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:

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.

-Richard

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