Archive for the 'Book Reviews' Category
Friday, November 13th, 2009
Benjamin Roth was a lawyer in Youngstown, Ohio during the Great Depression and kept a regular diary of his impressions during the era. The diary was required reading for his son who also became a lawyer at the firm he started, in order to understand what their clients went through. After the recent crash, it has now been published as a book called The Great Depression: A Diary.
The book is primarily a straight transcription of the original handwritten journal, with a few editor’s notes to provide a little additional background when needed. Each entry is dated, and it is very interesting to see the first-person perspective unfold over time. Indeed, imagine a “blog” back then and you’d get this. Roth was not an economist or historian, and simply wrote down what he saw.
Historical Similarities
It is easy to find many similarities between the recession back then and now. The stock market and real estate market boomed, speculation was rampant, and then it all collapsed. Banks were stuck with mortgages that nobody could afford to keep up with, and foreclosures were everywhere. Unemployment was very high, although it was 25% back then as compared to 10% now.
[9/19/32] It looks as tho the Democrats will win because everybody wants a “change”.
Sound familiar?
Roth considered himself a Republican, and did worry a lot about “a shift towards socialism” and inflation always being around the corner. The government did end up spending a lot of money to stimulate the economy, although not exactly the same way as now. On the other hand, many things that seemed like radical changes back then are things that we almost take for granted today - including new institutions like the FDIC to provide bank deposit insurance, the SEC to regulate investments, and even Social Security.
Historical Differences
Throughout the diary, Roth is always talking about how numerous banks failed or re-opened temporarily only to close again due to rapid withdrawals. This led to even the strongest banks putting very tight restrictions on withdrawals (i.e. max 5% of deposits). Without something like the FDIC, people ended up selling their account balances for 40 cents on the dollar because they needed the money immediately or were afraid they’d never see it again.
Personal Finance & Investing
Roth often wrote about personal finance and investing as well. He really like the idea of saving up a lot of cash during boom times, and then investing it all at the “bottom” after a crash, although he gradually seemed to realize that predicting the exact bottom was impossible and that simply holding it for the long term might be more reasonable.
In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy stocks and real estate. I see now how important it is for the professional man to build up a surplus in normal times. [...] His practice suffers and he has no chance of rising above the level of the ordinary practitioner who lives from day to day and from hand to mouth.
[5/9/1932] Those men who were wise enough to sell during the boom and then keep their funds liquid in the form of government bonds, etc. were not farsighted enough or patient enough to wait almost three years to re-invest. Most of them re-invested a year or more ago and now find stock prices have sagged to 1/3 of what they were when they thought they were buying bargains.
Of course, back then there was still the CNBC equivalent of various economists and business leaders sharing their “future economic outlook”. Roth recorded their predictions and always seemed to come back with a later follow-up note “…the predictions were wrong.” Some things never change!
If I were to levy a criticism of this book, it would be that it is more of a list of his observations, as opposed to his personal actions. For example, he often mentions how local Bank A or Bank B has failed or is restricting withdrawals. But Roth doesn’t actually share where he keeps his money, if he has moved it due to fear, or if he has had problems withdrawing his own deposits. He doesn’t share his personal investments, even though he records the share prices of many companies regularly. This ends up making the trip to the past a bit more dry than it could have been, but it was still a fun and enlightening trip to take.
Posted in Book Reviews | 7 Comments »
Thursday, September 3rd, 2009
I recently started reading The Undercover Economist by Tim Harford. So far, it’s a little like Freakonomics but a bit more economics and with slightly less controversial topics.
One interesting concept explained was price-targeting. Let’s say a coffee shop has to spend 50 cents to make a cup of coffee, including labor and materials but not rent. Now, each person walking by has a certain trigger price. If the coffee is cheaper than their personal trigger price, they buy, and if the coffee is more expensive, they don’t buy.
In a perfectly efficient market, a person would be honest about their trigger price, and a business could sell their coffee to anyone whose trigger price is above 50 cents. A frugal person might walk up and pay 75 cents, while a spendthrift coffee addict in a rush would pay $4 for the same cup. Obviously, this wouldn’t work in the real world, so stores have to find a way around this. Getting people to pay as close to their trigger price as possible is called price-targeting.
Instead, you have the current Starbucks menu = an entire wall of caffeinated options differing slightly by roast, size, flavoring, and preparation. When I need to get out of the house, I usually go in and get an iced coffee for about $2. They will add milk, or I can add it myself and you can get their syrup sweetener for free since sugar packets are hard to dissolve in cold drinks. Alternatively, a frappaccino is basically the same time but blended with some whipped cream for $3.50. So the “frugal” version is for the people looking to spend $2 on coffee, and the “premium” frapp is for those willing to spend over $3. The frapp probably cost around 10 cents more to make, while Starbucks made an additional $1 in profit.
A similar thing takes place in supermarkets, and is summarized well in this CFP Board newsletter article Taking Aim at Price Targeting:
Imagine you’re at the supermarket and want to buy a bag of chips. If you tend to be an impulse shopper, grabbing the first thing you see, you’ll likely end up with the most expensive chips available, conveniently placed at eye level by the supermarket’s thoughtful management. If you’re bargain conscious, however, a brief scan of the shelves will reveal cheaper chips tucked away closer to floor level. By offering similar products at different prices, the supermarket can make everybody happy: the impulse shopper gets her chips, the bargain hunter gets his bargain, and the supermarket maximizes profits from both types of customer. “In price targeting, customers pay what they are willing to pay,” Harford says. “It doesn’t depend on being a sucker. It’s even a good thing because if companies weren’t able to target, then nobody would get the lower prices.”
