Book Review

I recently received a review copy of a couple of Asset Allocation books, courtesy of Wiley Publications.

Studies have proven that investment returns are largely due to asset allocation and not individual stock selection. Needless to say, I was quite excited to get them.

One of them called Frontiers of Modern Asset Allocationand looked like a finance textbook I studied in business school, complete with graphs and equations. (And a hefty price tag).

The other one, called The Flexible Investing Playbook: Asset Allocation Strategies for Long-Term Success, seemed like an easier read. So I decided to tackle that one first.

The book was an easy read. Maybe, a bit too easy!

The author, Robert Isbitts – an investment advisor, spent the first half of the book talking about the big market crash of 2008, and had interesting stories about investors getting caught up in the excitement of investing. He also talked about the various ways wall street rips off investors, which was quite good.

The author made several good points about using diverse investments to reduce your risk (ie loss or drawdown) and improve your overall long-term results. He included a comprehensive list of 50 different asset classes.

However, the actual meat of the book (in my opinion) on asset allocation wasn’t as well fleshed out as it could have been. He talked a big talk, offering the Keys to successful asset allocation – simple rules like avoiding the big loss, cutting your losers early, finding the bull market (whether it’s long or short in equities, bonds, or commodities), being flexible, and other pieces of simple advice.

He didn’t however offer easy to implement instructions on these rules. For example, an instruction like selling any investments that’s declined 20% from your purchase price, or maybe has dropped below its 200-day moving average is actionable. Just as simple, but easy to implement. That was the part that was missing in the book.

He did, however, offer a chapter on the different portfolios he uses, like Hybrid, Concentrated Equity, And Global Cycle (which is the name he gives his Global Macro fund). While he explained the composition, and various strategies (like Market Neutral, Arbtitrage, Convertible Securities) pretty well, the actual composition and construction of the portfolio was missing. He also didn’t offer any information on their recent returns or performance.

You can hardly expect me to invest my money in your strategy without seeing backtested results, or at least past performance. Especially if your strategy wasn’t easy to follow to begin with. I also think that constructing an actively-managed global macro fund shouldn’t fall under the purview of asset allocation – at least not for the type of investor he’s targeting in this book. (Although, to be fair, his portfolio management rules of such a fund where quite good – but like I said, not exactly relevant).

Maybe the idea wasn’t to get you to understand how to allocate your assets at all! Maybe the author wanted to convince you that’s it’s tricky, and you should hire him to manage your portfolio instead?

Despite it’s flaws, it’s not a bad book. It walks you through a high-level view of asset allocation and explains in detail the various strategies available to investors. Like me, you’ll probably learn (or relearn) a few things, like how to use the R-square when comparing mutual funds or ETFs, and how target-date funds aren’t all they’re trumped up to be.

But if you’re looking for definite advice on how to construct a portfolio in these various asset classes, and when and how often to rebalance, you might need to look elsewhere.

I’m always in search of good books to read and a few people recommended Michael Lewis’ new bestseller The Big Short. I put off reading it because I didn’t really want to read yet another book about the subprime mortgage meltdown. However, I finally got the kindle version to read on my new iPad and was pleasantly surprised by how good it was. Actually, I wish I had read it earlier – the book was rather amazing. It was as fast paced and entertaining as his first book, Liar’s Poker.

Lewis describes the financial industry collapse induced by subprime mortgage bond derivative market from the point of view of a couple of hedge fund managers who shorted them. Not very large hedge funds either. Instead of focusing on well known managers like John Paulson, he focuses on relatively unknown and minor investors, with interesting personalities.

There’s Steve Eisman, the most pedigreed of the bunch with actual wall street experience, who’s abrasive personality insists on telling the truth even if it rubs everyone the wrong way. Running a fund that was owned by Morgan Stanley, Eisman desperately wanted to short his parent company but was prohibited by his lawyers. At one point in the book his partner asks “Who takes out a home loan and doesn’t make the the first payment?” to which Steve Eisman responds “Who the #$%^ lends money to people who can’t make the first payment?”  But that’s what happens when you lend $700,000 to a strawberry picker who makes $14,000 a year.

Dr Mark Burry, a one-eyed doctor with Aspergers syndrome,who quits his medical career to start a hedge fund with his own money and makes nearly $750 million for his investors.  And an almost comical garage-band hedge fund called Cornwall Capital that starts out with $110,000 and ends up with a whopping $135 million.

The book explains in great detail exactly how the great investment banks were creating junk bond securities with AAA ratings and selling them to institutional investors.  Companies like Bear Stearns, Lehman and Goldman Sachs blatantly lied about the quality of investment-grade bond products they were selling. The ratings agencies weren’t competent enough to properly rate these securities and they got hoodwinked like everyone else. In the end, everyone wins (except the US taxpayer) and no one goes to jail!

