog

    Nodrog Well-Known Member

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    A billion will be fine thanks I can give you my bank deposit details:D.
    IMG_0206.JPG
     
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  15. iggster

    iggster Active Member

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    Thanks my friend. A billion thanks. :)
     
  16. Nodrog

    Nodrog Well-Known Member

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  17. paulF

    paulF Well-Known Member

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    Very timely @austing as i just finisihed watching the interview above!Great stuff, thank you
     
  18. Nodrog

    Nodrog Well-Known Member

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    And some interesting ideas albeit US centric on tax loss harvesting which Malkiel mentioned in the interviews and book:

    Pro Tips: 10 Things to Know About Tax-Loss Harvesting

    One possibility. For many with an index portfolio they're likely to be drawing down capital in retirement and incurring CGT if assets held outside of Super (eg retired early). To accumulate a pool of tax losses to offset future CGT, in a market correction / crash sell part / all of one providers index product and replace with another's equivelent product. For example, the market tanks so if holding VAS then sell the profitable parcels then use proceeds to buy STW. So still holding the index but have banked the losses. This may avoid falling foul with ATO wash sale provisions.
     
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  19. The Falcon

    The Falcon Well-Known Member

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    Malkiel is of the rare breed, the pragmatic academic.

    Good interview. His lack of hubris and willingness to accept new ideas at his age (geez sounds patronising) should be a model for all investors.

    As Keynes (by way of Samuelson) said, to paraphrase ; when the facts change, I change my mind.
     
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  20. pippen

    pippen Well-Known Member

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    Just downloaded the elements of investing pdf book excited to improve my knowledge base!