Category: Book Review

“Influence: The Psychology of Persuasion” is far and away the best sales / marketing book I’ve ever read. Truth be told, it’s close to the only sales / marketing book I’ve found to have been worth my time to read (off the top of my head the only other two I could name would be “Crossing the Chasm” and “Raving Fans” and this is far better than either of those). Rather than presenting information in “sales speak”, the author (Robert B. Cialdini) takes a very academic approach to how we persuade one another, providing the techniques themselves, examples of how they are used in the real world, how to counter them when they’re used on you, psychological experiments that have investigated the behaviour and anthropological justifications to why these are useful behaviours (that are often exploited for malicious purposes).

His original motivation for studying these behaviour was when he got tired of being taken advantage of everywhere he went. Finally, he decided to try to figure out why he, as a reasonably intelligent man, was so susceptible to sales pressures. He presents his ideas in the context of “learn what people are doing to try to exploit you so you won’t fall for it”.

At the very beginning he gives some examples from the animal kingdom where animals can be tricked into doing bizarre things. One experiment (by the animal behaviourist M. W. Fox) involved a mother turkey that would attack a stuffed polecat (a natural enemy of turkeys) if it was shown to her, but if they put a sound recorder inside it playing “cheep-cheep” noises, the mother would gather it underneath her and take care of it as if it was a baby turkey. Cialdini asserts that while we may laugh at this strange behaviour of turkeys, we have just as many “cheep-cheep” reactions to situations where we behave predictably irrationally.

Broadly he breaks the techniques into 7 groups: reciprocity (someone gives you something and you feel indebted to them), commitment and consistency (you feel you have to do what the person wants in order to be “true” to your previous behaviour), social proof (where a group believes something and it pressures you to agree with them), liking (when you do something for someone because you like them), authority (when you’re convinced someone is an expert and you should do what they tell you to), and scarcity (when we agree to something because we’re afraid of losing the deal).

I gave one example from this book in a previous post, where a supply of gemstones started selling much quicker after the store owner accidentally doubled their price. A friend of mine was recently talking about selling two used vehicles he has, and I suggested something Cialdini’s brother Richard used to do in college. He’d buy used cars, fix them up (and clean them thoroughly), then he’d advertise it for sale and line up the viewings at the same time. When each person came to view it, he’d tell them it’s theirs to buy if they want it. While the first buyer was humming and hawing and trying to haggle him down, the second buyer would show up. Robert would say to both buyers that he “had” to give the first buyers first opportunity to buy, since he was there first. Apparently buyers would become visibly agitated (both of them) at the prospect of losing the vehicle to the other. If the first buyer remained undecided, usually the arrival of a third buyer would be enough to push them over the edge.

I think EVERYONE in sales or marketing needs to read this book, and anyone who is a consumer should as well. Mrs. Pillars and I are both book lovers, and we’ve discussed home libraries. She couldn’t give her’s up, which I am very sympathetic to. However, after having lugged tons of books between multiple dwellings (I move quite often) I got sick of it and trimmed down my books to the bare necessities (now I give away books to friends after I read them). “Influence” is one of the few books that I keep in my trimmed down library (and have no intention of getting rid off).

The Canadian financial press has been very kind to Four Pillars, so I was excited when Power Publishers offered us a review copy of Jonathan Chevreau’s new book “Findependence Day”.

Most Canadians interested in personal finance already know Jonathan Chevreau from his column in the Financial Post.  While Mr. Chevreau has written previous books on finances, with this one his goal was to present information in “classic fiction structure”.  By this, he means that it is first and foremost a story.  As he mentions in his interview with himself, and a number of the review blurbs on the book, he seems to be trying to create his own version of “The Wealthy Barber”.

Unfortunately, while “The Wealthy Barber” successfully used characters and a narrative to reinforce the financial concepts being presented, in this book the financial concepts and the story seemed to struggle against each other, with neither being particularly successful.

The story takes a predictable path from a young couple appearing on a “debt reduction” style TV show along their way to eventual financial independence.  The man, Jamie, gets talking to the financial planner that appears on the show with him and sets a “Findependence day” for himself:  A point in time where he’ll have enough money that he will no longer need to work unless he wants to.  The term “Findependence Day” is used throughout the book with a desperation to coin a new term that reminded me of Gretchen trying to introduce the new slang term “fetch” in the movie “Mean Girls”.

