Day: September 21, 2010

Book Review: The Elements of Investing

Book Review: The Elements of Investing

The Elements of Investing

This is a basic book.? A very, very basic book.? Did I mention this is a basic book?? Well, it is a basic book.

Sorry about that.? When you read a lot of sophisticated stuff on investing regularly, and then read The Elements of Investing, you know that you have to take a step back and re-think investing for everyone.

Written by Burton G. Malkiel & Charles D. Ellis, two notable investment writers favoring low cost indexing, and with a forward from David Swensen, you know that it will be a traditional buy-and-hold analysis.? (Though there is something funny here.? The authors criticize using the complex asset classes that Swensen uses, and Swensen criticizes buying individual stocks, which the authors use in small measure.)

The book has five sections:

  • Saving
  • Indexing
  • Diversify
  • Avoid Blunders
  • Keep it Simple

The section on saving is excellent, and offers many ways that people can cut their spending without ruining their lives.

The indexing section is fine, though it overstates the inability of investors to beat the indexes.? Yes, the market can’t beat the market as a whole, but dedicated investors following value and momentum can beat the market, until too many copy those unpopular strategies.

Diversification is wise.? But there are limits.? If one is going to be active, be active, and ignore the index.? Otherwise, be passive and index.? What’s that, you say: “If I miss by too much, I will lose a lot of assets.”? Sorry, but that is the price of being an active manager.? If you are going to do it make the most of it; don’t hug the index.? But the wag will say, “just avoid being in the bottom quartile.? You only get fired in the bottom quartile, so hug the index.”? The behaviors that benefit managers are not the same ones that benefit clients.

They recommend rebalancing, which I do as well.? They also recommend value investing in moderation.

I am totally in agreement with the chapter on avoiding blunders.? You win by not losing, and compound it over time to really build value.

The section on keeping it simple focuses on asset allocation, tailoring investment returns to individual situations, and is pretty basic.? I found little objectionable here, but I would spend some time analyzing when asset classes are cheap or dear.

They have an appendix on saving on taxes which is valuable, but if I had been in their shoes, I would have described additional strategies to lower tax liabilities off of both capital gains and losses.

Quibbles

They treat international investing as a free lunch, which it is not due to confiscation, currency risks, war, plague, famine, financial failure, etc.? The last forty years have been special, because of peace in developed economies.? That may not be true in the future.? I invest internationally, but only 25% of assets at most, and only in places where I trust the rule of law.

Who would benefit from these books:

This is the perfect book for your dumb brother-in-law (or similar) who has excess cash flow, and always seems to lose money on his investments.? Given the section on saving, it could also be valuable for your spendthrift brother who is constantly complaining about being in debt.

This is a very basic book.? Give it to the clueless; it cetainly won’t hurt them, and it might help them a lot.

If you want to, you can buy it here:?The Elements of Investing.

Full disclosure: Without asking, I was e-mailed a copy of the book.? Personally, if I were the publisher, I would send a physical copy.? Not that I am going to post it for free use, but I know that many will.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Redacted Version of the September 2010 FOMC Statement

Redacted Version of the September 2010 FOMC Statement

August 2010 September 2010 Comments
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months. No real change.
Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. No change.
Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Shades its view down on business spending.
Housing starts remain at a depressed level. Housing starts are at a depressed level. No change.
Bank lending has continued to contract. Bank lending has continued to contract, but at a reduced rate in recent months. Shades up bank lending a little.
Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated. The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term. No real change.
Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time. Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate. The FOMC will try to inflate, and let it into the goods and services markets, rather than merely using it to prop up the prices of assets backed by debt.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period. No change.
To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. No real change.
The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability. The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate. The change is from price stability, to returning inflation to levels consistent with its mandate, which means they will try to inflate, and let it into the goods and services markets, rather than merely using it to prop up the prices of assets backed by debt.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Oops, Kohn is gone.? I will not miss him not being on the FOMC.? Can we bottle up the replacements until after the 2012 elections?
Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives. Voting against the policy was Thomas M. Hoenig, who judged that the economy continues to recover at a moderate pace. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and will lead to future imbalances that undermine stable long-run growth. In addition, given economic and financial conditions, Mr. Hoenig did not believe that continuing to reinvest principal payments from its securities holdings was required to support the Committee?s policy objectives. No real change here; if anything, Hoenig is more firm in his opinions.
1. The Open Market Desk will issue a technical note shortly after the statement providing operational details on how it will carry out these transactions. Sentence dropped, since the announcement is over.