This is also why supermarkets have sales on a rotating range of products, instead of the same products or just lowering prices in general. The price-sensitive frugal folks will pretty much only buy what is on sale, and they’ll be drawn in and the store will make a little profit with slimmer margins. The people who never check what is on sale or are just buying ingredients required for a specific recipe will end up buying a lot of non-sale items which are marked up at a higher profit margin. Again, the store tries to get as close to a “perfect” market as possible.
The lesson? Be aware of price-targeting, be aware of your own tendencies, and look around to make sure you’re getting the best price when presented with a variety of options.
Posted in Book Reviews, Frugal Living | 12 Comments »
Tuesday, July 28th, 2009
How do you read a book that you can’t buy in bookstores or find in libraries… because people keep stealing them since the title is Steal This Book? Even used copies are selling for double the retail list price. By reading a ripped off copy on the internet, of course. 
Written by activist Abbie Hoffman in 1970, Steal This Book is basically a counter-culture guidebook to that era, and is self-described as a “manual of survival in the prison that is Amerika.” It promotes its own twisted view of morality, which is that it is okay to steal from everyone from the government to business owners like grocery stores, but not other Yippie activists. The “Survive!” section is basically a “How to see the US on zero dollars a day” travel book.
Whether the ways it describes to rip-off shit are legal or illegal is irrelevant. The dictionary of law is written by the bosses of order. Our moral dictionary says no heisting from each other. To steal from a brother or sister is evil. To not steal from the institutions that are the pillars of the Pig Empire is equally immoral.
The topics covered are very wide-ranging, although many are now out-dated. I’ll “steal” the description at Wikipedia:
The book includes advice on such topics as growing marijuana, starting a pirate radio station, living in a commune, stealing food, shoplifting, stealing credit cards, preparing a legal defense, making pipe bombs, and obtaining a free buffalo from the U.S. Department of the Interior.
Most people will probably be offended by a lot of the content, but I basically viewed it as a mix of history, entertainment, and knowledge. There are even congee recipes from National Liberation Front fighters. I’m also the type of guy who likes to know how all the scams work. Samples:
Free postage: “When mailing to the same city, address the envelope or package to yourself and put the name of the person you are sending it to where the return address generally goes. Mail it without postage and it will be “returned” to the sender.”
Free food: “In restaurants where you pay at the door just before leaving, there are a number of free-loading tricks that can be utilized. After you’ve eaten a full meal and gotten the check, go into the restroom. When you come out go to the counter or another section of the restaurant and order coffee and pie. Now you have two bills. Simply pay the cheaper one when you leave the place.”
Panhandling: “A good prop is a charity canister. You can get them by going to the offices of a mainstream charity and signing up as a collector. Don’t feel bad about ripping them off. Charities are the biggest swindle around. 80% or more of the funds raised by honky charities go to the organization itself. New fancy cars for the Red Cross, inflated salaries for the executives of the Cancer Fund, tax write-offs for Jerry Lewis. You get the picture.”
Never even thought about this: You can get $150 to $600 in advance by willing your body to a University medical school. They have you sign a lot of papers and put a tattoo on your foot. You can get the tattoo removed and sell your body to the folks across the street.
Posted in Book Reviews | 58 Comments »
Tuesday, July 21st, 2009
Why do some people exceed far more than others? This is the question asked by the book Outliers: The Story of Success by Malcolm Gladwell. The short book argues that most people erroneously believe that very successful people are primarily products of a high intelligence and lots of talent. But there are many other variables out there, ranging from their date of birth, to their family’s cultural background, to sheer luck.
But the most important relationship was between hard work and luck. In the Chapter called “The 10,000 Hour Rule”, Gladwell states that it takes 10,000 hours to master a subject - be it hockey, music, or computer programming. There are no shortcuts to this.
However, Bill Gates got 10,000 hours of computer time while attending an elite private school before he even reached college in 1973, at a time when many top universities didn’t even have computer labs. Before they became famous, The Beatles ended up playing at a club in Germany for over 8 hours a day, 7 days a week. This meant they accumulated more live stage time (1,200 performances) in a couple years than most bands had in a lifetime. In other words, they both had a nice does of luck to be able to get their 10,000 hours in when very few others had the same opportunity.
At the same time, they also had the ambition and drive to actually complete those 10,000 hours. Sometimes I think that “talent” is no more than loving something so much that you don’t mind spending endless hours doing it.
So to be extraordinarily successful, you need both luck and hard work. People can interpret these stories differently. One person might say “Yup, those guys were successful because they were more lucky than I was.” and then feel better about their lives. The thing to remember is that between hard work and luck, you can control only one.
If you don’t put in the hours, there is essentially zero chance of success. If you do, then when opportunity hits, you can flourish. Gladwell connects the Chinese proverb stating “No one who can rise before dawn 360 days a year fails to make his family rich” to a special public school network within low-income areas that creates kids who can compete with those from private schools in wealthy suburbs.
Although I was initially afraid that this book would try to put too much emphasis on the role of luck, in the end it actually reinforced my own basic beliefs about hard work. You can’t control the cards you are dealt. All you can do is play them as best you can.
Posted in Book Reviews, Entrepreneurial | 26 Comments »
Friday, June 12th, 2009
I recently received a review copy of Jean Chatzky’s The Difference: How Anyone Can Prosper in Even The Toughest Times, where she attempts to understand why some people easily move from barely getting by into a life of comfort and/or wealth, while others get stuck or even fall backwards. What are the attributes that set them apart?
