Burton G Malkiel Quotes

Never buy anything from someone who is out of breath.

put time on your side. Start saving early and save regularly. Live modestly and don't touch the money that's been set aside.

It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges. It is an obvious lesson, but one frequently ignored.

I view investing as a method of purchasing assets to gain profit in the form of reasonably predictable income (dividends, interest, or rentals) and /or appreciation over the long term.

The greatest of all gifts is the power to estimate things at their true worth.

there are four factors that create irrational market behavior: overconfidence, biased judgments, herd mentality, and loss aversion.

A firm's income statement may be, likened to a bikini-what it reveals is interesting but what it conceals is vital.

Predicting the stock market is really predicting how other investors will change estimates they are now making with all their best efforts. This means that, for a market forecaster to be right, the consensus of all others must be wrong and the forecaster must determine in which direction-up or down-the market will be moved by changes in the consensus of those same active investors.

Tip of the Week If you bought $1,000 worth of Nortel stock one year ago, it would now be worth $49. If you bought $1,000 worth of Budweiser (the beer, not the stock) one year ago, drank all the beer, and traded in the cans for the nickel deposit, you would have $79. My advice to you…start drinking heavily.

There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

The index performance is not mediocre—it exceeds the results achieved by the typical active manager.

Forecasts are difficult to make—particularly those about the future.

In crowds it is stupidity and not mother-wit that is accumulated,” Gustave Le Bon noted in his 1895 classic on crowd psychology.

Nobody knows more than the market.

In the 1990s, the ratio of buy to sell recommendations climbed to 100 to 1, particularly for brokerage firms with large investment banking businesses.

Finding the next Warren Buffett is like looking for a needle in a haystack. We recommend that you buy the haystack instead, in the form of a low-cost index fund.

Two-thirds of professionally managed funds are regularly outperformed by a broad capitalization-weighted index fund with equivalent risk, and those that do appear to produce excess returns in one period are not likely to do so in the next. The record of professionals does not suggest that sufficient predictability exists in the stock market to produce exploitable arbitrage opportunities.

You will never be allowed to buy the really good IPOs at the initial offering price. The hot IPOs are snapped up by the big institutional investors or the very best wealthy clients of the underwriting firm.

A couple, both age seventy-eight, went to a sex therapist’s office. The doctor asked, “What can I do for you?” The man said, “Will you watch us have sexual intercourse?” The doctor looked puzzled, but agreed. When the couple finished, the doctor said, “There’s nothing wrong with the way you have intercourse,” and charged them $50. The couple asked for another appointment and returned once a week for several weeks. They would have intercourse, pay the doctor, then leave. Finally, the doctor asked, “Just exactly what are you trying to find out?” The old man said, “We’re not trying to find out anything. She’s married and we can’t go to her house. I’m married and we can’t go to my house. The Holiday Inn charges $93 and the Hilton Inn charges $108. We do it here for $50, and I get $43 back from Medicare.

Look for growth situations with low price-earnings multiples. If the growth takes place, there’s often a double bonus—both the earnings and the multiple rise, producing large gains. Beware of very high multiple stocks in which future growth is already discounted. If growth doesn’t materialize, losses are doubly heavy—both the earnings and the multiples drop.

For many of us, trying to outguess the market is a game that is much too much fun to give up. Even if you were convinced you would not do any better than average, I'm sure that most of you with speculative temperaments would still want to keep on playing the game of selecting individual stocks with at least some portion of the money you invest.

As the economic historian Charles Kindleberger has stated, “There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.

There is one investment truism that, if followed, can dependably increase your investment returns: Minimize your investment costs. We

You, far more than the market or the economy, are the most important factor in your long-term investment success.

In fact, the most profitable investments you will ever make are precisely at the times when pessimism is the most rampant.

as the public realized that an excess of paper currency creates no real wealth, only inflation.

And if you buy the new issue after it begins trading, usually at a higher price, you are even more certain to lose.

It is the definition of the time period for the investment return and the predictability of the returns that often distinguish an investment from a speculation. A speculator buys stocks hoping for a short-term gain over the next days or weeks. An investor buys stocks likely to produce a dependable future stream of cash returns and capital gains when measured over years or decades.

Similarly, the buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve her long-term investment goals.

