Book Review: How A Second Grader Beats Wall Street

by Ron Haynes

How A Second Grader Beats Wall StreetWOW! What a fabulous book! When JLP from All Financial Matters said he had a friend who had written a great book, I knew it had to be something special. I was right. Allan Roth’s book, How A Second Grader Beats Wall Street, is a MUST READ resource for anyone looking to increase their wealth with the least amount of risk and the most opportunity for growth. As a recovering “return chaser,” this book was an AHA moment for me and is now listed as one of my favorite books on the subject of investing.

I’m willing to admit it: I’ve been one of those pitiful souls who thought he could beat Wall Street, but just because you finish your degree and then go on to get an MBA doesn’t make you an investing genius. I’ve done technical analysis with moving average convergence divergence charts, fast and slow stochastic oscillators, a relative strength index, 5-10-20-30-50-200 day moving averages, Bollinger bands, parabolic SARs, ROC, CCI, DPO, and ATR. All I can tell you is that hindsight is always 20/20. Human beings can spot a “trend” that ties in nicely with the financial markets using anything from sunspot activity to migrating ladybugs to the length of miniskirts and it all is worthless.

“The best thing you can do as an investor or a gambler, is to know the odds of the game you’re playing–because not knowing them will cost you.”
- Mathew Emmert, Motley Fool

Everyone knows the old stories about a chimpanzee that outperformed the old pros on Wall Street. We’ve heard about throwing darts at the newspaper and beating those same pros. We’ve also heard about kids in elementary school beating them too. Well, Allan Roth has truly created a model portfolio that will consistently beat just about anything else you hope to use — and give you spare time to enjoy life as a bonus.

How? Index funds. Aw, c’mon, not index funds again. How boring. Gimme something new, fresh, exciting, and revolutionary. Believe me, you’ve never looked at index funds the way Allan Roth does.

“You get what you don’t pay for.”
-John C. Bogle, Founder The Vanguard Group

Roth (ironic name isn’t it?) says that the reasons you and I should be investing our money for retirement in index funds are as follows:

1. You’re paying far more in fees than you realize (did you read that quote by John Bogle?).
2. You cannot predict where the stock market will be in [insert ANY length of time here].
3. Wall Street gurus don’t know either. They’re just really good at convincing others that they know what they’re talking about with their overly whitened teeth and a huge sound effects board. Remember that most “experts” were advising you to buy Lehman Brothers, Wachovia, and other stocks just days before they collapsed.
4. The fees and taxes we pay cause our real returns to shrink to a fraction of our perceived returns.
5. Our biases (and our financial planner’s biases) can cause us to lose big money over the long run.

Roth goes on to point out exactly HOW TO INVEST in these funds to obtain maximum returns. He even breaks it down by percentages according to your own personal risk tolerance.

“One must give up the fantasy of a perspicacious gunslinger/investor outwitting the market.”
-John Allen Paulos, author of A Mathematician Plays the Stock Market (quote regarding index investing)

Not all “index funds” are created equal.

Perhaps the most useful piece of information that Allan Roth gives readers of his book, is a list of funds that really ARE representative of the market. He lists several Vanguard funds as well as some iShares ETF’s. The S&P 500 IS NOT the market. It excludes thousands of small and mid cap companies that can perform quite nicely while the 500 big boys falter.

“How could I have been so mistaken as to have trusted the experts?”
-John F. Kennedy after the Bay of Pigs fiasco

Carrying the opportunity to obtain superior returns with some mitigated risk just a bit further, Roth advises readers to invest in a global fund and a bond fund, again refering readers to Vanguard and ETF’s. How much goes into each will depend on each investor’s personal risk tolerance.

My favorite chapter was Chapter Five: Can you beat a second grader’s portfolio? Roth lays out in simple language the statistical analysis that proves the answer is a resounding NO! You can’t. He shows that you have about as much chance of beating the market as you do of winning the lottery or walking away from the blackjack tables in Vegas with pockets stuffed full of cash. Ain’t gonna happen.