From her research, she divided people into four groups: The wealthy, which have on average assets of $2 million, not including home equity. The financially comfortable, who save regularly and have a financial cushion. The paycheck-to-paycheck, who are getting by but are one unexpected expense away from stumbling into the last group, which are the further-in-debtors. Here’s how the population breaks down:
20 Factors
As you can see, plenty of people are living paycheck-to-paycheck. But what about those who only used to live that way? She found that 75% of the wealthy and nearly 100% of the upper-middle class originally came from middle class backgrounds.
Here are what Chatzky says are the twenty key elements of those people who improved their situations. You don’t need to have them all, but she says that you need, on average, ten factors to make your way to financial comfort.
Financial Attitudes
- feel stocks are worth the risk
- devote money to savings
- save regularly for emergencies
- invest for retirement
- reduced debt
Goals
- want to retire comfortably
- want to be financially comfortable during working years too
- always knew what they wanted to do for a career
- made it a goal to accumulate $1 million
- want to own a home
Personality
- are confident
- happy
- optimistic
- competitive
- leaders
Nonfinancial Behaviors
- have a college degree
- socialize with friends at least once a week
- exercise at least 2-3 times a week
- read newspapers regularly
- are married
Sounds simple enough, eh? I call some of these “duh” factors. The rest of the book tries to explore these factors and ways to actually get yourself to really believe and/or achieve them, since simple doesn’t mean easy. For one, there are many levels of “wanting” - do you have the resolve to make it happen? Or, how is exercise related to wealth?
Posted in Book Reviews, Career, Frugal Living | 32 Comments »
Wednesday, May 20th, 2009
I am currently reading The Snowball: Warren Buffett and the Business of Life by Alice Schroeder. As an authorized biography of Warren Buffett intended for the general public and not a book specifically about investing per se, I think that so far it is excellent. I have only recently started learning more about Buffett, but he is certainly an intriguing person. Schroeder is an excellent writer, and provides both detail and insight into his life as well as does a especially good job of explaining the financial aspects of his activities.
Here are some of the notes that I took while reading the book so far, covering his early years:
Posted in Book Reviews | 15 Comments »
Tuesday, April 21st, 2009
John Bogle is the founder of the Vanguard Mutual Fund Group, and the creator of the first index fund. Reading his latest book Enough: True Measures of Money, Business, and Life was like listening to one of his many speaking engagements, a distillation of a lifetime of wisdom from a man who changed the way that billions of dollars are invested today.
As Heller famously responded when told by Kurt Vonnegut that a hedge fund manager had made more money in a single day than his classic novel Catch-22 made in its entire history, “Yes, but I have something he will never have… enough.”
Very simply, this book outlines the problem with making how much money we have the way to measure “success”. Such a philosophy affects how individuals invest, how business is conducted, and how lives are led. Bogle warns that this is taking our country down a dangerous road, which may leave our future less bright than the past. As Albert Einstein said: “Not everything that counts can be counted.”
His words about the need for character, accountability, and stewardship definitely ring true. However, I just can’t see the people of Wall Street turning down all this easy money without some “convincing” from the rest of us. Sure, they may feel a tinge of guilt now and then. But as Bogle paraphrases Upton Sinclair: “It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to.”
In my opinion, it all ends up falling on us common folk as a whole to vote with our own dollars by not allowing overpaid CEOs as shareholders and consumers, not investing in high-cost complex investments, and not valuing “stuff” so much. We need to change things from the bottom up, not just with top-down rules and regulations.
Finally, my favorite part of this book is how Bogle acknowledges that his success was largely due to a mixture of luck and the assistance of many other people who believed in him. Too many successful people look back and think they did it all themselves. Sure, they may have worked very hard, but every one of us had help. A loving and supporting parent. A teacher who went the extra mile. A mentor who shared their own experience. Knowing that you didn’t do it alone, makes it easier to stop thinking of only yourself, which helps you find the balance of “enough” that includes thinking of others. At least that’s how I see it.
Recap
This is not a book about what kind of stock to buy. If you want Bogle’s view on that, read the more in-depth Common Sense on Mutual Funds or the concise Little Book of Common Sense Investing. I actually like the short one better.
Nor is this a book about frugality or living below your means. Instead, this tends to be more of a “Big Picture” book, about our definition of what “success” is. What should our goals be? What do we value? If you’re looking for some guidance in this area, or feel like there is something missing to this pursuit of money, then this is the book for you.
Posted in Book Reviews | 19 Comments »
Wednesday, February 25th, 2009
There are hundreds of books about how to invest like Warren Buffett. For whatever reason, I haven’t read any of them (yet). For one, if really wanted to invest like him, why not just invest with him and buy a share of Berkshire Hathaway? A Class B share recently traded at around $2,300, more than 50% off its high of $5,000. And if I bought a share, I could attend those annual shareholder meetings in Omaha, Nebraska* that I’ve heard so much about. (I have read some of the shareholder letters.) Buffett himself calls it the “Woodstock of Capitalism”.
What’s a Berkshire Hathaway Annual Meeting Like?
That’s the question behind the book Pilgrimage to Warren Buffett’s Omaha by hedge fund manager Jeff Matthews. He first went to the 2007 annual meeting and wrote about it on his blog. I guess people liked it, and so he went back in 2008 and weaved it all together into this book.