In all it’s a fascinating read on the excesses of wall street, the complexities of the financial derivative markets, and the crooks who run the show.

The publishers of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, were kind enough to send me a free copy to review.

I’m glad they did. It was an excellent read, similar in some respects to one of my all-time favorite investment books: Extraordinary Popular Delusions and the Madness of Crowds delves into human psychology and crowd behavior. Mobs, Messiahs & Markets is like a modern-day version with emphasis on investing and explores popular delusions like “real estate never goes down”, “stocks always go up”, “deficits don’t matter”, “you are either with us or against us”. When rational, intelligent human beings become part of a group, they are fine. However, as soon as they become part of a crowd, they lose all rationality and turn into blockheads! I found the book quite entertaining, with great wit and sarcasm to keep me amused.

The book talks about people who were determined to make the world a better place by making it conform to their delusions. People like Hitler for example! The authors also talk about how crowd think leads to wars and how wars are futile and never worth the cost. There’s also a complete chapter making fun of Thomas Freedman and his banal book “The World is Flat”. I never liked that book and apparently neither did the authors. There’s also a full chapter devoted to Alan Greenspan which was particularly eye-opening. It describes how his cowardice was responsible for the mess we’re in today. He exchanged his ideals when he went to Washington for fame and fortune. In his younger years, Greenspan apparently once said “In absence of the gold standard, there is no way to protect savings from the confiscation of inflation…The financial policy of the welfare state requires that there be no way for owners of wealth to protect themselves“. But once in Washington, he turned on the credit spigot and inflated the money supply 10-fold!

The end of the book explains how you should ignore the popular beliefs and learn to think for yourselves if you want to invest profitably. They also caution against buy and hold investing. There is no such thing as buy-and-hold, you are either long or short an investment. If you are in cash, then you are long currency and short stocks and vice-versa. In the current economic climate they encourage going long Gold and short the US Dollar, which they think will fail like all fiat currencies before it (there’s actually a pretty extensive list of defunct currencies on page 256). As they say, gold isn’t a typical investment but its more of a store of value. Since the value of the dollar is about to be destroyed, it makes sense to load up on gold.

Overall, it was a very interesting read. The first half was a little excessive in its mockery of public figures and events. But the later half more than made up for this by explaining how the government and various financial institutions swindle the common public. I plan on re-reading it for the sheer entertainment value alone!

I subscribe to a lot of newsletters. One of them Capital & Crises by Chris Mayer had a very interesting write up on John Maynard Keynes:

You probably know John Maynard Keynes as an economist, but may not know that he was also a great investor, maybe the most the successful of the Great Depression era. And for that reason, given all that our own markets are going through, it may be a good time to look at his investment career.

Keynes managed Cambridge’s King’s College Chest Fund. The Fund averaged 12% per year from 1927-1946, which was remarkable given that the period seemed to be all about gray skies and storm clouds – it included the Great Depression and World War II. The U.K. stock market fell 15% during this stretch. And to top it off, the Chest Fund’s returns included only capital appreciation, as the college spent the income earned in the portfolio, which was considerable. I think it must be one of the most remarkable track records in the annals of finance.

Keynes also made himself a personal fortune as an investor. When he died, he left an estate worth some $30 million in present-day dollars, which surprised his contemporaries. How he did it is the subject of this essay. A new book by Justyn Walsh, Keynes and the Market, is our chief guide on the subject.

As Walsh points out, Keynes spent his last six years as an unpaid Treasury adviser. He outlived his parents, who left him no inheritance. And Keynes was a great patron of the arts, financing many ventures out of his own pocket. To finish with such a grand sum sent London society abuzz. “Some surprise has been expressed about the large fortune left by Lord Keynes,” reflected the Financial Times. “Yet Lord Keynes was one of the few economists with the practical ability to make money.”

It wasn’t easy for Keynes, as these things seldom are for anyone. Keynes began as a run-of-mill speculator and trader, trying to anticipate trends and forecast cycles. The Great Crash of 1929 sent him back to the drawing board.

Keynes was, in fact, nearly wiped out in the Great Crash. His personal net worth fell by more than 80%. He then had a great conversion. Trading the market demanded “abnormal foresight” and “phenomenal skill” to work, he concluded. “I am clear,” the new Keynes wrote in a memorandum, “that the idea of wholesale shifts [in and out of the market at different stages of the business cycle] is for various reasons impracticable and undesirable.”

After the crash, he became an investor, rather than a speculator. His new ideas on investing began to presage those of value investing icons Ben Graham and Warren Buffett. Interestingly, the crash hurt Graham too and motivated him also to think deeply about the process of investing. The two great money minds came to nearly the same place in their thinking.

