Book Review: How A Second Grader Beats Wall Street

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.

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

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