Gretchen: That is so fetch!
Regina: Gretchen, stop trying to make fetch happen! It’s not going to happen!

In terms of a story, the characters are flat and undergo very little development.  Jonathan Chevreau feels that you need to exaggerate human traits to make characters come alive, but his characters ended up coming across as caricatures.  The dramatic tension he tries to create doesn’t work.

Often conversations between the characters would jump between financial topics and plot development.  Rather than clarifying the ideas being presented, which “The Wealthy Barber” successfully did, these two directions undermined each other.

Similarly, he tried to offer both information for Canadians and for Americans (one of his fictional couple is a Canadian, the other is American).  Again, by trying to go too broad, he ends up not covering either topic well.

For some reason he felt vinyl music and classic rock were very important themes in this work, going so far as to title each chapter after a classic rock song.  I can’t even guess how this is supposed to relate to the work as a whole.

When I started reading this book I first thought it would be interesting for someone who was interested in learning about personal finance.  I figured the structure might help them get through the boring bits on finances and sneak a few of the core concepts into their head.  Instead, I think it would be tough for a novice investor to dig out these ideas.  In the end I felt that I was able to understand what he was getting at because I’d been previously exposed to the ideas presented, but for a rookie trying to get a handle on their finances, I think this book would a poor choice.

Later I thought maybe it would be interesting for people with a good understanding of finance to have a narrative incorporating some familiar ideas, but as mentioned previously the story wasn’t particularly interesting or well executed.

As much as I wanted to enjoy and recommend this book, in the end I really can’t think of anyone who would enjoy it or learn from it, so instead I’d just recommend giving it a pass.  Here are some suggestions for best personal finance books.

Preet was optimistic about this book when he posted about it, the Canadian Capitalist also reviewed it and the reviews on Chapter’s website have been glowing.  An exerpt can be read here.  We will be giving away our copy of this book at some point if someone wants to read it in spite of my review (hey, who are you going to trust, the reviewers at Chapter’s or me?).

[add]After this went live, I came across another review at “Blessed by the Potato” which was fairly balanced (and the author himself commented).[add]

“Die Broke” by Stephen M. Pollan and Mark Levine has been on my “to read” list for a while, and I finally got around to checking it out from the library.  It was published in 1997, so it should be easy to find a copy at the library or a used copy.  I was impressed in a few places in the book where he suggested caution about stocks (which would have been useful a few years later during the dot-com bomb) and caution with real estate (which seems particularly wise these days).

Although there’s a large number of ideas in the book, the most innovative (and people’s main take away point) is his idea that you should structure your finances such that there’s nothing left when you die.  He spends a fair bit of time talking about inheritances, and how he feels they are poisonous to the recipient and the giver.  The core of his argument is that in the past inheritances came with obligations.  The first son would get the family farm, but be responsible to take care of his parents in their old age.  A daughter would inherit the silver, but would be obligated to maintain it and pass it along to her daughter (or a niece).  He feels that in modern times the obligation has disappeared and turned inheritances into something like winning the lottery.

He’s not opposed to gifts or transfers of wealth, but suggests they be made during a persons lifetime so they can enjoy giving the gift and seeing it impact the person’s life.  He talks about buying a farm with a swimming pool where his children and grand-children would visit and spend time with him each summer.  He suggests paying for children’s or grand-children’s education or helping out with a child starting a business if finances allow and that’s the sort of thing you want to do.

It’s definitely worth reading the book to get all the details, but the core of his approach to making sure you don’t run out of money is:

1. Keep working:  He feels retirement is also poisonous, and that it’s harmful to suddenly become a useless lay-about at 65.  He recommends decreasing your workload, but maintaining some sort of paid labour for life.
2. As you cut back on work, replace the work income with things like annuities and reverse mortgages that will pay out over time in exchange for a lump payment.

One of his other big ideas is that job security is dead (remember, he wrote this in 1997 so it wasn’t as obvious then as it is now).  He recommends doing a good job, but to always be looking for your next position (and to look for job experiences that strengthen your career rather than just helping the organization you’re currently in).

He touches on a number of other financial issues, such as how much he hates ATM cards and credit cards (he feels people don’t consider purchases as carefully), investments, insurance, estate planing, health care and career planning.

I didn’t agree with everything in the book (I’m keeping my ATM card and credit cards) and I might even want to leave a nice inheritance if I ever have kids.  He has a very interesting  perspective however, and presents an well thought-out opinion on a number of issues that are worth considering.