Keynes now focused less on forecasting the market. Instead, he cast his keen mind on individual securities, trying to figure out their “ultimate values,” as he called them. He summed up his new philosophy in a note to a colleague: “My purpose is to buy securities where I am satisfied as to assets and ultimate earnings power and where the market price seems cheap in relation to these.”

He also became more patient. Paraphrasing from his own analogy, Keynes described how it was easier and safer in the long run to buy a 75-cent dollar and wait, rather than buy a 75-cent dollar and sell it because it became a 50-cent dollar – and hope to buy it back as a 40-cent dollar. Keynes learned to trust more in his own research and opinions, and not let market prices put him off a good deal. When the market fell, Keynes remarked: “I do not draw from this conclusion that a responsible investing body should every week cast panic glances over its list of securities to find one more victim to fling to the bears.”

Keynes also developed a fierce contrarian streak. One of his greatest personal coups came in 1933. The Great Depression was on. Franklin Delano Roosevelt’s speeches gushed with anti-corporate rhetoric. The market sank. America’s utilities were, Keynes noticed, extremely cheap in “what is for the time being an irrationally unfashionable market.” He bought the depressed preferred stocks. In the next year, his personal net worth would nearly triple.

Keynes was an adviser to an insurance company, as well as manager of the Chest Fund. In a note, Keynes laid out his understanding of the quirky, contrarian nature of investing. It is “the one sphere of life and activity where victory, security and success is always to the minority, and never to the majority. When you find anyone agreeing with you, change your mind. When I can persuade the board of my insurance company to buy a share, that, I am learning from experience, is the right moment for selling it.”

He also learned to hold onto his stocks “through thick and thin,” he said, to let the magic of compounding do its thing. (In a tax-free fashion, too, by avoiding capital gains taxes.) “‘Be quiet'” is our best motto,” he wrote, by which he meant to ignore the short-term noise and let the longer-term forces assert themselves. It also meant limiting his activities to buying only when he found intrinsic values far above stock prices.

Keynes also came to the conclusion that you could own too many stocks. Better to own fewer stocks and more of your very best ideas than spread yourself too thin. Committees and others repeatedly criticized Keynes for making big bets on a smaller number of companies. In a typically witty reply, Keynes defended his views. In this case, his critics accused him of making too large a bet on Elder Dempster: “Sorry to have gone too large on Elder Dempster. I was suffering from my chronic delusion that one good share is safer than 10 bad ones.”

He rejected the idea, as Buffett and other great investors have, that you dilute your best bets by holding a long list of stocks. At times during Keynes’ career, half of his portfolio might be in only a handful of names, though he liked to mix up the risks he took. So though five names might make up half of his portfolio, they wouldn’t be all gold stocks, for instance. “For his faith in portfolio concentration,” Walsh writes, “Keynes was rewarded with an investment performance far superior – albeit more volatile – than that of the broader market.”

In the depth of the Depression, Keynes lost a friend, Sidney Russell Cooke, who took his own life after suffering severe losses in the market. Keynes, perhaps reflecting on this experience, wrote that investors need to take losses with “as much equanimity and patience” as possible. Investors must accept that stock prices can swing wide of underlying values for extended stretches of time.

Keynes’ investment performance improved markedly after adopting these ideas. Whereas in the 1920s, he generally trailed the market, he was a great performer after the crash. Walsh dates Keynes’ adoption of what we’d think of as a Warren Buffett sort of approach as beginning in 1931. From that time to 1945, the Chest Fund rose 10-fold in value in 15 years, versus no return for the overall market. That is a truly awesome performance in an awfully tough environment.

As investors wonder whether we face a 1930s-style market or not, I found a review of Keynes’ investing career useful and inspirational. The more I study investing, the more this same handful of ideas and principles seems to recur.

I know what book I’ll be reading over Christmas!

I just finished reading A Million Bucks By 30:How to Overcome a Crap Job, Stingy Parents, and a Useless Degree to Become a Millionaire Before (or After) Turning Thirty. The author, Alan Corey, was kind enough to send me a review copy. I must say, it’s one of the most interesting personal finance books ever! In fact, its my all time favorite.

A lot of people have complained that Robert Kiyosaki’s Rich Dad, Poor Dad stories sounded insincere and that killed the whole concept for them. If you’re in that camp, then you’ll love Corey’s book. He recounts his days of living in abject poverty until he become a millionaire. Don’t get me wrong, he wasn’t poor – he just lived that way to achieve his dream of becoming a millionaire before his 30th birthday. While his story is quite hilarious, he actually covers all the points of personal finance without actually dwelling too long on them; live on less than you earn, learn about investing, invest for your retirement, delay your gratification, take educated risks, avoid payday loans, make sure your significant other is on the same page or get another significant other. Instead of explicitly mentioning these points, he just shows you how he practiced them on a daily basis.

