On May 25, 1978, I was a fifth grader at a small public elementary school in the San Fernando Valley, just northwest of downtown Los Angeles, California. Three of my class mates and I were chosen to represent our school at a math competition at Patrick Henry Junior High School, with 52 schools from the Los Angeles unified school district sending teams. We had a full morning schedule of solving problems, puzzles, and other math related tasks. We were presented with plenty of problems we knew how to solve, but we had no prior experience with some of the other challenges. The final task of the competition was in the auditorium just before lunch. We were given simple instructions how to build a hanging mobile, primarily using some plastic straws and red yarn (I didn’t even know what a mobile was before that moment, but it was supposed to look kind of like this). We initially struggled for a few minutes how to figure out the lengths of the pieces and how to connect everything. Then they let me try, and with their help we were able to make the calculations and make a simple mobile that worked, but I didn't think it was particularly impressive.
After lunch, they announced the winners of the half-day long competition. When they got to the first place team, they announced the winner was Darby Avenue Elementary School. My teammate Tim screamed out the loudest "What?" I think I'd ever heard. We looked at each other in shock as if there had been a mistake, but then we realized we must have done something right and went up to accept the award. The announcer asked us who was the leader of the group and my teammates all pointed to me. I was awarded a new calculator and we each got certificates declaring that we had earned the title of “Mathematical Problem Solver.”
To figure out what we did right, I thought back to earlier in the day. During one part of competition we had a limited amount of time to complete several tasks. I recall we were getting bogged down trying to solve one coded message problem. I looked at the clock and realized we needed to get going or we wouldn't be able to do all the other tasks. So I told my teammates I was moving on to another task while they tried to finish the code. I rushed over and solved several other problems and came back just in time to check the solution my teammates and I had been struggling with. When they called time, I remember thinking that none of the other teams in the room with us had even started several of the other tasks. I reasoned that was the best explanation for how we accumulated more points than any other team that day, because I was sure we didn't make the best mobile on the final challenge.
I concluded that it wasn't because we were the smartest that day. It was time management that was the key to our winning the competition. Too often people get too focused on one task and they run out of time for other important tasks. We see it all the time, when people get too focused on less important problems or issues and then completely forget, or don't have enough time, to do other important tasks.
I had a similar experience about a decade later in my business school statistics class. During the first mid-term exam, I was the only student of over 100 that figured out how to do several problems during the first (open book) mid-term exam. I had no idea how to solve some of the problems when I first read the questions, but I was able to locate similar problems in the text book fairly quickly and plug in the numbers to solve for the answers.
I have no illusions about being smarter than the next person, but math and some subjects certainly come easier to me than most people. Even though I was confident I could get an 800 on the math SAT, I didn't even get that close, despite several attempts, so I know there are many sharper and smarter people than I when it comes to math and other subjects. In fact, this book includes discussions about dozens of individuals that have made major contributions in the financial world. I also have to make up for other weaknesses, like being more of an introvert and not being able to write quickly. But I think I am usually very good at seeing the big picture. Investing is a very big and very complex picture and this book is my attempt to help investors focus on the critical parts of that big picture.
I've been fortunate to interact with many individuals that are extremely eloquent and efficient in writing, including some of the best-selling business writers of our time including Peter Bernstein (Author of Against the Gods) and Eric Tyson. Tyson efficiently produces a steady stream of columns and best-selling "For Dummies" books (including Investing for Dummies, and Mutual Funds For Dummies, both of which he asked me to do technical reviews on, for one of his many editions of each book). I wish I had just a modest percentage of the eloquence of Michael Lewis (who I've never met, but have exchanged emails with). He is an extraordinary writer who has a tremendous gift for being able to inform and tell a story in a way that intrigues and sticks in your mind. I, on the other hand need a lot of time to organize my thoughts into anything that approaches readable text. My English SAT scores were pretty much average, and that partially helps to explain why it takes me multiple drafts and revisions to write articles or web pages, and also partially explains why it has literally taken me decades to complete this book.
I don't know the exact day that the light bulb went off in my head with the name and idea to write this book, but I know it was over 20 years ago because I registered the domain name peacefulinvestor.com on November 24, 1998. I started registering internet domain names in 1996 when the internet was just starting to explode and I had already launched my InvestorHome.com web site, a sports-oriented web site, and reserved a handful of other domains that I had ideas for developing. But this book and the website were the most forward looking of my plans, and I intended them to be the centerpiece of my experience in investing.