The book is broken down in 72 chapters, some of which are only 2 or 3 pages long, so it’s a fast, easy read.  I enjoyed it, found it well worth reading, and I would definitely recommend tracking down a copy if any of the issues mentioned above are of interest to you.

Today is Remembrance Day.  Regardless of what you think of the military, foreign policy, and violence in general, I think its a wonderful chance to reflect on the young men (and women) who have risked, and sometimes lost, their lives in service to their countries.

There are a few books on finance that are must reads.  “Stocks for the Long Run” by Jeremy J. Siegel is one of them.  I had flipped through it a year or so ago, and recently took it out from the library and read it cover-to-cover.  Somewhat like William Bernstein’s “Four Pillars of Investing” (the namesake of this blog), I think these are books that you can re-read, and get more out of, as you learn and understand more about investing.

Dr. Siegel starts his book with a discussion of stocks vs. bonds.  Apparently in the past there would be constant fluctuations between which was better to invest in, but since the majority of the world has adopted monetary policies that lead to inflation, over the long run equities destroy bonds (he devotes a couple dozen pages to present a very convincing case of this).

He then discusses short vs long term investing, arguing that its hard or impossible to predict short term price movements, but far easier to count on healthy returns over long periods (hence the title).  Touching on risk and return and taxation, he basically advocates investing in stock indexes (which he explains in detail).  He also discuses large vs small cap stocks (investing in large vs. small companies), value vs. growth stocks, IPOs, dividends (and yields), options, volatility, and behavioral finance.

He dives into the basics of stocks ownership, what some of the key metrics mean, and what drives value for the company and shareholders.

Dealing with more current events, he talks about terrorism, the aging population, bubbles (such as the Nifty Fifty and the tech boom), and global investing.  The Nifty Fifty was a bubble where the public figured the top companies in the American economy were worth owning at any price, and bid them up to what are viewed as insane prices, around a 50 Price / Earnings ratio (basically it would take 50 years for the company to earn as much per share as investors were paying for them, Ben Graham suggests a P/E above 16 is overpriced).  He makes the interesting case that the Nifty Fifty were actually fairly priced at the height of the bubble and would have been a good investment if held.

He destroys the idea of gold as an investment (his chapter on it is like watching Mike Tyson pummel Steve Urkel into a pulp), gives a solid overview of the business cycle, and talks about how news and world events move markets (and that you’re not going to be able to stay ahead of the legions of people reacting to this news).

He admits that there *is* some weak evidence supporting technical analysis (but seems almost embarrassed to make the admission), along with calendar anomalies (such as the January / October effects, and the distribution of market movements over the week and over the month).  While he acknowledges that the data supports these effects, he cautions that they may disappear as they become more widely known.

Like Bernstein, he concludes with a  couple of chapters on how to use the information in the rest of the book to construct a solid portfolio, addressing money managers, mutual fund performance and the danger, to themselves, of investors who learn a little bit about investing then make big bets.

While I wouldn’t give this book to a friend as their first introduction to investing (it might be a little daunting to work through), I think it basically falls in the “must read” category for anyone who considers themselves a DIY investor.

If you’re wondering what the good doctor would say about current market conditions, the Canadian Capitalist helpfully provided a link to this article recently.

Derek Foster is the author of “STOP WORKING: Here’s How You Can!”, “The Lazy Investor”, and most recently “Money for Nothing:  And Your Stocks for FREE”.  When I happened to stop by his website recently, I was surprised that there was a new book posted there (I enjoyed both his previous books but I hadn’t heard of his newest).  I contacted him and asked for a review copy and an interview and delightfully received both.

His new book presents some ideas for how to earn “more money faster” (especially targeting people who want to reach financial freedom faster but are behind in their savings).  He intended this book for more sophisticated readers (which I was happy about, as I found his 2nd book more basic than I would have liked – it was intended to target beginners).

The central idea (explained in detail in the book) is to sell put options (where you agree to POTENTIALLY buy a stock over a period of time for a set price) in order to earn income or to acquire stocks you want to own at a better price (hence the title).  He makes a fairly strong case that while there is risk in the process, it can be minimized much as a casino takes a risk every time it lets a gambler make a bet, but reliably gains overall.

