Introduction

INTRODUCTION

Wouldn’t it be wonderful to be able to make a one-time life-time stock investment that, based on historical precedent, has a realistic expectation of “beating the market”? That option does exist. Buying and holding small cap value or Smart Beta small cap value ETFs is likely to achieve that goal. I believe this is the rare case of “what sounds too good to be true” actually being true.

There is sound reasoning behind the seemingly utopian concept.  And I’ll tell you what to do, and exactly how to do it. Welcome to investing Eden!


Want to know the definition of chutzpah?

It’s Marty Schulman writing a book on financial lifetime investment. You may pick up this book (after I, hopefully, finish it) — or download the e-book — on the assumption that this Dr. Schulman was some Ph.D. economist with a string of academic credentials.

Wrong!  I have never taken a business course. I have never taken a financial course. I have never worked in the securities industry and I have no investment advisor credentials.  I’m a vascular surgeon.   I am also 85 years old—not one of those well-turned-out young geniuses you might be introduced to at Wells Fargo Private Bank.

But wait—don’t banish this book to the shelf until you’ve read what I have to offer.  First, I have been studying investing and the markets for 60 years, and I think I’ve learned a thing or three.  In fact, I’ve been an extremely successful investor both for myself and my family.  (I must confess to two major investment faux pas. The only times I’ve entrusted assets to others, specifically a major investment bank and Bernie Madoff, have been disastrous.)

This strategy will appeal to you if, like most investors, financial affairs are not a major priority ─ or if you approach managing money with fear and insecurity. Or you might be a veteran investor who followed conventional orthodoxy ─ i.e. bought 60% stocks, 40% bonds ( where in the Bible does it say “thou must have 40% bonds”?), bought all stock classes, and included foreign developed and emerging markets ─ and are (predictably) frustrated by your mediocre returns.

You’re going to learn how you can put your money — funds you’re saving for retirement — in certain investments and forget about them.  Just let the power of compound interest work for you and, unless all market history is abrogated, I can pretty much guarantee you will prosper.  And a special bonus: not having to decide when and what to buy, and when and what to sell, removes a major emotional burden. Political events, dollar strength, oil weakness, terrorism, the Jets’ quarterback situation ─ none of them will affect your investment plan.

You ask:  What’s in it for Dr. Schulman?  Some of my credibility comes from not having any skin in the game. Aside from my book-in-progress, I have nothing to sell, and I’m not qualified to be your personal investment advisor. I’m in no way affiliated with the ETFs I recommend.  I know my children and grandchildren will be governed by these ideas. They’ve already seen the logic of my wealth growth strategy and experienced the rewards of buying and holding Smart Beta Small Cap Value ETFs. If, by some miracle, this book catches on, that will be a bonus.

I’m writing because, after many years of successful but burdensome investing, I think I have found a secret to investment success, and I want to share it.  What I’ve concluded is that you don’t need to juggle stocks and bonds, or build a puzzleworks out of large-cap, mid-cap, small stock and sector ETFs, or plunge into real estate, emerging markets, or hedge funds.  Indexing is the way to go, and a single investment class ─ small cap value (SVC) stocks ─ is the only investing vehicle you’ll ever need. As my charts will clearly show, no other stock class comes remotely close to matching the 90-year outperformance of SCV stocks.

I have been involved with Small Cap Value and the subclass of Smart Beta Small Cap Value ETFs for almost 15 years, and I will detail that experience, including the diamonds and the lumps of coal.

Buy your SCV stocks via that miracle of modern finance, exchange-traded funds (ETFs), which offer tax advantages and low fees.  And you can refine the category still further, as I have, by buying “smart beta” small-cap value (SBSVC) ETFs, whose returns, at this point, appear to be enhanced through computer-defined refinements in the investment selection process.  Details will come. Don’t know about Smart Beta, Small cap value or ETFs? Don’t know about stock sectors and stock classes? Alas, fret not: That’s why there will be the rest of this book.

To implement this investing strategy you don’t need a broker at Goldman Sachs, an account manager at Morgan Stanley, or even a financial planner or advisor.  If you have some degree of familiarity with funds and the markets—which you should from your previous investment experience ─ you can do it yourself.  If that idea makes you nervous, hire a financial advisor.  But make sure she is a fee-only advisor, and don’t let her sell you on a so-called diversified portfolio of stocks and bonds and mutual funds.  Tell her what you want – a select group of Smart Beta Small-Cap Value ETFs.  The ETFs I recommend are diversified ─ they include all industries ─ and, based on formidable historical evidence, can be expected to have superior returns over time.

This is not a motivational book.  My object is not to slap you on the back and tell you, “You can do it”.  Most investment pundits present vague plans and often use the insipid phrase “do your homework”. (It’s as if, when you do well, “we told you how”, but if you fail “it’s your fault”). I’ll tell you exactly how you can do it: I’ll do your homework for you. All you have to do is copy it! We know copying homework was a no-no in grade school, but with this investment strategy, it’s just the opposite ─ it’s essential.

