Book review: “The marvelous simplicity of index investing” by Jacques Wintermans

Thanks to a three week Christmas holiday I finally had the time to do some reading. Of the four books I choose to read in these next three weeks, the first one that I wanted to get my teeth in was the Dutch book “De schitterende eenvoud van indexbeleggen: wat de banken u niet vertellen” which loosely translates to “The marvelous simplicity of index investing: what the banks don’t tell you” written by Mr. Jacques Wintermans.

This book provides a clear and unambiguous view on why index investing is the best way to grow your worth. In his book, Wintermans created two distinct parts:

• Part I sets the stage by providing some background information about index investing and deals with its basic insights
• In Part II the emphasis is on the practical application of the information gathered in the first part.

Thanks to the clear structure of the book it’s easy to follow, and understand the reasoning that Mr. Wintermans applies. He supports all of his claims with references from leading books such as the world-renowned Common Sense on Mutual Funds by John C. “Jack” Bogle (who, unfortunately, passed away recently) or The Intelligent Investor by Benjamin Graham.

Part I helps you understand the basic concepts of portfolio management such as yield and risk, and how they are closely related.

Using scientific research he references throughout his book, Mr. Winterman explains us the staggering truths about active investing. One reference is a 1960 research where it was proven for the first time that investment experts could not beat the market at all. This caused a great deal of commotion in the scientific community and among wealthy American private investors. They wondered what purpose was of hiring expensive asset managers if they cannot achieve extra returns?
The historical data is supported by various graphs and tables which make the picture complete and helps you with understanding the information Wintermans shares with you.

Throughout the book, he tries to help you understand how index investing differs from active investing and why it’s a better solution for the vast majority of retail traders. The idea is that active investing is an alternative to passive investing and not the other way around. Index investment should be the norm. Only if asset managers can demonstrate that they can achieve an extra return that goes beyond the extra costs they charge, an investor could decide to give (part of) his money under management to an active asset manager.

The reason why index investing is so attractive and should be considered the norm for retail investors is, according to Wintermans, because of a combination of two factors:

1. The stock market prices are difficult or impossible to predict.
2. Index investing is four times cheaper than active investing. Where an active fund can charge rates well into the 2%, the majority of the passive index funds charge ~0.5%.

Point 2, costs, gets a great deal of attention in the book. It’s something retail investors underestimate how disastrous the effect of excessive costs is on their portfolio. The difference of 1.5%/year means that the return on index investments will in the vast majority of cases be tens of percent higher in the long term. It’s one of the few things a regular investor can control.

This is what this book does well, help a retail investor understand why it’s so important to shift and preferably not even bother with active investing and stick to a passive investment strategy.

In Part II of the book, Jacque Wintermans describes in a step-by-step fashion, how an index investor can compose a suitable portfolio himself.
The psychological side of investing in indices is also discussed and takes a more prominent role. The actual investment process explained has four steps:

1. Determining the investment mix
2. Completing the portfolio
3. Boarding
4. Rebalancing

In the final chapter, the recommendations made in this book are examined in light of the recent credit crisis.
How would an investor have performed if he had followed the recommendations in this book? Would he have been able to repay his mortgage or retire comfortably in the middle of the credit crisis?

The book finishes with a glossary of terms. To finish this review, I’d like to quote Benjamin Graham:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

–  B. Graham, The Intelligent Investor, 1949, pg. ix