Comments

  • The FOMC makes a major step in policy change.? The question is this: will the mechanisms of credit transmit inflation to goods and services?? So far, it has not.? Lowering the policy rate does little to incent borrowing when enough people and financial institutions are worried about their solvency.
  • Beyond that, if they succeed, how will it be received on Main Street, especially if price inflation is not accompanied by increases in employment, and is accompanied by higher interest rates and lower stock prices.
  • Aside from that, there was little change from August to September in the FOMC Statement.
  • Hoenig still dissents; hasn?t gotten bored with it yet.
  • That said the economy is not that strong.? In my opionion, policy should be tightened, but only because I think quantitative easing actually depresses an economy.? It does the opposite of stimulate; it helps make the banks lazy, and just lend to the government.
  • The key variables on Fed Policy are capacity utilization, unemployment, inflation trends, and inflation expectations.? As a result, the FOMC ain?t moving rates up, absent increases in employment, or a US Dollar crisis.? Labor employment is the key metric.
Asset Allocation Book Reviews: 7Twelve and The Flexible Investing Playbook

Asset Allocation Book Reviews: 7Twelve and The Flexible Investing Playbook

7TwelveThe Flexible Investing Playbook

When I get a book on asset allocation in the mail, I say to myself, “Another book on asset allocation?? What is there to say that is new on the topic?”

Tonight I review two decidedly different books, and end up praising the conventional book, and dissing the unconventional book.? Since I am not a fan of most conventional asset allocation, I am personally surprised by this result, but now let me explain why I reached this conclusion.

Where’s the Meat?

I don’t know about you, but personally, I hate books that talk big, and don’t reveal any of the significant details of their theories.? Can I figure out approximately how they did what they did?

Now, I am not looking for simple rule-based books either — “Follow this simple formula and make money!”?? But there should be enough to allow someone reasonably well-attuned to the markets to be able to say, “Yes, this is reasonable.? I don’t know all of the details, but I have some reasonable idea of how they did it.”

I don’t have that reasonable idea with The Flexible Investing Playbook.?? From what I can gather, they propose Dynamic Asset Allocation that is rather aggressive, trying to catch turns in markets.? I say aggressive, not because they advocate large moves; they don’t.? But the efforts to catch turns is a difficult endeavor, and they don’t give me enough grist for the mill, that I could set up my own approximate model for switching, if I wanted to do that.

One strength the book has is identifying alternative asset classes that can smooth the ride for investors.? Sadly, they don’t offer easy ways for investors to pursue these strategies.

On the other hand

7Twelve is static in asset allocation, urging investment in index funds (or active funds if you must), and rebalancing regularly.? The book urges investment in 12 index funds, which gives a very diversified mix.? The reason for the book’s name, is that the 12 funds have a limited track record, lasting from 2000-2009.? But an approximation to the 12, with only seven indexes, has a track record that goes from 1970-2009.

The twelve asset-subclasses are:

  • Large, Medium and Small US Stocks
  • Developed Foreign Stocks
  • Emerging Foreign Stocks
  • Natural Resources Stocks
  • Commodities
  • REITs
  • Barclays’s Aggregate Bonds
  • Inflation-protected Bonds
  • Foreign Bonds
  • US Cash

And the seven asset classes are:

  • US stocks
  • Foreign stocks
  • REITs
  • Resources
  • US bonds
  • Foreign bonds
  • US cash

And the book shows how in the past, an equal weighted blend provided? better total performance, and even better when compared to return volatility.

One additional note, the clever cover art helps prove that seven is half of twelve at least if using Roman numerals.? No wonder Rome fell.

Quibbles

In 7Twelve, there is a lot of “past is prologue.”? It ignore the factors that made 1970-2009 a special environment:

  • General peace.
  • Declining volatility
  • Increasing globalization.

It also ignores that not everyone could follow such a strategy because there would be scaling problems.? We would run out of small and midcap stocks, and emerging market stocks, and REITs and commodity stocks.? Even commodities would run up in price, and then provide subpar returns.

But if few follow such a prescription, such diversification could be wise, so long as there is no major war.? WW III can’t happen, right?

Who would benefit from these books:

I am not sure who could benefit from The Flexible Investment Playbook.? As for 7Twelve, those lacking a sound diversification strategy could benefit.? The strategy is simple enough to implement.

Both books provide significant and clever commentary in investing, if that is enough to commend buying books.

If you want to, you can buy either here: 7Twelve: A Diversified Investment Portfolio with a Plan, or The Flexible Investing Playbook: Asset Allocation Strategies for Long-Term Success.

Full disclosure: I received each book from the publisher; I don’t think I asked for either one.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

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