Category: Book Review

Yesterday Mike posted his review of “Your Money and Your Brain”.  Coincidentally I took the same book out of the library a while ago and had been meaning to write up my impressions about it, so now seems like the perfect time for us to have a “virtual book club”.  Canadian Capitalist also wrote up his impressions about the book a while back, so that’s three perspectives you get.

In “Your Money and Your Brain” author Jason Zweig sets out to explain the psychology and neuroscience behind how we think about money.  I’ve read similar books, such as Malcolm Gladwell’s Blink and Tipping Point, and I tend to like books about cognition.

Mixed in with investing anecdotes, the author visits researchers working in the field and participates in their experiments while explaining their findings to us.  Early on he introduces the concept of our reflexive and reflective systems (dealing with emotions and complex problems respectively).  Many of the ideas throughout the book discuss how the reflexive system trips us up in investing decisions (and Zweig’s advice is to let your reflective system take control by not rushing into any decisions, sleep on the issue and give your reflective system a chance to process it).

Because money is so closely tied up with all our biological rewards (you can buy any of them), investing decisions light up a number of primal areas in our brain.  The obvious problem of our brains evolving to deal with short term threats like predators rather than long term threats like inflation plays into a number of the issues he discusses.

Overall, while I found the book interesting, I didn’t find much I could take away from it and apply to make myself a better investor (I definitely don’t agree witht he tagline “How the new science of neuroeconomics can help make you rich”). Just as I didn’t change how I live my life after reading Gladwell, I don’t think I’ll change how I invest after reading this book.  “Don’t rush into investing decisions” is good advice, but I was hoping to get a little more than that out of a 340 page book.  Perhaps it was unfair of me, but I was expecting more applicable techniques.

I also found the lack of bigger themes a bit disappointing.  While its the nature of the work, little interesting tidbits from different reasearch programs, it very much comes across that way.  It would have been nice if he could of put the different research results into a larger model but that wasn’t how the book presented its material.

While I can definitely see why Mike and the Canadian Capitalist enjoyed it so much, and I also found it a good read, I would only recommend it as a pleasure read, not necessarily as a book that will make you a better investor.

I finally got around to reading Jason Zweig’s widely acclaimed book “Your Money and Your Brain” last week while on holiday up north. The book is mainly about human psychology and how it affects your emotions when it comes to money. We have a lot of instincts and emotions which helped us survive when we were cavemen and still serve us well today in a lot of situations – however they are counter-productive when it comes to investing.
photo by Image Editor
First off – I want to say that this book is quite excellent. Everyone should read this book – whether you are an avid investor, a casual investor or even if you don’t invest because you are afraid of losing money. Reading this book will help you understand your basic investing instincts and learn how to react differently.

What I liked

This book is very well written and researched – Zweig includes many examples of psych studies which he then ties in to your emotions around money and help understand that while you might think you are consciously making rational investment decisions, in actual fact it might be your human biology which is influencing your decision making capability.

An example is the rush you feel when you think an investment is going to give you a return – we think of this as “greed” but in fact there are parts of your brain which “light up”. This same reaction will occur in anticipation of many things, winning a jackpot, anticipating sex etc. The point he makes is that if you think you have a “hot tip” or some other great investment idea and you can’t stop drooling about it – take a minute to think about it – or a few days. Hopefully giving yourself time to cool off will allow the rest of your brain to weigh in on the decision and you can make the right one.

What I didn’t like

I thought the book was a bit too long – although it was full of great information, I found by about 2/3 of the way through I was starting to think “Ok, every one of my financial thoughts are caused by my biology – got it!”. It is still worth reading the entire book however.

Conclusion

Read this book! There are some excellent books available (Four Pillars of Investing, Random Walk Down Wall Street) which do a great job explaining why you shouldn’t try to time the market, why you shouldn’t sell when the market does poorly and why you shouldn’t buy when the market does well but Zweig explains why your biology makes you want to do those kind of destructive financial behaviours.

Other reviews of this book

Canadian Capitalist loved this book.

My Money Blog thought is was a good book, but he agreed with me that it was too long.

A while back I watched the documentary “Maxed Out”, and recently finished reading the book by the same name. James Scurlock developed both at the same time, and its interesting to see people profiled in one medium, then learn more about them in the other.

Both works put a personal face on America’s debt crisis by interviewing some of the people who have been hardest hit. Mr. Scurlock talks to mothers of university students who committed suicide when they couldn’t repay their credit card debts, the family of a woman who committed suicide when her husband was about to find out about her massive gambling debts, a soldier in Iraq whose wife is facing bankruptcy back home, debt collectors, pawn brokers and debt experts such as Dave Ramsey and Elizabeth Warren.

At the end of both works you’re left with a pretty bleak view of the financial situation of modern Americans. Its interesting to have a human face put on a problem and you definitely feel bad for all the people the author/director talks to.

The book and movie’s biggest failing, common to works of this nature, is that they rely on anecdotal evidence to convince you of the problem. They say look at poor person Y and how they suffer. Isn’t it awful? Whatever is causing Y must be stopped at all cost! Given the tight lens they can put on that person and their problems, whatever solution is proposed seems quite reasonable (James Scurlock advocates increased oversight of financial institutions and legal restraints on the marketing of credit cards – for the record I don’t think either idea is the worst I’ve ever heard).

The problem with anecdotal evidence is we don’t know if these are isolated cases. We’re left with the idea that their are hordes of people out there just like the ones profiled in the book and movie, but without comprehensive data its hard to be sure.

If someone wants to help ONE SPECIFIC PERSON, sure tell me about them. If you want to make changes to society as a whole, I feel you need to keep the discussion ABOUT society as a whole. Picking isolated cases and making policy changed based on them seems like a dangerous way to go about things to me. The financial institutions could probably make a movie profiling the dastardly deeds of people who committed fraud and leave us drooling at the end for harsher penalties and less legal protection for debtors.

If you’ve read the book or watched the movie, I’d definitely recommend the other if you enjoyed the first (read that sentence a few times until it make sense). If you haven’t seen either, but are interested in the real stories of Americans who have had their lives seriously damaged by debt, I’d recommend both.

People have sometimes commented being impressed (or horrified) at how little I live off of. While I’m flattered, I’m often somewhat confused as I know there are people who live on WAY less than I do. One such person is Charles Long, author of “How to Survive Without a Salary: Learning How to Live the Conserver Lifestyle”.

I read a previous version of this book years ago. Its apparently based on a course he taught, and discusses how he lives without a salaried job. He minimizes his (and his family’s) consumer purchases, and does casual work to bring in money.

Minimizing purchases entails things like wearing hand-me-down clothes, not buying his kids the latest toys, driving old beater cars and things along these lines. One part of his book that made me laugh is he finds out what is fashionable when someone will compliment him on some part of his wardrobe (which he’ll have had for years). The next year he’ll be complimented on something else, and people will give him a pitying look for what they complimented him on the previous year.

In his book he complimented readers who HADN’T bought it (e.g. if they got it from the library). You have to respect his commitment to his lifestyle when he’s praising people who are taking money out of his pocket. I’d borrowed it from a friend, so I patted myself on the back.

Casual work that he does includes things like helping people clear out basements (in exchange for them letting him take anything they don’t want – I got idea #5 from his book). He’ll sell the stuff he gets at flea markets, along with vegetables he grows. He finds that you earn less money from doing a variety of small things that bring in money, but he finds it a much more enjoyable life than doing the same thing for 8 hours every day.

Another comment that made me laugh is that his wife and kids would love to send him out to work 8 hours a day (and buy the various consumer goods they’re interested in), but he just refuses. He discusses how his lifestyle has a lower environmental impact, but that isn’t his motivation.

I certainly admire his lifestyle, and without a doubt he out-cheaps me on every front. I’m not sure if I could give up meals out, trips and having to hustle money to pay the rent and/or utilities every month like he does. I do envy him for kicking the 9-5 lifestyle to the curb and taking the actions to allow him to live life on his own terms.

After reading the reviews on Million Dollar Journey and Thicken My Wallet of “Retire Rich from Real Estate” by Marc Andersen, I contacted the good people at Sphinx Publishing and asked for a review copy (I didn’t win either of the give-away contests, so it was that or buy one).

I was particularly excited by MDJ’s comment: “some of the content in his book is fairly technical in nature. His conclusions are based on research from national real estate investor surveys, demographics and his own experiences.” Unfortunately I was a little bit disappointed from this perspective, as I found the book wasn’t quite as rigorous as I was hoping for. It certainly wasn’t a “get rich quick” book, and was still worth reading.

I disagreed with Dr. Andersen’s advice to use a property management company. He STRONGLY recommends this. I felt he didn’t provide enough warnings about kick backs and conflicts of interest that are common in property management. He did discuss the conflict from the perspective that PM companies will want to keep tenants happy and the building full rather than maximize profits (to keep complaints from tenants AND owners at a minimum), so you have to insist on policies that accomplish your goals rather than theirs.

