First, Schultheis begins the book speaking about his interactions with other "coffehouse investors" - that is, friends whom he'd discuss investing ideas at a coffehouse in Seattle with. Building on his 13-year Wall Street career mostly with Smith Barney, Schultheis argues that listening to stock brokers is a fool's gold and arguments for individual securities such as "I own world-class companies" doesn't hold water, especially if your age and risk tolerance suggests a certain allocation to bonds is more appropriate. The author really talks about living life (and retirement) to the fullest, rather than constantly worrying about stock picks and your broker. There are several side stories about his mountain climbing experiences as well as stories from his youth such as building an airplane with his brother. They serve a couple purposes - first, to make the book interesting and relay these lessons to investing by using various analogies and metaphors, and also to stress what's really important in life - and that's living it.
Schultheis espouses three main principles that guide his philosophy: 1.) Don't put all your eggs in one basket; 2.) There is no such thing a free lunch; and 3.) Save for a rainy day. In particular, he takes a fairly significant chunk of the book talking about the importance of saving early and the power of compounding; certainly not to the level of not being able to enjoy life, but making certain sacrifices in order to have the retirement you want. He outlines in details the effects of high expense ratios in mutual funds can have on your bottom line as well as inflation risk, holding small company funds, and the significance of re-balancing. While Wall Street likes you to believe that stock market risk is huge when compared to inflation risk in the long-term, when looking at 10-year returns on the market, you'll notice that rarely does it go down for a significant period. Of course there are no guarantees, but for long-term investing, taking a chance on stocks is the way to go and really the ultimate risk is inflationary in nature. Schultheis urges individuals to ignore the short-term Wall Street stuff and to focus on the big picture. We know the stock market is volatile in the short-term, but if your investment horizon is significantly longer, this should not be terribly concerning to you.
The author goes on to explain while certain funds will outperform in the index at large for certain periods/categories, sustaining such an outperformance is unheard of and underperfoming by even a seemingly small amount over the course of a long period can lead to a huge reduction in assets. So, while a fund may be the #1 performing large-cap for the last three-month period, this really is meaningless in the long-run and chasing such returns ends up biting you in the butt. It's better to have a plan to match the market return with the lowest fees possible, Schultheis argues. Even large state pension funds follow this strategy, with California indexing 85% and New York 75% (although the author doesn't mention that university endowments typically employ hedge-fund like strategies unlike state funds counterparts).
Schultheis proposing a hypothetical situation and game that he calls "Outfox the Box" that illustrates the index fund versus actively managed fund (or individually picking securities) quite well, so I thought I'd mention it here. There are ten boxes with money in them, ranging from $1,000 to $10,000 in $1,000 increments:
| $1,000 | $2,000 | $3,000 | $4,000 | $5,000 |
| $6,000 | $7,000 | $8,000 | $9,000 | $10,000 |
You are told to choose one. When the boxes show the amounts, it's obvious you'll choose the $10,000 one. But let's say it looks like this:
| $8,000 | ? | ? | ? | ? |
| ? | ? | ? | ? | ? |
In that case, you should choose the $8,000 since it's not worth the risk as chances are you'll get much less than $8,000 if you choose a "question" box. Picking a "question" box is essentially gambling, and investing should be going with the percentages. Most likely, you'll choose a box with less than $8,000, and this is equivalent to choosing an actively managed fund as they typically lag the market on top of having higher fees. A fund that has outperformed in the past is unlikely to do so in the future, and over a 10-year span, something like 85% of actively managed funds lag their benchmark. Schultheis explains that Wall Street is essentially trying to convince you to give them your money so that their experts can "outfox the box" even though the odds are quite grim that they can do so. On top of that, they charge much more so the chances of your total return improving is even slimmer.
Rating: 4 out of 5 stars
