Spreading Words of Wisdom

Larry Swedroe says he’s been “lucky in his career.” A former vice chairman of Prudential Home Mortgage and senior investment banker at Citibank, Swedroe has been a principal and director of research at St. Louis-based Buckingham Asset Management, an accounting and advisory firm with $600 million under advice, since 1996. “I don’t need money,” he states matter-of-factly. “I don’t work or write books for the financial reward.” Instead, his success has allowed him to return to his first love–teaching–but with a twist. “A way for me to teach was, as director of research, to educate people, without having to be in the educational system, and to be able to reach more people.” This quest to root out innumeracy has prompted Swedroe to write four books so far. And while his most recent book hits bookstores this month (The Successful Investor Today, from St. Martin’s Press), Swedroe already is hard at work in the next book in his series. Swedroe says he joined Buckingham because its investment philosophy fit “exactly with mine, which was that the markets are efficient and you should therefore invest passively,” which at Buckingham means using DFA equity funds, and that advisors should be fee-only “to minimize, if not totally eliminate, any conflicts of interest.” Swedroe spoke to Editor James Green in July about his passion for educating consumers, and for backing up his “accessible” books with references to the latest academic research to sate more sophisticated investor and advisors.

Who are your books written for? My first four books were all directed at the individual investor, though I hope professionals would enjoy reading them and find value in them. My next book, the fifth one, is called Investment Policy, and while it’s directed at both groups, [it's meant] particularly for investment advisors, to help them figure out what should be the right investment policy. It will be at a little higher level than my previous books, and anyone who’s read the others should have no problem, but if you’re reading Mutual Funds for Dummies, you ought to finish that before you read my book.

My fourth book (The Successful Investor: 14 Simple Truths You Must Know When You Invest), is directed right at the individual investor. I wanted this dual audience to benefit from all my books. So I did a tremendous amount of academic research, allowing the advisor or sophisticated investor to get value out of the research and then to show them how to utilize this information. I also had my wife, who is a very bright woman and taught at Stanford but knows nothing about investing and doesn’t care, to read my manuscript. If she didn’t understand something, I had to rewrite it until she did. So my first book in particular is filled with analogies to cooking and gardening and movies and history to convey these difficult concepts in a way that’s easy to understand.

I’m a big believer in using analogies based on experience to help people. I think the books pass that test of being accessible to the average investor who knows at least what stocks and bonds are, but is also worthy of more sophisticated investors who are looking for the academic research and the applications of that research.

This most recent book [is devoted to] 14 basic truths about investing, devoting 20 or 30 pages to each instead on some of the most important issues investors face.

After people find out what I do for a living, the first thing they ask is, “Got any hot stock tips?” And I respond by saying there’s only one incontrovertible piece of evidence: Invest in the indexes, and for the longest time. Here’s the way I say it very simply. Imagine you belong to a golf club and you’ve contributed $1,000 to a charitable auction, and as the winner of the auction, you get to play a round of golf with Tiger Woods. On the fifth hole, you hit your usual poor shot, it ends up in the rough near a big tree, and you think, I’ve got to lay up. Tiger Woods is so unlucky that as he’s swinging, a huge gust of wind blows his ball right next to yours. He gets there, notices an opening between two branches, and decides to go for the shot. But it hits a branch, and the ball’s right back where he started. He does it nine times in a row, and on the tenth time he makes it and it drops right into the cup. So now you have a decision to make: the very best player in the world can make the shot once in ten attempts: 90% of the time he fails. If you’re trying to get the best score, meaning which shot is going to produce the lowest score for you, what should you do? Should you lay up, or try to make the shot that Tiger failed at 90% of the time? You lay up, of course, because if the very best can’t do something 90% of the time, you shouldn’t try. That doesn’t mean the very best can’t succeed, only that it’s very unlikely that they will succeed, that therefore it’s not prudent for you. So what’s the analogy?

A study by Future Metrics cited in the book looked at the performance of 224 pension plans over about 14 years versus the performance of a 60% to 40% benchmark of the S&P 500 and the Lehman aggregate index for bonds. Of those 224 plans, 19 beat the benchmark. So what that means is that 90% failed and 10% did better. In other words, 90% of the plans would have been better off laying up.