Book: 20210728 to 20210808, "Little Book of Common Sense Investing" by Bogle, John C.

20210728 - Introduction to the 10th Anniversary Edition xv

As a whole, any activity such as buy or sell stock doesn't bring in benefit to our portfolio. On the contrary, we lose money because we need to pay trading fee. All financial advisors just pretend to do something, so they can charge us fees.

So, the whole Wall Street are bringing negative effect to economy through trading stocks.

The profit from stock market actually means the growth of economy. If we don't need to pay the relative trading fees, then we can take the fair share of it.

20210728 - Chapter 1 A Parable 1

As a whole, "helpers" only reduce the total return.

Short term trading is like gambling. The market is so complicated, that no one really know it all the time.

Sooner or later, their performance will follow the average return of market. But, because they charge fees for management and trading, the investors get less than the average return of market. Around 10% to 30% less.

Trading will also cause capital gain tax.

Considering compound effect, these fees and tax will bring in huge impact to our portfolio.

20210728 - Chapter 2 Rational Exuberance 9

Market emotion goes up and down. The cycle could be as long as 10 years. But in general, from 1900 to 2020, the P/E ration is going up. This is because the social productivity is going up, and the interest rate is going down starting from 1981.

What happened in 1981? My understanding is here.

1. Top federal income tax rate dropped a lot in around 1980, so rich people got more money to invest.

2. Rich people are confident that they could do well with business, so borrowed a lot from bank.

3. Unfortunately there was no MMT theory by that time, so serious liquidity shortage appeared.

4. Anyway, with the help of technology development (such as computer and internet), and the wider wealth gap, Goods and Service supply growth eventually surplus Demand growth.

5. For the next 40 years, there are more and more money on the market looking for investment opportunities. 6. So the interest rate keeps dropping, and P/E ratio keeps rising.

What will happen in the end? P/E ratio will be very high, and could be over 100. Then what? The government will provide unlimited liquidity, the surplussed money may have to go to crypt coin, as it's a better accounting system than FIAT currency.

Will the virtual economy go up forever?

https://tradingeconomics.com/united-states/government-bond-yield

https://www.macrotrends.net/2577/sp-500-pe-ratio-price-to-earnings-chart

https://bradfordtaxinstitute.com/Free_Resources/Federal-Income-Tax-Rates.aspx

Stock market shows us only the imagined economy, not the real economy. The imagined economy always fluctuate around the real economy (the cycle period could be more than 10 years).

Then how about Meme? Meme is not real, such as culture and crypt coin. How will people choose between 100 P/E ratio stock and crypt coin? Fiat currency is also not real, and it has unlimited supply. So for sure, people will convert fiat currency to something else as soon as possible. Stock is not bad, but mainstream crypt coin is better as currency.

What would happen if nuclear war break out? Some industry, such as energy and food, will keep going. But other industries will shrink quickly because of the interrupted global supply chain. Will nuclear war crash crypt coin? Not if crypt coins are accepted by most of the retail shops.

20210729 - Chapter 3 Cast Your Lot with Business 25

Indexing fund is not perfect, as investors need to pay tax for the dividends every year. So, long term invest in high growth zero dividend company is better choice.

Or, use SMSF/401K/Roth IRA account to invest in Indexing fund to minimize tax.

What will Tesla do when many years later they have too much profit? They will own quite a lot of crypt coins for sure, then, will then pay shareholders crypt coin as dividend? If yes, then those crypt coin also need to pay tax. Or they just hold more and more crypt coins, which would surely push up the price of stock and the price of crypt coins.

20210729 - Chapter 4 How Most Investors Turn a Winner’s Game into a Loser’s Game 39

Why people believe that they can beat Indexing fund? Because they think they are different. This delusion leads to loser's game. It's hard to realize that "don't do anything" is the key to win.

People are greedy. Most of people cannot hold themselves when possible better opportunities appear. Then they would lose a lot of money, then may stop investing after that. We should only take away "fair" share from economical growth. In a world full of sharks, to take a fair share of pie is a big win. For Indexing fund investment, that means we avoid been bitten by Wall Street.

There are always some people make good money over many years, such as Warren Buffett. But this is very rare case, and even Berkshire Hathaway's share price only grew 14% per year in the last 30 years, which is only 3% higher than SP500. FAANG obviously beat it.

