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Book Review: Letters to a Young Analyst

Tuesday, April 8th, 2014

letters cover (snipped)

 

We need to spend more time thinking about the big picture issues in investing.  Why do we do what we do?  How do we structure our firm to get the best out of the talented people that we employ?  Where do we really have a sustainable competitive advantage?

This slim volume has much advice in these areas, but focuses on how young analysts can make themselves valuable to the firms that they work for.

In addition to the advice of Tom Brakke, you get the advice of 12+ analysts, many of whom I respect, explaining the “nuts and bolts” of good analysis to young analysts.  I was on of the twelve, and judging from the other comments, there are many who remember what it was like to be young and grasping for help.  What would we have done differently, given our acquired knowledge?  This book is meant to give young and amateur investors a leg up.

The end of the book gives a wealth of resources on how the young analyst can learn.  In this era, it’s almost more of a question of excluding pervasive bad content.

This is a great book for young analysts, and serious amateur stockpickers.  If you are interested, you can buy it here.

Unlike most of my book reviews, there is no way for me to profit off of this one, not that I ever profit much off of my book reviews.  If you buy it, I encourage you to study it, because many older investors have given their best to aid young analysts.

Book Review: Treasure Islands

Tuesday, April 1st, 2014

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Tax havens exist to lower taxes and regulations on corporations and wealthy individuals.  But doing this involves significant complicated legal and accounting work.  The average person could not benefit because the fixed costs are high.  You need to have a lot of assets to benefit from tax havens.

So why do the wealthy governments of the world tolerate tax havens?  Why don’t they “use NATO to blockade these places, and tell them to end their tax-avoidance-facilitation policies, or else.”  Sadly, the wealthy have disproportionate power over politicians, and the majority of politicians are wealthy.  They like the system as it is.  You can make the tax code as progressive as you like; you will not end up taxing the intelligent wealthy much more.

This book confronts transfer pricing, where profits get shifted to low-tax countries by clever accountants.  Very difficult to police.

The is an amusing section in the middle of the book about the City of London Corporation, which has unique rights in the UK.  It is the home of most financial activity n London, and is mostly unaccountable to the UK.

In general, I believe that taxation should be the same regardless of the structure of the entity being taxed, its location, etc.  To that end, I think that corporations should be taxed on their global income as expressed to its owners.  Or, don’t tax corporations, but make all taxation like limited partnerships, and tax the individuals that own them.

There are other possible solutions.  There can be limits on corporate structure.  Israel limits subsidiaries such that the depth from the holding company cannot exceed two.  There could be consolidation and/or non-recognition of  subsidiaries in tax havens.

Additional Resources

Longreads article

Book website (those reading at Amazon, come to Aleph Blog to get links)

Quibbles

The book makes its last chapter about how tax havens helped cause the financial crisis, but it makes a very weak case.  Individuals and Banks overlevered themselves as asset prices rose, creating a bubble — not much different than the 1920s.  Tax havens played little role, even if they aided securitization in a few ways.

The book argues for capital controls, but those controls often create incentives for greater corruption.

My main problem with the book is that it does not offer any workable solutions to the problems.  My secondary problem is that the problem is not so much with the tax havens, which we could easily marginalize, but with the politicians, who do not do the hard work of seeing that taxation takes place, regardless of the corporate form or location.

Who would benefit from this book: You have to be willing to endure complex arguments to benefit from this book.  If you want to, you can buy it here: Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens.

Full disclosure: I borrowed it at my library.

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.

Book Review: “The Up Side of Down”

Friday, February 14th, 2014

Failure. We’ve all experienced it. Can we benefit from it?  The answer is maybe, depending on the costs of failure.

If the costs of failure are high, e.g., repaying debts for the rest of life, people will avoid taking risks.  As a result, society will stagnate, because few take risks.

But if the costs of failure are low, people will take more chances, start more businesses, try experiments that might prove something bold.  That is one great thing about America; the penalties for failure are low.  Some have said we are the land of unlimited second chances.  After resigning from the presidency, Richard Nixon became an influential voice on foreign policy.

Megan McArdle uses her own life and many other societal problems to illustrate how a proper use of failure  can benefit individuals and society as a whole.  Failure is how we learn.  As some have said, “The wise learn from the failures of others, normal people learn from their own failures, but the stupid don’t learn.”

I enjoyed this book a great deal, but I want to point out a few of the chapters that particularly struck me.

In Chapter 8, she described the various ways that ideologues described the causes of the financial crisis.  The Left and the Right chose their own monologues to explain the economic failure that occurred.  The truth was far more banal, as average people bought into a housing mania, with financial institutions more than willing to facilitate it, levered as they were.  When the bull market ended, many people found themselves with too much debt relative to the value of their houses.

