W. Scott Simon
What kind of investment book would a person write who was a Wall Street insider for over 25 years? If you’re thinking something like How I Became a Master of the Universe in Ten Easy Steps, you would be wrong. At least if you’re talking about Gordon Murray who, with co-author Dan Goldie, has given investors a real gift: the inside story of what investing truly is and how those who follow the prescriptions in their book, The Investment Answer, can have a successful and positive investment experience. The Investment Answer is also the kind of investment book that Murray, who has terminal cancer, chose to co-write in the time left remaining to him. That makes this book truly unique because Murray, who I met in 2005, has no axes to grind and so is entirely free to bring to the field of investing the kind of focus and clarity one gains when faced with such a condition. (Murray’s paper on the interplay between Wall Street and Main Street, written five years before the market meltdown in 2008, is by far the most clear and concise that I have ever read.)
Murray, who worked in institutional trading and sales at Goldman Sachs, Credit Suisse First Boston and Lehman Brothers, and Goldie, a fee-only registered investment advisor who invests his individual clients in the asset class funds offered by Dimensional Fund Advisors would, at first blush, appear to be an odd couple. When Murray retired in 2002, he looked for someone to manage his family’s wealth. After meeting Goldie, he had an epiphany and became a consultant with Dimensional whose investment philosophy, shall we say, is a tad different from that of Wall Street. Yet, ironically, it was Murray’s extensive training and experience in institutional investing that allowed him to readily see the folly inherent in the way most people invest, and to conclude that stock picking and market timing are speculation, while asset allocation, broad diversification of portfolio risk, reducing costs and staying the course are investing. How could any self-respecting investment banker come to any other conclusion when, in the course of his career, he had institutional money managers confiding in him that they hadn’t a clue as to what their next investment idea would be for the $50 billion or $100 billion they had under management? Or when others admitted to him that they were nothing more than (very expensive) closet indexers?
According to Murray and Goldie, when most people think of investing, they think in terms of forecasting, of searching for someone with an accurate crystal ball who can lead them to investment nirvana. The good news, they say, is that investors needn’t get the future right in order to have a successful investment experience. In fact, our capitalistic system generates a positive return on capital over time; otherwise, it just wouldn’t be capitalism. The authors don’t see wealth being created or preserved by moving money from stock to stock, from fund to fund, from market to market, from one hot money manager to another. On the contrary, that kind of activity to them is simply speculation, not investing.
Instead, to them true investment wealth is created and preserved by millions of laborers, entrepreneurs, workers and managers who–together with the application of capital supplied by investors–help build companies and make economies grow over time. Investors who supply this capital by investing in stocks and bonds are entitled to their fair share of the returns that are generated as a result of this activity.
Murray and Goldie believe that the most effective and efficient way to invest in stocks and bonds is in public equity and debt markets. With a proper time horizon and discipline, investors can capture global capital returns in these markets which should beat most active investors (who try to beat the market) with less risk. That, to the co-authors, is what really constitutes the process we call investing. So those who choose to invest in that way–broadly and cheaply in global capital markets with asset class funds and index funds–can win over the long run because global capital market returns are just sitting there for the taking by anyone. Because of this, Murray and Goldie maintain that there’s simply no need to speculate with investment capital via stock picking and market timing. The problem is that most investors don’t understand the difference between investing and speculation. The Investment Answer was written to explain this difference. And that – the long and the short of it – is the answer.
The Investment Answer is available at bookstores or online at http://www.theinvestmentanswerbook.com. The book, appropriate for all investors, is less than 80 pages long and can be read in a few hours.
W. Scott Simon is an expert on the Uniform Prudent Investor Act, Restatement (Third) of Trusts and Title I of ERISA. He provides services as a consultant and expert witness on fiduciary investment issues in depositions, arbitrations and trials as well as in written opinions. Simon is the author of two books including The Prudent Investor Act: A Guide to Understanding. He is a member of the State Bar of California, a Certified Financial Planner® and an Accredited Investment Fiduciary Analyst™. The author’s views expressed in this article do not necessarily reflect the views of Morningstar.