I just finished reading Investing at Level3, by James Cloonan, the founder of the American Association of Individual Investors. I have a lifetime subscription to the website, as well as a paid subscription to its Dividend Investor Newsletter and its Stock Investor Pro research program, so I am definitely a big fan.
As for the book, I believe it is a worthwhile read but the conclusion is a little disappointing. I may go in more detail in a future article, but here is one minute’s worth of what I learned:
- Volatility is a poor measure of risk for long-term investors. Rather, the greatest risk is that there isn’t enough money available for the withdrawal phase in retirement.
- Equal weight funds, both of the S&P 500 and the Wilshire 5000, outperform their market capitalization weighted equivalents over the long-run, by a significant margin. This is explained by factor investing, as smaller-capitalization alone is a significant factor of out-performance, and smaller capitalization stocks also are more likely to qualify as value stocks as well.
- The cost of having too conservative of an investing methodology, especially early in one’s investing career, is extremely high. Fore example, achieving an additional 3% of investment returns annually over thirty years by taking on more risk could result in having more than twice as much invested compared to a more conservative investor. If the market then dropped 30% on the aggressive investor’s retirement date, she would still be far ahead of her conservative counterpart (i.e., a 30% drop of a $4,000,000 portfolio to $2,800,000 is still more than a $2,000,000 portfolio that had been more conservatively invested).
- Some people just aren’t wired for active portfolio management, and they need a strict, passive strategy to avoid debilitating mistakes like selling low or changing strategies too often. He suggests some assessments/tests for determining if someone has the right temperament for active investing.
- Borrowing on margin may be a legitimate alternative to credit card debt, as the interest rates are currently much lower. He does not advocate for borrowing more than 25% of the amount in the brokerage account (as that would almost guarantee that the investor is never subject to a call on the debt). Cloonan mentions that margin debt is tax deductible, but that is not the case if the money is used for personal reasons.