Chapter 9 was the one from which I learned the most, as it described a probation method used in Hawaii, that I would describe as the judicial equivalent of spanking.  When one on probation violates a term of probation, he gets sent to a rather grim prison for a short period of time.  Like spanking, it is short, and sharp.  Those on probation get tested randomly and regularly.  Most quickly get the idea that they need to change their lives.  The recidivism rate on this program is low.  Small failures get punished.  Resistance to the system means permanent jail.  No failures means freedom.

But what I really appreciated in the book was the willingness of the author to expose her own life failures — jobs, caring for her mother’s health, bad relationships, etc.  She learned from her mistakes, and ended up with a husband who loves her, a good job, and a home in DC, where there is not much debt on the property.  Well done.

My own life has had its share of failures, and they have all taught me something.  The question to you, reader, is what have you learned from your failures?  Memorialize failures, so that you can avoid them and their cousins in the future.  In that sense you can fail well.

There is not a bad chapter in this book.  I recommend it highly, and you will learn a lot.  I learned a lot.

Quibbles

None.

Who would benefit from this book: Anyone could benefit from this great book.  If you want to, you can buy it here: The Up Side of Down: Why Failing Well Is the Key to Success.

Full disclosure: The PR people offered me a book, and I accepted it.  I am glad that I did.

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.

 

Book Review: The Safe Investor

Wednesday, January 29th, 2014

Safe-Investor-nest-egg-jacket-5

This is a special book.  It’s special because it explains investment concept in simple language, and tries to give average people an ability to understand how the markets work.

The author shares from his life experiences, where not everything turned out right.  With bonds in the 1970s, what was ordinarily a safe investment turned into “Certificates of Confiscation,” as inflation and interest rates rose.

The author is careful to point out the difference between fake diversification and true diversification.  False diversification has a large number of positions that are related, like owning many tech stocks from 1998-2003, or many financial and housing stocks 2005-2009.

True diversification means there is not some hidden factor that can affect your whole portfolio.  The author argues that we need a broad array of investments in the portfolio to diversify results, reducing volatility, so that the investment program can continue  until the target is reached.

Th author also argues  that investors need to dig into the guts of what they are investing in.  Who is the custodian?  Are my assets safe from commingling with the assets of others?  (Think of MF Global or Madoff.)  Is there any factor that could cause a substantial fraction of my assets to be significantly impaired?  As an example, what if you live to an old age?  Will you outlive your assets?  For most Baby Boomers, that is a significant risk that is under-appreciated.

The author, who managed two significant asset management firms in his career, encourages readers to do detailed checks on any active managers they hire (like me).  Analyze their methods, their incentives, their character, and more.  Passive investing does away with many of those questions, but still you have to set up an asset allocation.

As for active managers, they often buy and sell to make it look like they are doing something for clients, when frequently less activity would be in the best interests of clients.  Active management often works better at lower turnover rates.

Investment performance analysis has its own pathologies.  There is the need to buy an outperforming fund.  Why buy a fund that has done poorly?  An investor could ask two questions: 1) is the manager just benefiting from the current cycle, or are his picks good aside from that? 2) Has the manager gotten so large in that strategy that there is no place to place money to achieve an above average return.

The author also notes a strategy that many rich employ: hold safe assets and risky assets, but not the stuff in-between.  Few have made their wealth on the stuff in-between.  Preferred stock has made no one rich, nor investment-grade corporate bonds.  Junk bonds when carefully chosen may be an exception.

Now, that said, I think the author is too optimistic on emerging markets.  As in the current mini-crisis, many of them have immature financial systems, and are mis-financed.  Long assets are being financed by short loans.  This can goose growth in the short-run, but not in the long run.  I think that emerging markets have a place in portfolios, but smaller than the author implies.

Three Pockets

The author posits three pockets for assets — a large one for savings (don’t lose this), a medium one for investing (moderate risk), and a small one for trading (high risk).  He is trying to channel male actions in a good way.  You want to gamble?  Gamble with a small amount of money.  Keep the main body of your assets in ordinary hands that you do not touch.  Set it, and mostly, forget it.

This is an interesting way to try to get people to take limited risks, and have most of the portfolio be safe or have limited risks.

Passive vs Active

The author does not take a stark position on this, but points people toward passive funds if active fees are too high, and track records do not validate good investment choices.  That is how I feel about my own investing.  If I can’t outperform, I don’t want you investing with me.  The book’s position is only invest with active investors that have an edge.  That is more common with smaller cap stocks, international investing and junk bonds.