I’ll be honest with you. I am NOT a believer in Efficient Market Theory. But that is exactly WHY you need to read and follow the advice that Allan Roth gives in this book. There is no way you, I, the experts, the gurus, or anyone else can have all information about one company available to us at once. You’d go nuts trying to process it all. Now, imagine trying to process all that information on tens of thousands of companies. Even Mr. Market himself doesn’t have all information all the time.

Buy or Don’t Buy?

This one is a resounding BUY. But don’t just buy it and read it, but it, read it, and DO it. The information in these pages isn’t full of secret information that no one else has, nor is it glitzy or glamorous, but it is sound, wise information that will make you much better off than those touting their latest scheme, their latest secret, or their latest sound effect.

~~~~~~~~~~~~~~

Allan S. Roth is the founder of Wealth Logic, LLC. He has been working in the investment world with 25 years of corporate finance. He has been finance officers of two multi-billion dollar corporations and consulted with many others while at McKinsey & Company. As part of this work and as a current honorarium finance faculty member of the University of Colorado, Allan has studied financial markets and the behavioral aspects of investing. He notes that large corporations tend to invest their assets in a much more logical, non-emotional manner and believes that those same techniques are just as applicable to individual investors.

Note:
Biographical information and quotes come from Allan’s site at Dare To Be Dull.

About the author

Ron Haynes has written 1001 articles on The Wisdom Journal.


The founder and editor of The Wisdom Journal in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a Human Resources and Management consultant, helping companies know how employees will behave in varying situations and what motivates them to action, assisting firms in identifying top talent, and coaching managers and employees on how to better communicate and make the workplace MUCH more enjoyable. If you'd like help in these areas, contact Ron using the contact form at the top of this page or at 870-761-7881.


If you enjoyed what you just read and would like to get FREE email updates with the freshest articles from The Wisdom Journal delivered right to your inbox, subscribe today! It's ridiculously easy and you can unsubscribe at any time. Since your email address is never sold or abused, you can subscribe with confidence, PLUS you'll get free reports/guides/eBooks, subscriber only benefits, and other perks.


{ 52 comments }

Shumyla

I would love a chance to win this book. I would like to learn about investing, but there is so much information out there that it’s overwhelming to know where to start. I’d like to give this book a try.

Dallee

Sounds like a great book! Please enter me in your drawing.

You provide great reviews of investment books, which I enjoy greatly!

autumnesf

Sounds like a great book.

A. Arcega

I’ve appreciated your blog comments over the past several months, and in this recent edition you’ve given a valuable summary of Roth’s book that has piqued my interest. Thank-you!

Mark Foo | TheBigDreamer.com

Hi Ron,

Although I disagree with your view on investing in individual stocks, I do agree with you on investing in Index Funds, and I’m also NOT a believer in the Efficient Market Theory.

And I agree there may be people who think Index Funds are boring and they’d prefer something more exciting. I’d like to advise these people that investment is not about excitement. It’s about profiting. And it’s hard to profit from your investments if you let your emotions overwhelm you.

Just ask yourself this question, “Would I rather win money in a boring way, or lose money in an exciting way?” You get what I mean?

Thanks for this great book review Ron and I hope I’d be lucky enough to win it! :D

Cheers~

Mark

Student

I need this book so I can read chapter 5. I still believe I can outperform a second grader’s portfolio

Donald

I saw this in the bookstore just the other day and thought about picking it up based on the title.

Thanks for the review. Now I’ll definitley add it to my “buy” list. Unless, of course, I should be so fortunate as to win a free copy.

Keep up the great work.

jnwcmr

I need this book, as I no longer have a second grader! :)

Rick Francis

Please enter me in your drawing, I’m curious to read chapter 5- and review the analysis. I believe that anyone can beat the market short term- just by getting lucky but it becomes very difficult long term. The only examples I can think of are Warren Buffett and Peter Lynch.

-Rick Francis

thomas

I’d love to have another book for my shelf.

Jane