A very distinguishing trait of the annual meeting is that Chairman Warren Buffett and Vice-Chairman Charlie Munger not only want their shareholders to attend, but willingly sit down for a six-hour long Q&A session where you can ask any question, and they will answer it personally. Many of the famous quotes you’ve read elsewhere were first spoken in this format, and the best part of this book is probably reading about their thoughtful responses to all these questions.
Another feature I didn’t know about is that the meeting is also highly profitable for Berkshire. Shareholders are given special tours and discounts to subsidiaries like Nebraska Furniture Mart, Borsheim’s Jewelers, and so on. Estimates say that over $100 million is spent there.
What Else Is Inside The Book
A lot of the book is in informal “blog” format, with Matthews recounting his first-hand experiences down to grabbing lunch or renting a car. However, sprinkled throughout the book are also facts and tidbits about the company and Buffett, most of which I didn’t know very well but are things that I’d expect a die-hard fan to know already. It worked well for me and provided some helpful background.
For example, I learned that the businesses with Berkshire Hathaway tend to operate independently and without much oversight from Warren Buffett or Charlie Munger. And it’s a wide variety of stores - from GEICO insurance to See’s Candies to NetJets to Nebraska Furniture Mart. Berkshire also gets the chance to buy many profitable, well-run, private companies at a discount from the individuals and families that created them. Why? Because they are attached to these businesses, and want them to remain under a certain quality of stewardship.
But it’s not a total slurp-fest. Criticisms are brought up, like how Buffett has called derivatives “financial weapons of mass destruction”, but also bought millions worth anyway. Or when he talked up the values of executives for subsidiary General Re who later got convicted of securities fraud.
Summary
This book is well-written, easy to read, and a perfect companion for a cross-country airplane trip or nightstand. However, I don’t think I really learned much of anything practical from a financial perspective. I’d treat it mostly as entertainment.
To be clear, it is not a book on value investing. For that, stick to the classic The Intelligent Investor by Benjamin Graham. Nor is it a book about the personal life of Warren Buffett. For that, there is now The Snowball.
Actually, the book I most want to read next is Poor Charlie’s Almanack, which contains many quotes from Charlie Munger, who seems a bit abrasive but I have come to respect him as an independent thinker. The only problem is that the book doesn’t seem to be in print anymore and used copies are fifty bucks? Time to hit up the library.
I’m still wavering as to whether I want to attend this meeting. Would it be worth the hotel and airfare? Anyone planning on being in Omaha on May 2, 2009? 
* Actually, you don’t even need to be a shareholder to attend any more. Buffett got annoyed that people were scalping tickets on eBay for $100+, so every year he floods eBay with tickets for only $2.50.
Posted in Book Reviews | 16 Comments »
Wednesday, December 3rd, 2008
The story goes that Scott Adams wanted to publish this as a one-page book, but he couldn’t find a publisher to do it. In fact, he is quoted as saying that “if God materialized on earth and wrote the secret of the universe on one page, he wouldn’t be able to find a publisher” either [Marketwatch]. So, he weaved it into a Dilbert cartoon-based book called Dilbert and the Way of the Weasels (368 pages).
Everything else you may want to do with your money is a bad idea compared to what’s on my one-page summary. You want an annuity? It’s worse. You want a whole life insurance policy? It’s worse. You want to invest in individual stocks? It’s worse. You want a managed mutual fund instead of an index fund? It’s worse. I could go on, but you get the point.
Overall, the book is pretty funny if you like Dilbert and understand the corporate hell that he lives in. Otherwise, without further ado, here is Dilbert’s One-Page Guide to Everything Financial:
- Make a will.
- Pay off your credit cards.
- Get term life insurance if you have a family to support.
- Fund your 401k to the maximum.
- Fund your IRA to the maximum.
- Buy a house if you want to live in a house and can afford it.
- Put six months worth of expenses in a money-market account.
- Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement.
- If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio.
From Vanguard article:
Does Adams live by his financial rules? For the most part he does. Adams said he’s allergic to debt and makes a habit of saving half of his income.
“I found that people who had massive credit card debt were asking me how they could invest in stocks, or how they could borrow money from their credit card to invest in stocks,” the cartoonist recalled.
However, Adams said he no longer follows his rule to invest 70% in a stock index fund and 30% in a bond fund. The best-selling author says he invests primarily in municipal bonds today, which are tax-exempt, and also owns land in his adopted home state of California.
If I had his amount of money, I’d probably be investing only in muni bonds as well!
Posted in Book Reviews, General | 17 Comments »
Monday, September 29th, 2008
The last book I reviewed was Financial Armageddon. Then I saw the title of this book: When Markets Collide. I almost stopped right there, as I was not at all in the mood for yet more doomsday talk.
However, I saw that the author, Mohamed El-Erian, ran the Harvard University Endowment for nearly two years, and is now the co-CEO of the huge bond investment company PIMCO. Throw in the fact that the tagline of this book is “Investment Strategies for the Age of Global Economic Change”, and perhaps this would be an insightful book about investing like David Swensen’s Unconventional Success. (Swensen ran the Yale University Endowment.)
Ease of Reading / Target Audience
The first I noticed about this book was that it was very difficult to read. The author tried to write this book for both experienced economic policymakers and the average investor. Not an easy feat. I felt that he came off as one of those guys who is just “too smart” and can’t simplify things for the rest of us. Here is an example of this high-level writing from the book:
The challenge of how to deal with consequential and volatile endogenous liquidity relates to another policy issue that I will discuss in Chapter 7: how to refine the traditional instruments of monetary control and ensure more meaningful and sophisticated supervision on a range of activities, with volatile leverage, that have been enabled by the ongoing structural transformations and yet are outside meaningful oversight.
Quick Summary: My Interpretation
The relationships between the economies of the world are changing. Emerging markets, which used to either be debtor nations or those who would only buy the safest thing available (US Treasuries), are growing fast and will start to invest their considerable wealth elsewhere, including equities. The U.S. can’t rely on other countries to buy our debt forever, just as the other countries can’t rely on U.S. consumers to prop up the world’s economy. This is where the “markets collide”. Throw in complicated structured investments like derivatives which nobody perfectly understands, and we are only in the beginning of a very bumpy road ahead.
Model Asset Allocation
So what is a U.S.-based individual investor to do? El-Erian states the three basic steps of portfolio management are: “choosing the right asset allocation, finding the best implementation vehicles, and conducting risk management.” Accordingly, here is his model asset allocation, with midrange percentages.
Equities (49% total)
15% United States
15% Other advanced economies
12% Emerging economies
7% Private
Bonds (14% total)
5% U.S.
9% International
Real Assets (27% total)
6% Real estate
11% Commodities
5% Inflation protected bonds
5% Infrastructure
Special Opportunities
8%
This adds up to 98%, but the way I read the book, the rest should be in cash. As a comparison, here is the asset allocation from Unconventional Success.
El-Erian doesn’t like home-bias and is believes strongly in being “globally-diversified”. You can see that only about 1/3rd of the equity allocation is to U.S. stocks. If an investor does have access to private equity, then you can redistribute that back into the other equities. In my opinion, he cops out in the active manager vs. passive index debate. He simply states that it’s really hard to find a good active manager, but if you can you should go with them. Of course, no further hints are given. 
As for bonds, he believes that bonds are overall a good portfolio diversifier to manage volatility. He also advocates a big portion of international bonds, which he believes are mature enough to be considered right beside domestic bonds. (He was also was an emerging bonds analyst for many years.)
Inflation is another big concern due to huge global growth, and thus there is a sizable allocation to real assets - commodities, real estate, inflation-protected bonds, and infrastructure (publicly traded equity and debt securities of utilities, airports, ports, roads, hospitals, etc.). Special Opportunities could mean speculative plays such as distressed debt or long-term environmental gambles like carbon credits.
In general, this is pretty different mix from many other model asset allocations I’ve read about.
Summary
When Markets Collide is mainly a macro-economics book as opposed to a how-to-invest book, but it does give some interesting insights about the future that might influence my personal investing strategies. For example, I agree that activities from non-U.S. countries will be increasingly important and their equities should be a significant part of one’s portfolio. I am not so sure (or educated) about the rest. I could only give a very superficial review here, so if this perspective sounds interesting and you want more details than I have given, I would read the book. If futuristic projections aren’t your thing, then I’d probably skip it.
Posted in Book Reviews, Investing | 12 Comments »
Tuesday, May 27th, 2008
Like scary stories? I usually stay away from the horror movies section, but I was intrigued by the idea behind of Financial Armageddon: Protecting Your Future From Economic Collapse by Michael Panzer. This is a book about why our economic system is in danger, how it will collapse, and the bleak future ahead. Keep in mind that this was initially published in March 2007, even before the peak of the subprime mortgage mess and current economic slowdown. The book is separated into four parts: Threats, Risks, Fallout, and Defenses.
Threats
Here, the author lays out a relatively convincing picture of how fragile our economic system really is right now. This is the best part of the book in my opinion, and what you should read it for.
Debt. Our nation is in huge debt. Many consumers are also in huge debt or living paycheck-to-paycheck. We spend and spend, and don’t save for a rainy day. Guess what? Neither does the government. Does this sound healthy?
The Retirement System. We all know that more people are on their own with plans like 401ks, for better or worse (mostly worse). The problems with Social Security are relatively well-known. After a few big blow-ups like United, we now know that many private pensions are underfunded. And you know what? Many public pensions are underfunded as well. This is what happens when you allow politicians who need to get re-elected every few years to make promises for the next 100 years. If you think municipal governments can’t go bankrupt, check out the City of Vallejo. In other words, the things we depend on in our old age are shaky as well.
Federal Guarantees. We all love the FDIC insurance for our bank accounts, since we can basically keep our money anywhere. But due to fractional-reserve banking, for every $1 in checking accounts a bank can make $10 in loans. In other words, if a real “bank run” occurred, the FDIC reserves would be depleted quickly. Imagine what would happen if FDIC insurance started getting revoked. He also picks on Fannie Mae and Freddie Mac, which are both allowed to do some crazy things because they are “government-sponsored” and therefore people assume the government will bail them out if something goes wrong.
The problem with this is that such government guarantees encourage such financial institutions to take huge gambles. *cough* sub-prime mortgage loans *cough*. Indeed, many banks believe themselves to be “too big to fail” because they are so critical to the system. This is how we ended up with Bear Stearns being sold for $2/share. Indeed, Bear Stearns was too big to fail, so the government tried to make the bailout as painful as possible.
Derivatives are the final threat, and are instruments designed to manage risk. The problem is that corporations believe that because they are “covered” by a myriad of derivatives, they can take on some huge bets. But these “no-risk bets” are all based on complex mathematical models, and we all know models and reality are not necessarily the same. You could safely bet that the Cubs won’t win the World Series for last 99 years, but you never know…
Risks and Fallout
Inevitably, all of the these threats are weaved into a saga in which we fall into Financial Armageddon. Economic recession and then depression. Companies faltering. Stock prices plummeting. Bonds defaulting. Real estate prices dropping further. Banks and insurance companies failing. Government guarantees being removed. Skyrocketing unemployment. Entitlement programs are cut due to the lower tax revenues. Rising crime and gang activity. The government tries to print more money, leading to hyperinflation, with the prices of food and other commodities doubling every few months.