This is a book for people interested in a fairly advanced vehicle to consider for improving your returns on stocks you’ve picked.  I’d recommend such people pick up this book as it’s a fast, informative and enjoyable read.  Beginner investors would be better served by other books (including Derek’s previous two books).  Passive investors will find little of interest.


I’m looking forward to reading the reactions to this book from other bloggers and the media.  Mr. Foster was good enough to answer my following questions by e-mail.

MC:  How quickly do you think you’ll get sick of Dire Straits references while you’re promoting your new book?

DF:  There are worst things I could be referenced to and have been referenced to, LOL!!!

MC:  I predict you’ll hear some pretty lame jokes about it before the month is out.  I believe “Money for Nothing” is currently available from your website “Stopworking.ca”, when will people be able to purchase it at traditional bookstores?  Are you going to be doing any signings / talks to promote it?

DF:  It’s available at my site and also at Chapters/Indigo across Canada. Independent bookstores will order it over time depending on their demand. So far the only speaking engagement will be at the Financial Forum Show in Toronto (January) – I generally don’t do many public speaking events.

MC:  It’s tempting to swing through Toronto to catch that.  Throughout the book you worked with returns ignoring inflation (e.g. pg 17), except when you discussed fixed income. Did you feel your readers would already understand this distinction between real and nominal returns, that it was unimportant, or that it would obscure your message?

DF:  My first draft had nominal and real rates of return, but I always get “non-investors” to read my books and let me know what is confusing for them. I went with nominal returns for simplicity from feedback I received.

MC:  Whenever I’ve posted and tried to stress the difference, it definitely made the post more convoluted, I can understand stripping it out to simplify things.  I’ve made the same mistake you have by buying too soon (pg 23) and the whole “don’t try to catch a falling knife” adage always makes me glum.  HOWEVER, one of the downsides of your put selling strategy is that you will sometimes (often?) not execute a trade (the option won’t be exercised) and you’ll miss a dip in the stock.  Do you view these two “risks” as balancing each other out, an unavoidable aspect of investing (its impossible to know the point of maximum pessimism?) or are you now completely and totally in the put selling camp (and will never try to buy on the dips) and feel its better to miss a buy rather than overpay?

DF:  A few years back Warren Buffett was sitting on over $40 billion – waiting for “the perfect pitch”…and he kept waiting. I always hate waiting to buy (while earning 2% in my bank account) and worrying I might miss out – so I often pulled the trigger too soon. Buffett’s had the financial war chest to do some buying lately and overall his patient strategy speaks for itself. I’m trying to increase my “margin of safety” with my purchases and move as close to Buffett as I can. The “money for nothing” strategy will help me get paid to wait for my own “perfect pitches”.

MC:  You make the point in your book that getting a stock at as low a price as possible dramatically improves your returns, so I don’t blame you with keeping your focus on getting a good price.  There’s clearly a passion in the Canadian investing community for your style of stock selection.  Have you ever been tempted to start investing for other people (a mutual fund or whatever) or would that be too much like work for a retired guy?

DF:  Professional investors are forced to show short-term gains (or at least keep pace with their peers). In the late 90s, my portfolio held steady while hi-tech investors gained – but this was reversed after 2000 and my portfolio did very well. However, if I would have been investing other people’s money, I would have been fired long before my portfolio strategy bore fruit.

MC:  The short term focus of investors can be discouraging.  Your approach seems to be built on a similar philosophical outlook to Geraldine Weiss and Tom Connolly.  What do you think of their approaches (neither is listed in your recommended reading)?  Both approach buying in a similar manner to you, but Weiss’ idea of selling dividend stocks when they are “overvalued” is markedly different than your’s and Connolly’s “buy and hold forever”.  Are you ever tempted to sell a stock that’s shot up in value more than the dividend has increased and buy something with a larger income stream?

DF:  I generally try not to sell and buy something else. If I sell, that triggers capital gains which means I now have less capital to put to work in another investment. If I keep my money invested, I’m essentially getting an “interest-free” loan from the government (by deferring capital gains taxes)

MC:  Buying and holding forever definitely simplifies things (and has solid reason for doing so, as you say).  The MoneyGardener and I have gotten into a few friendly debates over whether dividend yield or dividend growth is the more important consideration when selecting companies.  Which side would you weigh in on (or are we arguing about angels dancing on the head of a pin)?  I may not include this question if you agree with him ;-).

