Book Review: When Genius Failed

Sorry folks for not blogging sooner. I have some insights to the market, but right now I am recovering from a vicious bout of food poisoning. In the past six years I have had four food poisoning’s and three times it was from sandwiches that I bought while driving. You would think it is a problem specific to a store or country. Nope, not at all, I bought bad sandwich’s in Canada, Austria, and Germany. What was common between them all? It was the meat that went bad. (Go vegans go?)

Ok to the topic, and the book review of When Genius Failed. I was recommended this book on CNBC Power Lunch Europe by a professional trader when I asked the question, “I understand the theory behind options, pricing, hedging, Greeks, and have read the classics like Hull, but I am wondering what books I should read to implement a hedging strategy as I do not have access to professional traders?” The trader’s answer was interesting in that he said, “What you need is experience and therefore the books you should buy are Hedge Hogging (which I read), Liars Poker, or When Genius Failed.


When I heard that comment I thought the trader was mocking me. But I gave him the benefit of the doubt and bought When Genius Failed and decided to read it. Having read both books I finally understand what the trader was trying to get at. He was trying to get at the point that to trade you need experience and trading is not always about risk management. It is about understanding the dynamics of the market. As the book When Genius Failed said, “Sometimes you need to know which way the trade winds are blowing.”

Ok, so what do I think about the book? I rather like it. It was an interesting read for anybody who wants to understand what happened to Long Term Capital Management. The book does a good job of covering the story from the start to the end of LTCM. The book was not purely historical, but also tried to put things in perspective and show all of the pieces. That oversight made it possible to follow the LTCM story in the context of the markets. What I especially liked about the book is how the author kept referencing names with associated companies. EG he would say, person X who worked at company Y throughout the book. That little trick helped me keep an oversight of who’s who and what their role was.

Though, here is what I disliked about the book. For example I disliked the following comment:

If Wall Street is to learn just one lesson from the Long-Term debacle, it should be that. The next time a Merton proposes an elegant model to manage risk and foretell odds, the next time a computer with a perfect memory of the past is said to quantify risks in the future, investors should run — and quickly — the other way.

I dislike the comment because it implies that the fault of LTCM was that a computer was used to model risk. When you read the book the problem of LTCM was two fold:

  • It strayed from its core strengths.
  • It was greedy and ignored Keynes rule where the market can remain longer irrational than you liquid. When the market knew LTCM was failing without saying so, but implying, traders on purpose went against LTCM.

Both of these problems had nothing to do with the computer model. The computer model picked out the opportunities and they made money. At one point LTCM could have stopped trading due to the lack of trading opportunities, returned the money and could have started a new fund. Yet they did not due to greed, and that was their downfall. Greed in the market is a very bad thing!

Computers are not fortune tellers, nor are they money machines. Computers are capable of calculating and processing data faster than we humans ever could. If computers were bad then we would not apply technical analysis (since it requires quite a bit of computing) nor would we use it to look at past trends. Computers are a means to an ends, and when used properly are extremely useful.

There were a couple of other items I disagreed with. For example I actually do think the market is efficient, with moments of inefficiency. But these are things you either accept or do not accept.

In conclusion, putting it all together I thought this was a great book. It is professionally written, objective, and enjoyable to read. If you have not yet read this book I suggest that you do.

Review of FinanceMarkets.co.uk

The following is a paid review…

Finance MarketsFinance Markets is a blog written by some folks across the pond. Despite an understandable bias towards European news and posting prices in British pounds, the blog is applicable to investors everywhere.

The Finance Markets blog is updated a lot. There are about 3-6 posts every day, most of which come from one Elaine Frei. The posts cover a familiar range of finance topics from “Economy” to “Investments” to “Property“. There are also some “personal finance topics” like “Insurance“, “Loans“, and “Banking“.

The writing is generally good and much more professional than your typical blog. In fact, I might say that the posts are a bit too professional. There is a bit of a lack of character to the entries. The lack of a way for users to comment on a post don’t help this.

Still I’d say the site is worth a look. Browse around for topics that interest you and you might learn a thing or too. This blog would be especially useful if you are interested in getting a European view of the market. There are daily recaps of the action in the US markets, with citations from some sources that might not be on your reading list.

Here are a couple of my favorite articles I ran across when browsing around the site:
What Are Futures For? by Khurram Naik
Property Statistics Investors Need to Watch by Brian Turner

While I wish each blog post had comments on it, there is a Forums section of the site, which hasn’t yet run into the spam problems we’ve had. The forums are separated into appropriate categories and seem to have some decent use.

I can definitely appreciate what the folks at Finance Markets are trying to do: create a community for investors and financially responsible people, fostered by a core set of bloggers. If they can keep up their energy to maintain the level of posting and possibly add a little bit of character to the content, they should fair well.

On a side note, I like the way the blog is formatted and how ads appear along the left side of each post. I think this is a decent setup for AdSense optimization, although it does mess up the layout on some smaller posts.

Book Reviews: Profit From Uranium and Profit from China

I am going to review the two books; Profit From Uranium and Profit from China. I want to structure my review in three parts, initial, reading it, and digested the information.

Initial: When I first received the books I looked at them and thought, huh that’s it! Fifty pages and about a third are “don’t do this or that.” Let me say that I was a bit disappointed and had some very low expectations. But I guess one should never judge a book by its cover, or page count. 😉

Reading it: Wow, that’s interesting. I myself don’t invest in commodities or China due to certain self imposed restrictions. I read “Profit from Uranium first” and have to say I was impressed by the materials. Granted the materials were written with a bit too much marketing speak (eg “Do this now and become rich”) but the information itself was very good.

When I invest I like to understand how the strings are held together. It is no good investing in a buggy whip company based on superb PE ratios when the future is the automobile. These books provided those tidbits that lets me piece a picture together. It gave me a sense of understanding who the players were in the uranium industry.

The materials were laid out in a fashion where you can easily understand why Uranium or China should be interesting to an investor. I especially liked the comment regarding China on the topic of whether you should invest on the Chinese stock market or a Chinese company listed in the US. The recommendation was to invest on Chinese companies listed in the US. I feel that the comment is one of those little insider things you should know about. BTW for those wondering why not invest in the Chinese market, or for the record or many Asian markets it is because many consider the Chinese or some Asian stock markets like a casino.

Digested the information: I don’t like to post reviews to books or comment on topics until I had a think on the materials. I find all too often I will write or say things in a knee jerk fashion. So I wait and mull the information over and make a personal judgement.

Here is what I did not like about the books; I did not like the voice in either of the books. It was a bit too Cramerish for me. When Cramer does his thing where the camera zooms in and out while he is talking my mind explodes. Usually at that point I stop looking at the TV and just listen to his words. I felt a bit of that while reading the books. I had to ignore the “Cramer” speak and focus on the information.

I did like the fact that even if you are a complete newbie they have some tips on what you should do and not do when investing. It goes beyond the basic disclaimer, “You can loose money investing…” Their disclaimers were more like “Hey here is a disclaimer on what you should not do because otherwise you will loose money.” That was a nice touch.

I did like the information in the book. I learned about topics being presented. I did not have that feeling, “ugh I just bought a book and learned nothing.” 

The books are good if you plan on investing in the topics talked about. Or as in my case I was interested in the materials for informational purposes. Even though the books are about 50 pages long they have something interesting to say. For the savy Uranium or China investor these books might give some new insight, but I don’t know since I am a newbie in those fields. Overall I do give these two books two thumbs up.

PS: One more thing, would I become “rich” based on the information given in the book? I will let you know in six months!

Savings-Accounts.com

Money Money Money. Money.The following is a paid review. See the notes at the bottom for more information.

Looking for a place to store your hard earned (or not so hard earned) money? Savings-Accounts.com is site that shows the interest rates available at the most popular US banks.

According to the list, HSBC is the best bet with a 6% rate on “new money”. But hurry, you only have until April 30th to get the “promotional rate”. Bank of America and E*Trade are also decent with 5.1% and 5.05% repspectively. Your corner banks like Wachovia and Wells Fargo are offering just 0.25% and 0.50% respectively. The worst offer on the list is Key Bank, with a pitiful 0.15%.

The table at Savings-Accounts.com also has a notes column, which relays any minimal balance requirements extra fees or (as in HSBC’s case) if the rate is promotional or the standard rate.

Other than that, the site doesn’t offer any more. If the data stays up-to-date, it will still be useful to people who want to compare all those numbers in the same place. And if Savings-Accounts.com’s SEO strategy pays off, they might get enough search engine traffic to make a few bucks on the Google ads they show. (They didn’t seem to have affiliate links for the bank links though, which could be a better source of income.)

I’d like to be able to sort the list by any of the columns (primarily the rate column), and an RSS feed or email update feature would be nice. Also user-submitted comments and reviews would help round out the info in their notes column (which looks like it was just copied from a website) and possibly out any “hidden fees” or issues with the banks. The site is in “alpha” though, so features like this and more than I can’t even imagine could be in the works.

I think a site that with this information that is uncluttered and easy to use would be great. I did a quick search for similar sites and coulnd’t find anything else in this space I really liked. There is a savings account search application at BankRate.com that seems to have much more data. However, the site is a bit cluttered.

Note: A couple months ago, I signed up as a blogger at “pay-per-post” site ReviewMe.com. The post above is my first paid posting through this service. I plan on writing an article soon about my experience using ReviewMe. Stay tuned.

Six Quick Book Reviews

I was going to write an individual post reviewing in depth each of the six books listed below. But since I’m a bad citizen and have given in to the fact that I will never find enough time to do so, I’m going to give a quick review for each of them here. So in the order I’ve read them…

The Real Estate Coach by Bradley J. Sugars.
This book was kind of hard to read at first. It is written in scenes, staring the made up characters Brian and Sarah as they learn from their Real Estate coach. The dialog is not well written and rather tedious. I’d pick out the best (or worst) example, but I don’t want to spend the time and I probably don’t have to. Here is an excerpt chosen at random from page 16.

As they sat back down with fresh drinks the Coach began again.

“What we are going to look at now are the types of property deals that you can do. You see, they will figure in your rules when you go out looking for properties to buy. So what are the different types of deals, then?”

Brian looked up at the ceiling for a while, and then replied: “I have heard about negatively geared deals, Coach. Is this what you mean?”

“Exactly. Any idea what the other two are?”

First, what do I care that Brian and Sarah have “fresh drinks”? In any other Real Estate book, this section would have looked like this.

Type of Real Estate Deals

  • Negatively Geared Deals
  • Quick Cash Deals
  • Positive Cashflow Deals

To be fair, I didn’t know a lot about real estate before reading the book and I definitely learned a bit from it. I just feel I could have learned as much in 10 pages instead of 200. However, for those of you out there who have a hard time reading textbook like
books about real estate, this might be the book for you. You’ll be tricked into thinking your reading a novel, but you’ll really be learning about real estate!

The content of the book is very introductory and doesn’t go into as much detail as you will need before actually going out there and getting your hands dirty in real estate. And that’s not such a bad thing since the main point of the book is that a “coach” is going to help you more than any book. So after reading this go out and find a coach. Peeps with a basic understanding of real estate concepts can pass on this one or look for education elsewhere.

Become the CEO of You, Inc. by Susan Bulkeley Butler
Susan spoke at an Accenture get together last Summer. Susan had worked for Accenture for a while back when it was Arthur Anderson Consulting and worked in the CEO’s office through the Accenture IPO. She was largely responsible for the establishment of Accenture’s “Change Management” division, which now accounts maybe 1/5 of Accenture’s consultants (just a guess there).

Susan’s message at that get together, and in this book too, was more applicable to women trying to excel in the traditional business culture. However, there was a bit us guys could learn from her too.

We were all given a copy of her book, compliments of Accenture. I read about the first third then lost interest and moved on to other reading. The truth is I put the book down because of it’s focus on women (which is okay if you’re a woman) and because of an exchange I had with Susan at the Accenture meeting. I introduced myself to her and told her I worked on an investing and business blog. I let her know that I could review the book on the site and possibly drive some sales her way. She seem very disinterested and brushed me off. At the time I got this feeling that she just had something against member of the opposite sex. I’m sure she’s a great person when you get to know her and wonderful in her private life, but this is the impression I got from her then. And it dissuaded me from putting too much effort into writing a review for the book.

I’m a punk for airing this in the public here. I know that. But it’s why I don’t have much more to say about this. If you are a woman, working in the business world, Susan probably has a lot to tell you. She could be a role model for you. Her story really is incredible, going from the only woman at Accenture to one of the highest positions in the company. For me, eh…

Built to Last by Jim Collins and Jerry I. Porras
Here’s a good one. This was recommended by Chris, and I read it while on vacation in Maine last Summer. The book relates a study of some of the greatest companies of the last 150 years: GE, HP, 3M, Merk, Ford, Wal-mart, Disney, and a few others. The research tries to get to the heart of what made (and makes) these companies so great. What makes these companies “visionaries”?

For someone who is in the middle of a startup, Built to Last helped me think on a higher level about our company. Activities like writing mission statements and lists of core values are great, but the important part is to actually live up to them. Here are some of the chapter titles, which do a great job of summing up the ideas behind the book.

  • Clock Building, Not Time Telling
  • Preserve the Core, Stimulate Progress
  • Big Hairy Audacious Goals
  • Cult-Like Cultures
  • Try a Lot of Stuff and Keep What Works

The first of that list really resonates with me. Great companies are those that build clocks, rather than tell time. While working on the next new feature for WineLog (telling time), it’s important (and very difficult) to keep perspective and remember to devote time and effort to developing the WineLog company itself (clock building).

The guys at 37Signals are a great example of a company that clock builds instead of time tells. Sure they have a lot of great software applications, but they are focused on building their company into a fine-tuned software building machine. Ten years from now, when Basecamp is but a memory (or maybe a ubiquitous development tool), 37Signals the company will be still chugging along doing their thing.

Built to Last might be a help to investors looking for some ways to sort well-managed companies from poorly-managed companies. There’s even a few stock charts in there. The book is far more useful however to entrepreneurs and business professionals in management positions.

Finding the Hot Spots by David Riedel
I read this book back in Fall 2006. The subtitle for this book is “10 Strategies for Global Investing”. I can’t remember what any one of them is, but the book does have 10 chapters… I guess that fits. Here are the chapter titles/tips:

  1. Invest Internationally for Yourself
  2. Think Globally, Invest Locally
  3. Diversify–Don’t Put All Your Eggs in One Basket
  4. Understanding Relationships: Who is Benefiting from Current Trends?
  5. Invest in Line with Government Goals
  6. Don’t Buy Regulatory Structure
  7. Know the Shareholders
  8. Buy the Banks
  9. The Impact of Currency
  10. Don’t Be the Last One In

FTHS is a quick read, and so a decent book for people who are thinking about getting dirty with international equities. The main points I got from this book were (1) you need to invest internationally since that’s where 20% of stocks are and (2) you shouldn’t be so scared to invest in foreign stocks; in fact it’s easy! The didn’t get much more of substance from the book.

Jim Cramer’s Mad Money – Watch TV, Get Rich by James J. Cramer with Cliff Mason
Confessions of a Street Addict is a great read for anyone. Jim Cramer’s Real Money (my review) is a good read for any investor. Cramer’s most recent book Watch TV, Get Rich is a book to be read by Jim Cramer fans only.

If you watch Jim’s show, you’ll love the book. It goes behind the scenes into the meaning behind most of Jim’s catch phrases and sound clips.

He also details how the lightening round is run and encourages readers to do lightening rounds of their own as a way to train their investing muscles. It’s actually a decent plan and might help you at least sound more intelligent about stocks. It will take a lot of time, but I bet you will have a better “feel” for the overall market if you follow Jim’s plan. If this idea turns you on, go to a book store and read the lightening round chapter; you don’t need the whole book for just this.

The other addition in this book is a new version of Cramer’s Cyclical Investing and Trading chart. The chart has recommendations for which sectors to be rotating into and out of at different times in an economic cycle. If there is interest, I might write a seperate post on this. Again, I’ll try to contact Jim’s crew to see if we can post an image of the chart. We didn’t have any luck last time though.

The Only Three Questions That Count by Ken Fisher
I’m only about two thirds through this whopping 365 page book, but I can already recommend it. It is different from most of the investing books I’ve read, coming at investing from a higher level and yet still managing to be relevant. I won’t keep you in suspense any longer; here are the three questions:

  1. What do you believe that is actually false?
  2. What can you fathom that others find unfathomable?
  3. What the heck is my brain trying to do to blindside me?

The first two questions revolve heavily around efficient market theory and the idea that the best way to make money in the market is to know something that others don’t.

Question 1 involves a lot of debunking of commonly held investing beliefs… like high P/Es are bad for the market, a federal deficit is bad for the market, an inverted yield curve is bad for the market. Fisher gives convincing arguments against these beliefs. And while you don’t necessarily want to go out and bet against these theories when you find they are wrong, you can at least avoid betting with them.

If everyone else is wrong, how do you find a winnable bet? Questions 2 is an exercise for finding “investing technologies” you can use to inform your investing decisions. And the key here is to find an indicator or strategy that no one else knows about. Actually even better is when everyone knows about it, but they’re still not using it. Fisher uses his “discovery” of the price-to-sales ration (or PSR), which was hugely successful for him in the 80s and supposedly a big deal. The idea is/was that low PSR stocks outperformed higher PSR stocks.

When PSR values had to be calculated by hand and were relatively unknown to investors, the strategy worked well. By now the technology has been priced into the market since everyone knows about and believes in it. For this reason, we should always be working to develop our next strategy. Fisher’s book kind of gives you the base tools to do this.

Question 3 discusses behavioral finance and some common mistakes that investors make that results in lower returns for the average investor. Fisher prefers to explain a lot of these concepts in the frame of evolutionary biology. He talks a lot about our “prehistoric brains” and anecdotes around why cavemen would have been more fond of big things than small things for example.

One of the main points Fisher makes with question 3 is about how cavemen (and all of us to this day) busy ourselves with “accumulating pride” and “shunning regret”. Back when we were hunter-gatherers, both pride and regret kept the hunting males hunting. If they caught 2 big mammoths while hunting, their pride would send them back to that hunting ground. If they didn’t manage to catch anything, they would blame the lack of a catch on factors like the weather or a random saber tooth tiger that scared the animals away. If the hunter could convince himself that it wasn’t his own fault he didn’t catch any food, he would try again the next day. I think Fisher explains it all better than I have, but maybe you get the point.

So overall, I think Three Questions is a good book for investors. If you’re well read, a lot of this will be familiar, but I’m sure everyone could learn something from the book. The greatest thing this book will do for you is teach you to think for yourself. And if you can use the three questions to develop and test your own strategies, you’ll be placing better bets and setting yourself up to outperform.

The Buy List: Keep Track of the Big Guys

TheBuyList.com is a nice, simple website with just one purpose: to show you if mutual funds are trading the stocks you’re tracking.

Just enter a ticker and click a button. You’ll be shown a table of “recent” transactions of that stock made by “the top rated mutual funds”. The table shows you how many shares were bought or sold, the name and ticker of the fund, and the general “family” of fund.

Ebay at TheBuyList
A search for “EBAY” at TheBuyList.com on Nov. 14, 2006.

The same information can be found on sites such as Morningstar.com, but then you’ll have to pay high $100+ subscription fees for the privilege. TheBuyList is currently completely free, with just some tasteful and non-intrusive Amazon ads on the pages.

The one thing the site lacks which I would love revolves around those terms “recent” and “top rated mutual fund”. It’s not clear when the transactions shown were made or if all transactions are shown. And so it can be hard to infer trends from the data. But then that’s like getting a free Volkswagen and complaining that it’s not a BMW. I asked the site’s owners if they could show more accurate date data on the site, and this was their response:

The exact date of the transaction per fund is pretty hard to extract… We are working on it. We do process the data a couple of times per week and I believe that the transactions are pretty recent. The date of the update is shown on the main screen. We also maintain historical transactions every time we update the database, but right now we only display the data as of the latest update. As the portal section is fully built, there will be more features such as the capability to add stocks to a watch list to receive emails when there’s a transaction on those.

I do see a form on the current site allowing you to receive updates by email. This would be a good way to track the updates. You’ll know that the transactions have happened at least since your last update or so. And you’ll also have a historical record of the transactions to look at since TheBuyList is currently showing just the most recent transactions on the website.

TheBuyList is a great resource for some data you might not have had access to before. Use it to fight to good fight.

Book Review: The Little Book of Value Investing

The Little Book that Beats the MarketWiley is trying to turn their hit Little Book that Beats the Market (discussion, Amazon.com) into a series: Little Book Big Profits. The second book in the series, The Little Book of Value Investing, is written by Christopher H. Browne and focused on (what else) value investing.

While Browne obviously has the pedigree and experience to write a book on value investing, the lack of practical examples ruins the potential of the book. The basics of the value investing philosophy are presented well and in a way that is easy to read. However, the author seems more interested in convincing the reader into buying into value-based mutual funds than teaching us how to become value investors on our own. The book would be good for current value investors looking for more arguments against market timing and day trading strategies. Aspiring value investors will have to go elsewhere for instruction, though The Little Book of Value Investing may be a good, light introduction for readers who are completely new to the concept of value investing.

Christopher Browne is a successful value investor; his pedigree and experience are chronicled well in the forward by Roger Lowenstein. Browne’s father, Howard Browne, was a founder of Tweedy, Browne and Reilly. TB&R touts none other than Benjamin Graham and Warren Buffet as past clients. The company has been going strong for over 60 years, with our author now in the Managing Director position.

Browne is a contrarian. Value investors are innately contrarian, buying stocks just as they are hated the most. It’s a philosophy of investing I have a lot of faith in, by which I mean that I don’t have faith in the herd mentality of the typical money manager. Early in the book, Browne points out a common flaw with mutual funds and similar managed investment machines:

But it’s not just everyday, individual investors who fall prey to the herd mentality; it also happens to professional portfolio managers. If they own the same stocks everyone else owns, they are unlikely to be fired if the stocks go down. After all, they won’t look quite so bad compared with their peers… (page 3)

In the early chapters, Browne presents the standard value investing philosophy, which can be summed up pretty well here:

  • Search for the “intrinsic value” of a stock, just as you would any other purchase. Buy stocks which are undervalued.
  • Try your hardest not to lose money. i.e. have a margin of safety (MOS) on your stock purchases.
  • In practice, the above two points lead to investors trying to buy $1 of value for less than $1. I’ve typically heard investors strive to buy $1 of value for $0.50. Browne has a chapter titles “Buy a Buck for 66 Cents”, though he doesn’t explain exactly where the 66 cents figure comes from.

In addition, Browne also suggests some of the following tactics:

  • Buy stocks that are under book value, the price of the company if it were to be liquidated.
  • Pay attention to what similar companies are fetching in leveraged buy-outs.
  • Watch for insider buying. In particular, look for insider buying and activists share holders that may act as a catalyst for an undervalued stock.
  • Don’t be scared to “catch a falling knife”:

In the halls of academia, under the eyeshades of researchers, and in the rough-and-tumble world of Wall Street, buying stocks that have fallen in price and yet still offer a margin of safety has resulted in successful investments. Although the public at large and most institutional portfolio managers find it difficult to leave their comfort zone and buy stocks that have fallen, those of us buying cheap inventory realize that the bargains are found in the sales flyers and the new low lists, not in highfliers and $12 per pound Delmonico steaks. (page 69)

Not all of the paragraphs in the book are as whimsical as the one above, the book is generally a light read… and quick at just 179 pages.

In chapters 11 through 14, Browne focuses on how to evaluate potential investments. Browne encourages us to check out balance sheets and earnings reports, but again fails to give concrete examples which may actually be of help to us. Instead he says things like this statement on gross profit margin: “I like for this to be a fairly stable number, but often it is not.” The end result is that a reader may learn where to look on balance sheets and income statements, but they won’t know how to process the data they find.

Investments are complicated, and I’m not looking for a “magic formula” as there was in The Little Book That Beats the Market, but I think readers would benefit from some more specific examples. Give us goals for these numbers and let us know when you might want to break your rules and let a company slide on a specific data point.

Chapter 14, cleverly titled “Send Your Stocks to the Mayo Clinic”, is one of the best in the book. It has a series of 16 questions that you should ask of any investment before pulling the trigger. Each question is followed by a decent elaboration on how the question might play out in practice. My favorite two questions of the bunch are repeated below (emphasis his):

5. If the company does raise sales, how much of it will fall to the bottom line? If sales can be grown at no additional cost, every dollar goes right to bottom line profits. If, however, a company has to hire additional salespeople, build new plants, or add additional shipping costs to gain growth, the increased sales will not all translate into bottom line profit… Often the cost of gaining revenue and market share can actually cause profit margins to fall or even reduce a company’s profits… (page 107)

9. Is the company comfortable with Wall Street earnings estimates? Although I rely very little on the estimates when looking for stocks or estimating their value, I like to know if management is comfortable with the earnings estimates the Street is making. If they feel they are too high or too low, I know that missing the earnings will likely cause the stock price to fall, while exceeding the estimate will often cause the price to move higher. (page 109)

Browne also spends some time talking about the benefits of investing globally. It is much easier now to invest in foreign companies. Online brokers and developments like American Depository Receipts (ADRs), which allow you to purchase stock in a foreign company on a local US exchange, take away a lot of the burden that used to come with investing globally. You still have to do your homework though, and it will be tough. Reports may be in another language, accounting practices will be different, and the lack of SEC regulations can lead to some risky predicaments.

In general though, Browne believes that the struggles of investing in foreign securities are worth the effort. Looking globally will effectively double (or more) the number of potential investments. For value investors with tough requirements, this is great.

It won’t be easy though, and Browne let’s you know this. He tells a couple stories where his firm used some obscure accounting mistakes to make a ton of money by buying into companies that would later update their books to show a rosier picture. In one story, Browne buys shares in Lindt and Sprungli, a Swiss chocolate company. At the time of his purchase L&S had a P/E ratio of 10.7, typical of other European candy companies. However, it turned out that S&L was calculating depreciation and amortization differently than some other companies (like Nestle). I won’t even try to understand all of the accounting behind it, but the end result was that with new calculations the L&S P/E was closer to 7.5.

Browne made a killing on that deal. And it was an interesting read, but it also points out one of the flaws of this book. The average investor will not be able to find such deals. Browne explains the accounting on the deal after the fact, and I still don’t understand it. Maybe myself and other “average” investors don’t have the make-up of a value investor. I don’t think so, but this book may lead you to believe it. To be sure, Browne has some sound advice for choosing a mutual fund manager in a later chapter, roughly outlined here:

  • “Does the manager have an investment approach and can explain it to you, or any layperson, in plain English, and has the manager applied it consistently over time?”
  • “What does the track record look like? Would you have been satisfied with the returns earned if you had been invested with them in the past?”
  • “Whose record is it? Does the manager who produced the returns that you find acceptable, still run the fund?”
  • “What do the managers do with their own money? Are they invested in the fund alongside the money you intend to invest?”

In chapter 17, Browne argues against “market timing” strategies (which would include day trading and swing trading, etc). While, I believe that this thing people call value investing can be a great way to make money in the market, I take issue with the assumption that no other investing strategy is worth looking in to.

I’ve always believed that there are many ways to be a successful investor, just as there are many ways to run a successful football team or build a successful website. Browne and others cite Warren Buffet and other super-wealthy individuals as proof of the value investing system. Well, I agree that if you are a multi-millionaire and want to become a billionaire, your investment strategy is going to lean toward the side of value investing. There’s just no way to invest $100 million or more in short term trades. The act of selling your stock is going to erase your gain.

However, that doesn’t mean that day trading, swing trading, or any other short-term focused trading is ineffectual. While value investors are looking to a few trades which will make big moves over a medium to long time frame, other investors are successful making a lot of trades that make smaller moves over a short time frame.

Browne gives some arguments against these strategies, which involve market timing. His main argument is that:

It is simply better to be in the market… between 80 and 90 percent of the investment return on stocks occurs around 2 percent to 7 percent of the time… it strikes me as a daunting task to find a way to reliably predict the 7 percent of the time stocks do well. (page 124)

My favorite statistical citation of the book is this one though (emphasis mine):

According to an American Century Investments study, if you had ridden out all the bumps and grinds of the market from 1990 to 2005 (through the go-go 1990s into the severe sell-off from 2000 to 2002), $10,000 invested would have grown to $51,354. If you had missed the 10 best days over that 15-year period, your return would have dropped to $31, 994. If you had missed the 30 best days -one month out of 180 months- you would have made $15,730. Had you missed the 50 best days you would have come out a net loser, and your $10,000 would now be worth only $9,030.

