Archive for the 'Book Reviews' Category
Sunday, March 25th, 2007
I’ve been chipping away at it for months, and finally finished Thomas Friedman’s The World Is Flat: A Brief History of the Twenty-first Century. By a flat world, he means that the playing field is being leveled and the gap between emerging and developed countries is closing faster and faster. For many people this means the fear of losing jobs to outsourcing, but it’s actually a lot more than that.
Flat means less friction. Yes, less friction for jobs to go back and forth across the world (usually away from the US). But the same holds true for people, money, ideas, and even cultures. He says this is caused by the “triple convergence — of new players, on a new playing field, developing new processes and habits for horizontal collaboration.” We can either look at this loss of friction as a bad thing and try to ignore it or keep it from happening, or we can realize that it is inevitable and work to take best advantage of it.
Up to now, many of the best jobs were here, and you had to live here to perform them. But thanks to new technology like the internet and computers, as long as someone is able to learn the same skills, they can do it from anywhere. This varies from the familiar cheap manufacturing of goods and telephone support, to highly skilled jobs like corporate accounting, computer chip design, even medical procedures.
Up to now, the best education was here. To me, this is critical, and I don’t think people realize it enough. Historically, we have had the most advanced and desirable graduate schools in the world. While in grad school, just in my building alone, I was surrounded by the top students from Germany, India, China, Taiwan, Brazil, and Russia. I’ve heard their stories about having to be the top 0.01% in their country just to get here. The vast majority of these people ended up getting jobs and settling down in the US. If you look around, first-generation immigrants anchor many of the research arms of all our major corporations. Microsoft, GE, Genentech, Google…
In other words, this country has been skimming off much of the smartest and most driven people in the world for ourselves. That’s a pretty sweet deal. But as I type many countries are working feverishly to make their own educational systems better.
If another country has a similar or better educational system, and their workers can do it for less, you can bet the job will be moving there. Patriotism, protectionism, or whatever - it’s still fgoing to happen. This means that we need to work to improve our own education systems and get rid of any sense of entitlement. Soon, simply being lucky enough to have been born in the US won’t be enough.
The book touches on many more topics than this, and I don’t even claim to understand all of it. I’m not an economist nor am I much of a historian. Although Friedman overall is a great storyteller and good at explaining complex ideas, there are also several slow and repetitive parts that literally made me fall asleep while reading it.
Conclusion
In the end, The World Is Flat reminds us that we are all in constant competition with each other. Before, it was your neighbors across the street. Now, it’s anyone with internet access. While it is not a zero-sum game (there is not a fixed number of jobs), there will be people who do better than others. As Americans, we are being chased. Our choices are either to run faster or risk getting left in the dust. Just making us consider such a possibility is a good result from this book.
How you think this competition will unfold can also alter your investment strategy. I still haven’t made any conclusions regarding this, but have been considering simply weighting my investments in proportion to the value of the world’s companies (i.e. using a world market cap-weighted index).
Overall Rating: 
(ratings explained)
Posted in Book Reviews | 13 Comments »
Friday, January 12th, 2007
I’m naturally skeptical of most real estate gurus, with all that feel-good “You too can be rich!” talk and very little substance. Still, I was curious to see what was inside Robert Allen’s best-selling book Nothing Down for the 2000s: Dynamic New Wealth Strategies in Real Estate. As you’ve probably guessed, it’s supposed to be about getting rich by investing in real estate with none of your own money.
If you cut out the copious amounts of go-change-your-life fluff in this book, it boils down to two main ideas:
Buy below market price by finding a “don’t-wanter” seller. A “don’t wanter” is someone who is going through some sort of trouble so that they don’t have the time or ability (or intelligence) to get market value for their property. Maybe they can no longer support the payments and are almost in foreclosure. Or they are tired of property management headaches.
Use creative mortgages to buy the property with little or no down payment. Then sell for a profit. Lending ideas included:
- Getting the owner to finance the house, so you pay them a mortgage each month instead of the bank.
- Using interest-only mortgages to minimize the monthly payment while you try to flip the house.
- Do 110% financing where you borrow more than the value of the house, and take the rest out in cash to cover the down payment (or buy another property)
- Use a loan backed by Property #1 to buy Property #2.
- Use credit cards or signature loans from the bank as a down payment.
- Buy an apartment complex right before rent is due, and use the rent and security deposits as a down payment.
