In a previous post, I had posted part 1 of an investment fable that was attempting to distil the learnings from Buffett's shareholder letters where he strongly advocates index investing and a paper by Prof. Bessembinder which explains exactly why index investing works (based on stats from more than 90 years of market data). I have now published Part 2 of this investment fable. Key learnings here:
- Avoid investing using borrowed money.
- We review the key stats from Prof. Bessembinder's paper - how the market is essentially a "winner take all" environment where capital rushes to the winners and away from the losers. In our desire to get in on the "ground floor" we try to pick individual stocks with often disastrous consequences to our portfolio.
- We explain just how S&P 500 index actually works. It's kinda obvious but for those who don't know this other than as a term they have heard, I walk through how the index is constructed.
Pop quiz for the interested reader to make sure they understand this - If an S&P 500 company splits its stock (say 2-for-1), will the index value change?
Good luck!
Submitted March 12, 2018 at 07:13AM by arnexa http://ift.tt/2Hrx12r