My education and experiences over the last 30 plus years have allowed me to observe and participate in many of the major evolutionary developments in the investment world over that time. I was fortunate to get direct exposure in the traditional investment asset classes of stocks, and bonds, as well as real estate. The combination of my education (including business school, the CFA program, and professional licensing exams), as well as my personal and professional experiences in finance and the internet have allowed me to have a unique perspective on the remarkable times we are living in.
During my junior year in college I learned about a company that offered a course for preparing to pass the National Association of Securities Dealers (NASD) Series 7 exam. I took that course and subsequently passed the exam which qualified me as a fully licensed (but part-time) "Stockbroker" at the age of 20. I was fascinated with the investment and analysis side of the investment business, but starting to work at a regional brokerage firm was my first professional experience and I soon learned that "sales" skill (of which I had little, if any at the time) was considered to be a primary factor of success in the brokerage industry. Plus I didn’t really know many wealthy people. Virtually from the start I also developed concerns about the conflicts of interest between the broker's incentive to generate commissions and the client's interests in maximizing returns (which logically included minimizing costs).
In the investment business, the common practice of selling mutual funds to clients with front end loads always concerned me given that clients could just as easily purchase no-load funds that were effectively equivalent. I was also troubled by the trading mentality that I saw in many brokers and investors. I recall reading Burton Malkiel's A Random Walk down Wall Street and showing it to one of the firm's top brokers that traded based on "technical" indicators. That broker didn't offer a logical argument or evidence to support his trading rationale.
When the stock market crashed on Black Monday October 19, 1987 I was actually at the brokerage office. I was a junior in business school, but had scheduled all my classes on Tuesdays and Thursdays. I recall standing next to the trading room where the door had been locked shut. They were telling brokers not to bother sending in orders (which were submitted on paper slips in those days) because no one could get through to the floor of the exchange to make trades. I was concerned, but felt fortunate that I only had a few clients and not much of their wealth was in the market, so the losses were relatively modest. Ultimately the experience was a tremendous learning opportunity.
My grandfather Jack was a Realtor and in 1986, halfway through my college years, he encouraged me to take a class to prepare for taking the California real estate license exam. I passed the exam and became licensed as an agent, but it didn’t take long for me to realize I really didn't know what to do with that license, nor how to realistically make money with it given that I didn't really know anyone that wanted to buy or sell properties, which would allow me to earn commissions.
I didn't renew the sales license, but it certainly helped me get two positions that proved to be extremely valuable experiences. For a brief period, I worked as an assistant to an agent at Marcus & Millichap, which was (and continues to be) one of the most active real estate investment brokerage firms. After another Marcus & Millichap agent listed two multi-million dollar properties in downtown Los Angeles, the agent I later worked for had been the first to contact a corporation that later bought the properties (earning hundreds of thousands of dollars in commissions). The knowledge of who might be an interested buyer and a quick phone call produced a windfall for the agent. He hired me on an hourly basis to help do research on properties to continue to build his business.
The modest compensation for that assistant role was insignificant and the primary reason to take that position was to help potentially become an agent at the firm. But I had seen enough to realize I didn't have the skills and contacts to become a successful agent in that environment, so I let him know I wasn't going to continue. But it was invaluable experience to see how investment properties were valued, bought, and sold.
My other much deeper experience in real estate was working for a prolific commercial real estate developer in 1989 and 1990. The firm had run a job advertisement in the Los Angeles Times and my prior real estate experiences helped me get the interview and the job. I was hired as an analyst for a three month trial period and then was made a permanent employee. The company had built over a hundred commercial properties and most were small (often on former gas station corner lots), but some were quite large including a joint venture with Walmart. Walmart tended to build in outlying areas and developers couldn't resist the opportunity to partner with them even though making the numbers work profitably was a challenge to say the least. The benefit to Walmart was cost sharing in some of the development costs, which tended to be higher than in more developed areas.
On some developments, the firm secured construction loans that were greater than the cost to buy the land and build a shopping center. That was a great situation for the company since it had no money invested in the deals, but it created an interesting problem for an analyst since you can't calculate a rate of return when you have no investment. Looking back after the fact, it was easy to see why the country was soon engulfed by the Savings & Loan crisis. Values on many of the firm's properties were dropping and seeing the writing on the wall for that business, I impulsively quite that job, chalked it up as another learning experience, and used the opportunity to take a trip of a lifetime backpacking through Europe.