As active trading doesn't create value, it's zero sum game. So, cost of investment is the key of success.

20210729 - Chapter 5 Focus on the Lowest-Cost Funds 53

Zero sum, fees, tax and small percentage of investors have the luck to take most of the profits. There are not much left to other actively managed fund, no matter how smart they are.

Low cost is actually the most important important factor, and maybe the only factor, when choosing fund. So indexing fund beat all other actively managed fund.

Considering the funds that closed down......the actual performance of mutual funds drops from 9% to 7.5%. p75 

20210729 - Chapter 6 Dividends Are the Investor’s (Best?) Friend 65

Many people may forget about dividends. But for long term, any bit of extra effect cause huge differences. Dividend is not exception.

However, quite large part of dividend is taken by funds as all kinds of fees. This is a hidden cost of mutual funds.

https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp

"the average dividend yield between 1970 and 1990 was 4.03%. It declined to 1.90% between 1991 and 2007. After a brief climb to 3.11% during the peak of the Great Recession of 2008, the annual S&P 500 dividend yield averaged just 1.97% between 2009 and 2019."

https://www.suredividend.com/sp500-dividend-yield/

A History of the S&P 500 Dividend Yield

20210730 - Chapter 7 The Grand Illusion 73

Survival ship bias: many mutual funds closed down.So the average mutual fund return is much higher than the actual result. (Claims 9%, but actually 7%)

When a fund showed nice performance, normally a lot of cash would flush in. But next year, normally it would earn poor result. This means, more investment got poor result, and less investors got good result. Although for the same fund, the average result could be even.

Emotion make things worse. Quite possible buy at peak, sell at bottom.

Buy and hold index fund can avoid these illusions.

20210731 - Chapter 8 Taxes Are Costs, Too 85

Tax caused by trading is a huge problem for mutual fund is a critical problem, but tax of dividend is same to both index fund and mutual fund.

401K, IRA, Super is roughly immune to these tax, as the tax are deferred or exempted or discounted.

20210801 - Chapter 9 When the Good Times No Longer Roll 93

In bad time, index fund also goes down. But mutual fund goes down a lot as 2% fees (and 2% inflation) are still there.

As we don't know where the market bottom is, it's safer to invest in index fund to make sure that we will not miss the bounce back.

20210802 - Chapter 10 Selecting Long-Term Winners 111

There were 355 mutual funds in 1970, only 20% survived in 2016. Only 10 funds beat Index. Only 2 funds beat Index by 2% per year. And, these 2 funds only succeeded in around 20 years out of 46 years, when their size is tiny.

No one can predict the number before throwing out the dice.

This means, there is no Moats for funds in financial industry. Not even with the help from AphaZero.

Is there any easy way to tell Moat from randomness? Maybe just ask the question: can other people copy it easily? If not, then it's Moat.

20210802 - Chapter 11 “Reversion to the Mean” 127

RTM(reversion to the mean) is the basic rule. It means pure luck, which means complete randomness.

This means, there is no Moats for financial professional in financial industry.

How about Warren Buffett? He almost missed Nasdaq completely. Other people can learn his strategy, then it's hard for him to stay in the lead position. Someone like ARK Cathie Wood seems understand innovations better.

So, the real question is, are these temporary strategy/understanding advantage worth the 2% fees and tax? I doubt it.

Randomness has no cause. But our brain always look for cause, so cannot understand randomness. ---"Thinking, fast and slow"

This feature is decided by our gene. Normally it gives us better chance to survive, but it doesn't suit modern society well. ---"Selfish Gene"

How to minimize the problem? My thoughts is to think about it, and don't follow our instinct.

20210803 - Chapter 12 Seeking Advice to Select Funds? 139

It is the worst choice for investors to rely on advisors to pick up the stock or fund. Even the best of best choices in theory, could turn out to be the worst choices.

Advisors should be like lawyers. They tell us how to do something, the tricks and the traps, but not about what to do. Then, the fees should be much lower. The problem is, those information are (almost) all on Internet or in books. I think we can get those information for free in the near future.

If the advisor get other fees paid by other companies, then they don't always care about their clients' benefit. If the balance is less than $1M, the fee should be less than 1%; between $1M to $5M, around 0.75%; above $5M, around 0.5%.