Planning
This is the most disappointing part of the book, especially since it offers to “protect our future” on the cover. So what do we do to prepare for Armageddon?! Stop spending so much and save more money for a rainy day. Okay… What about all these dropping stock and bond values? Unfortunately, there is just some vague advice about having to be “smart” and “quick” to make money from the volatility. For the rest of us, we should simply sell everything and buy physical gold because our paper money will be inflated until it is worthless. The old “buy and hold stocks” idea is useless now. We should also buy all the physical goods we can with our cash before hyperinflation hits. Perhaps this really is the best plan, but I was hoping for something more substantial than what I call the standard “buy gold and stock up on Spam ‘n toilet paper” strategy.
Summary
Panzer points out that not one recession in the past 50 years has been predicted in advance by a majority of top economists. While this is supposed to scare you, all it did was remind me that predicting the future reliable is pretty much impossible. I enjoyed reading the first half of this book, because I do think that such a scenario can happen at least to some degree, and the books does a good job of pointing out many of the weaknesses in our financial system. Moreover, it is simply a good “doom and gloom” story that is entertaining to read. Indeed, some of it has already happened! However, I did not find much insightful information in this book on how to actually protect myself from such a collapse.
Posted in Book Reviews | 28 Comments »
Thursday, May 15th, 2008
The overall moral of this book review is that even though a book finds a publisher, it doesn’t mean the advice is accurate or applicable to you. The book Millionaire by Thirty: The Quickest Path to Early Financial Independence by Doug Andrews & Company appears to be very similar to the other Missed Fortune books by the same author. In fact, from reading the reviews all of these books seem to contain the exact same material.
The book starts out innocently enough, talking about familiar concepts like focusing on your strengths, paying yourself first, spending less than you earns, and it even provides an explanation of the “envelope” system of budgeting. However, it then quickly shifts into the two main points of the book, both of which I have issues with. Too bad, I only have a few months until I’m 30 and I could use another $742,000…
Housing Prices Always Go Up, Take Out Largest Mortgage Possible!
“Do you rent? Rent is like throwing money down a black hole. It doesn’t matter how much money you have saved or how long you plan on staying in the same place, you should always try to buy a home. If you aren’t going to stay very long you can simply get an adjustable-rate loan with no down payment. Housing prices always go up, so you can enjoy the low interest for a couple of years, and then sell and make a nice profit.
If you are really smart and disciplined, you can even get an interest-only or negative-amortization loan because then you won’t build up any equity at all. Accumulating home equity is bad. Anytime you have any, you should take out a loan on it and invest it somewhere else, like a second home.”
The above are all the dangerous generalizations about real estate contained in this book. Newsflash… Renting can be the best option for many people. Housing prices do not always go up. Thousands of people who bought a home and now have to sell after a few years will have lost tens of thousands of dollars compared to if they had rented.
Don’t Invest In 401ks and Roth IRAs, Buy Universal Life Insurance Instead
Throughout the book, tax-deferred plans like 401(k)s and IRAs are dismissed, saying that you should not contribute to them unless you have at least a 50% match, and maybe not even then. Why? 401(k)s and Traditional IRAs are taxed upon withdrawal, and the Roth versions use contributions that are already taxed. In other words, both types will be taxed at least once. Also, there can be penalties for early withdrawal, even though there are ways around these.
Instead, the book repeatedly hints at a mysterious alternative investment that is completely tax-free: at contribution, during accumulation, and at distribution. This investment turns out to be equity-indexed, universal life insurance.
How are contributions tax-free? It turns out that they want you to take either a larger mortgage or home equity loan, and using that to fund the life insurance plan. Because mortgage interest is often tax-deductible, he counts this as a “tax-free” contribution. Huh?? I could put the same borrowed money into a Roth IRA or anything, and call it a tax-free contribution.
However, it appears to be true that after a few years due to an apparent loophole in the tax law, you can take out “loans” from a universal life insurance policy tax-free. This simply reduces your death benefit when you die, unless you repay the loans. There are withdrawal limits, but can we use this to our advantage?
Equity-Indexed Life Insurance, Risk and Performance Concerns
The pitch is always the same for equity-indexed insurance. You can never “lose” money like it can in a stock market, but if the market goes up your investments will go up with it. There is usually both a cap rate and a guaranteed rate. For example you might get a 15% cap and 1% guaranteed. If the index goes up 30% you get 15%, but if it goes down 30% then you still get 1%. Not bad at first glance.
Catch #1: You Miss Out On Dividends When you invest in an index fund like an S&P 500 index fund, you get both the return of the index (capital gains) and also the dividends that are paid out. The average historical dividend yield over the last century has been ~4.5%. Currently, it is about 2%. Since the index does not include dividends, you are automatically losing that portion of total return. If the total annual return on the mutual fund was 8% and there were no additional costs, then the indexed-return on the insurance balance would only be 6%.
Catch #2: You Don’t Get All The Capital Gains Either
Consider this - If the insurance companies are indexed to the same thing we can buy and they offer us downside protection, this will always come at a price. There is simply no way the annual expenses of such a high-commission, salesperson-promoted product like this can be as low as that of a similar index fund. Details on how each universal life insurance policy tries to “participate” according to stock index vary widely, so I can’t run the exact numbers based on historical returns.