After returning to reality it took a while to find another full time job, but my luck improved several years later when I met Lewis Kaufman, a former Partner of Goldman Sachs (and the founder of their Los Angeles office). Mr. Kaufman had retired from Goldman Sachs over a decade earlier, but had remained active and had a boutique investment firm. I spent nearly five years working with Mr. Kaufman, learning to become much more efficient. During those years working for Mr. Kaufman I met my wife, became a CFA Charterholder, began acquiring internet domains, and built InvestorHome.com (which I launched in 1996).
Before I launched InvestorHome, I had emailed many prominent professors that had published studies and books on the topics I wrote about. One of amazing features of the internet and email is that virtually anybody can contact anyone else with a publicly listed email address. Some of the Professors not only responded, but offered suggestions and allowed me to use some of their comments about the site. Yale Professor and world class historian William Goetzmann emailed me "You have created a remarkable resource for investors and anyone interested in the financial markets." Stanford Professor and 1990 Nobel Prize Winner in Economics, William Sharpe emailed me "Your site is a treasure trove of information."
Professor Sharpe had much grander plans for how the internet was going to revolutionize the investment business and shortly thereafter shared with me the then non-public website for FinancialEngines.com. He founded the company and they were about to formally launch their web site. Financial Engines would eventually become the largest registered investment advisor in the country. The firm sold shares publicly in 2010 and was later purchased and taken private in 2018. There were other start-ups around that time attempting to offer services directly to investors by leveraging the internet. Some did not survive and others morphed into other products or were acquired, like mPower, which was acquired by Morningstar. The term “Robo-Advisor” wasn't used to describe automated internet based services until much more recently, but Financial Engines was certainly the initial driver of the internet based investment advice industry.
I was still working for Mr. Kaufman during the first few years after launching InvestorHome and I hadn't figured out how to actually make a significantly profitable business from the website. I wasn't drawn to the advertising model since I was more interested in providing quality and useful information than trying to maximize traffic. On July 25, 1997, there was a spike in traffic on the site. I asked someone that had emailed me how he found the site and he let me know my site had just been featured on CNBC. I had to order a copy of the tape to actually see the "Power Lunch" "Cool Web Site" segment, in which Bill Griffeth told viewers to check out the "really great stuff" on the site and in particular the tests page, where I had links to many financial quizzes and even samples of the CFA exam, which Griffeth suggested would be especially interesting for anyone considering working in the business. Tests and quizzes are particularly useful, not only for determining an investors knowledge level, but for identifying risk tolerances. As you'll see, I've sprinkled questions throughout this book that readers can learn from and use in the future.
Investorhome was also cited in a wide collection of financial media including Forbes, Barron's, and Individual Investor Magazine, where the author of one article described me as an "indefatigable organizer." I emailed the author to thank him and ask what "indefatigable" meant. Even though my kids think I'm great at vocabulary nowadays, I wasn’t familiar with the term at that time.
In 1998, Mr. Kaufman moved cross country, but he introduced me to Wayne Wagner. Wayne's firm Plexus Group was growing rapidly and had pioneered a new business in analyzing "Best Execution" and evaluating stock market trading to help large money managers and institutional investors like pension plan sponsors improve their performance. I was hired by Mark Edwards at Plexus to help service their rapidly growing list of money managers and to assist with the firm's research efforts.
I didn't make much progress writing this book from 1998-2009 simply because I was working full time and our family was growing. My role at Plexus included helping our clients reduce their trading costs, optimize their performance, and improve returns for their shareholders. I worked primarily with Portfolio Managers and Traders at many of the largest money managers in the world. I interacted with Chief Investment Officers, compliance and other management staff, and was often asked to present to their Boards of Trustees. Numerous books, articles, and studies (some of which I’ll summarize later in this book) have included estimates and data on trading costs and their impact on investment performance, and I was one of the many people analyzing and crunching the numbers behind that data. Plexus Group was sold to JP Morgan Chase in 2002 and was sold again to Investment Technology Group at the end of 2005. In 2010, I refreshed InvestorHome and started working directly again with individual investors.