J. P. Morgan once had a friend who was so worried about his stock holdings that he could not sleep at night. The friend asked, “What should I do about my stocks?” Morgan replied, “Sell down to the sleeping point.

A stock selling at $100 per share with earnings of $10 per share would have the same P/E multiple (10) as a stock selling at $40 with earnings of $4 per share. It is the P/E multiple, not the price, that really tells you how a stock is valued in the market.

By buying a share in a “total market” index fund, you acquire an ownership share in all the major businesses in the economy. Index funds eliminate the anxiety and expense of trying to predict which individual stocks, bonds, or mutual funds will beat the market.

Daniel Kahneman has argued that this tendency to overconfidence is particularly strong among investors. More than most other groups, investors tend to exaggerate their own skill and deny the role of chance. They overestimate their own knowledge, underestimate the risks involved, and exaggerate their ability to control events.

Kahneman and Tversky concluded that losses were 2½ times as undesirable as equivalent gains were desirable. In other words, a dollar loss is 2½ times as painful as a dollar gain is pleasurable. People exhibit extreme loss aversion, even though a change of $100 of wealth would hardly be noticed for most people with substantial assets. We’ll see later how loss aversion leads many investors to make costly mistakes.

WHAT DOES IT ALL MEAN? The lessons of market history are clear. Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times conforms well to the castle-in-the-air theory. For this reason, the game of investing can be extremely dangerous. Another lesson that cries out for attention is that investors should be very wary of purchasing today’s hot “new issue.” Most initial public offerings underperform the stock market as a whole. And if you buy the new issue after it begins trading, usually at a higher price, you are even more certain to lose. Investors would be well advised to treat new issues with a healthy dose of skepticism. Certainly investors in the past have built many castles in the air with IPOs. Remember that the major sellers of the stock of IPOs are the managers of the companies themselves. They try to time their sales to coincide with a peak in the prosperity of their companies or with the height of investor enthusiasm for some current fad. In such cases, the urge to get on the bandwagon—even in high-growth industries—produced a profitless prosperity for investors.

The first concerns how an investor should choose among different types of broad-based index funds. The best-known of the broad stock market mutual funds and ETFs in the United States track the S&P 500 index of the largest stocks. We prefer using a broader index that includes more smaller-company stocks, such as the Russell 3000 index or the Dow-Wilshire 5000 index. Funds that track these broader indexes are often referred to as “total stock market” index funds. More than 80 years of stock market history confirm that portfolios of smaller stocks have produced a higher rate of return than the return of the S&P 500 large-company index. While smaller companies are undoubtedly less stable and riskier than large firms, they are likely—on average—to produce somewhat higher future returns. Total stock market index funds are the better way for investors to benefit from the long-run growth of economic activity.

The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline. Without a regular savings program, it doesn’t matter if you make 5 percent, 10 percent, or even 15 percent on your investment funds. The single most important thing you can do to achieve financial security is to begin a regular savings program and to start it as early as possible. The only reliable route to a comfortable retirement is to build up a nest egg slowly and steadily. Yet few people follow this basic rule, and the savings of the typical American family are woefully inadequate. It is critically important to start saving now. Every year you put off investing makes your ultimate retirement goals more difficult to achieve. Trust in time rather than in timing. As a sign in the window of a bank put it, little by little you can safely stock up a strong reserve here, but not until you start.

Those with a broader view—investors who recognize that the world has changed considerably since Markowitz first enunciated his theory—can reap even greater protection because the movement of foreign economies is not always synchronous with that of the U.S. economy, especially those in emerging markets.

Two behavioral economists, Terrance Odean and Brad Barber, examined the individual accounts at a large discount broker over a substantial period of time. They found that the more individual investors traded, the worse they did. And male investors traded much more than women, with correspondingly poorer results.

a blindfolded chimpanzee throwing darts at the stock listings can select a portfolio that performs as well as those managed by the experts.

ou could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.

You could talk about Prohibition, or Hemingway, or air conditioning, or music, or horses, but in the end you had to talk about the stock market, and that was when the conversation became serious.

It is not hard to make money in the market.

Percentage of Actively Managed Mutual Funds Outperformed by the S&P 500 Index (Periods through June 30, 2012) Sources: Lipper and The Vanguard Group.

