Lessons From Stock Market History Pt.5: keep investing simple (video)

– Posted in: Investing In Stocks

This 8-part series is about investing in stocks. The next lesson is to keep investing simple. This outstanding video series was produced by SensibleInvesting.tv. I have created a summary and transcript to help you find spots that interest you and make the best use of your time.

Summary of video: Lessons From Stock Market History Pt.5: keep investing simple


SensibleInvesting.tv is an independent voice that makes important educational videos about passive investing—the best I’ve seen. This series features some of the biggest names and brightest minds in the investment world. It is presented and produced by Robin Powell and his team at SensibleInvesting.tv, and published on YouTube. It is a great honor to include it in our collection of video tutorials about “Investing in Stocks”.
Key points about investing in stocks from this video:

  • The next lesson is to keep investing simple.
  • Complicated products often don’t work the way that you think they’re going to work.
  • Watch for people hiding risk in ways that you don’t understand.
  • Stick to what you understand.
  • Costs matter! The net return all investors divide up is equal to the gross return on the financial markets, minus the costs of playing the game.

Transcript of: Lessons From Stock Market History Pt.5: keep investing simple


(At 0:08 start Robin Powell, reporter)

Welcome back to the series that aims to give you, the investor, the key lessons to learn from hundreds of years of global market history. So far we’ve discussed the need to be realistic, to stay calm, and to forget trying to time the market. The next lesson is to keep it simple. The rules of sensible investing are actually relatively straight forward. Many in the investment industry appear to prefer complexity. Twice in recent years, that complexity has sent markets tumbling.

Speaker 2:

Wall street recovers after another wild day, but London’s stock market does it again, down another two hundred and fifty points.

(0:49 Prof. Janette Rutterford)

Keep investing simple.

Stick to the plain vanilla products and keep investing simple.

One of the things that happened in the eighty seven crash, was that a lot of institutions were trying to do something called portfolio insurance. Which was this idea that you could protect the value of your portfolio, not going below a certain amount. The way it was done was to buy ordinary equities, and hedging with futures contracts. What happened in the crash of eighty seven was it didn’t work. The futures fell out of bed at the same time as equities, and they weren’t able to be quick enough to hedge their equity position.

One of the lessons that you learned from that, is that complicated products often don’t work the way that you think they’re going to work. Don’t leverage up. Watch people who are hiding risk in ways that you don’t understand. Stick to the plain vanilla products and you know approximately what the risk-return ratio is.

(1:33 Robin)

Of course, the lessons of market history often go unlearned. Just twenty years later came another crash largely caused by investments that were so complex, that not even the professionals understood them.

(1:48 Richard Wood)

What happened, it created a lot of debt and the banks became insolvent. That’s why the governments had to intervene, and prop up these banks. If a bank or investment bank cannot understand how toxic some of these investments are, and how complex they are, you’re average man on the street. Your individual investor, that has sold these funds, how is he or she suppose to understand?

(2:11 Robin)

Yet still there are some who just don’t get it, even after what happened in nineteen eighty seven, and again in the credit crunch. The industry continues to peddle complex investments, and investors continue to buy them.

(2:23 Dave Plecha, Dimensional Fund Advisors)

I would caution structured debt products. We think well, if I gather up a pool of assets, and of course the poster child for this was the CDO, the Collateralized Debt Obligation. I could gather up a pool of sub prime mortgages, and I could just slice and dice and package in a way, and I could create a triple A rated security out of that. I would be very, very skeptical about the notion that somehow, with enough engineering, we could generate bonds that pay more than what the risk might suggest.

(2:53 Robin)

What’s the answer? For start, stick to what you understand. If you want to invest in shares, invest in shares. The same with bonds and cash. Products which combine different assets should generally be avoided. Of course, there are so many different types of equities you can buy. There are growth shares, and shares for dividend income. Shares from different sectors of the economy and different parts of the world. The simplest way at investing in equities is to invest in the entire market. A strategy known as passive investing.

(3:27 Jasmine Birtles, Moneymagpie.com)

Passive fund managing is basically a computer program. Generally speaking, they track an indices or index. It could be the FTSE one hundred, or the FTSE all share. It could the DAX, or the DOW JONES, something like that. Essentially, this computer program puts a small amount of your money into every single company in that index.

(3:49 Robin)

Simplicity is just one of the advantages of the passive approach. It also provides greater diversification, but the biggest benefit is that it’s far cheaper in the long run, than paying an active fund manager to buy and sell shares on your behalf.

(4:05 John Bogle, founder The Vanguard Group)

Gross return on the financial markets, minus the cost of playing the game, is the net return all investors divide up. It’s as simple as the relentless rules of humble arithmetic.

(4:16 Robin)

You might say, surely an active manager can achieve better returns, which justifies the extra cost. Of course in theory they can, but all the evidence suggests that generally, they don’t.

(4:29 Dr. Mike Tubbs, Research Investments)

The best study that I know of is one carried out in the states, thirty five years, from nineteen seventy to two thousand five. That looked at three hundred and fifty five funds. Just nine of those funds beat the index by two percent or more. Just three of them showed sustained out performance. A study in the UK at twelve hundred funds, over three years, finishing in March of two thousand eleven, showed that just one point three percent of those funds were in the top quartile for all three successive years.

(5:02 Robin)

If you’re new to the idea of passive investing, you’ll find plenty of information about it on the Sensible Investing website, and on our YouTube channel. See you in part six, for the next key lesson to learn from market history.

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Footnotes and Credits: Lessons From Stock Market History Pt.5: keep investing simple

This video was produced by SensibleInvesting.tv and published on YouTube Sep 2, 2013 on their YouTube channel SensibleInvesting. Their videos are the best I’ve seen on this topic. They produce them and own the copyright. They have given me permission to embed this via YouTube license onto this educational website.

Sensibleinvesting.tv provides information and opinion on low-cost, evidence-based (passive) investing. They are based in the United Kingdom, but their lessons are universal.

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