In 2015 I was invited to do several presentations. I decided to focus on how “Robo-Advisors” were impacting the investment business. When I finally decided to commit to completing this book I felt the timing was perfect because new tools had been created that investors can utilize to start and become successful investors. I'll be describing recent developments in more depth later, but individuals that have never invested before and currently have no savings have new tools available to begin that process. Some of the innovative firms already have millions of individuals signed up to start investing regularly, in many cases from scratch. These firms are providing simple (to the customer) yet arguably sophisticated investment products at minimal cost that can help investors start a long term process of saving regularly and building a portfolio for their future.
I remember printing the original pages of my initial Investor Home web site in 1996 so I would have a physical record and I described the stack of paper (that is still stored in a box in my garage) to my wife as a book. I believed some of the content on the web site could be adapted for a book, but I always intended to write this stand-alone book. At several points over the last two decades I worked on the table of contents, introduction, and many of the chapters of this book. But several of the key concepts I struggled with finding supporting information, plus the sheer enormity of completing a book that I would be comfortable putting out in the public gave me enough pause to continue procrastinating and keep it on the back burner. I have multiple versions of drafted material saved on my computers and in email archives dating back more than a decade. But I didn't set a goal of formally writing and completing this book until 2017.
October 22, 2017 was a beautiful Sunday afternoon in Los Angeles. My two youngest sons were playing two-hand touch football in our front yard with two of their friends from the block. My then 11 year old son stopped between plays to glance up at the sky to the south and called out "American 787 from Shanghai." About a minute later after a few more plays, he glanced up again and announced "KLM 747 from Amsterdam." A little while later he blurted out "Emirates 380 from Dubai." As they played, he continued to call out the model, airline, and departure city from planes passing above. While the boys were running around and keeping track of the score of their own game, the planes were descending eastbound past the Los Angeles Coliseum where the Rams were playing the Arizona Cardinals. The planes then made a wide U-turn to line up for their final westbound approach into Los Angeles International Airport.
I stopped for a minute and thought about how the world my kids are growing up in has become much more technologically advanced and globally connected than the one my parents and I grew up in. We tend to take a lot for granted and the reality is that if I had been born a century earlier, my life would have been different in many ways. There obviously wouldn't have been jets from around the world flying overhead, but I probably wouldn't have been able to see those planes in any detail anyway.
Then again, without the medical advances of the last century, my two youngest sons and daughter probably wouldn't have even been born. That's because I have A+ blood type and my wife has O- blood type. Our first son got my A+ blood, which probably entered my wife’s circulation during pregnancy or during the delivery. A mother can then develop antibodies to the Rh protein. That's not a problem for the first child, but in future pregnancies that are Rh positive, her immune system probably would produce antibodies that can cross the placenta and attack the red blood cells of the fetus. Around the time I was born, doctors figured out how to prevent that process, and as a result my wife got "RhoGam" shots after each pregnancy, which prevented those problems and allowed us to have more children.
When I was a kid, I had a lazy eye and at around four years of age it was getting so bad that I was having a hard time keeping my eyes straight, even with glasses. I am also very farsighted in my left eye, and have some astigmatism. Glasses helped, but the eye doctors recommended surgery. Fortunately, my parents heard about a new technique (pioneered by the late Dr. Donald Getz) using exercises to strengthen the eye muscles to help some conditions. So I did several years of therapy and it worked. I was able to keep my eyes straight and see relatively well with glasses. Thanks to manufacturing and technological advances, plus economies of scale, and competition, I now use disposable contact lenses (when I’m not wearing glasses) that I can just throw away (instead of cleaning) and they cost less than a dollar a day.
My sons’ interest in airplanes increased after they discovered flightradar24.com, which continuously tracks flights around the globe, virtually in real time. So they can easily find out exactly which planes are about to come into view, where they are coming from, and other information about the flights. Sprinkled in between the American carriers (like Alaska Airlines, Delta, Hawaiian, Southwest, and United) are carriers from Asia and Europe. My sons tell me early morning flights come in from Australia, New Zealand, Korea, and other Asian destinations. While the majority of the planes we see arriving are American made Boeing jets and European Airbuses, there are also Canadian Bombardiers, and Brazilian Embraers.
