Sunday, February 26, 2017

Review: The 3 Simple Rules of Investing

A few months ago I read the excellent book, The 3 Simple Rules of Investing, by Michael Edesess, Kwok L. Tsui, Carol Fabbri and George Peacock. In their book, they make the startling statement that "everything you've learned about investing is wrong".

So what are their three simple rules?
  1. Simplify Your Options
  2. Look Only Forward
  3. Tune Out Noise
You will need to read the entire book to hear their rationale, but not surprisingly they favour broad, low cost index funds over specialized investing instruments.  They also favour a long term approach, and to 'tune out' the vast majority of advice you will hear or read from financial writers and advisors.

By look only forward, they warn against placing too much faith in how a certain fund has done in the past. As we all know 'past performance does not guarantee future results'. For example, as David Berman (among others) has written, the simple strategy of investing in the Canadian big bank that performed worst in the past year, yields better results than trying to pick the best bank stock in more sophisticated ways, or holding a basket of banks.
As well as their three simple rules, the authors identify seven deadly temptations.   Some of these are obvious and widely accepted, such as 'Don't try to beat the market', while others may seem contrary to common sense.  They urge small investors to not follow what most wealthy and sophisticated investors do. This is not because it would be difficult or impossible, but rather because most high worth individuals use high powered financial advisors and typically pay large fees for expert advice. There is little indication that this advice has resulted in better investment returns. Warren Buffett has emphasized this point in his 2017 statement, making the claim that high worth individuals have spent $100 billion in unnecessary fees.

While I would not agree with everything in the book (for example, I believe they argue for too much simplification), I do support the main tenets. I certainly recommend that you read this book as one part of your investor education. As one Amazon reviewer has written "If you read only one investment guide in your life, make it this one elegantly boiled down to the essence of what makes sense and makes money."

I agree 100% with their statement: "Don't trust it all to the expertise of someone else". Indeed my decision to start this site was largely because I fear that too many trust too blindly in investment advice. You can, and should, learn about your financial options, and you should take ownership of your financial future.

It's interesting that they also warn about over reliance on modern 'scientific' financial theory. That will be a topic for some future column.

Some of their advice is very practical, and can be immediately applied to your portfolio.  They argue that it does not make sense to hold a large number of specialized funds for diversification, if in total they essentially mimic the entire equity market.  Why not just get one total market fund?

From time to time I will review investment books.  Have a favourite?  Why not leave a comment, and we will consider making it a topic for a future column (or if you prefer to review it yourself, we welcome guest posts.)  If you were going to read three Canadian investing books, what would they be?

This column is intended for education only. The reader is responsible for their own financial decisions.  The writer is not a financial planner and reading this column should not be interpreted as obtaining individual financial planning advice. For major financial decisions it is always wise to consult skilled financial professionals. While an effort has been made to be accurate, any statements of fact should be independently checked if important to the reader. 

Disclosure: I have read this book and have no association with the publisher or authors.  I did not receive a copy of the book, or any other benefit, for writing this review.

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