The Elements of Investing
Tenth-anniversary edition 2020.
Summary
Burton Malkiel and Charles Ellis wrote this deliberately short book as a distillation of what they both concluded across long careers. Malkiel wrote A Random Walk Down Wall Street and Ellis wrote Winning the Loser's Game, and this compresses both positions into about a hundred pages.
The advice is minimal and consistent. Save regularly and start early, because compounding over decades does more than any investment decision. Index rather than select, because the evidence on active management is conclusive in aggregate and the winners cannot be identified in advance. Diversify across asset classes, geographies and time. Minimise costs and taxes, which are the only certain component of the return equation. Rebalance to a chosen allocation rather than responding to markets. And avoid the specific behavioural errors that destroy returns, principally performance chasing, panic selling and overconfidence.
The book's method is subtraction: it says less than other investment books deliberately, on the argument that the additional content in longer books is either wrong or irrelevant. Its limitations are that it does not help a reader who wants to understand why the recommendations follow from evidence, and that the tax and account material is American. As a book to give someone who needs to start investing and will not read three hundred pages, it is the best available.
Key takeaways 7
- Saving regularly and starting early contributes more to outcomes than any investment selection decision.
- Index funds win because costs are certain and manager outperformance is neither predictable nor persistent.
- Costs and taxes are the only components of return an investor controls, and they compound exactly as returns do.
- Rebalancing to a chosen allocation enforces selling what has risen and buying what has fallen without requiring judgement.
- Investors destroy returns through performance chasing and panic selling, and both are avoidable by rule.
- The authors argue that most investment advice consists of content that is either wrong or irrelevant to the outcome.
- Diversification across asset classes, geographies and time is the only protection against being wrong about the future.
Who should read it
Anyone starting to invest, or anyone who needs to give a short and unconflicted book to someone who is.
About Burton G. Malkiel
Chemical Bank Chairman's Professor of Economics Emeritus, Princeton University; Chief Investment Officer, Wealthfront; former Vanguard director
A Random Walk Down Wall Street, now in its thirteenth edition after fifty years, is the primary popular source for the index-fund case.
Where it sits in the reference 2
Similar books 6
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