Category: Book Review

This book is written by John Rothchild who took a year off in order to learn how to make lots of money through investments and then write a book about it. He did learn a lot about investments and the various financial institutions that deal with them, but he ended up losing most of his money. Luckily his sense of humour makes this book a pretty good read since there is very little useful investment information in it.

I would rate Rothchild as one of the worst investors of all time. Even though he manages to figure out some good investment advice such as an investor would be better off just buying the market rather than trying to beat it, he continually makes investment decisions that seem to be based more on trying new types of investments ie options and investing in commodities rather than on any type of investment knowledge. Even his equity buys are based on hot tips.

He interviews with a lot of industry employees including traders, analysts and executives, he evens visits with a forecaster/astrologist who apparently is the most accurate forecaster of all the people Rothchild meets with in the books. The option spread that he bought as a result of the astrologist’s recommendation is one of the few investments that makes him money.

Rothchild manages to visit a lot of financial institutions including the New York Federal Reserve Bank otherwise known as the “Fed”, sneaks onto the floor of the New York Stock Exchange and gets quite a few interviews with various investment personnel in the industry. One particularly funny section describes how he managed to get an interview with a highly paid analyst covering Gillette which he had just bought. From that analyst he manages to see several other top analysts and finds out that they all get their information straight from Gillette and their main concerns are keeping Gillette and their big clients happy and finding out what the other analysts had to say about Gillette.

If you are looking for an amusing read with a bit of financial information thrown in for good measure then this book is probably for you.

In Chapter 3, “The Market Is Smarter Than You Are” Bernstein lays out the case for the Efficient Market Hypothesis and that stock picking is impossible. He details how its somewhat possible to beat market returns by becoming active in the management of the companies you buy (ala Warren Buffet) or by managing small funds and working hard (ala Peter Lynch). He makes the case that its possible to find mis-priced equities, but that its a lot of work and will only give you a slightly improved return (for most people their efforts would be more lucratively applied elsewhere).

By the end of this chapter Bernstein had me doubting the Derek Foster approach to investing. I believe what Bernstein is debunking is the idea of buying stocks then reselling them a future date based on “superior knowledge” that its under-priced currently and will be over-priced in the future (and that you’ll be able to tell when that occurs). I’m hopeful that buying tax-advantaged income producing stocks (with no intention of selling them) is a different game.

Chapter 4 details asset allocation and how its possible to combine asset classes to decrease volatility and IMPROVE returns. Its a little confusing as he discounts historical records of returns, but then believes historical records of risk (he claims one is valid but the other isn’t and I wasn’t able to follow his reasoning on this point). I posted on this subject previously and he made a good case of convincing me that asset allocation is one of the best places for investors to spend their time / mental energy.

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Based on Mike’s Four Pillars blog, I decided I should grab a copy of Bernstein’s 4 Pillars and read through it (he named his blog after it, so how bad can it be? 🙂 ). There seems to be ton’s of good stuff in it already (I’m on chapter 2), that I decided I’d actually do a write up on chapters in chunks so that I don’t miss any of the big trends in this book (basically a good way to force me to use the knowledge I’m reading about).

While risk & reward going hand-in-hand is clichéd, there’s certain implications to this that are ignored by the investing community as a whole. Bernstein does an excellent job of presenting the idea, then pushing the implications into some interesting territory. He makes the assertion that its a bad idea to invest in “good” companies, since they will already have had their price pushed up to a level that will be tough for them to deliver ever increasing superior returns. With the possibility of bad fortune existing for any company, you’re often getting a meager return for the risk you’re accepting. He gives the example of Walmart being a “good” growth company and Kmart being a “bad” value company. Because investors aren’t interested in owning Kmart, those who buy it stand to do well if the company can get their act together and manage their business better (whereas, there’s not a lot of improvements or streamlining that Walmart can do). Another way to view this is with value companies, the bar is a lot lower for them to increase their performance, even if just by emulating the “growth” companies in their sector.

He also pushes this idea into the large-cap (big companies) versus small-cap (small companies) world, and provides convincing stats that although small-caps companies are far more volatile, the average return rewards investors for this volatility. Equally he shows how investors are rewarded for investing in riskier emerging as opposed to established markets.

He wryly points out that anyone who promises you large returns with total safety is very likely trying to scam you (which has certainly been my experience).

He lays out the grand goal of asset allocation such that portfolio volatility is minimized while returns are improved by accepting volatility from the components that make up your portfolio.

Starting Ch 2 he lays out the idea that some of the ideas require thinking about and suggests that the reader move through his book at a slow pace and think through the concepts. There’s something comforting about an author who says “this is going to be confusing, don’t worry about it, just take it slow”. When I reach a concept that doesn’t seem clear, I don’t feel stupid or that I’m missing something, since I’ve been primed for it. I just slow down (or plow through the section and plan to re-read).

It’s nice that he’s gentle with us.

He lays out the idea of a discounted valuation model for an ongoing income stream (basically how to determine the PRESENT value for something that will pay you in the FUTURE). After teaching the procedure and calculation, he shows how useless it is (what the hell?!?!) then shows us how to rearrange the formula and actually use it for something worthwhile (well, that’s ok then). Basically he makes a good case that the true return of a stock or a market is the dividend yield + dividend growth rate (and anything above or below this is the “speculative return”). This is known as the Gordon Equation.

So far I’ve really been enjoying this book, it seems to be packed with some really interesting ideas, and I’m looking forward to the rest of it.

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I’m off on holiday for the next week so there will be no posts until Monday, July 23.

On with the review…

This rather long book by James Grant is another in Bernstein’s recommended reading list which I am determined to work through.

Basically this book is about the history of American banking from around 1850 to the mid-1980s. I found the first half quite fascinating as it detailed the “wild west” of banking in the 1800’s with numerous bank runs, bank failures, bank startups and lots of colourful characters. The book explains that before the US government had a federal currency, each bank would print its own currency (backed by gold) and people would trade the currencies at some relation to par value based on how solvent they thought the bank was or how far away the bank was. The other thing I learned was that personal bank loans were not made popular until the 1920’s. Before that banks only lent to people and businesses “who didn’t really need the money”. Real estate loans were another item that proper banks didn’t stoop to. Perhaps way back when, real estate values were not as well defined as they are today?

The second half of the book I found quite boring as it kept moving further along in history into the 1980s but using the same ideas that banks would go overboard with lending in the good times and then get too conservative after a crash. Without the historical aspect I just wasn’t interested. I recommend reading this book but if you get to a point where it starts to get boring then just put it down – you’ve gotten all you’re going to get out of it at that point.

I think I heard about and read “Rich Dad, Poor Dad” right when it hit the tipping point and everyone was talking about it (I’d guess around 2004 maybe?). My aunt and uncle had read it, and I wanted to borrow another book from them and they forced this one on me. They told me it was about this guy and his two fathers (they couldn’t remember exactly how he had two fathers, but they assured me they explained it at the beginning), one of whom was a business guy, and the other was an academic. My uncle is very anti-education, so I was immediately suspicious and asked if it glorified the “business father” and denounced the “academic father”. They assured me this wasn’t the case and I foolishly read it.

From a very early age my parents taught me that its better to save then spend, and ideally you put money into things where it grows (how do you think I became Mr. Cheap?). Unfortunately they also made me ultra-conservative, and I wasted my investing youth on GICs and CSBs, but that’s a story for another day. With this background, when Mr. Kiyosaki advocated buying assets (which he defined as things that increase in value) instead of liabilities (which he defines as things that decrease in value) my reaction was “well, duh?!?!”.

I was excited when he kept promising to tell you how to find investments that would yield 13 or 17% (that range seems to be his “conservative estimated returns throughout the book”, but I got to the last page and hadn’t found anything.

John T. Reed thoroughly debunks Rich Dad, Poor Dad and if you’re at all thinking about reading this book or are enthusiastic after reading it, I’d recommend reading through his entire analysis before you gamble money on any of his ideas.

A couple of the things that Mr. Reed points out that bothered me too were that Bob seems quite unethical (I was bothered by him creating a library out of “discarded” comics that had been reported destroyed to the publisher and making money off of them the same way Mr. Reed was). I also didn’t like his re-defining the terms assets and liabilities. His “definition” of an asset is simply an appreciating asset, while his definition of a liability is a depreciating liability. Depreciating assets (like cars) aren’t liabilities and appreciating liabilities (like mortgages) aren’t assets. A car that you need to earn a living is still a depreciating asset, even though its a required expense for a business that earns money.

If you’ve read it, well at least its a fast, easy read. If you haven’t: don’t bother.

Winning the Loser’s Game is written by Charles D. Ellis and is based on a ground breaking 1975 article he wrote for the Financial Analyst’s Journal on passive investing.

This book is similar to Bernstein’s Four Pillars of Investing and Malkiel’s Random Walk Down Wall Street in that the main theme is active investing can’t beat the market so investors are better off using low cost index funds. Ellis doesn’t go into the detail that Bernstein and Malkiel do and he also tends to stick to his main message and doesn’t get into portfolio advice such as asset allocation. I found the book well written and quite entertaining. Although the indexing message has been written about in many other books, he finds interesting ways to explain why indexing is the best investment method.

The title of the book comes from his explanation of how amateur tennis is an analogy for the investment game. According to Ellis, professional tennis is a winner’s game because the ultimate outcome is determined by the action of the winner. Amateur tennis is very different because the outcome if determined by the loser. In amateur tennis, the skill levels are so low that neither player is capable of a “winning” play very often. In fact the the winner of this game gets a higher score because his opponent is losing even more points.

Ellis says that the investment field used to be a winner’s game because prior to the 1970’s, 90% of the trades on the NYSE were by individual investors so the professionals could realistically beat the “amateurs” if they were good enough. By the 1970’s however most of the trades on the NYSE were by institutions so investment professionals were now competing against themselves (other professionals). They couldn’t beat the market anymore because they were the market.

Part of the book is about investment policy which I found quite interesting. Ellis suggests that investors should write down their investment policy and by referring to it periodically it will help determine if the policy is being followed. For example if you want a conservative portfolio and it goes up 30% in one year then your portfolio doesn’t match your policy.

I did get a laugh at his comment on leveraged investing since I just started doing some leveraging myself.

“The saddest chapters in the long history of investing are tales about investors who suffered serious losses they brought on themselves by trying too hard or by succumbing to greed. Leverage is all too often the instrument of self-destruction.”