Book Review: Simple but not Easy

Richard Oldfield was an investment manager for three decades, and he evaluated and appointed investment managers for a decade.  His book, Simple but not Easy: A Practitioner’s Guide to the Art of Investing, was first published in 2007, and his second edition, that I review here, came out in 2021.  The quality of the writing makes it a pleasure to read, but it comes from a time when “investing” meant stock picking, and few doubted that active investing based on star managers was the best approach.  For those who still think this way, this book offers many useful lessons, but others might see it all as advice on traveling by horse-drawn carriage.

The 2007 edition of the book is left intact with a new preface and a lengthy new afterword added for the second edition.  The new afterword provides interesting commentary on the modern investment landscape, but I still can only recommend this book to those dedicated to trying to beat the market.

Many themes in this book might have been controversial back in 2007, but seem well accepted today, at least by me: active managers are bound to make mistakes, “in aggregate, hedge funds are a con,” “leverage and illiquidity are the kiss of death,” fees drive down returns, investors need to avoid managers who are closet indexers, benchmarks are tricky, a manager’s approach can go in and out of style, forecasts are random at best, and valuations matter.

Some claims are a blast from the past.  Investors “can get almost all the diversification there is to get with a portfolio of as few as 15 stocks.”  No.  The author claims that ignorance and distance from the investing action are advantages for amateur investors.  “Investors in places remote from the City frenzy are arguably at a huge advantage.”  This idea that DIY investors can easily beat the pros used to be very popular, but it isn’t true.

The afterword written in 2021 is more interesting to me.  On bonds, “it is hard to justify using bonds as the counterweight to equities when they now yield almost nothing.”  This would have been written 3 or 4 years ago, and I certainly agreed at that time in the case of long-term bonds.

On electric cars, “there is no obvious reason why the traditional carmakers should not succeed with electric cars.”  To me, the obvious reason is engineering.  Tesla was hugely devoted to advanced engineering, to an extent that traditional car companies have had challenges matching.  U.S. car companies have covered up poor engineering with marketing for decades.  The author’s discussion of safety problems with self-driving cars left out the fact that human-driven cars kill people at a frightening rate.  We don’t need perfection to justify replacing the status quo.  Continued improvement can come later.

On the subject of the rise of passive investing, the author convincingly explains why active managers, on average, must trail passive investment returns by roughly their additional costs.  But he goes on to say “I think that it is possible to choose a group of active managers the majority of whom will outperform for the majority of the time.”  Oldfield’s own arguments make it clear that only a small minority of investors can hope to do this.

“The next ten years could … be a golden decade for active managers because the trend away from them has been too strong and is due for a large dose of reversion to the mean.”  This is just hopeful thinking from a former investment manager.  Active managers can only make up for their costs by exploiting other investors.  If the only other investors to exploit are index investors, the pickings are very slim.  Perhaps if 99% or more of investors were passive, there would be room for active managers to live off these pickings, but the proportion of investor money that is indexed is nowhere near that level yet.

This book is well written, and I would have enjoyed it back in 2007 when the first edition appeared, but now that I’m solidly in the index investing camp, I find its focus on trying to beat the market less compelling.  Investors who are still trying to beat the market with their own stock picks or who seek investment managers who can beat the market are its best target audience.