Average Annual Returns of Actively Managed Mutual Funds Compared with S&P 500 20 years, Ending June 30, 2012 Sources: Lipper, Wilshire, and The Vanguard Group. S&P 500 Index Fund 8.34% Average Active Equity Mutual Funda 7.00% Shortfall +1.34%

has become increasingly clear to me that one’s capacity for risk-bearing depends importantly upon one’s age and ability to earn income from noninvestment sources. It

Thus, purchasing a fund holding all the stocks in a broad-based index will produce a portfolio that can be expected to do as well as any managed by professional security analysts.

In one celebrated incident, an analyst who had the chutzpah to recommend that Trump’s Taj Mahal bonds be sold because they were unlikely to pay their interest was summarily fired by his firm after threats of legal retaliation from “The Donald” himself. (Later, the bonds did default.)

What is a cynic? A man who knows the price of everything, and the value of nothing. — Oscar Wilde, Lady Windermere’s Fan

A firm’s income statement may be likened to a bikini—what it reveals is interesting but what it conceals is vital.

Despite all the evidence to the contrary, suppose an investor still believed that superior investment management really does exist. Two issues remain: First, it is clear that such skill is very rare; and second, there appears to be no effective way to find such skill before it has been demonstrated. As I indicated in chapter 7, the best-performing funds in one period of time are not the best performers in the next period. The top performers of the 1990s had dreadful returns in the first decade of the 2000s. Paul Samuelson summed up the difficulty in the following parable. Suppose it was demonstrated that one out of twenty alcoholics could learn to become a moderate social drinker. The experienced clinician would answer, “Even if true, act as if it were false, for you will never identify that one in twenty, and in the attempt five in twenty will be ruined.” Samuelson concluded that investors should forsake the search for such tiny needles in huge haystacks.

The implications are simple. If past prices contain little or no useful information for predicting future prices, there is no point in following technical trading rules. A simple policy of buying and holding will be at least as good as any technical procedure. Moreover, buying and selling, to the extent that it is profitable, tends to generate taxable capital gains.

It turns out that the portfolio with the least risk had 18 percent foreign securities and 82 percent U.S. securities. Moreover, adding 18 percent EAFE stocks to a domestic portfolio also tended to increase the portfolio return.

research analysts were increasingly paid to be bullish rather than accurate. In one celebrated incident, an analyst who had the chutzpah to recommend that Trump’s Taj Mahal bonds be sold because they were unlikely to pay their interest was summarily fired by his firm after threats of legal retaliation from “The Donald” himself. (Later, the bonds did default.)

your investments have to produce a rate of return equal to inflation.

Invariably, the hottest stocks or funds in one period are the worst performers in the next.

Any

Any investment that has become a topic of widespread conversation is likely to be hazardous to your wealth. It was true of gold in the early 1980s and Japanese real estate and stocks in the late 1980s. It was true of Internet-related stocks in the late 1990s and condominiums in California, Nevada, and Florida in the first decade of the 2000s, as well as bitcoin in 2017.

14 A LIFE-CYCLE GUIDE TO INVESTING There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can. —Mark Twain, Following the Equator INVESTMENT STRATEGY NEEDS to be keyed to one’s life cycle.

Lynch calculated each potential stock’s P/E-to-growth ratio (or PEG ratio) and would buy for his portfolio only those stocks with high growth relative to their P/Es. This was not simply a low P/E strategy, because a stock with a 50 percent growth rate and a P/E of 25 (PEG ratio of ½) was deemed far better than a stock with 20 percent growth and a P/E of 20 (PEG ratio of

The point is that market timers risk missing the infrequent large sprints that are the big contributors to performance.

the public realized that an excess of paper currency creates no real wealth, only inflation.

For those in their twenties, a very aggressive investment portfolio is recommended. At this age, there is lots of time to ride out the peaks and valleys of investment cycles, and you have a lifetime of earnings from employment ahead of you. The portfolio is not only heavy in common stocks but also contains a substantial proportion of international stocks, including the higher-risk emerging markets. As mentioned in chapter 8, one important advantage of international diversification is risk reduction. Plus, international diversification enables an investor to gain exposure to other growth areas in the world even as world markets become more closely correlated.

