I am generally not a fan of formulaic books on investing, and this is particularly true of books that take unusual approaches to investing. This book is an exception because it does nothing unusual, and follows what all good quantitative investors know have worked in the past. The past is not a guarantee of the future, but if the theories derived from past data make sense from what we know about human nature, that’s about as good as we can get.
The book begins with a critique of the abilities of financial advisors — their fees, asset allocation, and security selection. It then shows how models of financial markets outperform most financial advisors.
Then, to live up to its title , the book gives simple versions of models that can be applied by individuals that would have outperformed the markets in the past. You can beat the markets, lower risk, and “Do It Yourself [DIY].” It provides models for asset allocation, stock selection, and risk control, simple enough that a motivated person with math skills equal to the first half of Algebra 1 could apply them in a moderate amount of time per month. It also provides a simpler version of the full model that omits the security selection for stocks.
The book closes by offering three reasons why people won’t follow the book and do it themselves: fear of failure, inertia, and not wanting to give up an advisor who is a friend. It also offers three risks for the DIY investor — overconfidence, the desire to be a hero (seems to overlap with overconfidence), and that the theories may be insufficient for future market behavior.
This is where I have the greatest disagreement with the book. I interact with a lot of people. Most of them have no interest in learning the slightest bit about investing. Some have some inclination to learn about investing, but even the simple models of the book would make their heads spin, or they just wouldn’t want to take the time to do it. Some of it is similar to seeing a Youtube video on draining and refilling your automatic transmission fluid. You might watch it, and say “I think I get it,” but the costs of making a mistake are sufficiently severe that you might not want to do it without an expert by your side. Most will take it to the repair garage and pay up.
I put a knife to my own throat as I write this, as I am an investment advisor, but there is more specialized knowledge in the hands of an auto mechanic than in an investment advisor, and the risk of loss is lower to manage your own money than to fix your own brakes. That said, enough people after reading the book will say to themselves, “This is just one author, and I barely understand the performance tables in the book — if right, am I capable of doing this? Or, could it be wrong? I can’t verify it myself.”
The book isn’t wrong. If you are willing to put in the time to follow the instructions of the authors, I think you will do better than most. My sense is that the grand majority people are not willing to do that. They don’t have the time or inclination.
The book could have been clearer on the ROBUST method for risk control. It took me a bit of effort to figure out that the two submodels share half of the weight, so that when submodels A & B flash green — 100% weight, one green and one red — 50% weight, both red — 0% weight.
Also, the book is enhanced by the security selection model for stocks, but how many people would have the assets to assemble and maintain a portfolio with sufficient diversification? The book might have been cleaner and simpler to leave that out. The last models of the book don’t use it anyway.
Summary / Who Would Benefit from this Book
I liked this book, and I recommend it for those who are willing to put in the time to implement its ideas. This is not a book for beginners, and you have to be comfortable with the small amount of math and the tables of financial statistics, unless you are willing to trust them blindly. (Or trust me when I say that they are likely accurate.)
But with the caveats listed above, it is a good book for people who are motivated to do better with their investments. If you want to buy it, you can buy it here: DIY Financial Advisor.
Full disclosure: I received a copy from one of the authors, a guy for whom I have respect.
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