When to Adjust Portfolios to Reduce Risk from Aging

This book has risk positions lasting longer than most books, and generally, I think that is right, unless markets have gone to such high levels that intelligent investors should lighten up.  I think we are in one of those moments now.  Walk, don’t run, to reduce risk assets, and don’t go all the way, just lighten up.  I rarely make big moves, and the book would not advocate tactical big moves either.

I thought the book’s chapters on choosing advisors were well-written.  It gives you adequate ways to check out financial advisors like me, and those much larger than me.

Summary

The summaries at the end of each chapter are very useful.  I can endorse almost everything in the book.  Just be more careful about emerging markets than the book is, they have a lot of risk embedded at present.

Quibbles

None, aside from what what previously mentioned.

Who would benefit from this book: Most amateur investors could benefit from this great book.  If you want to, you can buy it here: The Safe Investor: How to Make Your Money Grow in a Volatile Global Economy.

Full disclosure: The PR people offered me a book, and I accepted it.  I am glad that I did.

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.

 

Book Review: Financial Blogging

Friday, January 24th, 2014

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This is a practical book that is a very good book.  Do you want to write things that people want to read?  This book will help you do it.

Coming out of US public schools, not everyone is prepared to write for a broad audience because:

  • They aren’t good with spelling and grammar.
  • They can’t make it interesting.
  • They don’t know what to write about.

This book can help with many of the deficiencies, aiding writers, to write and rewrite tight prose.

This book will help you source ideas.  It will help you refine ideas, as you write and rewrite ideas.

It will help you map out ideas before you write, so that you have a visual outline of what you want to say, which will aid you in expressing your ideas.

Now if you read this book does it mean that it will guarantee that you write great stuff? No.

You have to have some edge that you want to express.  Most investment commentary is garbage.  Those the have a differential insight might be able to create value.  But that is not generally true, unless we are at Lake Wobegon, where all of the children are above average.  Lake Wobegon is fictitious, easy excess returns are hard.

The main idea is start blogging, and start improving.  Start with a good idea that would have broad interest. Then write, revise, revise, revise.  Writing gets better with effort and editing.

Beyond that, you will have to think of compliance.  Disclose all relevant interests that you the writer might have.  If you own or short a stock that you write about, disclose it.

This book will improve your blogging.  It will sharpen what you write about, the frequency at which you write, and how you write.  This is a great book for financial bloggers.

Quibbles

None

Who would benefit from this book: Almost all financial blogger could benefit from the book.  Though I am experienced, there are many places where I learned more.  If you want to, you can buy it here: Financial Blogging: How to Write Powerful Posts That Attract Clients.

Full disclosure: I asked the author for a review copy, because I respect her to a high degree.

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.

Book Review: Banking and Financial Institutions

Saturday, January 4th, 2014

Banking and Financial InstitutionsMany readers ask me for a good book on financial institutions, and this is a good one, if limited to depositary financials, not including insurance companies and asset managers.

This is a comprehensive book for depositary financials, even covering Islamic finance, which I will admit I learned from it.  It is a good thing to understand in depth those with whom you you disagree. Islamic finance imbibes the errors of Aristotle, who deemed money to be sterile.  Why force everyone into a mold where there can’t be loans at interest?  Why restrict that freedom?

But that is a small part of the book.  Most of the book deals with how banks operate.  It is very good at describing how banks create profitable lending, and how they act within regulatory boundaries.

It’s a good book, and I recommend it to all.

Quibbles

That said, there were many small errors in the book, which if the author had been an intelligent bond trader, the errors would not have been in the book.

As an example, on page 32, he called an MBS to be a CDO.  Yes, in an attenuated way that might be so, but for professionals that know the market, we would never phrase it that way.

Who would benefit from this book: Almost anyone will benefit from this book, but those who will benefit most are those who analyze banks.  If you want to, you can buy it here: Banking and Financial Institutions: A Guide for Directors, Investors, and Borrowers (Wiley Finance).

Full disclosure: The publisher sent me the book after he offered me a review copy.

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.

Book Review: Rule Based Investing

Friday, January 3rd, 2014

Everyone would like a “money machine.”  Follow simple rules, and “Wow, this makes money.”  This is that kind of book but it has better foundations than most in its class.

The book examines three types of investing, most of which are foreign to average investors.  Most investors don’t invest in equity by shorting it, and most investors are not currency traders.

But that is what the book encourages.  I’m going to digress here, because I have to explain some salient matters, and say what I think, so that my later critique makes sense.