You start to realize how far technology has come when you consider that with wifi, or a mobile phone network, and a computer or cell phone (or even my middle son's ipod), we can instantly know things like where the plane overhead is arriving from, or what the score and stats are at events around the globe, like the pro football game that was being played less than 10 miles way. Similarly, many also check their portfolios and other financial information regularly in real time. And ironically, just as we have people flying in and out from around the world, we can now invest with a few clicks in both domestic and foreign companies (and foreigners can invest in U.S. companies). Technology has improved so fast, and costs have come down so much, that first time investors now and in the future may not realize how lucky they are to have the access and options that are now available.
When my oldest son asked if he could buy stock in a company (his interest at that time was in Lockheed Martin), I told him he already owns some shares through a mutual fund in his investment account, which owns a small piece of all the public U.S. stocks. One of the best examples of the evolution of the investment business is the ability to buy in one fund, the public companies in both large countries and emerging countries around the world. As those countries modernize we can participate as investors as well. These are some of the topics I'll be discussing later in this book, but first I think it’s important to keep in mind the context of how these evolutionary changes ultimately impact our lives.
We live in a remarkable connected world where people from around the globe can travel thousands of miles in one day, or simply contact each other live with a cell phone or computer. Just at LAX on a typical day we have passengers and goods coming in and out from more than 40 countries around the world. The medical, technological, and other innovations and advances we enjoy would have been unheard of just a few generations ago.
We also have access to food and goods from around the world and in most cases at much lower relative prices than in the past. For example my youngest son has, like me, developed a taste for cantaloupe and has come to expect it every day in his lunchbox without knowing they and most fruits that we now have year-round access to, used to only be available during parts of the year. My daughter kept telling me the blueberries I bought on sale the prior week were the best she's ever tasted. Blueberries typically grow in the U.S. into September, but the ones she was raving about were grown in Peru. The reality is, Kings and the richest people in the world from just a century ago would envy the blessings we all now enjoy.
I have been fortunate to work with many investors and financial professionals. There have been many relatively recent discoveries from psychology about how our brains work and I have come to realize that people's education and experiences give them a unique perspective that can be dramatically different from mine and others. I try to be pragmatic and focus where the evidence leads, as opposed to pursuing any particular agenda. I also try to learn from the good times and the bad times, and in this book I share some personal stories and opinions that I hope will make this book more interesting and informative. I apologize in advance for any mistakes, or anything that might be considered insensitive to some.
The primary goal in investing for retirement for the vast majority of people is neither entertainment, nor sport. Smart investing usually takes commitment, discipline, and time (usually many decades). The get-rich-quick orientation prevalent in today's society is often a problem that many investors fall victim to, and the sensationalism that permeates the press and social media usually doesn't help either. I'll discuss intentionally inflammatory terms and titles later, but much of the theory and actual empirical evidence point to the conclusion that investors in many cases should utilize simple, unexciting options. Faced with many new options and "this time is different" opportunities, the best approach is usually to say no thanks, I'll wait to see how that works out in the long run before leaving the proven and safe path.
Viewership at CNBC, the financial news TV network, has been declining for several decades, and there are several reasons for that. Their list of shows includes "Mad Money" and "Fast Money." Shows with titles like "Slow Money" and "Sane Money" probably wouldn't increase viewership either. Imagine a show on CNBC titled "Peaceful Money." Not only does it sound boring, but watching the show you'd hear advice to stop watching market news and don’t expect any information that could make you "fast" money.
I'm not sure how a book titled "The Sexy Investor" would do, but I know "The Unsexy investor" or "The Boring Investor" would not be the best description for this book either. It may not sound exciting to some, but "The Peaceful Investor" is simply the perfect title describing the thought process for this book. In the long run, I think most readers will agree.
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On May 25, 1978, I was a fifth grader at a small public elementary school in the San Fernando Valley, just northwest of downtown Los Angeles, California. Three of my class mates and I were chosen to represent our school at a math competition at Patrick Henry Junior High School, with 52 schools from the Los Angeles unified school district sending teams. We had a full morning schedule of solving problems, puzzles, and other math related tasks. We were presented with plenty of problems we knew how to solve, but we had no prior experience with some of the other challenges. The final task of the competition was in the auditorium just before lunch. We were given simple instructions how to build a hanging mobile, primarily using some plastic straws and red yarn (I didn’t even know what a mobile was before that moment, but it was supposed to look kind of like this). We initially struggled for a few minutes how to figure out the lengths of the pieces and how to connect everything. Then they let me try, and with their help we were able to make the calculations and make a simple mobile that worked, but I didn't think it was particularly impressive.
