Foreword

You will learn much about investing at the feet of Mr. Larry Swedroe while reading this fine book. Here are a few of the things he will teach you. First, intelligent, hard‐working individual investors can reliably beat the stock market through stock picking and market timing. If you somehow disagree with that, then he will convince you that at least very‐well‐paid, overeducated professional money managers can consistently outperform. Okay, maybe you don't believe that's true, either. But Larry will convincingly argue that at least the subset who've reliably beaten the market in the past will again do so going forward. Okay, if you don't believe him about that, then at least believe him that sophisticated institutional investors, like pension funds and the investment committees of endowments and foundations, can make money manager hire‐and‐fire decisions that add a lot of value over the long term. Okay, enough about all the different ways Larry will show you how the pros can beat the market for you. Larry also teaches a lot of other important things about investing. For instance, he shows us that stocks become riskless but only if you hold them long enough. He clearly demonstrates that if you've built up a large nest egg by keeping your money in the stock of the company you work for, then continuing to do that going forward, provided that you really and truly love the company, is a prudent and low‐risk strategy. He notes that dollar cost averaging is the real secret to investing success, and that owning gold hedges away your inflation risk, and how the stock market would be a paradise without bear markets. I could go on (and Larry does!). All vital pearls of wisdom.

Okay, in truth, this might actually be a somewhat painful (though important!) book to read for investors new to Mr. Larry Swedroe.1 Many sacred oxen are gored (mixing my bovine aphorisms). Specifically, the book you are about to read will show you (quite persuasively) that everything I just listed in the previous paragraph is false. Larry teaches you the opposite of what I said, and that believing otherwise can be very damaging to your long‐term financial health.

You can find this all out on your own.2 All you have to do is read and understand a few hundred academic and practitioner research papers, some of them (unnecessarily?) mathematically difficult. Or you can come here and get it all in a few hours with some entertainment thrown in gratis. The math you'll find in Larry's book consists mainly of reporting average results, what tends to matter, what doesn't, what fraction of the time things happen in, and to what magnitude. Nothing too daunting and there is only as much math as you need to understand the concepts. Larry takes a few hundred serious research papers and turns them from mathematical exercises into understandable stories.

Like I said, the stories still have a little bit of math. The tales Larry tells are not quite the same as a 7th‐century BC Greek reciting Homer by the fire (sorry, Larry). But they are a lot closer to that than the papers he draws from! Larry uses stories, mostly as analogies, to make the difficult easy and the complex simple. Instead of regression analysis and matrix algebra, Larry teaches with examples ranging from Gaylord Perry to Sisyphus. You won't find that in the Financial Analysts Journal!

To play favorites, and get a little personal, out of the entirety of a great book, perhaps the chapter that resonated most with me was Chapter 24: Why Do Smart People Do Dumb Things?3 No, it isn't because I think I'm a smart person who often does (very) dumb things, though that is certainly the case (and I'm definitely right about the second part). It's very personal and it's about the 2018–2020 horrendous period for most forms of quantitative stock selection (led by the famous “value factor”). Larry presents reams and reams of evidence that past performance doesn't predict future performance.4 Wait. Actually, that's not quite right. He presents evidence that it does (mildly) predict future performance but with the wrong sign!5 He discusses this for choosing mutual funds and for professionally managed pension funds choosing managers. He does so under a wide variety of rebalancing rules and a wide variety of ways to evaluate performance (e.g., benchmark relative performance, raw performance, risk‐adjusted performance done a variety of ways). Quoting Larry:6

The bottom line is that so many investors are doing the same thing over and over again and expecting a different outcome. Most seem to never stop and ask the question: If the managers I hired based on their past outperformance have underperformed after being hired, why do I think the new managers I hire to replace them will outperform if I am using the very same criteria that have repeatedly failed? And, if I am not doing anything different, why should I expect a different outcome? I've asked these very questions, and never once received an answer—just blank stares.

Larry is not alone in making this point. To pick an utterly randomly chosen example of someone else making this point, in 2014 I wrote an article in the Financial Analysts Journal called “My Top 10 Peeves” and out of the 10 my number 3 was “had we but world enough, and time, using three‐ to five‐year evaluation periods would still be a crime.” It was a shorter, less evidence‐based, more sarcastic take on what Larry is explaining here. Picking winning money managers7 over three to five years isn't just wrong; it's mildly backwards. Picking the losers is (again, the predictive power is only mild, don't bet a lot on this either!) on average the right thing to do. Of course, I wrote this in 2014 when the prior three‐ to five‐year period was quite good for us. You know why? Because you don't get to write about this when it's been a bad period for you. If you do, people roll their eyes and say you're just making excuses. You only get to scream this from the rooftops when the last three‐ to five‐year period is great for you. I did that. Well, I didn't so much as scream as discuss it. But inside I was screaming.

Then, 2018–2020 rolled around and things got ridiculously tough for the academic factor‐based strategies we favor. We could show precisely why it was so bad. We could put it into historical context. We could even measure how extreme was the pain and what we thought the concomitant opportunity. Yet exactly when, in a Vulcan world of rational investors, investors should've doubled up on value investing (and us!), we lost lots of clients and had (nearly) zero investors take up the opportunity (and our clients are, I dare say, of a high level of sophistication—remember Larry's admonition that this doesn't seem to help!).8 Rather people, yet again, went the other way, adding what had worked recently and running from what had not despite its (sorry, I have to say) rather obvious attractiveness. It seems that despite overwhelming evidence of how crazy the world had gotten, despite my own prior statements in good times about not automatically selling after bad times, despite us surviving and thriving from a similar episode in 1999–2000 so we knew what the path looked like, and despite the gigantic and robust set of research Larry cites that people sell what they should be buying and buy what they should be selling, most still couldn't do it.9 If I sound a bit bitter, well, it's not that much more than my average.10

From my description thus far, you might think this book is pure nihilism, glorying in shooting down harmful myths about investing. There is a healthy dollop of that, and it's very valuable unto itself. But Larry doesn't end with nihilism, not at all. Yes, implicitly springing from nearly every chapter is indeed the depressing all‐caps “YOU CANNOT WIN” by doing what so many self‐interested experts tell you to do. But behind that there is also the ultimately uplifting “YOU DO NOT HAVE TO WIN TO WIN” as Larry convinces you that you mostly win by not playing. He even gives some good life advice along the way (not playing doesn't just leave you wealthier and more secure, it gives you some of your life back!).

So, what's Larry's prescription? Simple. Stay very diversified. Pay low costs. Do not chase performance or run from tough performance if you understand what drove it. Do not try to time the market. If you do try to beat the market, focus on the “factors” that have been discovered in academia and refined by applied researchers in industry.11 Of this last piece of advice, I will say little save that I have no quarrel with him here.12

Do less. Pay less. Think about it all less. Don't put all your eggs in one basket. Think about the worst outcomes and make sure you aren't doomed if they occur.13 If you're going to attempt to beat markets, do so using sound evidence‐based academic findings consistent with behavioral finance or harvesting a risk premium. Stay the course.

I know. He could've just told you all that upfront, without the reams of academic evidence and the great stories/analogies, but would you have believed him? Nah. Well, you should now!

Notes

1. 1. Though if you have...