I thought he gave an excellent treatment on renting to students (hard on units with few complaints). He also talked about numbers (too many students and he feels you’re guaranteed to get a “party house”) and the differences between men and women (more damage and more complaints respectively). Truth be told I think this gender difference is true of ALL tenants (if you’ll allow me to leave my political correctness at the door), not just students.

He has a section on selling, and provides good advice on FSBO vs. using a Realtor: do it yourself if you can, use a Realtor if you live elsewhere or don’t have the time. He advises not to tell your Realtor anything you don’t want the buyer to know.

I liked his references to the Property Owners and Mangers Survey (POMS). Rather than just using personal experience or “best practices” he’s able to provide statistics gathered from a large number of property owners.

He gives good advice, warning that property values and rents aren’t guaranteed to always go up. The books that say to blindly buy real estate “’cause they’re not making any more of it!” always concern me, so its great that he puts in warnings of some of the risks.

All-in-all, I think this is a great book for beginners who are thinking about buying their first property. I was hoping to get more from the book after reading the two reviews, but found a lot of the material to be information I’d already been exposed to. No book can cover everything, so I imagine a nervous beginning investor would still be nervous after reading this, but hopefully it would address some of their concerns.

After spending another afternoon at Indigo, I read “A Million Bucks by 30” by Alan Corey. This book has been previous reviewed by Million Dollar Journey and Thicken My Wallet (who were sent review copies – humph!).

The format of the book is “slices of life” from when Alan graduates and starts job hunting (he soon reaches New York) to when he reaches his goal of becoming a millionaire at 29. In a typical Hollywood ending, the book advance for this book supposedly puts him over the threshold of being officially a millionaire.

Spoiling the ending doesn’t matter (I’ve already spoiled it for you now – bwahahaha). His journey is more of a framework which lets him talk about where he was at each stage, highlight things he did that saved or made money for him, and throws in a bit of humour to keep you reading. Each chapter takes a snapshot of his life at that point, what he was doing with his finances, and what his networth was (broken down by cash, retirement savings, stocks and real estate).

When I was reading it, I got to some of his “frugal suggestions” and agreed with what others have said that they were somewhat unethical (things like taking umbrellas from lost and founds and keeping a “refillable popcorn tub” between movie visits – he used the same container for 7 movies). Afterwards I was talking to Quietrose about the book, and she asked what he’d done that was so unethical, and when I articulated it, I reversed my position. The things he does aren’t illegal (the police wouldn’t pursue him even if they were) and it seems to be more grey area stuff than anything.

Keep in mind, I’m the guy who read the book at Indigo so I wouldn’t have to pay for it, so maybe I’m not the best ethics judge. The Ethicist from the Wall Street Journal seems to agree about the umbrella though (I can’t find the link, but he wrote a column that basically gave the ok to taking abandoned umbrellas).

Each chapter seems to have a “save money” and a “make money” component. In the first chapter after arriving in New York, he lives in the projects to save money and opens a retirement account (Roth IRA) to make money. This continues through to the end where he buys a bar to make money, then always drinks there (to save money). En route he buys a one bedroom condo (and rents out the living room), buys a duplex and converts it into a rooming house (living in the smallest room himself). He compares this to being on “The Real World” which I can believe.

Halfway through our conversation Quietrose was laughing at me claiming I actually wrote the book (cheap guy buying real estate). I didn’t write it, but I can definitely relate to it. He does acknowledge some of the downsides of being frugal (such as getting dumped, and having friends refuse to visit him in the projects).

My other big feeling at the end of the book was that Alan didn’t really need to do what he did. He *REALLY* hustled, doing 4 significant real estate transactions though this period. He lucked out (which he acknowledges) that real estate took off while he was doing this. In the end I felt that he could have been successful as an entrepreneur WITHOUT being as cheap as he was (he might have had $950K instead of a million at the end – who cares?). Alternatively, he probably could have lived a happy, frugal life without doing all the entrepreneurial stuff he did. I kind of get the feeling that he’s going to be a Warren Buffet type – living off of a small fraction of his wealth while he keeps increasing it. At a certain point you wonder why people would want to keep making money they aren’t going to spend. Good for him, but even better for whoever inherits it all when he dies.

If he’s looking to adopt, I’m available.

Its a fun book. But its not the greatest for practical strategies: you wouldn’t learn enough from it to implements any of the things he did, other than living a frugal existence – and he doesn’t even give a complete framework for that, just a scattering of “money saving tips” that shows where his mind was at. Its would be a great gift for any cheapskates you know – I saw myself in some of his adventures and had a good laugh.

A podcast interview with Alan Corey is available here.