Volatility and credit are cousins.  After all when markets go nuts, and everything is in disarray, those that have been trying to borrow at low interest in one currency, and invest at higher interest in another currency get hosed.  Why?  Because in volatile times, the riskier currencies face capital flight versus safer currencies that have the confidence of the markets.

All of the methods mentioned in this book as a result are making bets on volatility/credit, and try to control the bet by monitoring implied volatility, credit spreads, and momentum.  They limit when they are in the market and when they are out.

I don’t have a problem with the theory here, but with the ability of average people to carry it out.  This book would be good for quantitative hedge fund managers; I am less certain about individuals here.

As an aside, what the book describes is how PIMCO has done so well at bond investing over its history — shorting volatility to pick up yield.

But the main criticism is this: the author optimized the book to fit her full data set.  When you read the last chapter, and see that you could have earned 30%+/year for 13 years, if you were as clever as the author, you should think, “Yes, if I had 20/20 foresight.”  The methods will not do as well in prospect as in retrospect.

Quibbles

There is little that I disagree with in the book on a theoretical basis.  Where I differ comes in two areas: individual investors will not have the fortitude to carry out what is a complex method of investment.  Secondly, when enough hedge fund money adopts these strategies, the pricing in the market will shift, and the hedge funds will no longer have easy money.

Who would benefit from this book: If you are willing to do the work of a volatility-selling hedge fund manager, this is the book for you.  If you want to, you can buy it here: Rule Based Investing.

Full disclosure: The publisher sent me the book after he offered me a review copy.

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.

 

Book Review: Kentucky Fried Pensions

Tuesday, December 17th, 2013

frontfinal This book takes you through the corruption in the Kentucky Retirement System.  It has the dubious distinction of being the worst-funded municipal pension system in the US, leaving aside Puerto Rico.

This book is very well-researched for three reasons:

1) The author served one four-year term on the board of the Kentucky Retirement System, so he has insider knowledge.

2) The author is an expert on pensions — he has worked in this area for over 25 years.  He also holds a CFA Charter, which demonstrates his knowledge in investments, and his commitment to ethics in investing.

3) The author extensively cites his findings, giving nearly 600 endnotes in an otherwise 256-page book.

The Kentucky Retirement System is not a victim of incompetence alone, but of fraud, political favoritism, and structured neglect.  The structured neglect is probably the most serious matter.

For years, Kentucky would not pay its full actuarially required contribution to the retirement system.  Now, you can’t argue with the math, though you can argue with assumptions.  Not making the full payment persistently will leave a pension plan weakly funded.   As the author points out, it is a quiet means of borrowing against the future, and at a far higher rate than Kentucky could borrow in the municipal bond market.

This is the product of a broken political culture that only cared about the present:

1) Keeping current taxes low

2) Spending more than taxes

3) Politicians accepting bribes campaign contributions from those gaining pension business from the State of Kentucky.

4) Board members that would not enforce thorough audits.

5) Board members that would not seek out investment experts for their board.

6) Politicians that would appoint weak board members that were political cronies.

7) Awarding investment mandates to political cronies, where placement agents would earn disproportionate sums.

8 ) And more…

If you read this, you will wonder how a municipal pension plan could get screwed up so badly.  My answer is this — the political culture of the state tolerates corruption, so it grows like a weed in obscure places like the Kentucky Retirement System.

On the Rating Agencies, Etc.

The book asks the question as to why the rating agencies were complicit on municipal pensions, waking up late to the problems.  My answer is simple.  The rating agencies have never hired many actuaries, and as such did not consider what is obvious to any actuary that I know.  They came to the game late, and that is normal for the rating agencies — if there has not been a failure from a given factor, their models will not have that factor.  That’s normal for most of us, because few of us can envision failures that have never happened before.

Few are like Buffett, who said, “We’re paid to think about things that can’t happen.”  That is the sound of one hand clapping, and few can hear it.

Never allege conspiracy, when mere incompetence will do.  Few saw the housing bubble, and many denied it, including the present and incoming Fed Chairmen.  Incompetence is pervasive; we should be surprised when things go well.

On Pension Obligation Bonds, we should note that they are a dumb idea, and that every municipality that has tried it ended up regretting it.  It is hard enough to fund pensions without borrowing money; it is much harder to do after borrowing money.

Quibbles

The main problem with the book is that it needed a better editor.  It reads like a series of essays that are self-contained, because much material is repeated that could have been eliminated.

Secondarily, the book takes a position that pension benefits can’t be cut.  That is not true.  It may take constitutional changes to do so, but in a democracy, anything can be done.  We could repeal the prohibition against ex post facto laws on a basis limited to pensions.