He was so passionate about living below his means that he moved into the projects (Spanish Harlem) in NY and lived on Ramen noodles for 3 months. He invested 55% of his meager pre-tax salary into stocks, 401k, a Roth IRA and real estate and lived on the rest. By deeply studying the real estate market he was able to recognize changing market conditions and he took a big risk with his investments. But he partnered with the right people and his investments grew exponentially. Coupled with his frugal lifestyle and his book deal, he achieved his goal at the age of 29.

It’s a very enjoyable read. He doesn’t hit you over the head with any lessons and you really feel you’ve gotten to know him by the end of the book. Thanks for the copy Alan!

If anyone else would like me to review their book, you know where to find me!

Previously, I had mentioned a $2,500 book by Mohnish Pabrai called Mosaics:Perspectives on Investing and how I was hoping I could find my own signed copy to hawk on Amazon.

Well, I did find it and after jumping through several hoops I was finally approved as a seller on Amazon.com. (Don’t know what the issue was, just some technical difficulties on their end).

Not only did I find a signed copy, I also happened to have an unsigned copy too!

I’m selling the autographed copy for $2,395 (don’t want to be too greedy!). Here’s the link on Amazon.com. If anyone’s interested, contact me directly and I’ll let it go for $2,200 with free FEDEX shipping.

I’m not sure what sort of people buy these kind of books. But I know they exist. Someone spent $395 and bought the unsigned edition a few days ago. I know that for a fact because I got a $23 commission from Amazon on the sale of that book(thanks whoever you are!).

I just read Pabrai’s latest book, The Dhandho Investor: The Low – Risk Value Method to High Returns and its really very, very good. I’ll write a review on it shortly.

And yeah, the title of this post is a bit misleading. 😉

I spent Sunday evening browsing books at Barnes and Nobles. I picked up The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New because of the rave reviews I’d read, but while I was there I glanced at a book on display called Survival of the Sickest: A Medical Maverick Discovers Why We Need Disease.

Intrigued by the title I started reading the book. It was so interesting that I spent the next two hours standing there and I finished the entire book! The author has a PhD in neurogentics (which I had never heard of) and using non-scientific terminology provides explanations for the probable reasons behind common genetic diseases.

He explains how diseases like diabetes and high-blood pressure may have had evolutionary advantages. Based on research on a wood frog that gets frozen solid every winter but thaws out in the spring with no side effects he draws a highly plausible conclusion that diabetes may have developed during the glacial age to prevent the extreme cold from damaging our internal organs. He also talks about skin color, downward pointing nostrils and our lack of hair compared to other primates!

Very interesting and definitely worth reading!

Monish Pabrai is being called the ‘young Warrent Buffett’. He’s been returning 30% annual returns for his investors, similar to what Warren Buffett had been returning in the initial stages of his career.

He’s come out with a new book:
The Dhandho Investor: The Low – Risk Value Method to High Returns

Based on the fact that his previous book, Mosaic: Perspectives on Investing is now selling for about $495, it might be worth picking up a copy as an investment, even if you don’t like reading!

I happened to meet Mr. Pabrai when he was giving a speech in Orange County a year ago and was lucky to pick up a signed copy of Mosaic. Signed copies of that book have sold for $2,500!!! I hope I didn’t throw it away, it was lying in my car trunk for the longest time.

I haven’t read the new book yet, but its next on my list (after I finish The Black Swan: The Impact of the Highly Improbable which is an awesome book on the philosophy on improbably events affecting investing).

I’m currently half way through a great book by Jared Diamond called Guns, Germs, and Steel: The Fates of Human Societies.

It delves into 30,000 years of human history and tries to answer the question how some cultures were able to dominate over others and become successful. Its an incredibly interesting book and the author has done a ton of research. If you’re too lazy to read it, its also available on DVD from National Geographic.

It doesn’t have anything to do with investing but I had to recommend it nonetheless. On the other hand, anything you learn can spark a million dollar idea! Check out some really dumb ideas that made millions.

I just finished reading Hot Commodities by Jim Rogers. Its a very easy to read book and the author does a great job explaining why everyone should invest in commodities. A lot people mistakenly believe that commodities are very risky and that investors usually lose their shirts.

Jim Rogers shows this isn’t the case and that commodities and stocks just follow different cycles. Infact in many cases, commodities have similar returns to the S&P500 but with lower risk. He explains what causes commodity prices to rise & fall, how a few different commodities have behaved in the past and how they are likely to behave in the future. If you don’t have any commodities or commodity related stock in your portfolio I strongly recommend you pick up the book.

This book is not a primer on how to go about investing in commodities. Thats the topic of another book. I also recommend The Oil Factor as a related book which also has good investment ideas. [Incidentally, Jack Schwager’s Complete Guide to Mastering the Markets also comes highly recommended but at $799.00 its a bit pricey!]

If you get both books, don’t forget to take advantage of the Get $20 off $50 when you use Google Checkout! promotion.