Long-Term Investing

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F). Summary of Chapter 6:

In this chapter, equity styles are the main topic of discussion. In today’s time, there has been a greater sense that portfolio managers of stock funds feel pressured to keep the portfolios they manage fully invested all the time, in order to give themselves a portfolio management style, defining the fund’s investment strategy. An example of this topic of equity styles is growth stocks versus value stocks, o large-cap stocks versus small-cap stocks. Bogle believes that the choice of which equity fund styles to utilize, similar to how to choose fund portfolio managers, is another example of industry witchcraft. He believes this because there is absolutely no evidence that exists proving that past returns are a precursor to future returns, so in turn there is no evidence that one investment style will be superior against another over time. When talking about the stock market, the risk is much greater if an investor bets on inefficiency rather than on efficiency. This logic is essentially the conclusion of equity style analysis within the mutual fund industry, because no matter which fund style an investor seeks, they should always try to emphasize low-cost funds or eschew high cost-funds. Another strategy and one that is simpler, is to index an entire equity portfolio with the S&P 500 index, or even the total stock market. In the end, there is no specific equity investment style that is more efficient than the other, ultimately it come to investor preference on which equity style to take up when investing.

G). Summary of Chapter 7:

This chapter’s main focus is on bonds. Bond mutual funds make it possible for investors to gain extraordinary values of broad diversification over 100+ bonds, while reducing risk without a sacrifice in gross return. Professional fund managers manage these bond mutual funds and emphasize higher rated bonds to hold in their portfolios, while offering a range of maturities. This range of maturities allows investors to balance their income requirements with their risk tolerance. Bonds take various forms, from long-term to short term, municipal to corporate to government bonds, all have their positives and negatives, but overall the bond segment of the mutual fund industry has lost a majority of its attraction to investors. The main reasoning behind the resurgence of the bond fund segment is due to the lack of returns bond assets yielded in comparison to the stock market and the bond market itself. Regardless of the decline in bond fund segment popularity, people still invest in bond mutual funds, and when they do they consider three important factors when measuring the risk involved with bonds, duration, volatility, and portfolio quality. The lowest-cost group of bonds had the shortest duration, lowest volatility, highest quality, highest returns, and the lowest risks. For bonds, as costs go down, returns go up, but as costs go up, returns go down. Another reason for bond funds being an unattractive investment today is due to the excessive costs such as sales charges and management fees, bond fund investors have to face to invest in the bond fund industry. Failure to provide adequate returns to compensate for the absurd costs could lead to the bond fund industry failing altogether, but the future of the bond fund industry is ultimately determinant on the bund fund investors and what they decide to do going forward.

H). Summary of Chapter 8:

Chapter 8 focuses on global investing. Investing in overseas investments is not necessarily a bad idea, but at the moment, the US has the most productive economy, a brilliant capital market, the best innovation, and one of the most hospitable legal environments across the globe. The United States has five percent of the world population but produces roughly twenty-five percent of global goods and services, making it safe to say that the America is the envy of almost every other country. One type of global investment strategy is the global efficient frontier, which determines the precise allocation of assets between US and foreign investments. The ultimate goal of this strategy is to provide a combination that gives the highest return at the lowest level of risk. A downside to this strategy is that it is solely based on past returns and past risk patterns. In reality though, historical data is the closest thing investors have as hard statistics, but they are also not always determinants of the future performance of investments. The one risk that equity investors need to assume when using this strategy is market risk, which is the truth that all stock portfolios fluctuate in value. By assessing the success of global investing based on total returns and the global fund’s risk, one would find that historically, global funds realized lower annual total returns than those of the S&P 500, and also having higher volatility. Overall, global investing does not provide any exceptional outcomes that would entice investors to join the global fund investing industry.

I). Summary of Chapter 9:

This chapter focuses on selecting superior funds. Intelligent and great investors realize that the main point of investing is to attain the highest possible return in the long-run through the financial asset class that they invest in. These investors also recognize two realities of the marketplace, that investors, as a group will never beat the market, and that there are overwhelming odds against any mutual fund from performing consistently over an investment’s lifetime. There have been various academic studies all conducted in an effort to find the best way to select the most superior mutual funds, two of these studies were the Carhart Study and Sharpe Study. Both studies ultimately resulted in the same conclusions that, relying on past historical data to select mutual fuds that will provide better future performance is a challenging task with little evidence to support that there is a way to pick these superior funds. Investment strategies such as holding managed mutual funds for the long-run or switching rapidly in and out of funds, have not resulted in the holy grail of providing superior market returns that investors seek. The true holy grail of mutual fund investing is achieved through a diversified portfolio that has a return as close as possible to 100 percent of market return as possible. The odds that an equity mutual fund portfolio managers beat the stock market or earn a return over 100 percent of the market return are very low as they are normal human beings working in a very efficient market. In the end, there is no single strategy to select the best mutual funds, as the odds are high that no fund will ever beat the market.