I say this because many municipal unions pressed for pensions far beyond what was warranted, in exchange for lower salary increases.  It appealed to venal politicians, because increasing pensions usually had no current cash cost.

Eventually, municipalities will be forced to cut pensions, even for those that have retired.  There will be no other choice.

Who would benefit from this book: If you want to know the depths of depravity in municipal pensions, this is the book for you.  If you want to, you can buy it here: Kentucky Fried Pensions: Worse Than Detroit Edition.

Full disclosure: The author sent me the book after I asked for a review copy.

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.

Book Review: The Dao of Capital

Wednesday, December 11th, 2013

Jacket.aspxHave I said this before: this is a tough book to review.  Much as I am in sympathy with Austrian Economics, I am not in sympathy with Daoism.

When I came to Christ at age 16, the major rival for my heart was Daoism, not the Catholicism that I grew up with.  My main difficulty was that Catholicism did not speak with a single voice on critical matters — one priest would say this, another that.

Daoism has an advantage in some ways because it seems to describe the world; the world is cyclical, and often a condition gives way to its opposite.

But Daoism, though descriptive of what happens, is amoral, as is much of radical libertarian thought.  A system without rules is no system.  There have to be rules for a good nation to exist.  On economics, there have to be ways to prosecute fraud.  There have to be ways to protect property rights.  That can’t happen without a strong, if limited, government.

Capitalism does not derive from Daoism, but from the laws of Moses, and the words of Jesus.  “Thou shalt not steal.” has impact, because it implies property rights.  70% of the parables of Jesus involved money, and assumed that people were free to do with their resources as they saw fit.

Daoism did not develop capitalism.  It was a creation of the Christian West.  Was everything perfect in the way it was worked out?  No.  There were many mistakes, and much dispropriation of cultures that had no concept of private property.

Other Problems

The book would have been better without the constant repetition of foreign words.  It is pretentious to make readers learn a bevy of foreign words.

Minsky is better than the author makes him out to be.  At least Minsky sees how financing gets warped through the boom-bust cycle.

I believe that most financial crises occur because of government interference, but not all of them.  Men are greedy/envious/fearful enough to create self reinforcing cycles in the absence of government interference.  Look at the Creation more generally.  There are many species that ceased to exist long before Mankind became dominant.  In the same way, there have been many crises that have occurred in the absence of government interference.  “Man is born to trouble, as the sparks fly upward.”

Practical Upshot

In the last two chapters, he comes out in favor of the Q-ratio and the price-to-book style of value investing, plus quality.   Both good ideas, but both require patience, which is in short supply among aging baby boomers.  The question to the reader is how long you are willing to wait.  That is the big question of much investing, and how to answer the question — the book says wait.  I agree, but it is tough to hold a lot in cash in a bull market.

Who would benefit from this book: It is a good book, though I doubt that many can follow the advice.  If you want to, you can buy it here: The Dao of Capital: Austrian Investing in a Distorted World.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

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.

 

 

 

Book Review: Bonds are not Forever

Sunday, December 8th, 2013

Bonds-are-not-Forever

This is a good book, it is not a great book like The Hedge Fund Mirage.  Why?

There are a few reasons.   First, the book on hedge funds contradicted the conventional wisdom.  This book confirms the conventional wisdom that interest rates have to rise.

We all have to be wary of the conventional wisdom in economics.  Economics is a social science, but I mean it not in the sense that we study society, but that economists toe the line as to what is acceptable to publish.  This is guarded by peer review, which ensures that no new idea that might be correct gets published.  (This is true of most of the “sciences” because many “scientists” are not neutral observers — they have axes to grind.)

This book assumes that the US will inflate its way out of this crisis.  In the  Great Depression, it did not work that way, though many thought it would.

The book correctly calls out all of the ways that Wall Street cheats individual bondholders, particularly structured notes, and the illiquidity of muni bonds.

He does not get how muni bond ladders are durable investments, being a good compromise on how to avoid interest rate risk.  Further, he never mentions how the TRACE system of FINRA reports all trades.  The system is not that opaque.

This is a good book, but not a great book.  Yes, I think inflation is more likely than deflation, but I don’t think inflation is a slam-dunk.  We haven’t had it yet amid many predictions for it.

Quibbles

Already expressed.

Who would benefit from this book: It is a good book, though I doubt that the theory is certain.  If you want to, you can buy it here: Bonds Are Not Forever: The Crisis Facing Fixed Income Investors.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

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.

 

 

Disclaimer


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.


Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.


Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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