Is there going to be a sequel revealing the investing secrets of the third grade?

Admin

Doubt it, but that would be a natural follow up book.
There really aren’t any secrets and the information is so simple and easy to understand, a second grader could grasp it. That was the point of the book. Allan spends time explaining complex financial concepts to his son, who in turn astounded his dad with his perception.

Eric

I’ve gotten Mr Roth’s newsletter for some time now and have enjoyed his practicality. He writes in a no-nonsense, easy to read manner.

I would be honored if I won the book!

A.J.

Sounds like a sweet book! Count me in.

Yana

Would be tickled to win this book.

Clay C

Lets try my luck here. Please enter me for the drawing. I am trying learn a little about the whole investing thing, rather than just savings.

ray

Would love to win this one!

Peter

Please count me in.

Richard

Would like to win this! I’ll read it whether I win or not. Thanks for the chance!

Brian

Count me in please!

Steve @ Start-Up

Sounds like an interesting read. Count me in.

Brian S.

I would love to try to win a copy of this book! I’m in it to win it.

Eric

If you liked the book that much I would consider picking it up.

debbie

You’ve convinced me that it is a must-read. So, I would love to win it.

Dave

Sign me up, Please.

Jeff

I adhere to the index principle myself, great post!

Erica Douglass

Hi Ron! I’d love to be entered. Thank you for the opportunity!

-Erica

Trevor @ Financial Nut

Count me in! Sounds interesting.

Peter

Nice post

Allan Roth

I can’t tell you how much I appreciate the nice review of my book. Investing really is simple but don’t confuse simple with easy. As we get older, money starts to mean too much to us to act rationally, or in ways we’ve all learned by second grade.

I’m not a believer in the Efficient Market Hypothesis either even offer a way to beat indexing when it comes to fixed income.

Hope whoever wins the book likes it. If you don’t, it’s on Amazon and I’d love your comments.

Allan Roth
Father of the Second Grader

Admin

Thank you Allan. You’ve packed a lot of wisdom in those pages. I hope everyone who reads it puts those ideas into practice.

Heather from girl meets world

This sounds like a great book… thanks for sharing!

Amit

Looks interesting

J W

Interesting book. Would love a copy.

Lee

Hi Ron,

Thanks for the opportunity to win this book. I’m 27 and just started researching how to get my financial life in order. I’d love to read this book. Sounds like exactly what I’m looking for.

Thanks again.

Mark W.

Thanks Ron for your review of this book. Please enter me in this drawing. I’m sure I can learn a few things from this book. If I’m not selected in the drawing I’m checking this book out at my local bookstore.

Jesse

The book sounds interesting, I’ll take a shot.

Siobhan

Thanks for the great review!

Despite being young, I am not at a point in my life where I want to take a great deal of risk with my money, so this book really appeals to me.

OEP

In for a chance to win he book. I enjoy your blog. I find that I share lot of philosophies with you. Have you developed your philosophies on your own, or do you feel that they were passed on to you from your parents?

Adam Lechnos

Sounds like I could use such a book. My current second grader is always making suggestions about my investment decisions!

Maybe it was meant to be!

Mr. Pilgrim

I have read some other investing books, this sounds like more my speed. Just made one investment that is paying off today, just because I liked the company, I jumped at the stock , should have invested more . I will enjoy this book.

Mary

Thanks for bringing this book to our attention. I don’t know much about investing but this looks like a good read to start with. Considering I’m getting into the game very late in life, I guess I’d better get started!

George

Sounds like a great read…I’m in for the drawing.

Romyr

Would love to read this book. Count me in for the drawing!

Becky Buchanan

The simpler the better works for me. Sounds like this book is full of great, applicable information. I’d love to be entered in the drawing…thanks for keeping us informed of information out there.

Andy B

Looking forward to reading this! Thanks for the heads up

Chatak

Sounds like a good book. Would definately love to read.
Thank you

Linda Duty

sounds like a good book

Mike

Sounds like a great book. Please enter me into the drawing also. Thanks

Matthew

Thanks!

De Coonse

Yes, Count me in. I always love to read and learn new investing ideas and techniques. Please enter me in the drawing and I look forward to reading this book regardless of if it is free or not.

Alan S

I’d be very interested to read this.

Previous post:

Next post: