Subtitle: How to Be a Long-Term Winner in a Short-Term World

If you want to be "superior investor" or "long-term winner," be a "partaker," not an "outsmarter."

That's the author's key message, and nobody with any sense would argue with it.

The problem is comes from how to define those terms. So many investors are highly intelligent that they think they can or should be able to "out-smart" the market. Glassman doesn't address any of the emotional/psychological aspects of this behavior, and falls prey to it himself.

"Outsmarters" are the vast majority of mutual fund and pension managers and investors, day traders, and all the rest of people who think they can achieve superior returns through finding great stocks, buying them cheap, and eventually reselling them for a huge profit.

So Glassman devotes chapters advising readers to stay away from such outsmarter type techniques as buying on margin, options, selling stocks short, and all trading (to minimize broker fees and taxes) or market timing.

However, one chapter advises readers to keep a "wish list" of companies whose stock you want to own but which are too expensive, and the price at which you would buy them. Sooner or later the market or that particular company's stock price will go down and may reach your wished for price. Then buy it.

But what is that but a form of market timing? An intelligent example of market timing, but market timing nonetheless. And while you're at it, if your broker allows you, why not sell puts on that company's stock price? That way you'll make money even if the stock price doesn't reach your wished for price. If it does, you'll buy it at that price, and still put some extra moola into your pocket. Sure, you have to have enough cash in your account to buy the stock at that price, but that's also true of Glassman's advice.

Glassman explains the value of keeping expenses low, which is great advice, especially concerning mutual funds (most people don't realize they're paying high management fees, and that greatly reduces their long-term returns). However, he also advises you to start a separate, "fun and games" account of no more than 10% of your total portfolio, if you can't stay away from buying stocks on stock tips. This is a concession to people's emotional vulnerability, but wasting 10% of your total investment funds will reduce your long-term returns by much more than mutual fund management fees.

I do understand that some people insist on gambling in the stock market as a form of entertainment, so why not advise them to use only money in their entertainment budget? Want to buy some call options? Give up dining out for the next two months. Want to buy that junior gold exploration company? Cancel your cable or satellite TV subscription. Want to buy the latest high-tech IPO? Use your summer cruise money.

Glassman does advise readers to instead be a "partaker," -- that is, find good businesses and share in the long term success.

My argument with the author here is not in the basic idea -- I applaud it -- just in the specific application of his advice.

He constantly tells readers to look for good businesses, study them and then invest in them for the long term. My own concession to the foibles of people is my belief that most people don't have the time or skills or business savvy to do this research or to correctly evaluate the future prospects of the businesses they research, and therefore won't do it.

And I believe that for many people, this is a wise course of action. They should spend their spare time either making more money through a part time job or business, exercising (the longer you live, the longer your investments can compound), or simply enjoying life with their families.

Yet these people need to invest their money also.

But of course, Glassman is aware that Burton Malkiel already wrote the book (A RANDOM WALK DOWN WALL STREET) advising investors to simply put their investment money into a broad S&P index fund and be done with it.

But Modern Portfolio Theory also says that a portfolio of 30 individual and diversified stocks pretty much tracks the entire market just as an index fund does, so Glassman adds his own perspective by giving lots of advise on choosing the 30 best stocks you can. (And he mentions a recent study that shows that since stock market volatility has increased recently, you now need to own 50 individual and diversified stocks.)

Yet according to Modern Portfolio Theory, it's only important that your 30 (or 50) stocks be well diversified across industry sectors. Efforts to find and choose good companies (which Glassman devotes this book to) don't add value -- which supports my contention that much stock market research is a waste of time better spent making money other ways). That's because all stocks are fairly valued by the market and move up and down at random only as new information happens -- which is inherently unpredictable.

Yet there is one way, which I support and which Glassman does devote a chapter to, of selecting good companies and "partaking" in their business success -- buying companies that pay dividends.

His chapter on dividends is titled, "Give Dividends the Respect They Deserve" and concludes that a good portfolio contains many dividend-paying stocks, but should not be entirely made up of dividend-paying stocks.

Why not? I would argue that if a company doesn't pay dividends to its shareholders those shareholders are NOT "partaking" in the business.

Yes, they plan to make a profit when they eventually selling the stock. (Glassman gives lip service to author Philip Fisher and investor Warren Buffett's advice to hold on to good stocks "forever," yet continually praises rises in stock prices -- which are meaningless to the non-selling shareholder).

But until stock owners sell the stock, they get no cash return from the business. They may consider themselves a "partner" in the business, but businesses that don't pay their "partners" a generous dividends are treating their shareholders as "red-haired step-partners."

There's a lot of good advice in this book. It's too bad Glassman doesn't take his model to its logical limits.

I submit to you that paying ANY attention to a stock's price (after you've bought it) is clearly and insidiously a trap for "out-smarters."

Buy companies with a history of rewarding their "partaker" shareholders with quarterly dividend checks and don't ever sell them.

Copyright 2007 by Richard Stooker

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