DF:  I had some “high-yield, slow growth” investments when I retired – so that I could stop working quickly. I didn’t want to continue to rely on earned income for any longer than I had to. However, I tried to balance that with “lower yield, higher growth” investments so that my income would keep growing faster than inflation.

MC:  A diplomatic answer, which I’ll take as complete and utter agreement with my position ;-).  Many authors publish articles or books and reading what they write is the only way to interact with them.  You’ve taken a far more interactive approach in the “Canadian Business” forums.  There, in the blogging world, and in the national press you have been both praised and attacked (sometimes by the same people).  I’ve been impressed that you seem to keep your cool under attacks.  Is that just a part of running a business (you can’t get into flame wars with your readers) or are you really that unflappable?  You respond to readers’ questions on-line and in your books, have you ever thought about starting a blog?  Do you regularly read any of the Canadian personal finance blogs (other than Four Pillars, of course ;-)?

DF:  I get and offer feedback for a few reasons (some selfish, some not). It helps answers readers’ questions in case there are things they didn’t understand, additional coverage helps sell books, I get ideas from investors on what topics they are interested in (ideas for new books), and my strategy can be challenged just in case there are some factors I haven’t considered.

MC:  I think you’re right that there are benefits to both your readers and yourself from your approach (which has been quite different than the traditional publishing approach).  The Canadian Capitalist points out that there has recently been an exceptional decade of very good returns for dividend stocks.  Are you concerned that people who follow your strategy after looking at the results you post for the last decade might be disappointed with their future returns?  Do you think that your early retirement may have been possible in that environment but that those of us investing today might have to wait a bit longer?  You suggest in your 2 most recent books that you think refinements in your strategy would have let you retire even younger.  Is that assuming returns comparable to what you experienced in the past or are you confident about that even in the current and upcoming market environment?

DF:  Dividend growth is based on earnings growth over time, and with 3-plus billion people suddenly adopting capitalism, I feel dividends of good companies should grow nicely over time. I think I would have retired sooner if I had followed my strategy from the beginning. I am a better investor today than when I was on my early retirement journey.

MC:  I hope those of us using some of your ideas are as successful as you have been.  Almost all investing books have a “good story” (like the book on commodities investing you mention on pg 29-30 which puts forward the idea that developing nations would lead to a boom in commodity prices). The philosophies behind them all seem to make sense, but often they are mutually contradictory (and will even attack each other).  How do you recommend readers select from a range of authors who each suggest future gains from their approach?  Obviously trying each out over a couple of decades isn’t possible, and as you quote Buffett “if past history was all there was to the game, the richest people would be librarians”.

DF:  Buy solid companies that sell products/services that are needed and then sit back and collect the dividends. If there is a “story” you agree with, add some solid companies within that area and then sit back and collect dividends. Repeat as necessary.

MC:  I’m certainly a big fan of collecting dividends!  You’re quite damning of buying on margin (going so far as saying your Altria/Philip Morris bet was one of your worst investing mistakes).  I have a leveraged plan (using margin, as you discourage, instead of a paid off house as you encourage).  What level of investor expertise would you consider acceptable for a small margin position (maybe 10% on margin), or do you stand by your assertion that no one should ever do it?

DF:  Once you margin, you are dependent on stock market fluctuations. That’s why I would only borrow money in situations where I’m not suddenly forced to come up with money to cover losses such as a HELOC – I don’t want to depend on the performance of the stock market.

MC:  Its definitely good advice to make absolutely sure your broker can never force you to sell (as you mention in your book).  You also mention at the end of your book that you currently have puts on a number of US companies.  At what point in your “financial journey” did you first start using your options strategy?

DF:  I don’t generally like options as it always seemed like gambling to me (a loser for every winner), so it’s only fairly recently that I started using the put option strategy.

MC:  I suspect there will be some people with a strong reaction to options, but I think you do a good job of explaining the basic idea of selling puts as well as the benefits and risks.  I expect the primary attack people will make on your book is that buyers may sell puts on stocks they want to own, the options won’t be executed, and they will miss out on gains they could have made by buying the stock instead of selling the put (if we hit a strong bull market, they’ll have the nice return from the premiums, but will have missed out on a nicer run up in stock price).  Especially if they have the cash sitting in a savings account and could have just made the purchase outright.  Alternatively, some *MAY* attack it from the opposite direction, saying that you may be forced to buy a stock at a higher price than its “worth”.  I don’t think there’s any value in the second attack (since you’d face the same risk if you’d bought the stock and it dropped in price), but I’m somewhat sympathetic to the first one.  You mention in your books that you’re acting as a casino, accepting the volatility in exchange for the options premium.  Do you think this will be the point more traditional investor fixate on or do you think there’s another element of your strategy that will bother them more?