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Posted in Book Reviews, Real Estate | 15 Comments »
Tuesday, December 12th, 2006
David Bach has sold a lot of books under his “Finish Rich” and “Automatic” titles. Most of his books seem to be heavy on the inspirational talk and light on the specifics, but I think that’s actually what has helped them sell so well - they are targeted for beginners.
Case in point, I wasn’t very impressed his earlier book The Automatic Millionaire (review), but as a home-buying neophyte I found a lot of useful information in The Automatic Millionaire Homeowner. Sure, he recycles a lot of his “make it automatic” mantra when talking about saving up for a house down payment (set up automatic transfers to a online savings account) or setting up a bi-weekly mortgage repayment plan (set up automatic transfers with your lender), but you can pretty much just skip over those parts.
Besides all the automatic-talk, what this really provides is a brief overview of the home-buying process. Think of it as “Home Buying For Dummies”, but even shorter. From finding a real estate agent, to finding the right loan, to finding the right home. The writing is clear and well-organized. It promotes long-term homeownership, and is not at all about flipping properties. However, if you’ve already gone through the process once, the book will probably bore you to death.
The main weakness in the book is that it focuses on the upsides of homeownership without fairly discussing all the potential downsides. It’s very “rah-rah”, you can almost imagine David Bach wearing a cheerleader’s outfit complete with pom-poms:
“I say BUY, you say HOUSE!” “GO REALTORS GO!”
(I added the Wells Fargo logo as he is sponsored by them.)
Conclusion
I would recommend this book for first-time home buyers, as it provides some helpful information. But, I would not recommend it as the only book to read, as it is doesn’t address the pros and cons as fairly as possible.
Overall Rating: [ratings explained]
Posted in Book Reviews, Real Estate | 17 Comments »
Sunday, December 3rd, 2006
While there is a ton of great financial information on the internet, I still think the best way for a beginner to learn how to invest is to read a book. It’s by far the most efficient way to understand all the history and research behind why people like me promote low-cost index fund investing. The more you know, the less you’ll be tempted to pay high fees or chase hot stocks.
By my count, I have read and reviewed 24 financial books so far. Here are my picks. They would make a great gift or simply provide some useful reading during holiday downtime. I own all of these books, and they were some of the best money I’ve ever spent.
Best Beginner Personal Finance Book
Best Starter Investing Book
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Posted in Book Reviews, Investing | 15 Comments »
Saturday, November 4th, 2006
Almost a perfect counterpoint to The Little Book That Beats The Market (review), this book could easily be titled The Big Book That Shows You Can’t Beat The Market. It weighs nearly 5 pounds, and is almost 400 pages long. This thing is a beast!
Instead, the title is Index Funds: The 12-Step Program for Active Investors. This is actually a pretty good title as well. Instead of starting at the pure beginner level, it assumes that you know a little bit about the market. Maybe you’ve dabbled in stocks, or have some hot mutual fund picks on your 401(k). The basic layout of the book is this:
1) Present an active-trading idea, and then
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Saturday, November 4th, 2006
There’s been a lot of buzz about The Little Book That Beats the Market, so I was excited when it finally came in from the library. Of course, at the time I was midway through Index Funds: The 12-Step Program for Active Investors, which I’ll also be posting a review about shortly. Alternating between the two books was like a roller coaster - the Little Book fanning the (little) stock-picking flame inside me, and Index Fund book trying just as hard to stamp it out forever.
The Little Book is well, really little. It’s about the size of a 5″x7″ photograph and barely over 100 pages long. It could be easily finished in one afternoon. The writing style is simple and easy to read, although many of the jokes felt a bit forced to me.
It starts with a nice little story which explains what you are actually buying when you purchase a stock. In short, you’re not buying a physical object, but a stream of future earnings. This is why stock prices fluctuate so much - you’re trying to predict the often-hazy future.
Accordingly, Greenblatt argues that the Market is simply crazy over the short term. But due to this craziness, there is the opportunity to snap up a company at a bargain price. Enter the Magic Formula: Buy good companies at bargain prices. Doing some number-crunching, using the formula gives you historical annual returns of about 30%, beating the market by 20% every year. All with lower risk than the market. Yowza! Sounds good right?
The tricky thing about this book is how ‘good’ and ‘bargain’ are defined. Greenblatt uses a vague definition in the main part of the book, and then a more complicated definition in the appendix. Thanks to JLP at AllFinancialMatters, I discovered this Barron’s article which confirms that even other quantitative people can’t understand the exact definition of the Magic Formula or replicate his awesome returns. They used a different stock database, leading to the returns going down significantly. That’s a bit fishy.