20210804 - Chapter 13 Profit from the Majesty of Simplicity and Parsimony 153

No matter large, mid or small cap market, no matter which market sector, they all could be over priced or under priced. To guess which one is over priced and which one is under priced, is actually gambling.

For zero sum gambling, cost decides everything.

So, the index fund with the lowest cost is the winner. But no professionals would recommend it, because they cannot make money from the investors if they choose this one!

20210805 - Chapter 14 Bond Funds 167

Bond Index vs Stock Index

As the interest rate getting close to zero, the yield from Bond itself is also close to zero. But when bond yield rate drop 50%, the bond price goes up a lot, which make it attractive. 

When interest rate goes up, both stock market and bond market go down. Vice versa. But if the bond yield rate stays at close to zero place, it's not wise to invest much in bonds. Bonds (especially the short term one) is the alternative choice of fiat currency, which is less valuable compare to other assets that can generate profit.

20210806 - Chapter 15 The Exchange-Traded Fund (ETF) 179

Each ETF focuses on different set of stocks.

The problem of ETF is, you can trade it. This temptation is hard to resist, which make Index Fund much better choice.

All ETFs want to beat Index Fund. But the trading cost inevitably reduce the return.

No one can predict any single stock or ETF. So don't timing the market!

We should treat Index Fund as bank account with 10% interest rate. Don't keep withdrawing and depositing (at the cost of fees).

20210806 - Chapter 16 Index Funds That Promise to Beat the Market 195

Each Index Fund uses different way to set up the Fund. Instead of the TIF use market-cap, other Index Fund may use dividend or fundamental factors (such as revenue, earnings, etc.) So the same stock has different proportion in different Index Fund.

"The greatest enemy of a good plan is the dream of a perfect plan." Stick to the good plan.  p204

This seems apply to everything, not just stock investment.

For example, physical exercise. Swimming is perfect, but running or squats could be better, as it's convenient to do it everyday.

Why good plan normally is better than perfect plan? Because perfect plan could be just illusion. Or, it's not worth to gain tiny improvement at relatively heavy cost.

20210807 - Chapter 17 What Would Benjamin Graham Have Thought about Indexing? 209

Finance related knowledge is not that complicated. It's easy to understand it after a few months/years of study, to anyone who knows basic arithmetic.

So, it's all about common sense.

If someone claims that he find some new algorithm to guarantee better performance, he is lying. Even ARK has this problem: for exponential growth, it's almost impossible to predict the tipping point.

We need to admit that we are normal people. We don't deserve larger piece of pie than other people in the stock market.

20210807 - Chapter 18 Asset Allocation I: Stocks and Bonds 223

We need to admit our ignorance of the world.

We know the economy is growing, and we know the substantial risk is waiting ahead. One thing for sure: if we don't invest, we get nothing.

Interest rate is so low now. Bond is the alternative fiat currency with slightly better return and bank saving account.

Bond->Real Estate->Stock->Crypto currency

They have higher and higher risk, and stay further and further away from economy.

lg30/lg1.08=44, 2021+44=2065, 1.1^44=66

If the stock price goes up 10% per year (as what happened in the past 120 years), but if the economy growth is between 4%(at the moment) to 0%(in the end), then 44 years later, P/E would be 30*1.08^44=887.

In 2065, 2% economy growth would means 2%/887=0.002% compare to the cap of the stock market. By that time, I believe most of the money will flow to cyrpto currencies.

Fiat currency has zero interest but unlimited supply.

Cyrpto currencies also has zero "interest", but it has at least restricted supply, and the trading cost is much lower than fiat currency.

20210808 - Chapter 19 Asset Allocation II 237

There are so many different retirement account types in USA.

Defined contribution(DC: 401(k), 403(b), 457), Traditional IRA, SEP IRA, Roth IRA, etc.

Roth IRA obviously is obviously designed for rich people to avoid capital gain tax.

20210808 - Chapter 20 Investment Advice That Meets the Test of Time 259

It's wrong to avoid necessary risk. Such as investing in stock market.

It's also wrong to take unnecessary risk. Such as paying high fees, or do unnecessary re-balancing of our asset.

The compound effect of those fees will cause real damage to our wealth.

Investing in our brain is the best investment, especially under compound effect.