However, you can get an idea of the lost performance from this Scott Burns article regarding an earlier book by Mr. Andrews:
Using a 30-year history of the S&P 500 index ending in 2005 and a common formula for crediting returns, he says that a policy crediting 1 percent in loss years and 100 percent of gains up to 17 percent in good years would have provided an average crediting rate of 9.62 percent. [...] Even after subtracting the cost of insurance and other policy expenses, such as the commissions that would enrich all of his disciples, he estimates that your net return would be 8.5 percent…
8.5% sounds nice. Now what was the total return of the S&P 500 from 1976-2006? 12.7 percent annually. If you had $100,000 in a tax-deferred account like a 401(k) invested at 12.7% annually for 30 years, you would have $3,611,748 vs. the $1,155,825 tax-free from the insurance. Even you paid 40% in taxes upon withdrawal, you’d still be over $1,000,000 ahead with a regular 401(k).
Simply put, you give up a lot of potential return. Just because something is “linked” to the stock market, doesn’t mean it will return anywhere near the same amount. If you are truly saving for retirement and are relatively young, then you have a long-term time horizon and do not need such risk-reducing products that include a guaranteed rate.
In all 62 of the 20-year investing periods from 1926 to 2006, an investment in large stocks produced a positive return. The worst return was 3.1 percent annually for the 20-year period beginning in 1929 and ending in 1948. In other words, even investing on the eve of the Great Depression produced a higher long-term return than the guaranteed minimum return of equity-index products.
Arbitrage Gone Bad
Finally, recall that a significant part of this insurance is supposed to be funded by a home equity loan, where you can earn more interest from this investment than you are paying in mortgage interest. Arbitrage! Okay, but if the market only returns 8% including dividends which is 6% without dividends, and you then factor in the expenses of this insurance layer, you are maybe looking at a 5% return max. If you are paying 6% in mortgage interest and earning 5%, you’re now losing money.
Now, there may be a small slice of the population that may be best served by this product. But it’s definitely low on my list, and definitely not until you have maxed out tax-advantaged accounts like 401ks and IRAs. Even after that, I would first investigate either tax-managed mutual funds or a low-cost variable annuity from Vanguard.
Summary
Many of the books I read may not be brilliant, but they contain generally good ideas and target a specific type of reader. However, this book is one that could actually hurt more people than it helps. This book is just plain misleading. It would be wonderful if home prices always went up and there was an investment where I could never pay taxes, have no downside risk, and get stock-like returns, but unfortunately both are too good to be true. I’ve tried to lay out my arguments for this briefly, but if you want a better description read the detailed reviews here and here. Clever Dude also shared his thoughts here.
Short version: Don’t read it, don’t buy it, don’t even borrow it from the library.
Posted in Book Reviews | 24 Comments »
Friday, May 9th, 2008
Initially, I had intended this to be review of Suze Orman’s newest book Women & Money: Owning the Power to Control Your Destiny to be done by my wife. However, she expresses no interest in doing so. So I read it myself, and found out that her reaction was actually a bit ironic. Here is my review of this book both from the perspective of a male and the husband of a smart, capable woman who doesn’t like dealing with money.
The first half of this book deals primarily with the question of Women can handle money as well as any man… So why don’t they? It’s tough to deal with this subject obviously, because not all women are the same and you don’t want to be accused of stereotyping. But at the same time I’m glad that Suze tried. Here are a few ideas.
Women feel like coveting money is wrong. For some reason, it is okay to be proud to have a good job and a good family, but it’s wrong to openly admit you want lots of money. It could be that women tend to be more nurturing and taking care of others versus themselves. They don’t want to be considered selfish.
But at the same time that they try not to focus on money, they still worry about being broke. The book quotes a study that showed 90% of women describing themselves as feeling insecure when it came to their finances. In the same survey, nearly half the respondents said that the prospect of ending up a bag lady has crossed their minds.
Women are more team-oriented, as opposed to individually oriented. When a man thinks about money, they are at war - it’s a competitive battle. Me, me, me. When a woman thinks about money, she wants to make sure the whole team is treated fairly, and wants everyone to get along without hurting anyone else’s feelings.
An example of this is during salary negotiations. The book states that research has shown that women are 2.5 times more likely to say they feel “a great deal of apprehension” about negotiating. In one study, men used the metaphor of “winning a ballgame” to describe negotiating, while women picked the metaphor of “going to the dentist.”
I have personally experienced this with my wife. Although her performance reviews are always great, she has always been very passive when it comes to salary negotiations. Despite my suggestions, she has never asked for an higher raise than offered, and never put in a counter-offer when accepting a new job. Suze puts it this way - “You are not on sale. Do not undervalue yourself.”
Save Yourself Plan
The second half of the book is a condensed version of all her personal finance tips, broken down into 5 steps. The idea is that a woman should finish one manageable step per month. The advice is solid and straightforward, if a bit one-size-fits-all. Here’s a brief summary of each step:
- Checking and savings accounts. Get organized, get a free checking account, open up a higher-yield savings account, etc.
- Credit cards and FICO scores. Check your credit score, build up your credit if you don’t have any, pay down bills, pay less fees, etc.
- Retirement Investing. Start putting something away, invest in 401ks and Roth IRAs, buy low-cost index funds, etc.
- Must-Have Documents. Wills, living revocable trusts, advanced directives, etc.
- Protecting Your Family and Home. Life insurance, renters or homeowner’s insurance, personal liability insurance, etc.