DF:  If you have a target price to buy a stock at, if it never reaches that target price –you’d never buy the stock. If you sell options at that same target price, how are you in a different position? (except for the fact you’ve earned premium income) In my strategy, I’m harnessing volatility to my long-term advantage (the same way any value investor does).

MC:  Yes, definitely.  With each of your books I’ve enjoyed the ideas, but have had trouble with the execution.  In “Stop Working” I read it when it was first published and decided I should buy Pfizer and GM.  I lost my nerve (after talking to my father) and have been somewhat relieved that I didn’t buy GM as they’ve been going through a prolonged melt-down since.  Years later I picked up BMO, NA, ROC, BAC and GE following your approach (and have been happy with them, even though overall I’m in the red).  I liked your DRIP approach in Lazy Investor, but never went through the process of setting one up (partially I was past the point where I needed to do so, I had enough cash to justify an account with discount broker).  Similarly, I’ve looked into options and found them VERY complex.  You recommend going to a discount broker options seminar to learn how to execute the strategy you recommend.  Do you think many of your readers will follow through on this?  Do you think all of them will understand it well enough to be executing trades selling puts?  Do you think they’ll have trouble getting authorization from their brokers for an options update to their account (I’m imagining people manning the call centers will start hearing “Money for Nothing” by Derek Foster as a justification why they should quality for a higher level of trading)?

DF:  I don’t mean to be offensive, but GM does not fit the criteria I outlined for stocks in “STOP WORKING” – I would never touch it with a 10-foot pole as it fails on many fronts. The “money for nothing” strategy is very simple, IMO. Figure out how much you’re willing to pay for various stocks, then sell options at those strike prices.

MC:  You’re definitely not offensive!  Considering buying GM is but one of the many, many foolish things I’ve done.  What do your family and friends think of your books?  Do any / most / all of them follow your investing approach?  (other than your kids, who clearly *do* follow your approach <grin>)  What does your wife make of it all (maybe she assumes all Canadian men are best selling authors :-)?

DF:  Some have asked me for advice, but I don’t go there for a variety of reasons. Investing is a big part of who I am, so my wife accepts that (and is happy with the results).

MC:  A happy wife is a happy life.  Have you had anyone approach you having lost money using your strategy?  What was your reaction?  (anyone providing financial advice or ideas would have to deal with this I imagine, I still feel awful after I mentioned to a friend that I thought “Washington Mutual” might be a good buy during the sub-prime meltdown).

DF:  Again, I don’t get into specific stock picks. I have never had anyone who has mentioned my dividend-based strategy did not work for them. There are a few people who emailed saying the strategy helped them reach their financial goals – which was gratifying.

MC:  Not getting into specific stock picks is unbelievably good advice (which I’ve heard many times and foolishly ignored, see what I mean about the GM thing?).  How many more books do you expect to write?  Any ideas for the next one yet?

DF:  I have no idea what I’m doing next week, let alone any plans for another book. I’ll probably write another (I enjoy it), but it will depend on what ideas are generated from people who contact me.

MC:  Well, if you’re ever looking for ideas for a book, I have some about a frugal man (and the women that love him) that’d make a great romance novel…

Many, many thanks to Derek Foster for sending me a copy of his book and for taking the time out of his busy schedule to answer my incredibly long list of questions.

I’ll be passing my copy of his book (with a personal message written to Mr. Cheap on the inside cover, for extra collectibility) along to Mike, who in turn will pass it along to Guiness416 (both of whom will hopefully consider writing a review).

I’d come across a few references to Phil Town’s “Rule #1” and finally decided to pull it out of the library and give it a read. The rule #1 referred to in the title is Warren Buffett’s idea that the most important rule of investing is “never lose money”. Mr. Town promises a “simple strategy for successful investing in only 15 minutes a week!”

“Successful investing”, according to the author, is a return of 15 percent or more “with almost no risk”. He claims by the end of the book he’ll have proved it. Its presented starting with the idea that the author is a simple river guide who saved the life of a rich guy, who rewarded him by teaching him how to invest (and now, lucky for us, he’s decided to make money by selling us information how to invest via books and $90 get motivated seminars rather than just make cash in the market himself). Unfortunately, I remain unconvinced.

The first 32 pages basically explains repeatedly that a 15% return is really good. I get annoyed at books that start by saying “I’m going to tell you something great here, but first let me start by saying HOW great its going to be!!!” I *KNOW* that a reliable, 15% returns is good. When I was a kid, interest rates were sky-high and I got some bonds and GICs yielding over 10%. I don’t need 32 pages telling me its good. I knew as a kid this was a good thing (some people reminisce about snowball fights or fishing trips of their youth – for me its interest rates).

Warren Buffett quotes can be a bit like proverbs or fortune cookies messages, very open to interpretation. Perhaps Warren Buffet meant one shouldn’t invest in anything that might go down in value (and we should only purchase investments with FDIC insurance)? I know he doesn’t mean that, but it’d be pretty easy to take that position if “don’t lose money” is the sum of our instructions.

While the author definitely tries his best to tie his strategy in with Warren Buffett, from the title to his Ben Graham-esque approach, he undermines it later in his book when he suggests incorporating elements of technical analysis (MACD, Stochastic and Moving average) when deciding when to buy and sell.

Warren Buffett has this to say about technical analysis: “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” and “If past history was all there was to the game, the richest people would be librarians.” A pretty damning judgement from the guy Phil Town respect enough to use as the basis of his system. Another Buffett quote which could be used to denounce this book is “The best way to own common stocks is through an index fund”.

I understand that its the nature of anyone with a stock buying system to discount the Efficient Market Hypothesis, but Mr. Town gets snarky towards Professor Malkiel, taking some of Malkiel’s comments out of context and unfairly condemning the man and his ideas.

The system itself SOUNDS good, but I think any trading system probably has a good story behind it. The basic idea is that you find a business you like, with a moat (a reason why it should be able to keep beatings its competitors, such as Disney’s brand, or Microsoft’s massive install base). He identifies 5 big numbers (ROIC, Sales, EPS, Equity, & Cash) and demands they be consistently above 10% over the last 10 years (and trending upwards). He suggests looking into the CEO, and finding someone who is honest with the shareholders and looking out for the company’s best interest. Using some magic he determines a “sticker pricer” for the stock (what it *SHOULD* be worth), then insists on a “margin of safety” where you buy it for half this price or less.

He presents equally convincing rationale for his recommended technical analysis tools.

Its an entertaining read for what it is (I suspect Phil would be a fun guy to have a beer with), but I couldn’t help but feeling at a few points that “this could be dangerous stuff if he’s wrong and people buy it”. Ultimately I don’t believe its possible to earn 15% in a low risk manner (we’d all be doing it if it was). He makes the argument that its possible for us small guys but not for the institutions, because they’ve got too much money, which I accept for what it is. But somehow Buffett does it with lots of money. And lots of small guys lose their shirts.

I was wondering if there are any bloggers who have been following his system and posting returns. He uses what I think is a bit of a cop-out by demanding that people invest in companies they personally care about (the meaning part of his system), and therefore he doesn’t release many details about his own trades (since what is meaningful for him is different than what’s meaningful for you). I did find one trade where he bought Whole Foods in 2005 (he mentions it in his book), and while they did great in the year after he bought it (doubling), its since kept sinking (he bought at $45, adjusted for the stock-split at the end of 2005, and its currently worth $20). One of Buffett’s quotes he uses is “If you don’t feel comfortable owning something for 10 years, then don’t own it for 10 minutes.”

I realize its not fair to pick a single trade and judge a whole system by it (although honestly this was the first trade with concrete details where information was provided at the time of purchase, instead of cherry picked later, I came across that was made using his system). Mr. Town would probably defend his pick either saying “10 years isn’t up yet” or “I used my technical analysis tricks to sell it at the peak”. Fair enough, but I’d love to see someone who provided an ongoing, real-time history of their trades using this system and see how close they get to 15% a year.

I also realize that, as much as I like his approach, Derek Foster is also selling a stock picking system (and many of the criticisms in this post could be leveled against his books).

If there’s any uncertainty, I don’t recommend this book. If you’re dead-set on implementing a stock picking strategy, you could probably do a lot worse than this, so maybe this would be the least of many evils. I’d recommend following Mr. Buffett’s advice and just buy an index fund.