Note: While reading a book whenever I come across something interesting, I highlight it on my Kindle. Later I turn those highlights into a blogpost. It is not a complete summary of the book. These are my notes which I intend to go back to later. Let’s start!

  • Market timing doesn’t work

  • There are five major asset classes: cash, commodities (like gold and energy), stocks, bonds, and real estate

  • Let us start with the definition of a “correction.” It is simply a stock market drop of 10 percent or more. If the market drops a total of 20 percent, we change the name from correction to “bear market.”

  • Less than one in five corrections turns into an official bear market

  • If we combine the 4,000 or so exchange listed stocks into one large portfolio, these stocks have a combined return called a market return

  • Active management of stocks, regardless of how sophisticated, expensive, or complicated, results in underperformance over long periods of time, almost all the time

  • A bubble is when an asset class trades at a level far beyond its intrinsic value

  • Let’s say that the typical residential real estate investment yields an investor 10 percent. An investor searches the market and finds a duplex to buy for $100,000. The investor rents out the duplex and after paying his taxes, maintenance, and insurance, makes an annual profit of $10,000. A few years go by, and the economy has recovered a bit. Renters can afford to pay more, so the investor charges more rent, and his annual profit is now $15,000. A new investor comes along and wants to buy a property to earn the typical residential real estate return of 10 percent. The new investor pays the previous owner $150,000 for his duplex. This makes sense as the profits are $15,000, which will net him 10 percent. The duplex went from being worth $100,000 to being worth $150,000 because the earnings went up. While the price is up 50 percent, the expected return is still the same. Had the duplex gone up in value from $100,000 to $150,000, with the profit staying at $10,000, we would have a “bubble,” meaning the price of the investment is much higher than the historical average

  • A bubble is not defined by rising prices alone; rather, a bubble is defined by rising prices relative to earnings

  • Whenever I am talking with a client who has an investment they won’t sell until it recovers, I ask them a simple question: “If you had cash instead of this stock, knowing what you are trying to accomplish, would you buy the same stock today?” The answer is almost always no, and when it is, we know the investor is hanging on only because of the loss aversion effect

  • Make sure your financial advisor has no conflict and follows the investment philosophy that makes sense for you

  • Over long periods of time, cash has always underperformed all other major asset classes

  • Bonds are insurance. We are giving up expected return in exchange for dramatically increasing the likelihood the investor’s needs will be met in the short and long run

  • If any investor has more than 10 to 20 years before part of the portfolio may be needed, this can be invested in subsets of the market that are extremely volatile but have a long, well-documented history of rewarding the investor for their patience. This includes mid-cap stocks, small-cap stocks, microcap stocks, and emerging markets stocks. The higher volatility should reward the investor with a higher return. As an example, if an investor has more than 20 years to retirement, they might have a substantial part of their portfolio in emerging markets. Some investors have wealth they will never spend or parts of the portfolio they will never touch. For situations like this, it can make sense for even a 75-year-old to have a significant portion of their portfolio in small stocks or emerging markets stocks

  • Actively trading securities in any asset class will likely yield lower returns. Choose index-based holdings for most if not all of your portfolio