This is not a sermon on investing. It’s a guide to a simple, easily replicated, productive and rational investment strategy.

The two events that have helped investors most during the six decades I’ve been investing are indexing and ETFs. Lower commissions, discount brokers, smaller spreads, smart beta and the internet are other winners. It is only since 1975, when the Vanguard S&P 500 Index Mutual Fund was introduced by John Bogle, that we have been able to buy an index — a single fund that replicates or mimics a specific portion of the whole market, or a piece of it.     

The next phase in the development of index investing was ETFs. The first index ETF was State Street’s S&P 500 Index ETF (SPY). Born in 1993, it launched a whole new era of stock investing. You’ll learn what ETFs are, and their many advantages over index mutual funds.  In 2003, the first smart beta ETFs (much more about smart beta later) were introduced, further enhancing index investing.

The benefit of being able to invest in a diversified index is enormous.  Anyone who invested in the S&P 500 over the past 40 years would have done well — I believe better than  99 + percent of “active” investors—despite the inevitable burps, belches and explosions in the market that happen every few years. ( And naysayers might say the S&P 500 isn’t diversified ─ it only has large cap companies ─ but it includes every industry, and, by my definition, it is diversified.)

But, remember, NOT ALL INDEXES ARE CREATED EQUAL.  I’ll suggest specific SCV and SBSCV ETFs, describe their virtues, and illustrate their performance with easy-to-read charts.

To be a successful investor you don’t need a complex investing strategy and you don’t have to understand all of the impenetrable jargon (much of which I’ll redefine) that the investment world has showered on us. All you have to know is that not all classes of stocks perform equally; that, historically, one stock class, small-cap value, has outperformed all others, and that the best method of investing in that category is through Smart Beta ETFs.  And I’ll show you the simple ways to determine which ETFs, over many years, perform best.

This is about passive investing.  With this strategy, there is no place for active management.  Those folks can’t beat the market, and neither can you.

Small cap value ETFs come in two flavors. The first are conventional, capitalization weighted and based on major indices: Examples of high performing SCV ETFs are IJS and VBR. I’ve chosen to invest in “smart beta” (SB) SCV ETFs, where computer derived indexes choose stocks based on factors like revenue, earnings, book value, cash flow, and other parameters, and where the weighting of each stock in the underlying index is  determined in ways other than conventional capitalization weighting. Examples of high performing SBSCV ETFs are EES, PRFZ, EZM, and RWJ. (OMG 😱 – I just gave the whole plot away.)

I will examine the 90 year history of SCV outperformance (and I think that will be the clincher). Evidence supporting the superiority of SBSCV ETFs is much more tenuous, but I’ll show what appears to be a consistent trend. (It’s OK if you peek at the charts now.)

You can compare and contrast the performance of the major SCV ETFs with charts on the websites of discount investment firms. How do you construct and interpret these charts? Don’t worry ─ it will all be in my book.

When should you sell your index funds?  NEVER—or at least not until you are retired and need the money to live on.  (If you’re fortunate enough to start early, you might be able to live off your dividends. But it’s never too late to start, as I’ll explain.)

Since this is the last book I will ever write (and also the first) I will include chapters on government help — how you can use IRAs, Roth IRAs and the federal rules on gifting to preserve capital by minimizing  taxes for yourself and your heirs. (Please keep in mind I have no academic qualifications in these or any other financial areas).

I strongly believe that my SBSCV ETFs will increase your family’s assets. I know it will be of value to my grandchildren, who have already seen the fruits of this investing approach — and are glad, as perhaps you will be, that I’ve done their homework.

One last thing: Please excuse my repetition. Even if you include obituaries, horoscopes, sports and weather reports in a book like this, you can’t avoid saying stuff over and over. I trained in vascular surgery under Dr. Michael E. DeBakey, the father of our specialty and arguably the most prominent surgeon of the 20th century. His recipe for writing a medical paper: “Tell them what you’re going to tell them, then tell them, then tell them what you told them.”

Marty Schulman

If you've made it this far, there is something you may be wondering about: Why hasn't anyone said this before? It’s hard to believe that this simple, safe, and successful lifetime investing approach has not been presented, but that seems to be the case. As I’ll show, it’s been hinted at ─ like tapping the tip of a nail into wood to start the process. But nobody has driven it in all the way: Nobody has “nailed” it.

Or, to put it another way: why hasn’t the all-in Smart Beta small-cap value approach been recommended in the past? It’s been alluded to, flirted with, sent flowers, and even briefly caressed, but the marriage has never been consummated.

Ready for Grandpa's Rules? Don't disobey!