The New Coffeehouse Investor is a wonderful book. You have to really read it for its message to sink in. I have summarised the big ideas from the book here:
1. The three principles of investing
- Save for a rainy day. (Develop a long-term financial plan- how much you will spend and how much will you save)
- Don’t put all your eggs in one basket. (Diversify in different asset classes-stocks and bonds.Bond percentage=age in years)
- There is no such thing as a free lunch (Capture the entire return of each basket, or asset class, through low-cost index funds( because higher expenses will decrease future returns). Reinvest your dividends. Invest for the long term- decades, not years. Start as early as you can, which is, now. ).
2. Remember it is not worth your time, your money or the risk to try to beat the market. It is better to get the return of the market by following the three principles of investing.
3. Diversification decreases the volatility of your portfolio and gives similar returns in the long run(20 years or more).
4. Instead of trying to predict the future’s best asset class, own all asset classes and rebalance vigorously. This is because ‘reversion to the mean’ is a constant thing in the stock market.
5. An example of a coffeehouse portfolio is shown below.
6. Take time to experience the richness of life. Money is not everything. Spend time developing a personal financial plan for spending and saving. Discover fulfillment and excitement in other areas of life apart from the stock market. Remember that low-cost index funds or ETFs(exchange-traded funds) are the best and easiest ways to build wealth. If you want excitement in the stock market, then invest in individual stocks in great businesses that have stood the test of time( not more than 5-15% of your portfolio)
7. In the attempt to beat the market(which is difficult), do not end up underperforming the market when an easy way to equal(approximate) the market average exists.
8. And, once again, remember- a simple philosophy of creating a long-term financial plan, diversifying in different baskets and capturing the entire return of each basket, has a far greater chance of serving you well than trying to keep up with the whims of the Wall Street crowd.