Overall Review
I would read Women and Money if you (or someone important you know) feels like they should learn more about money, but for whatever reason haven’t been able to do so. This books tries to find the right buttons to push, and if it works then it will be worth it. It’s pretty popular so I’m sure most libraries have a copy. The advice included afterwards is good enough as starter material, but is not a source for advanced financial tips.
As for me, this book has caused me to want to involve my wife more in the day-to-day activities, if only to get her more familiar with things. I will continue to encourage my wife to read this book, and will probably include it in my Financial Will. Any thoughts from the women who’ve read this book?
Posted in Book Reviews | 23 Comments »
Wednesday, April 30th, 2008
I’ve been getting back into reading financial books, but am really behind in writing reviews for them. One book I finished last month was Wise Investing Made Simple by Larry Swedroe, which promises “Tales to Enrich Your Future”.
The key word is “tales”, because this is not a book with complex mathematical formulas or lots of charts and statistics. (Although I love charts…) It contains 27 short stories using simple concepts like sports analogies to explain the benefits of a long-term, passive approach to investing. Each story includes a quick “Moral of the Tale” summary.
I’ve already written about my favorite tale in Why Sports Betting and Stock Picking Are Similar. But here is my paraphrasing of another good chapter:
The $20 Bill
Here’s is a common story used to poke fun at the Efficient Market Hypothesis. An economist who believes in efficient markets walks down the street with a friend. The friend says “Look, there’s a $20 bill on the ground!” The economist says “No way. If there was a $20 bill on the ground somebody would have already picked it up”, and continues to walk away. This supposedly counters the idea that in a truly efficient market it would be impossible to find an under-priced stock (similar to a $20 bill priced at $10 or even free).
However, this argument is not really correct. What the story eventually explains is that while many passive investors believe that the occasional $20 bill on the ground may exist, spending your time looking for them may not be the most effective way to make money. The same could be said about stock-picking or market timing. Persistence in beating the market (finding $20 bills) beyond the randomly expected is very difficult to find.
Summary
For the investor that is already committed to passive investing and fully understands the underlying reasons why they believe that is the best strategy for them, this book probably won’t bring that much new to the table. It won’t help you decide whether to hold 20% International or 45% International stocks, or if you should include exposure to commodities or precious metals. If you are a full-time trader who is adamantly against passive investing, this book probably won’t contain enough hard facts to sway you either.
Instead, I think the sweet spot for this book are those investors that have been told “index funds are great” and may even invest in them but don’t really know why they are so great and don’t have the interest level to read some dry investing book about correlations and standard deviations. The problem with this level of understanding is that when things get tough it can be easy to bail out if you don’t really know why you’re doing something. This book breaks things down into simple, bite-size pieces without being patronizing.
On a personal level, this book might not be the very first book on saving money I’d give someone, or my favorite book about investing, but I am going to keep it in my library because it provided some different ways to explain to others (and myself at times) why I invest the way I do.
Overall Rating: 
(ratings explained)
Posted in Book Reviews | 10 Comments »
Sunday, November 18th, 2007
In the book Your Money and Your Brain, author Jason Zweig explores neuroeconomics, which apparently is a mix of psychology, neuroscience, and economics. This book looked like it would be an easy read, but it turned out to be very densely packed with information and data from numerous psychological studies. Truth be told, it got kind of tedious and repetitive, which is why it took me over a month to finish reading it. I think more aggressive editing would have helped this book a lot.
Instead of trying to do an in-depth review, I’m just going to focus on a few interesting points brought up in my favorite chapter titled “Happiness”. Isn’t being happy our ultimate goal?
If I was rich… I’d be happy. Right?
When you are below the poverty line, then yes, making more money is correlated with happiness and even better health. But as long as you have enough to meet your basic needs, more money doesn’t buy very much more happiness. We think it will, but it reality it doesn’t. This has been shown in studies comparing African tribal herders with the Forbes 400 Richest People, ones comparing people with $500,000 net worth and those with $10M+ net worth, and even between different generations of Americans:
In 1957, the average American earned about $10,000 (adjusted for inflation) and lived without a dishwasher, clothes dryer, television. or air conditioner. But 35% of people surveyed said they were “very happy” with their lives. By 2004, personal income had nearly tripled after inflation, and the typical house was bursting with consumer goods. Yet just 34% of people now said they were “very happy”. Somehow, almost tripling our wealth has made Americans a little less happy - and still we want more.
Chasing Happiness
Similarly, people think that “splurges” or getting that next hot gadget will make them happy. In truth, studies reveal that the anticipation of obtaining that object makes your brain’s dopamine levels go nuts and you feel happy. Actually getting it? Not so much. Which leads you to thinking about the next hot gadget… and so on. The “thrill of the hunt”, eh?
Keeping Up With Those Darn Joneses
It turns out that your happiness is related money in one way - how much money the people around you have! Social comparison is a very primal instinct in humans and other animals. One theory is that such attention allowed people to imitate the stronger hunters and learn to be more like them.
For example, should you buy the nicest house in a middle-class neighborhood, or a below-average house in the richest neighborhood? Your real estate agent might point out that buying in the rich neighborhood offers the best potential for home value appreciation. But the data suggests that buying in the middle-class neighborhood and getting a bigger house than everyone else will likely make you happier.
A study of more than 7,000 people in over 300 towns and cities found that, on average, the more money the richest person in your community makes, and the greater number of neighbors who earn more than you, the less satisfied you will probably feel with your life.
The relationship between money and our brains is an interesting one. It’s good to learn about those innate tendencies, so we can recognize them and react appropriately.
Posted in Book Reviews, Family | 26 Comments »
