10 Lessons I learned from the Book Abnormal Returns by Tadas ViskantaOctober 12th, 2012 by David Waring
I just finished reading Abnormal Returns, Winning Strategies from the Frontlines of the Investment Blogosphere by Tadas Viskanta. Tadas is best known for his twice daily list of finance links from around the web, which he publishes via abnormalreturns.com. I find his links very useful in filtering through the noise and helping me zero in on what’s important to read, so I was excited to see what else I could learn from him.
He did not disappoint. Unlike most books on investing which claim to offer the “secret to investing success”, Tadas lets us know upfront that there is no secret. What he offers instead is a “framework for success” that investors ranging from those who work with a financial advisor to manage their investments, to those who want to make a living from investing, can all use.
The path he outlines is in line with how we think about the markets here at Learn Bonds as well. Where most investors focus the majority of their attention on returns, successful investors focus the majority of their attention on risk. Tadas therefore puts the concept of risk front and center with the whole first chapter of the book devoted to that subject. He then goes on to talk about returns, which lays the foundation for the rest of the book which covers all the asset classes from a risk/return standpoint, and how to combine those assets into a portfolio which matches your unique investment goals.
If you are looking for the latest investment fad or get rich quick scam, then this book is not for you. If you are seeking to build a solid foundation in the investment concepts and philosophies that lead to success, then this is a great place to start.
Here are 10 things I personally learned from the book:
1. On the importance of dividends: “From 1900 to 2010 the US Stock market with dividends reinvested returned 9.4% per year, without dividends reinvested it returned 5%.”
2. A good reason to consider indexing: “25% of stocks were responsible for all of the russell 3000’s gains.”
3. A surprising fact about stock market risk: “Low risk stocks have outperformed riskier stocks.”
4. Interesting fact about bond market risk: “Within the realm of investment grade bonds, taking some additional credit risk seems to pay off over time. What does not pay off over time is stretching into high yield or junk bonds”.
5. On the importance of asset allocation and risk management: “The performance of a domestic portfolio 50% invested in bonds and 50% invested in stocks from 1926 to 2009 showed almost no difference in real returns between US economic expansions and recessions”.
6. Another example of how most investors think of things in the reverse order that they should: “A true asset allocation plan starts first with a scheme to deliberately invest in certain asset classes. Then and only then does the investor begin selecting vehicles to fill out these asset class targets”.
7. On the importance of having realistic return expectations: “From 1965 to 2010 Buffett was able to compound the per share book value of berkshire at a 20.2% rate….in so doing Buffett has become one of the wealthiest men in the world”.
8. On the growing importance of international investing: “For decades the United states was by far and away the largest equity market in the world, with upwards of 90% of the world’s market capitalization…..Recently the United States was estimated to have 40% of the global market capitalization.”
9. Why you might not need to add the hard assets themselves to a portfolio: “An investor in the S&P 500 already has a nearly 16% exposure to energy and materials companies”.
10. One reason gold has been on a tear lately: “When real interest rates are low the price of gold tends to increase and that as real interest rates rise the price of gold tends to fall.”
If you haven’t already done so I highly recommend checking out the book which you can purchase below: