Book Reviews – Page 22 – The Aleph Blog

Book Reviews of Two Very Different Books

Posted on 15 December 200915 December 2009 by David Merkel

Tonight’s book reviews are of two very different, yet very similar books: Fire Your Stock Analyst!: Analyzing Stocks On Your Own (2nd Edition) and, Far from Random: Using Investor Behavior and Trend Analysis to Forecast Market Movement.

Why different?? Well, the first relies on fundamental analysis, and the second on technical analysis.? Why similar?? They are both very single-minded in the way they present how to win in investing.

There are other differences, though.? Fire Your Stock Analyst, by Harry Domash, is a very complete fundamental investing guide for both value and growth investors.? Very complete, to the degree that most average investors will not be able to do all that Harry recommends.? There is a lot to do, and not all of it is of highest importance in my opinion.? Many professional investment shops ignore steps that he prescribes.? I don’t do half of what he prescribes, and I do better than most.? Also, much of what he prescribes is not applicable to financial stocks, but he does not seem to realize that.

Far from Random has a different flaw.? It spends 75% of the book talking about what does not work, and only 25% on what he thinks works.? In the last quarter of the book, the author asserts that trend channel analysis works? through giving stylized examples.? There are no academic studies to prove the point, or, audited track records, as Michael Covel is fond of.? (This makes me want to recommend Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets; there is more logic behind it than Far from Random.)

Who could benefit from these books:

With Fire your Stock Analyst, someone who wants an introduction to fundamental analysis could benefit.? Far from Random, I’m not sure anyone could benefit.? There are much better books on technical analysis.

Full disclosure:? Publishers send me books for free.? I review some of them, the ones that I think are most interesting.? If you enter Amazon through my site and buy anything, I get a small commission.? Don’t buy anything you don’t want.? I do this as a service to readers, and am not looking for remuneration as much as tips for what I have written more generally.

Book Review: Dynamic Asset Allocation

Posted on 12 December 200912 February 2011 by David Merkel

James Picerno writes the popular blog? The Capital Spectator. One of his main topics is asset allocation.? He has a book coming out in February called Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.

Asset allocation is important.? It determines much of the returns investors will receive.

This book goes into a long discussion of modern portfolio theory, and the author finds MPT to be valuable, but needs to be supplemented by other factors other than the market portfolio.? Market capitalization, individual stock valuation, and overall market cheapness/dearness plays a role in asset allocation.? This rectifies the main complaint of value investors regarding asset allocation, in that relatively lower prices should lead investors to allocate more to an asset class.

There are elements of my own view here, which says that asset allocation should look at sustainable yield levels adjusted for the likelihood of those yields occurring, and the potential for downside risk.

Also, the author spends time on the special situations of asset allocation for the individual or institution — how old you are, or, what industry you are in.? I experienced that at one firm I was at where I managed the profit sharing assets.? We underweighted financials because our firm did well when financials did well.? We did not want employees worrying about their assets if the firm was having a bad year.

I recommend the book, but it is not a popular book.? Average people will not get a lot out of it.? The book requires a moderate knowledge of finance to make it valuable to the reader.

Who would benefit from this book: those who have a strong interest in asset allocation, and like or are willing to tolerate a decent amount of academic discussion of modern portfolio theory.? As academic views go, this is a better one.? That said, many people will find this book a tough slog because they don’t want to deal with the academic arguments.

If you want to buy it, you can get it here: Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor.

Full disclosure: I earn a small commission from Amazon for anyone entering Amazon through my site, and buying anything there.? Your price does not rise from my commission.? Don?t buy anything you don?t want to buy if you want to reward me for my writing.? Only buy what you need if Amazon offers you the best deal.

<a href=”http://www.amazon.com/gp/product/1576603598?ie=UTF8&tag=thalbl-20&linkCode=as2&camp=1789&creative=9325&creativeASIN=1576603598″>Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor</a><img src=”http://www.assoc-amazon.com/e/ir?t=thalbl-20&l=as2&o=1&a=1576603598″ width=”1″ height=”1″ border=”0″ alt=”” style=”border:none !important; margin:0px !important;” />

Book Review: The Ten Roads to Riches

Posted on 5 December 20096 December 2009 by David Merkel

Many dream of riches.? Few achieve them.? Why?? It usually involves self-denial and hard work.? It’s not that anyone can’t achieve riches, if they start young enough, but they won’t make the sacrifices to do so.? A strong education helps, but is not absolutely required.? As my old boss Eric Hovde said to his staff repeatedly, the biggest difference in success comes from the degree of effort put forth.? I would only add that working smart amplifies the effort of working hard.

Ken Fisher the billionaire asset manager, identifies the ten ways he has seen to become wealthy.? They are:

1) Build a significant business.

2) Manage a significant business.

3) Be the right hand man of a wealthy person.

4) Be a star athlete, entertainer, or one who significantly facilitates star athletes and entertainers.

5) Marry a wealthy person.

6) Be a lawyer that helps clients sue for major amounts of money on a contingency fee basis.

7) Manage a lot of Other People’s Money.

8 ) Be an inventor of something popular, a popular writer, a prominent politician, or invent an organization that a lot of people want to give money to.

9) Borrow a lot of money and speculate on property appreciation.

10) Work hard, save a lot, and invest wisely.

I think he has nailed it.? My way of summarizing it is that you have to do something that makes a lot of people happy, or at least has the potential to make a lot of people happy.? Or, make one wealthy person very happy or unhappy. Three groups — how do they work out?

A) Those who do something that makes a lot of people happy can earn a lot:

Successful business founders, CEOs, right hand men, inventors
Stars and their significant enablers
Good asset managers
Good writers
Successful real estate developers

B) But even those that promise to do something to make people happy and fail at it can earn a lot:

Any CEO of a big enterprise can earn a lot — at one investment firm, we used to joke that you got paid $50 million to destroy a company — it is what they had to pay to get rid of you.? Their right hand men will still prosper too, just not as much.? In the current financial crisis, that is what gores many about the large surviving firms that were bailed out.? The executives are still prospering after previous dumb decisions.? Easy to complain about it, but it is nice work if you can get it.? (Note: this is why they should not have been bailed out, especially not at the holding company level.? Government officials lie when they say they could not have done it differently.? I for one suggested alternatives ahead of time.)
The same applies to CEOs that tweak the company’s earnings while they are there, but leave their successor in the hole.
Many still follow stars as their stars fade; they may not make as much, but it is still a lot.? Same for writers that lose their knack.
Many asset managers have an early period where they don’t have much in the way of assets, and their track record is great; their ideas for excess return are executable with the current assets under management [AUM].? That leads to growth in assets, until they are too big for the asset class in which they have expertise.? They become index-like, or they venture outside their circle of competence, and their track record suffers.? But AUM is high, and the fees can provide a nice income.? Assets are sticky if you don’t do too badly, and are a good salesman/storyteller.
Politicians can make a lot of money off of contacts or giving speeches once out of office, even if they were on net harmful to the nation while in office.
Some charities (or nonprofits like mutual insurers or credit unions) can be less than scrupulous about what managers get paid.
The real estate speculator, the CEO, and certain investment managers can have a “Heads-I-win, Tails-you-lose” attitude.? America gives people a lot of second chances before you are permanently branded as a fraud.? It only takes one big win to make a lot for yourself, even if you destroy the well-being of others in the process.

C) Then there are those that only have to serve a few:

The spouse of a wealthy person.
The right hand man of a wealthy person, and
The Trial Lawyer going after a big tort
Serve yourself, as an ordinary person working at a job.

No one begrudges the wealth of those in group A — they have served society well.? Many begrudge the wealth of those in group B — they have not served society well.? Group C?? It depends on motives.? More later on this.

One thing is certain, though.? There aren’t many seats in each of the “roads to riches,” except for the last ordinary one, #10.? Few are founders of massive enterprises, or CEOs, or stars, or investors of must-have products or processes.? Few can serve in high office, or write best-sellers, or be able to source a lot of assets to manage.? Few can get the capital markets or banks to loan them millions, even billions.? Few get to try a lawsuit where a huge award is won.? Few get to marry rich.? Also, most succeeding have to hit their right path while young, to allow enough time for compounding their success.

It takes a lot of effort and good breaks in order to be at the top of any economic situation where there is a lot of wealth.? Even road #10, doing well at your job, saving a lot and investing wisely is tough.? Few get to become “The Millionaire Next Door,” but more achieve reasonable wealth that way than all of the rest combined.

Ken Fisher writes about all of these areas in an entertaining way, and gives practical advice on how to follow each road, including additional books to read, and techniques for getting started.? It is an ambitious and compact book weighing in at around 230 pages of text including the preface.? It is an easy, breezy read. As a bonus, in road 10, Ken Fisher shares basic investment advice for the retail investor.

More than Quibbles:

I owe a lot to Ken Fisher for advice that he gave me in Winter 2000, and though I enjoyed the book, I can’t endorse it wholeheartedly.? He is out to tell you how to do it, even in cases where there might be significant moral compromise.? He acknowledges that, but says it is a part of the game.

To me, the key question is what your motives are.? It’s one thing to enter into a risky business, offer full disclosure to all stakeholders in advance, make a best effort, and fail.? It is quite another to trick/cajole people into backing you without full knowledge, and fail.

It is one thing to try a legal case where the damages are proportionate to the harm caused, and another thing to help create disproportionate judgments. It is one thing to serve a wealthy person who asks you to do things that are ethical, and another thing to serve in things that are unethical.? Once you have fans, a privileged job, or “sticky assets,” do you start giving less than your best?? I write this as one that is himself prone to laziness when things go well.? It is a common sin that one has to fight.

Are you looking out for the best interests of those you serve, and society more broadly?? A tough question for any of us, but society itself does not do well when a dominant proportion of it does not serve for good motives.? If it gets bad enough, the society will lose legitimacy and vitality.

Finally, it is one thing to marry because you love the person, and want to give your all to your future spouse.? It is quite another thing to enter in with crossed fingers, and say, “Maybe this will work, maybe it won’t.? I will be careful to protect myself, because the odds of failure are significant.? But economically, it will work out for me either way.? I’m wealthy if we marry, whether it works or not, because the prenup will leave me well off.”

Here’s the common vow: I, (Bride/Groom), take you (Groom/Bride), to be my (wife/husband), to have and to hold from this day forward, for better or for worse, for richer, for poorer, in sickness and in health, to love and to cherish; from this day forward until death do us part. Maybe promises don’t mean much any more, but I can’t see how one marrying for money can say that with a clear conscience.

Before my wife and I married, but after we were engaged, we were at a bookstore together, and we were looking over some marriage books to find one our pastor recommended.? She found a book entitled, “Marry Rich.”? She said to me, “This is a joke book, right?”? I said, “Uh, you would be surprised at the motives some have in marriage.”? She began leafing through it, amazed at the level of greed involved.? She married her poor graduate student boyfriend anyway.? 23 years later things are still working out well for her (and me).

One final note, not from the book: greed wears people out.? It is one thing to do what you love so long as money is not the sole purpose.? But those that are greedy for gain at all costs destroy themselves, and those around them.? It is not a good trade.

With those caveats, if you want to buy the book, you can buy it here: The Ten Roads to Riches: The Ways the Wealthy Got There (And How You Can Too!) (Fisher Investments Press).

Full Disclosure: I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.? Those that want to support me can enter Amazon through my site and buy stuff there.? Don?t buy what you don?t need for my sake.? I am doing fine.? But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.? Win-win.

Book Review: Warren Buffett on Business

Posted on 2 December 200920 June 2017 by David Merkel

In the Fall of 2005, I was at the Annual Meeting of the Casualty Actuarial Society in exotic Baltimore, Maryland.? The Keynote address was by Roger Lowenstein who did a talk on two topics.? Warren Buffett the great investor, and the looming problems from the demographic crisis.

At the end of what was arguably a good talk, he asked for questions.? No one raised their hands.? After a pause, he asked for questions again, and I raised my hand.? I commented that he should have given his talk to the Life actuaries — they are the ones concerned about longevity and health costs, and if he really wanted to do a favor for casualty actuaries, don’t talk about Buffett the investor — talk about Buffett the P&C insurance CEO.

He commented that he was asked to speak about the topic by the CAS.? I like Lowenstein, so if you are reading this Roger, my apologies for making the comment.

Warren Buffett on Business is one step closer to the book I would like to see — I would like to see a book on Buffett as an insurance CEO.? Buffett is a great insurance CEO, and deserves a lot of credit in that capacity.? (Warren, I doubt you are reading this, but if you would like me to write that book, please e-mail me.)

But Berkshire Hathaway is an insurance/industrial hybrid, unique among companies.? Warren Buffett on Business ignores Buffett the investor to take up issues that are just as significant: Buffett the business owner and manager.

The words in the book are Buffett’s.? The man who organized the book took Buffett’s words over the last 25-30 years, and organized them into categories regarding management issues.? The topics include:

Berky acts like a partnership even though it is a corporation.
Corporate Culture and Governance
Competent Managers and Honest Communication
GEICO and Gen Re acquisitions (personally I think Buffett got hosed moving to terminate financial contracts? at Gen Re rapidly.? There is a rule of thumb that says negotiations on illiquid contracts should be undertaken slowly, unless the other side is panicking.)
Assessing and Managing Risk
Compensating Management
Time Management
Crisis Management
Acquisitions — Buffett gets to own a wide number of unique corporations, because the one selling out wants the culture preserved, and if the price is right Buffett will do that.
Ethics in Business
And more…

Both in the chapters and in the appendices, the words of Buffett shine forth as a way to manage corporations for the best long term results, even if things don’t work so well in the short run.

Quibbles

Much as I like the words of Buffett, I prefer a second voice adding analysis.? Let the words of Buffett star, but let someone else add color and history, because Buffett’s own words are not complete enough.

Also, an analysis of how Buffett managed the insurance lines of his enterprise would be welcome.? Even for those looking exclusively at investment issues, the insurance enterprises offered Buffett the balance sheet he needed to buy assets that could take a while to work out.

Who would benefit from this book: Any manager of any company would benefit from this book.? Buffett lovers, if you have read the last 25-30 years of annual reports from Buffett, and notable things he has said outside of that, you likely do not need this, unless you have specific questions on management that you want answered by Buffett, and you can’t remember what he said in the past.

For most of the rest of us, this will still be a valuable book.? If you want to buy this book, you can buy it here: Warren Buffett on Business: Principles from the Sage of Omaha

Full Disclosure:? I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.? Those that want to support me can enter Amazon through my site and buy stuff there.? Don?t buy what you don?t need for my sake.? I am doing fine.? But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.? Win-win.

Book Review: Where Keynes Went Wrong

Posted on 28 November 200929 November 2009 by David Merkel

When I was a grad student, I always felt weird about Keynes.? I grew up in a home that was not explicitly “free market” but was implicitly so.? My Dad was a small businessman and my Mom was a retail investor (as well as home manager).? My Dad’s business did well, but it had its share of hard times, including the depression of 1979-1982 in the Rust Belt, where many of his competitors did not survive.? He had to be a member of the local union and run a closed shop, but as an owner, he had no vote in union matters.

I worked for my Dad for two summers.? During one of them, when we went to get parts, the parts dealer said to me,”I’ve heard good things about you.? Even the union steward has heard about you.”? My face and my Dad’s face went white. I was not in the union. After an uncomfortable pause, he said, “Eeeaaah! Got you!” and he laughed.? Dad and I looked at each other, embarrassed but relieved.

My Mom, like Keynes, and like me, has beaten the stock market for most of her life.? There are excess profits available for wise investors, some of which stem from the foolishness of other investors.

Keynes was a fascinating man who understood asset markets well, but when trying to consider the economy in general, looked to what would work in the short run.? The author of Where Keynes Went Wrong points out repeatedly from Keynes’ writings his view that interest rates are almost always too high, and that interest rates should only rise when inflation is rising quickly.? Can lowering short term rates juice the economy.? Yes, in the short run, but in the longer run it fuels inflation and bubbles.

The strength of Where Keynes Went Wrong is that it spends a lot of time on what Keynes actually said, rather than the way Keynesianism developed into a branch of Macroeconomics, eventually becoming part of the dominant macroeconomic paradigm — the Neoclassical Synthesis.? I admit to being surrprised by many of the statements Keynes made — granted, the author is trying to prove Keynes wrong so he goes after what is least defensible.

The author dissects the errors of Keynes into a few main headings:

Lower interest rates are almost always better.
Growth comes through promoting consumption.
You can’t trust businessmen to do the right thing when it comes to capital allocation.
Government planning is superior to decentralized planning, because experts in government can allocate capital better than businessmen.
Crashes require government intervention.? Using the balance sheet of the government will have no long run negative impacts.
Markets do not self-correct.
Globalization is good, and the nations of the world can cooperate on creating a standard of value independent of gold.

For the most part, those are my words summarizing the author.? After going through what Keynes said, he then takes it apart point-by-point.? The author generally follows the Austrian school of economics, citing Mises, von Hayek, and Hazlitt.

After that, the book continues by taking on the rhetoric of Keynes, both oral and written.? He was one sharp man in being able to express himself — orally, there were few that could match him in debate.? In writing, where time is not so much of the esssence, there is more time for readers to take apart his arguments, and point out the fallacies.? The author points out much of the fallacies in how Keynes would argue his points.

The book finishes by pointing out the paradoxes involved in Keynesianism, e.g., in order to reflate a debt-ridden system, the government must lower rates and borrow yet more.? Also shows how beginning with manipulating the money supply leads to greater intervention in credit, banking, currency, and other economic policies over time, and why the politicians love the increase in power, even if they realize that the policies don’t work.

One surprise for me was how many ways Keynes suggested to intervene in a slump, and how many of them are being used today.

Rates down to zero.
Direct lending by the Fed.
Directing banks to make certain loans.
Bailouts.
Nationalizing critical companies.
Inflating the currency.

The idea of letting the economy contract in any way was foreign to Keynes.? He felt that a seemingly endless prosperity could be achieved through low interest rates.? Well, now we have low rates, and a mountain of debt — public and private, individual and corporate.? Welcome to the liquidity trap created by Keynesian meddling, together with the way our tax code encourages debt rather than equity finance.

I recommend the book; it is an eye-opener.? It makes me want to get some of Hazlitt’s books, and, read the whole of Keynes General Theory for myself.? The book that my professors once praised as a tour de force has holes in it, but better to read it all in context.

Quibbles

The book could have used a better editor.? Too many things get repeated too often.? The book also has two sets of endnotes, one for reference purposes, and one for expanded discussions.? The endnotes that were expanded discussions probably belonged in small type at the bottom of the page rather than as endnotes.? Many of the endnotes are quite good, and it is inconvenient to have to flip to the back to see them.

Also, on page 274, the author errs.? The risk to a business owner is higher after he borrows money.? The total risk of the business is not higher, but the risk to the equity owner is higher.? Whether that risk is double or not is another question.

There’s another error on page 328.? When I buy stock in the secondary market, I am putting my capital to work, but someone else is withdrawing capital from the market.? There is no net investment.? When I buy an IPO, not only do I put my money to work, but there is more investment in the economy (leaving aside the venture capitalists that are cashing out).? It is hard to say when investment in the economy is increased on net.

The table on page 330 is confusing.? The first row should have been set apart to show that GDP is not a government obligation.

Finally, I don’t think that Say’s Law (“Supply creates its own Demand.” Or in the modern parlance, “If you build it, they will come.”) is true, but neither is its converse (“Demand creates its own Supply”).? The two are interconnected, and either one can cause the other.? Markets are complex chaotic systems, and entrepreneurs sometimes produce goods that no one wants.? Similarly, when consumers discover a new product or service, that demand can help create a whole new industry.? Supply and demand go back and forth — the causality doesn’t go only one way.

Who would benefit from this book: Send it to your Congressman, send it to your Senator.? Make sure every member of the Fed gets one, and the fine folks at the Treasury as well.? Beyond that, think of your liberal friends who think of Keynes as a hero, and give them one.? After reading this, I want to add Keynes’ General Theory to the list of books the everyone cites, and no one reads.? (That list: The Bible, Origin of the Species, The Communist Manifesto)

If you want to buy it you can get it here: Where Keynes Went Wrong: And Why World Governments Keep Creating Inflation, Bubbles, and Busts.

Full disclosure: I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.? Those that want to support me can enter Amazon through my site and buy stuff there.? Don?t buy what you don?t need for my sake.? I am doing fine.? But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.? Win-win.

Book Review: Market Indicators

Posted on 28 November 2009 by David Merkel

Every one one us has limited bandwidth for analysis of data.? We pick and choose a few ideas that seem to work for us, and then stick with them.? That is often best, because good investors settle into investment methods that are consistent with their character.? But every now and then it is good to open things up and try to see whether the investment methods can be improved.

For those that use market indicators, this is the sort of book that will make one say, “What if?? What if I combine this market indicator with what I am doing now in my investing?”? In most cases, the answer will be “Um, that doesn’t seem to fit.”? But one good idea can pay for a book and then some.? All investment strategies have weaknesses, but often the weaknesses of one method can be complemented by another.? My favorite example is that as a value investor, I am almost always early.? I buy and sell too soon, and leave profits on the table.? Adding a momentum overlay can aid the value investor by delaying purchases of seemingly cheap stocks when the price is falling rapidly, and delaying sales of seemingly cheap stocks when the price is rising rapidly.

Looking outside your current circle of competence may yield some useful ideas, then.? But how do you know where you might look if you’re not aware that there might be indicators that you have never heard of?? Market Indicators delivers a bevy of indicators in the following areas:

Options-derived (VIX, put/call)
Volume and Price driven (Money flow, rate of change, 90% up/down days, and more)
Where the fast money invests (money in bull vs bear funds, sector fund sizes, and more)
Analyzing the likely motives of other classes of investors (margin balances, short interest, etc.)
Price Momentum and Mean-Reversion
Measuring asset classes and sectors using fundamental metrics? (Fed model, sector weightings, Q-ratio, etc.)
Investor sentiment surveys
How to use analyst opinions, if at all?
News reporting and reactions of stocks to news
Odd bits of news (CEO behavior, little things that indicate a qualitative change in the life of a company)
Insider buying and selling
Commodity market data (COT, etc.)
Bond market behavior (credit cycle, Fed moves, Credit Default Swaps, and more)
Changes in the capital structure (M&A, equity/debt issuance, etc.)
Monitoring the greats (13F filings)

No one can use all of these indicators.? You can probably only use a fraction of these indicators.? But being aware of how others view the market can widen your perspective, and help to reduce negative surprises on your part.

Quibbles

By its nature, since the book cuts across a wide number of areas in 216 short pages, you only get a taste of everything.? I liked this book, but there is room for a second book in this area — one of additional indicators passed over (I have a bunch!), or going into greater depth on the indicators covered.

Who will benefit from this book?

You have to have a quantitative bent, at least to the level of being willing to go out and collect simple data in order to benefit here.? Now, most serious investors do that, so I would say that serious investors can benefit from the “cook’s tour” of market indicators that this book gives, unless they are so serious that they know all of these indicators.? (Like me.)

If you would like to buy the book, you can buy it here: Market Indicators: The Best-Kept Secret to More Effective Trading and Investing.

Full disclosure: This book is unusual for me in two ways.? First, the author (not the PR flack) sent me a copy, with a nice handwritten letter thanking me for my blog and my assistance.? That is why there is the second reason.? Pages 80-81 summarize the longer argument made in my blog post, The Fed Model, where I take the so-called Fed model, and rederive it using the simple version of the Dividend Discount Model, giving a more robust model with reasonable theoretical underpinnings.

I earn a small commission from Amazon for anyone entering Amazon through my site, and buying anything there.? Your price does not rise from my commission.? Don’t buy anything you don’t want to buy if you want to reward me for my writing.? Only buy what you need if Amazon offers you the best deal.

Book Review: This Time Is Different

Posted on 25 November 200925 November 2009 by David Merkel

I love economic history books.? The book that I am reviewing tonight is different because unlike most economic history books, it is mainly empirical rather than mainly anecdotal.

Don’t get me wrong, one good anecdote can deliver more information than a carefully controlled study.? But more often, it is the careful studies that reveal more in their bloodless way.

This Time Is Different takes the reader through the last eight centuries of financial crises globally, subject to the prevalence of available data.? Data is more available recently, so the A.D. 21st, 20th, and 19th Centuries get more play than the more distant past.? Also, the developed West gets more coverage than the East.? This is to be expected.? It all depends on who writes down more.

Crises? have been far more common than the average economics textbook would suggest.? One of the first ideas to toss out of economics should? be that markets strongly tend toward equilibrium.? My own empirical research in the financial markets indicates that mean-reversion is there, but very weak.

The book has a wide number of disasters that it draws us through, namely inflation/debasement, currency crises, banking crises, and internal and external default.

Now, all of these crises tend to happen more frequently than the modern fat, dumb and happy Westerner would like.? Central banking has substituted fewer and larger crises for more and smaller ones.

Regardless, the chapters on sovereign defaults are worth the price of the book.? Will defaults be internal, external, or both?? A lot depends on how much debt will be compromised through default.? If a majority of debt is held externally, foreign creditors should be wary.

This book is needed now because many so-called scholars implicitly assume that the US Government could never default on its obligations.? Yes, it would be a horror, but leading nations in the world have defaulted before, and they will do so again.? It is the nature of mankind that it is so.? Promises happen in good times, and defaults happen in bad times.

Quibbles:

The book is listed as 496 pages, but for non-academics the true length is more like 292 pages.

Also, I would suggest to the authors, that there are predictive variables that they have not considered regarding crises.? Two variables are growth in debt, and yield spreads.? Debt grows like kudzu or topsy prior to crises, and yield spreads are very small prior to crises.? As the crisis nears, debt growth slows, and spreads widen a little.

Summary

This book is not for everyone.? If you tire looking at tables, and prefer more discursive arguments giving anecdotes rather than facts, this book is not for you.

Who could benefit: if you want intellectual confidence that sovereign defaults /currency failures can happen even in the US (note we have had two so far, in addition to many other financial crises), this will give you confidence that you are not a nut.? If you want to educate one of your friends who thinks that such disasters are impossible, this is the book for him.? Just make sure he is willing to endure a semi-academic book.

If you want to buy the book, you can buy it here: This Time is Different: Eight Centuries of Financial Folly.

Full disclosure: I review books because I love reading books, and want to introduce others to the good books that I read, and steer them away from bad or marginal books.? Those that want to support me can enter Amazon through my site and buy stuff there.? Don’t buy what you don’t need for my sake.? I am doing fine.? But if you have a need, and Amazon meets that need, your costs are not increased if you enter Amazon through my site, and I get a commission.? Win-win.

Book Review: Nerds on Wall Street

Posted on 31 October 2009 by David Merkel

After my last book review, a reader asked how I was able to read so many books, given my other responsibilities.? My answer is this: I keep a book near me at all times.? When I get a break, I read a few pages.? Over a week, that means a book gets read.? That’s how I read so many books.

Onto tonight’s book: I had a number of friends that liked Nerds on Wall Street, and I liked it as well.? The book has a number of strengths.? The author explains complex financial instruments in relatively simple terms.? The same for complex trading techniques.

The author gives history and background as one that was sucked into computerized finance from a technical background that might have had him in a purer technological role.? As I read what he went through, I said to myself, “He was seven years ahead of me.”? I had my own share of innovative things that I did, but the things done in his era were bigger.

He gives reasonable explanations of how computerized trading works, and what factors they look for in designing trading systems.? He talks about the common factors that dominate trading systems, and a few that he knows of but has not published.? (He gives a taste, but does not serve up the full dish.)

Like me, he serves up a full plate of data mining disasters.? There are a lot of losses to be taken by those who think they have discovered a statistical regularity in the financial markets.? The few significant regularities make sense to seasoned observers, and are not consistent.? They pay off 70% of the time, and kill you 15% of the time.

On Wall Street, if you are really, really smart, they will hand over to you exceptionally advanced tools that you can use to destroy yourself in a unique and memorable way.? So it was for LTCM.

Quibbles

The book is badly edited.? Many elements appear multiple times with little modification.? It sometimes reads like a bunch of articles that was strung together into a book.? The editors should have tried to create something more cohesive.

The last several chapters feel like an afterthought, though many of the ideas presented there are ideas that I have suggested.? I have talked about splitting mortgages into smaller mortgages plus equity appreciation rights.? I have also suggested creating mutual banks, rather than what was done with the TARP.

All that said, the average reader will learn a lot here.? I recommend the book to those that want to dig into how the equity markets became more computerized.? For those that want to understand the same for the debt markets, that book remains to be written.

If you want to buy it, you can find it here: Nerds on Wall Street: Math, Machines and Wired Markets

Full disclosure: If you enter Amazon through my site and buy anything, I get a small commission.? Your price does not go up.? You benefit, I benefit, Amazon benefits.? How could it be better?

Book Review: The Predictioneer’s Game

Posted on 27 October 200928 October 2009 by David Merkel

Most of us were kids once.? I think I was a kid once, but my memory is fuzzy.? I do remember playing the card game “War.” Nice game, but suppose if you were dealt a weak deck you had the option to look at the opponent’s deck, and stack yours to meet the challenge.? That would be a sharp example of how game theory could be used to defeat a stronger player.

This book is a little further afield than I usually go, because this is not an economics or finance book in the traditional sense.? The Predictioneer’s Game describes using game theory to solve complex problems, and possibly, affect the results in your favor, or, the favor of your client.

The author, Bruce Bueno de Mesquita is a professor of political science at NYU, and a senior fellow at the Hoover Institution.? Though he uses game theory in his academic work, on the side, he uses game theory in his own firm to analyze tough policy, business, and legal questions.

His methods are simple and complex.? Simple, because the math at first glance isn’t that difficult, but complex, because many different iterations of the simple model must be considered using a computer.? Often the answer that the computer spits out is a surprise that reveals that there is a clever strategy to achieve an unusual result.

There are many elements that go into building such a model.? It begins with designing the question in a way that facilitates sharp opinions from experts.? The experts name all of the parties that have an interest in the outcome, and:

What their desired outcome is.
How motivated they are to achieve their desired outcome.
How influential can they be with other parties in the dispute.
How much they want an agreement, even if it is not their favored outcome.

The experts rate all of the parties on those variables on a scale of 0 to 100.? Then the math starts, analyzing what sorts of coalitions can develop to come to an outcome that satisfies those with the most influence and motivation.

Now, I don’t buy in entire his view that everyone is strictly motivated by self-interest.? I have adopted five children, in addition to having three with my wife.? Yes, we wanted a large family, but we would have been happy with fewer.? We saw this as something good for society on the whole, as well as the church, which made us more willing to adopt.? If we are going to argue that a person having love for their culture or for their church is an expression of self-interest, then please tell me what would be self-disinterest.? To use an example from the book, I have mixed feelings about “Mother Teresa,” but I have little doubt that she did what she did out of devotion to the Catholic Church, and not out of self-interest.

That said, until proven otherwise, assuming any party is entirely self-interested is probably correct to a first approximation, which is why game theory is so applicable to complex problems.

Bruno de Mesquita has quite a track record according to the CIA:

Since the early 1980s, C.I.A. officials have hired him to perform more than a thousand predictions; a study by the C.I.A., now declassified, found that Bueno de Mesquita?s predictions ?hit the bull?s-eye? twice as often as its own analysts did.

As a result, I tend to believe his claims as he goes through the book.? He has helped solve some tough political and business problems. Most of the examples in the book fall into legal or political categories, though there are a number of examples for the business world: CEO succession (funny), merger negotiations, and how to buy a new car.

The last will pay for the book on its own.? I have used the technique twice before, and it works.? That said, that I have used it twice before means it is not unique to the author.? (For those buying used cars, I have another approach.)

Now, the author offers the opinions of his models on:

What will happen in the global warming negotiations?
Will Iran develop a nuclear bomb?
Will Iraq and Iran develop an alliance?? (Note: there is no explicit mention of the Saudis in this discussion, which I think is a major miss.)
Will Pakistan continue to cooperate with the US in the “war on terror?”

Good questions all, but I would ask the following questions:

How will the various nations of the world fare through the coming demographic crises?
Will the US Government pay off its debts in real terms, or will they inflate the debts away?
Will the US Dollar remain the global reserve currency?? If not, then for how long?
When will the Communist Party lose control in China?

Perhaps the author could favor us with some answers, but regardless, I recommend the book to all that have interest in predicting the outcomes of complex situations.

Who will benefit from the book?? This is a book that many will benefit from, because the subject area is broad, and the ability to turn the windmills of the mind are considerable.? For those who want to buy it, they can buy it here: The Predictioneer’s Game: Using the Logic of Brazen Self-Interest to See and Shape the Future

Full disclosure: my goal is to have alignment of interests between me and my readers.? I don’t want any of my readers buying something only to benefit me.? But if you want to buy something at Amazon, please enter it through my site — you buy at the prices that you like, and I get a commission.? I like the fact that my readers get what they want at no additional cost as they aid me.? I look for win-win situations, and this is one of them.

Book Review: The Bogleheads’ Guide to Retirement Planning

Posted on 22 October 2009 by David Merkel

This was a book that I did not ask for.? Wiley has been sending some books unsolicited.? I’m not glad on all of them, but I am glad they sent this one.

Much as I admire Jack Bogle, I am not a Boglehead.? Low fees?? Yeah.? Diversification without overdiversification?? Sure.? Asset allocation?? Top priority.? Passive investing?? Best for most of us, but not me.? Quantitative methods don’t work?? Sorry, they do, if done right.? And aside from all that, I think (unlike Jack) that unhedged foreign bonds are a core part of asset allocation, especially if used tactically.? (Buy them when little looks good in domestic fixed income, like now.)

But in skimming/reading this book, I came away impressed with the acumen of those that call themselves “Bogleheads.”? They are not just dittoheads, but people who have thought hard about the retirement planning process for average individuals.

There is a decent amount of advice on tax planning.? What sorts of vehicles will make sense for most people?? How much can be contributed?

There is a decent amount of data on the usefulness of insurance, and it tends to follow my understanding of matters:

Avoid combination products unless you have a specialized tax planning need.? Keep savings separate from protection.
Don’t forget disability and health insurance.
Immediate annuities can be a useful replacement for some of the bonds in a retiree’s portfolio.

A small amount of the book deals with investing proper, but what is there is good, if simple.? It posits fund investing and passive investing, which again, is best for most people.

Another part of the book deals with the neglected liquidation phase.? How to do it?? What to tap first?? When should one file for Social Security, and what games can be played there?

Finally, the book considers what can go wrong in life (divorce and other disasters), and how to bounce back; also, how to find a good professional to help you with your specific needs, which “one size fits all” does not cover.

Quibbles

The book really does not deal with the troubles that will come in Social Security, Medicare and federal/state/corporate pension plans.? Also, by its nature, tax law is ephemeral in the US — in an era of rising structural deficits due to entitlement programs, who can tell what the tax situation will be 20 years out?? 23 years ago, after the passage of the Tax Reform Act of ’86, who would have thought that we would create something materially worse in complexity terms than what TRA ’86 replaced?? Rates are lower, though, but I don’t see it staying that way for long.? We can look at Roths, but will the government preserve the tax-free treatment if things really get tight?

Also remember that this is a single purpose book — retirement, though they have some good sections on insurance and investing.? For a good, short, all purpose book on personal finance, consider Easy Money: How to Simplify Your Finances and Get What You Want out of Life.

Summary

That said, I found it to be a useful guide for average people that might not be up on the nuances of strategy for retirement that an average person might use.? Wealthy people should retain specialized advisors, because they will be aware of strategies that would not make sense for average people.

This was a book that I skimmed half and read half, because I’m familiar with the material and would just check aspects of sections that I was familiar with to see if they got it right.? If you want to buy it, you can find it here: The Bogleheads’ Guide to Retirement Planning.

Full disclosure: If you enter Amazon through my site and buy anything, I get a small commission.? Your costs remain the same.