But… even if you use his dumbed-down (my name, not his) definitions of:
Good = High Return On Assets (ROA), and
Bargain = Low P/E ratio,
both of which are part of most stock screeners, you still get market-beating results.
Criticisms
Any time a book claims to beat the market, people line up to crap all over it. I mean, isn’t this just good ole’ Value investing? Traditionally this is done with other ratios like Book-to-Market ratios. Again, the data seems to support that the Little Book method does better than other ratios.
Another criticism, which is noted in the book, is if everyone knows this secret, won’t the prices adjust and remove this market inefficiency? Greenblatt counters this with the fact that his method only works for the long-run, and will underperform the market for sometimes years at a time. This volatility will scare away enough investors and/or fund managers over the long haul such that the premium will endure. Okay, maybe.
My personal nitpick is that the returns also don’t take into account trading commissions and bid-ask spreads. Greenblatt glosses over this point by implying “This method kicks so much ass (remember, 30%!) that you could pay full-service broker commissions and you’d still come out ahead!”
But let’s take a closer look. He suggests holding 30 stocks, each for only a year. Unless you’re investing huge sums, that’s a big drag. If you buy in $500 chunks ($15,000 total portfolio size) with $10 trades, that’s a 4% dent in profits every year (buy and sell). Even at $5 trades, that’s 2%. Finally, if you’re not holding these in an 401k/IRA, you’ll have to deal with taxes.
Added:
1) His returns were based on data from 1988 to 2004, which may be the best he could get will full data, but still is less than 20 years. Will it persist?
2) The book has a website, MagicFormulaInvesting.com, which you can generate the current picks per the Little Book method.
Conclusion
So, if you add in the database inconsistencies, smaller future market inefficiencies, the existing value-premium, the trading costs, and taxes, will you still end up with a risk-adjusted market-beating return for the next 20 years? I have no clue. I can only say that I’m not changing any of my current investments, but if I do eventually set up a small stock-picking portion of my portfolio, I’ll keep the results of this book in mind.
Although I don’t really recommend it as an investing guidebook like The Four Pillars of Investing, I did find it a fun book to read. I think it presents a new-ish view on picking stocks and was a refreshing change of pace for me.
Overall Rating: (ratings explained)
Posted in Book Reviews | 13 Comments »
Friday, October 13th, 2006
The Big Money by Frederick R. Kobrick, was also sent to me for review. It was good timing because I was looking for books on stockpicking to expand my reading horizons. One can only read so many books on the wonders of index funds before monotony sets in.
I’d never heard of Kobrick before this book either, but apparently he is a long-time mutual fund manager with accolades such as:
- Manager of the State Street Research Capital Fund, which was ranked as one of the top five mutual funds in the country for the entire 15-year bull market in 1997
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Tuesday, August 15th, 2006
After reading their investing book Yes, You Can Time The Market! and liking their writing style and slightly different view on things, I decided to read Ben Stein and Phil DeMuth’s book on retirement - Yes, You Can Still Retire Comfortably!
Even though this book is targetted at Baby Boomers worried about their impending retirement, and I’m still in my 20s, it was an interesting read. First, they scare you with (true) tales of underfunded pension plans, a shaky Social Security system, and rising healthcare costs. Obviously, you need to do something about it!
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Posted in Book Reviews, Retirement | 4 Comments »
Wednesday, July 5th, 2006
Recently, I have been avoiding reading more investing books that were basically ‘invest in index funds, invest in index funds, invest in index funds’. Great message, but I get it already. I wanted a more detailed analysis of the different asset classes, and more advice as to what to actually buy. And so I found All About Asset Allocation by Richard Ferri, which does exactly that.
The beginning of the book starts like most other index fund books: great investment skill is very rare, asset allocation determines much of your investment return, expenses matter, and you should invest for the long term. The book also explains (better than I can here) how asset allocation works by reducing your overall portfolio risk by introducing asset classes that have a low correlation to each other.
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Wednesday, March 15th, 2006
The Intelligent Asset Allocator (IAA) by William Bernstein does exactly what it says on the cover, it teaches you ‘how to build your portfolio to maximize returns and minimize risk’. However, I would recommend that 95% of readers not buy it. Come again? Instead, I would recommend the later book by the same author, The Four Pillars of Investing (review). Even though Bernstein himself refers to it as for the ‘liberal arts’ audience, I have an engineering background and I still like Four Pillars much, much more. It just feels more refined and easier to follow.
