The 14 Truths You Must Know When You Invest

This proves active investing is a loser's game. Some can win. The only question left is, can you identify ahead of time the very few people that are actually going to win?

Truth 2: Past Performance of Active Managers Is Not a Good Predictor

Let's start with the old coin-flipping contest, where the object of the game is to flip heads consistently. If you have 10,000 coin-flippers, odds are you'll get 5,000 who pass the first round. The next flip it goes to 2,500, then 1,250, then 625 after four tries.

When this happens in the stock market, we are quick to call the coin-flippers who beat the market geniuses, when it could be luck. Why take the chance of it being luck when you don't have to -- you already have index funds that beat an increasing percentage of fund managers with each passing year?

Who was the best money manager of the 1970s? Not Fidelity Magellan. It's David Baker of 44 Wall Street fund. So, let's say investors saw that performance on the 1970s and put their money in Baker's fund. Well, 44 Wall Street was the worst-performing fund of the 1980s, it lost 73%.

Now, today a lot of people point to Bill Miller at Legg Mason Value -- he beat the S&P 500 12 years in a row, right? Well, it may be skill and it may be luck. We don't know for certain.

In the book, I write about the Larry Swedroe Investment Trust, which has a higher return than Bill Miller's fund going back 15 years. How did my fund manage to beat Miller and the S&P 500? Well, since my wife's name is Mona, my lucky letter is "M." I construct a value-weighted portfolio of all stocks that begin with the letter "M" and rebalance annually. Now, I made up that fund, it was created by data mining. But the great returns were purely a matter of chance, yet people would put a ton of money in the Larry Swedroe Investment Trust if they could.