Elements of investing, short and simple

Marketplace Staff Mar 19, 2010

Elements of investing, short and simple

Marketplace Staff Mar 19, 2010


Tess Vigeland: I’m sure you have a copy of Strunk and White’s “The Elements of Style” from college sitting around somewhere. Simple rules for elegant writing.

Well, economics professors Burton Malkiel and Charles Ellis recently released an homage to the classic called, of course, “The Elements of Investing.” I asked Burton Malkiel to tell us about the 122-page book, including why shorter is better in investing advice.

Burton Malkiel: I’ve got a 400-page book on investing that’s got these lessons. Charlie Ellis, my co-author, has a 400-page book. For most people, they look at something that large and just throw up their hands and say, “You know, I don’t want to spend many many hours reading through all of that.” And what we’ve tried to do is tell individuals really everything they need to know in, essentially, 100-page book. We also told the publisher we wanted to make this easy to read, so use a big typeface. And what we’ve tried to do is tell individuals really everything they need to know and that they can grasp in an hour or two of reading.

Vigeland: Fair enough. You know the one-sentence take away from “The Elements of Style,” is “make every word tell.” And I wonder how you would phrase that for your book — perhaps “make every dollar count”?

Malkiel: I think that’s probably a very good way of doing it. First of all, make sure you’ve got some dollars to begin with. In other words, it all starts with saving.

Vigeland: Which sounds so basic. And I wonder your thoughts on why we still need to tell people that this is important?

Malkiel: Well, I think because saving requires discipline. It’s incredible to me how much stuff we accumulate. Talk to any 25-year-old, say, “You spent so-and-so many dollars. Did you really get satisfaction?” And I’ll bet you the answer invariably is, “I got a lot of stuff that I really didn’t need.” We’re trying to get people to think in terms of what they give up in a dollar that they don’t save, is not just a dollar later in life, but maybe $20 or $30. Because as Albert Einstein once said, “The power of compounding is probably the strongest force in the universe.”

Vigeland: Let’s talk about those dollars that people are putting away, once they start doing that. You are all about indexing, and you are particularly talking about total market indexing. And that means that we’re not just talking about the S&P. Is that a change from, even just a few years ago, where it did seem like the conventional wisdom was, “OK put some of your money in the S&P 500 and maybe half of it in bonds and you’ll be good.”

Malkiel: I think it is. And it’s actually been a change in my thinking, as first of all, I realized that the S&P 500 is only large companies. Maybe some of the faster-growing companies are the smaller ones, so maybe we ought to go from an S&P 500 to a total U.S. stock market fund. And then realizing, in fact, you think of everything we buy and you realize it is a global economy, there are wonderful global companies and what we ought to do is to completely diversify — and that’s what we think people should invest in for the long pull.

Vigeland: You write that this book includes a lifetime of lessons that you wish you’d always known. I wonder if you’d be willing to share with us a lesson that you, perhaps, learned the hard way.

Malkiel: When I was in my twenties — first of all, there were no index funds then, so I didn’t even know that I could’ve done something like this — but I bought a lot of individual stocks. A few of them did well, a number of them were disasters. So, I learned that lesson that trying to time the market was wrong; nobody can do it. And I’ve also learned that if you buy the thing that’s popular, that everybody thinks is wonderful, you are likely to make terrible mistakes. And we know from statistics that that’s what people do.

Vigeland: I just want to, in closing, bring us back around to “The Elements of Style,” and it does seem like the rules of language are pretty timeless. But with investing, you have things like tax laws, all kinds of new financial products that come along. You know, you mentioned that there weren’t index funds in your early years of investing. So is it really possible to write a classic investing manual?

Malkiel: I do think so. The lesson of diversification; the lesson that you ought to have not just stocks, but stocks and bonds; the fact that you shouldn’t put all your money in the stock of the company that you work for — those are timeless.

Vigeland: Burton Malkiel is the co-author with Charles Ellis of “The Elements of Investing.” And we’ve been talking about the book. Thank you so much for coming in.

Malkiel: Oh, thank you so much for having me.

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