Both books seem to cover the same general topics, with IAA giving you a clearer mathematical basis for his conclusions. To me, here are the main ideas within the book:
1) There is very little evidence that, on the whole, actively managed funds outperform the market. In fact, if you just buy what’s been hot the last 5 years, history has shown that you would consistently underperform the S&P 500 afterwards. In other words, don’t chase past performance.
2) As risk increases, so does the return. But that doesn’t mean you should just go out and buy the one riskiest thing you can stomach. Your goal is to get the maximum return out of your acceptable amount of risk.
3) To achieve the goal in #2, you must construct your diversified portfolio out of multiple asset classes which will work in combination to reduce risk. The vast majority of your returns come from your asset allocation mix.
4) You can’t guarantee your future returns, or expect them to follow historical returns exactly. What you can do, is to optimize your portfolio using that data to give you the best chance at achieving the highest returns.
5) Minimize expenses and taxes by choosing no-load index funds with low expense ratios, and by carefully placing each asset where it will be most tax-efficient (taxable vs. tax-deferred accounts).
Finally, in the end, the book gives you some advice on how to choose your specific asset allocation and then implement it using Vanguard or DFA funds. Again, I found the same section in Four Pillars to be easier to follow, and I’ve found myself referring back to it instead of IAA to plan my portfolio.
Summary
Read Four Pillars of Investing first. If you like things like standard deviations and statistics, then pick up The Intelligent Asset Allocator. They are both excellent books, with different approaches to teaching the same material.
Overall Rating: (ratings explained)
Posted in Book Reviews | 8 Comments »
Friday, February 17th, 2006
Ponzi scheme. You’ve most likely heard of the term, although you may not know exactly how it works. A Ponzi scheme is a scam where investors are promised amazingly high returns on their money based on some ’secret super-investment’, but in reality the money to pay older investors is simply taken from the money of new investors. Of course, this can’t go on forever, and the investors involved at the end are usually left with nothing.
Let’s take the most recent ‘investment program’ which reeks of being a Ponzi scheme, 12DailyPro, which is now being investigated by the FBI. The story of this interested me so much I started reading ‘Ponzi: The Incredible True Story of the King of Financial Cons‘. The similarities between his story and 12DailyPro are astonishing.
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Wednesday, February 8th, 2006
How do you know when there’s too many personal finance books out there? When comedian Dave Barry does one. In his new book Money Secrets: Why Is There A Giant Eyeball on the Dollar?, he pokes fun at corporations, Suze Orman, and everyone else.
He shares such gems as the solution to soaring college costs: Don’t let your kid study too much, so they can’t get into private school. State schools are much cheaper. Just like the gurus, he’s got a financial assessment quiz for you, with questions like:
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Friday, January 20th, 2006
Smart and Simple Financial Strategies for Busy People. Whew, what a long title. I was putting off reading this book because it seems like ‘just another personal finance book’ by another so-called Money Guru. (I’d never heard of Ms. Quinn before getting this book from the publisher.) And in many ways it was. But I also learned a couple of new things.
I found it amusing that she makes fun of David Bach’s “latte factor”, while the rest of her book is so similar to his Automatic Millionaire book. Save a certain percentage of your money automatically every month. Invest it into diversified index funds. Let it compound happily. Sound familiar?
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Sunday, January 8th, 2006
The predominant investing mantra nowadays is to pick some nice index funds and stick with them, since you can’t know when the market is going to go up or down. In this appropriately titled book Yes, You Can Time The Market!, Ben Stein and Phil DeMuth argue against that. Instead of using fundamental valuation, where someone tries to analyze a company and find it’s “true” value vs. market value, they argue that a market index as a whole, such as the S&P 500, can be viewed as cheap or expensive by comparing it against it’s 15-year moving historical average.
For example, you can take the average of the P/E ratio of the S&P 500 for the last 15 years. If the current P/E ratio is greater than that average, then it is overvalued. If the current P/E ratio is less, then it is undervalued, a signal to buy. (Right now it’s 25 vs. 19, undervalued.)
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Friday, January 6th, 2006
The Number by Lee Eisenberg was generously provided to me by the book’s publisher. It sounded neat, so I agreed to read it and review it.
The Number, as you may have guessed, stands for the specific amount of money that people have in their mind that they need to retire on. For example, a person may say “Once I get $1 million saved up, that’s it. I’m off to the golf course forever.” You may think, as I did, that this book is about how to deduce your Number and how to invest to achieve it. We’d both be wrong. I kept reading and reading, looking for financial enlightenment, only to be left wanting.
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