Mike won “The Little Book of Value Investing” (2006), by Chris Browne and a couple of visits ago I borrowed it from him. The author is a managing director of investment firm Tweedy, Browne who were the legendary Ben Graham’s brokers apparently. What Has Worked In Investing: A Tweedy Browne Case Study made the rounds of PF blogs a while back, so the author definitely has value investing “cred” (Mr. Cheap is in touch with his urban roots).

The basic idea of value investing is you figure out some way to appraise a company, then look for companies that are selling for valuations significantly below that. Graham used the idea of assets of a company and managed to find stocks that were selling significantly below the sum of its assets (e.g. the company could just sell off everything they owned and raise more cash than the total value of their company according to the stock market). This worked out quite well for Graham but, because its such an obvious arbitrage opportunity, its very difficult to buy companies at this sort of discount anymore.

Browne touches on quite a few of the big ideas of value investing such as “buy stocks like groceries: when they’re on sale” and Buffet’s famous “Rule number 1: don’t lose money”. He spends a couple of chapters outlining how to value stocks, but my feeling was that these were incomplete and would do more harm then good (if someone, using just these two chapters as their basis for stock evaluation, started buying stocks I think they would be very naive buyers). At one point Browne suggests that the book could be used to inform readers about value investing so they understand the concepts better if they’re talking to a paid advisor, which I think would be the best usage of this book. He also suggest it can be useful for DIYers, which I disagree with (unless the DIYers read more before putting any of his ideas into practice).

Browne is a big believer that value opportunities lie outside the US and suggests that global bargain hunting can be the best approach for buyers. He hedges this recommendation with concerns about limited oversight of corporations in some countries, which definitely does balance the extra reward in my opinion.

He attacked active trading and made a pretty convincing case against being able to profit over the short-term by stock picking. He was preaching to the choir with me here though, so he might not make as convincing a case to someone who is a believer in active trading.

I was a little disturbed when he dismissed asset allocation and index investing. His feeling was that a value oriented approach makes it trivial to beat the indexes, which I’m not totally convinced about. He presents research saying how low P/E stocks pretty consistently outperform high P/E stocks. From this perspective, an ETF that just tracks the low P/E stocks in a market should do very well – I’m not sure if such a beast exists and if it has had as good of a track record as he claims. He attacked asset allocation with the idea that when you rebalance your allocations you’re selling your winners to buy losers. However, he advocates buying out of favour stocks and selling them when they become fairly valued – so he’s selling winners to buy losers too.

Value investing makes a lot of sense to me, I just don’t seem to be able to get a handle on the whole process of evaluating stocks for purchase. If I got to the point where I had faith that the “under valued” deals I was finding would give me a strong return, I’d be delighted to go bargain hunting, but at this point I’m just not a believer.

I would recommend this as a great primer on value investing, but would caution anyone repeatedly not to make any changes to their investment strategy based just on this book (unless it was to move from actively managed funds to passively managed funds). If you like the concepts presented in this book, please do further reading.

Mike (who also read this) may do his own review – so encourage him in the comments to write it up if there’s any interest in another perspective on this book.

In case you are wondering why I’m reviewing Barbarians At The Gate which was written in from 1990 when all the other bloggers are reviewing new books – there are two reasons

1) I read in the Globe and Mail that it was the best business book ever and I have to agree that it’s pretty good.

What it’s about

This book covers the leveraged buyout of RJR Nabisco back in 1988. The deal ended up being worth about 25 billion dollars which was three times the size of the previous record deal. The authors did extensive research on the deal and had great access to all the parties involved so many of the descriptions of events and meetings have a lot of great details and actual dialogue.

What I liked

The unbelievable greed, excess and egos involved in this deal along with the detailed reporting of the events makes for a very entertaining read. Even though the deal was so big with record fees, some of the competing parties could not agree to work together over things like who got top billing on the deal.

RJR’s CEO Ross Johnson (a Canadian) is a pretty entertaining character since he seems to be the boss mainly because he is so charismatic and knows how to party and make people feel good. The guy also knew how to spend other peoples money!

This book was very educational since it contained so much information about leveraged takeovers and was pretty exciting to read.

What I didn’t like

Pretty long – one criticism is that the authors feel the need to get into the history of a lot of the main characters and companies – but there are just too many. This could have been cut back quite a bit. At 500 pages it’s a hefty read.

Conclusion

A bit long but a great read regardless. I would suggest that when reading the first half of the book which covers the time period before the takeover attempt, if you are getting bored then try skimming through the various history sections. It’s interesting to hear how RJR got its start but not essential to the main story.

To order this book: