Larry Swedroe's 'Think, Act, And Invest Like Warren Buffett': Sound Advice Most Investors Can Bank On

Includes: AGG, BND, DIA, IVV, SPY, VOO
by: Lowell Herr

Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals is Larry Swedroe's latest effort to educate both beginning and veteran investors. This 135-page volume will likely crack my top ten investment books as it written in an understandable style and the fundamental concepts are sound and well-organized. While it takes approximately two hours to complete, there is an abundance of material to study, so don't rush to finish.

Using Warren Buffett in the title is a hook to entice readers to pick up this small book. While Swedroe recognizes the small investor cannot buy companies and swing deals as does Buffett, there is much in Buffett's writing that can be used as advice for the average investor. Those Buffett snippets constitute much of the first two chapters. This book does not tell readers how Buffett analyzes companies or how he invests, so part of the title is somewhat misleading.

The underlying thesis of this book contains the following salient points. 1) Use index funds and eschew stock selecting. 2) Become a passive investor instead of an active investor. 3) Examine the research pointing out the folly of active investing, while recognizing there are successful active investors. 4) Lay out a detailed financial plan. This includes more than investing. 5) Understand the importance of diversification and portfolio risk. 6) Learn how to construct and maintain a portfolio. 7) What to look for in a financial advisor. 8) How to build a well-designed portfolio. 9) How to control your investment emotions.

Of the nine chapters my favorites are 3, 5, 6, and 7. Chapter three (3) emphasizes the advantages of employing a passive investing style vs. the active approach. While the academic literature makes a strong case for passive investing, it only captures the attention of a minority of investors. That is fine with passive investors as they are willing to scoop up the "nickels and dimes" dropped by active investors over a lifetime of investing.

Chapter five (5) is all about diversification and risk reduction. There was no mention of how apparently diverse index investments may be highly correlated and therefore do not reduce risk. Maybe one should not expect this kind of detail in a small book. The importance of diversification is not lost in this chapter.

Chapter six (6), How to Build a Well-Designed Portfolio, includes six example portfolios, something I would like to see in more investment books, particularly those emphasizing the use of index funds. Unfortunately the tickers are missing so readers need to do more searching if one wishes to perform analysis on the portfolios. Including ticker symbols would assist readers in knowing more precisely how to construct diversified portfolios.

Many of the sample portfolios include funds not available to the do-it-yourself-investor. Unless an investor is working with an approved Dimensional Fund Advisor, a number of the suggested index funds are unavailable to prospective investors. Recommending DFA funds discourages one from managing their own portfolio. The book would be stronger if alternative investments were referenced in addition to the DFA suggestions.

Chapter seven (7) focuses on the portfolio maintenance. While the general ideas within this chapter are sound, there is insufficient space available to get into the specifics of measuring portfolio performance, setting up appropriate benchmarks, and how one actually goes about measuring portfolio risk.

Chapter Eight (8), not one of my favorites, asks the question, Should You Hire a Financial Advisor? Five test questions are posed to the reader and question number 2 will stop 99% of all readers from investing on their own. This question argues one needs to have advanced knowledge of probability theory and statistics, such as correlations and the various moments of distribution such as skewness and kurtosis. While statistical knowledge is important, and can be learned, the beginning investor can build a productive portfolio using the fundamental guidelines included in this book, and do is successively without laying on the added fees of professional management.

Think, Act, and Invest... is a valuable addition to the growing library of books for investors wanting to successfully launch their own portfolio. Sticking to the core principles of this book will go a long way in preparing investors for their eventual retirement years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.