(dividends,

October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February. —Mark Twain, Pudd’nhead Wilson

To overcome the drag of expenses and taxes, an actively managed fund would have to outperform the market by 4.3 percentage points per year just to break even with index funds.* The odds that you can find an actively managed mutual fund that will perform that much better than an index fund are virtually zero.

High-quality bonds can moderate the risk of a common stock portfolio by providing offsetting variations to the inevitable ups and downs of the stock market. For

You are also allowed to “Roth and Roll.” You can roll the balance of your traditional IRA into a Roth, again if your income level qualifies.* You need to pay tax on the amount converted, but from then on neither the earnings nor the withdrawals in retirement are taxed. Moreover, you are not required to take the money out at retirement, and contributions can continue to be made into your seventies and eighties if you wish. Thus, significant amounts can be accumulated tax free for future generations.

There is no simple road to riches for you and your family. The secret to getting wealthy is that there is no secret. The only way to get rich—unless you inherit or marry a fortune or hit the lottery—is to get rich slowly. Start early and contribute as much as possible to your savings for as long as possible.

The best choice for your equity investments is a fund indexed to the total world stock market. If you are truly uncomfortable investing in “foreign” stocks, you could choose a domestic total stock market fund. We recommend that you be diversified internationally because the United States represents less than half of the world’s economic activity and stock market capitalization. For your bonds, choose a total U.S. bond market index fund.

The secret to success and enjoyment in so many parts of life is to know your capabilities and stay within them. Similarly, the key to success in investing is to know yourself and invest within your investing capabilities and within your emotional capacities.

ETFs tend to have very low expense ratios, and they can be more tax efficient than mutual funds because they are able to sell holdings without generating a taxable event. This could be an advantage for taxable investors. However, brokerage commissions are charged on the purchase of ETFs, and for small and moderate purchases these commissions can overwhelm those other advantages. No-load indexed mutual funds typically have no purchase fees. However, if you are investing a lump sum (as, for example, when rolling over an established plan such as an IRA), an ETF may be an optimal choice.

Only liars manage always to be out of the market during bad times and in during good times.

As an investor, what should you do about forecasts—forecasts of the stock market, forecasts of interest rates, forecasts of the economy? Answer: Nothing. You can save time, anxiety, and money by ignoring all market forecasts.

Note also that during the punishing bear market of 2007–2008, new record withdrawals were made by investors who threw in the towel and sold their mutual fund shares—at record lows—just before the first, and often best, part of a market recovery.

You don’t care if it’s cold and raining or warm and sunny 10,000 miles away because it’s not your weather. The same detachment should apply to your 401(k) investments until you approach retirement. Even

Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many investors to throw in the towel and sell out near the market’s bottom when pessimism is rampant and seems most convincing. One of the most important lessons you can learn about investing is to avoid following the herd and getting caught up in market-based overconfidence or discouragement. Beware of “Mr. Market.

Indeed, when pessimism is rampant and market prices are down is the worst time to sell out or to stop making regular investment contributions. The time to buy is when stocks are on sale.

The stock market as a whole has delivered an average rate of return of about 9½ percent over long periods of time. But that return only measures what a buy-and-hold investor would earn by putting money in at the start of the period and keeping her money invested through thick and thin. In

As an investor, you have one powerful way to keep from getting distressed by devilish Mr. Market: Ignore him. Just buy and hold one of the broad-based index funds that

Psychologists also remind us that investors are far more distressed by losses than they are delighted by gains. This leads people to discard their winners if they need cash and hold onto their losers because they don’t want to recognize or admit that they made a mistake. Remember: Selling winners means paying capital gains taxes while selling losers can produce tax deductions. So if you need to sell, sell your losers. At least that way you get a tax deduction rather than an increase in your tax liability.

Here’s why: Past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for investment advice, the lower your investment return. As our friend Jack Bogle likes to say: In the investment business, “You get what you don’t pay for.

Diversify across securities, across asset classes, across markets—and across time.

One asset class that belongs in most portfolios is bonds. Bonds are basically IOUs issued by corporations and government units. (The government units might be foreign, state and local, or government-sponsored enterprises such as the Federal National Mortgage Association, popularly known as Fannie Mae.) And just as you should diversify by holding a broadly diversified stock fund, so should you hold a broadly diversified bond fund.

