The Hindu Business Line : Stock market is a giant distraction

The only investment that guarantees you ‘fair share of the returns that business earns’ is index fund says John C. Bogle in ‘The Little Book of Common Sense Investing’ ( www.wiley.com ). He founded Vanguard more than three decades ago, and is credited as the creator of ‘the world’s first index mutual fund’.

His book promises to change the very way that you think about investing, and is especially pertinent if, like most investors, you think you “can avoid the pitfalls of investing by due diligence and knowledge, trading stocks with alacrity to stay one step ahead of the game.”

Mutual fund investors, too, have inflated ideas of their own omniscience, observes Bogle. “They pick funds based on the recent performance superiority… Fund investors are confident that they can easily select superior fund managers. They are wrong.”

Stop contributing to the croupiers of the financial markets, he exhorts. Instead, through index fund, “buy the entire stock market,” he counsels.

Bogle divides stock market returns into two parts. One, “investment return (enterprise), consisting of the initial dividend yield on stocks plus their subsequent earnings growth, which together form the essence of ‘intri nsic value’.” And two, “speculative return, the impact of changing price/earnings multiples on stock prices.”

When returns on stocks depart materially from the long-term norm, it is rarely because of the economics of investing, argues the author. “Rather, the reason that annual stock returns are so volatile is largely because of the < em style="i">emotions of investing… When greed holds sway, we see very high P/Es. When hope prevails, P/Es are moderate. When fear is in the saddle, P/Es are very low.”

According to Bogle, it is not possible to accurately forecast swings in investor emotions. However, forecasting the long-term economics of investing can be done with high odds of success, he says, because “in the long run it is reality that rules.”

In what might be terribly disturbing for most market regulars, Bogle says, “The stock market is a giant distraction that causes investors to focus on transitory and volatile investment expectations rather than on what is really important – the gradual accumulation of the returns earned by corporate business.”

The real market is about investing, he urges. “The expectations market is about speculation.” Ignore the noise of emotions reflected in our financial markets, pleads Bogle. “[It is] like a tale told by an idiot, full of sound and fury, signifying nothing,” reads an apt quote of the Bard cited in the book.

To those who would still like to play the market by building an investment portfolio, the author says it’s fine for the excitement it offers, but you should do so “not with one penny more than 5 per cent of your investment assets. That can be your Funny Money account.” The balance 95 per cent should be in your Serious Money account, insists Bogle. “That core of your program should consist of at least 50 per cent in index funds, up to 100 per cent.”

Makes eminent sense to read!

To those drowning in debt

Carmen Wong Ulrich, a former special projects editor at ‘Money’ magazine, has written ‘a how-to guide’ to help you take control of money: ‘Gener@tion Debt’ ( www.crosswordbookstores.com ).

“The sad, sick truth is that young adults today are drowning in debt,” laments the author in the intro. Though the statement is about the US situation, it may ring true closer home, too. But hasn’t debt become a way of life, you may wonder? Isn’t debt normal, and no longer a stigma, so why fix it? “Because too often, it hurts,” answers Ulrich. “Because it squeezes and wrings until your hard-earned money is unable to breathe, or even see the light of day… It makes you tired.”

If debt is not managed well, it can become your prison, she cautions. “If you take control of your situation as soon as you can, you can prevent that multiple-year sentence for overspending… Start up new and better habits.”

Such as, getting a grip, setting goals, and making a plan, to take control. “On a limited income, needs and wants require strict definitions and, sometimes, a rather agonising dividing line.”

The mantra Ulrich offers to keep you in a beneficial state of mind is, ‘delayed gratification’. “When you pick up that new CD or shirt or sneakers, ask yourself: Do I really need this right now? Really, really, truly? Can I do without it? Can I wait?”

You’d be surprised at how many things you put down when you say those words, she assures. “Bottom line: What’s in your wallet stays intact.”

A book you’d be well advised not to put down, more so, if you are deep in debt.
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