Unlike common stocks, whose dividends and earnings fluctuate with the ups and downs of the company’s business, bonds pay a fixed dollar amount of interest. If the U.S. Treasury offers a $1,000 20-year, 5 percent bond, that bond will pay $50 per year until it matures, when the principal will be repaid. Corporate bonds are less safe, but widely diversified bond portfolios have provided reasonably stable interest returns over time.

So-called “total stock market” funds will include both real estate companies and commodity products. Broad equity diversification can be achieved with one-stop shopping.

Does achieving extremely broad diversification seem completely out of reach for ordinary investors? Fear not. There are broadly invested, very low-cost funds that can provide one-stop shopping solutions. We will recommend a broadly diversified United States total stock market index fund that includes real estate companies and commodity producers, including gold miners. We

You should diversify over time. Don’t make all your investments at a single time. If

You can reduce risk by building up your investments slowly with regular, periodic investments over time. Investing regular amounts monthly or quarterly will ensure that you put some of your money to work during favorable periods, when prices are relatively low. Investment advisers call this technique “dollar-cost averaging.” With equal dollar investments over time, the investor buys fewer shares when prices are high and more shares when prices are low. It won’t eliminate risk but it will ensure that you don’t buy your entire portfolio at temporarily inflated prices. The

Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

And you must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest. No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic-pilot nature of the program. Because if you do, you will lose the benefit of buying at least some of your shares after a sharp market decline when they are for sale at low-end prices. Dollar-cost averaging will give you this bargain: Your average price per share will be lower than the average price at which you bought shares. Why? Because you’ll buy more shares at low prices and fewer at high prices.

The right response to a fall in the price of one asset class is never to panic and sell out. Rather, you need the long-term discipline and personal fortitude to buy more. Remember: The lower stock prices go, the better the bargains if you are truly a long-term investor. Sharp market declines may make rebalancing appear a frustrating “way to lose even more money.” But in the long run, investors who rebalance their portfolios in a disciplined way are well rewarded.

Rebalancing will not always increase returns. But it will always reduce the riskiness of the portfolio and it will always ensure that your actual allocation stays consistent with the right allocation for your needs and temperament.

Avoiding serious trouble, particularly troubles that come from incurring unnecessary risks, is one of the great secrets to investment success. Investors all too often beat themselves by making serious—and completely unnecessary—investment mistakes. In

Benjamin Franklin provides us with an actual rather than a hypothetical case. When Franklin died in 1790, he left a gift of $5,000 to each of his two favorite cities, Boston and Philadelphia. He stipulated that the money was to be invested and could be paid out at two specific dates, the first 100 years and the second 200 years after the date of the gift. After 100 years, each city was allowed to withdraw $500,000 for public works projects. After 200 years, in 1991, they received the balance—which had compounded to approximately $20 million for each city. Franklin’s example teaches all of us, in a dramatic way, the power of compounding. As Franklin himself liked to describe the benefits of compounding, “Money makes money. And the money that money makes, makes money.

The average actively managed mutual fund charges about one percentage point of assets each year for managing the portfolio. It is the expenses charged by professional “active” managers that drag their return well below that of the market as a whole. Low-cost index funds charge only one-tenth as much for portfolio management. Index funds do not need to hire highly paid security analysts to travel around the world in a vain attempt to find “undervalued” securities. In

In David Copperfield, Charles Dickens’s character Wilkins Micawber pronounced a now-famous law: Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

There are few, if any, absolute rules in saving and investing, but here’s ours: Never, never, never take on credit card debt. This rule comes as close as any to being an inviolable commandment. Scott

The secret of getting rich slowly but surely is the miracle of compound interest. Albert Einstein is said to have described compound interest as the most powerful force in the universe. The concept simply involves earning a return not only on your original savings but also on the accumulated interest that you have earned on your past investment of your savings.

This simple investment strategy—indexing—has outperformed all but a handful of the thousands of equity and bond funds that are sold to the public. But you wouldn’t know this when Wall Street throws everything but the kitchen sink at you to convince you otherwise. This is the plan we use ourselves for our retirement funds, and this is the plan we urge you to follow, too.