Like I said, value investors should feel free to use that argument when talking with their day-trading friends, however, the argument is flawed. Investors randomly timing the market would be just as likely to miss the 10 worst days as the 10 best days. I would like to know how much your nest egg would be if you missed the 50 best days and the 50 worst days.

I don’t have stats to back it up, but I would guess that good short-term traders are even more likely to time (and avoid) a big loss than they are a big gain. If you spend any amount of time reading the works of day and swing traders, you’ll find that they are much more concerned about managing their risk (or loss) than they are at trying to predict when a stock is going to move a lot. The strategies I’m familiar with are all about finding “safe” trading setups where there is some support (or resistance in short trades) that will ensure the trade doesn’t lose too much money… with a good chance you’ll make some money. Also, most of the day traders I know have adopted the style because the fact that they don’t hold positions longer than a day helps them avoid price crashes.

Okay, end of value investing vs. short-term trading rant.

Throughout the entire book, Browne does a great job of selling the value investing philosophy. While value investing is not the only way to go about things, I think it is sound advice. Buying things on sale, having a margin of safety, looking overseas for opportunities… all sound advice. I also believe that investors of any style should be sure to understand how other investors are working.

The Little Book of Value Investing is an easy read that touches on all the major points of value investing. Practical examples are lacking, so investors who are interested in getting dirty with the stock market will have to look elsewhere for more instruction.

The Little Book that Beats the MarketRating: 2.5 out of 5 stars
Best Suited For: Established value investors looking for anecdotes or complete newbies looking for a light introduction to value investing.
Buy the Book: The Little Book of Value Investing at Amazon.com

Other Reviews:

Motley Fool Caps Brings Fun Back To Social Stock Picking

It doesn’t have to get all hot and heavy and technical here on InvestorGeeks all the time! If you tell me an investor with good temperament needs a serious attitude every second, I’ll counter that by saying sometimes you really need to let loose and have fun! Even Warren Buffett gets crazy once in a while; even if his idea of crazy fun may be playing a ukelele, playing bridge or eating Dairy Queen ice-cream.

Investing should be an enjoyable experience, perhaps even fun for you! This is NOT the first time that InvestorGeeks have reviewed sites that try to bring to fun into stock picking with social websites. But I don’t believe my fellow InvestorGeeks have reviewed Motley Fools CAPS; which I believe is on the right track to injecting some fun into a mundane task.

If you’re an investing newbie, you might remember those days when you were not sure if you wanted to get started investing with real money. You only wanted to dip your toe in the lake and test the temperature. Stock pick sites are a perfect way for the amateur investor to test their analytical skills without really committing their hard-earned money. But be warned! Nothing can truly prepare you for the emotional rollercoaster that you’ll go through when something is really put on the line, and you’re exposed to real losses.

Why Motley Fool?
I’ve always compared InvestorGeeks as being the next Motley Fool community. Even if some people feel that value investing is passé, it’s still my preferred investing style. I’m able to find a lot more like-minded, analytical people who are drawn to the Fool community. I like the idea that these guys don’t easily commit to opening a position until they have come up with a good battle plan. Indeed, throughout the stock bubble and the stock crash, the Fool community has stayed very strong in its reputation.

And why not feed your narcissistic nature while you’re at it? Motley Fool CAPS is striving to be very Web 2.0 with their approach to social stock picking. There are a lot of AJAX interfaces that load without you leaving the page. The AJAX components work well, load fast, and are well designed in their layouts. But what really impresseed me is the concept of making it into a competition oriented site.

Social stock pick sites like SocialPicks, StockTickr don’t focus so much on helping you interact with other users. On those sites, if you want to add someone as a friend, great! If you don’t, you’ve merely signed up for another Web 2.0 account. Motley Fool CAPS succeeds in keeping you coming back because you want to find out how your picks rate against the market, and other investors — especially those reputable Motley Fool insiders!

My Experience (or How Did I Do?)
As of this writing, I’ve only been trying CAPS for 11 days and find myself visiting the site once a day after market close to see how I’ve fared against other investors. I’ve picked 8 stocks during this period. Some of which I’ve personally invested money, some of which were only selections from my watch list. Here’s how I’ve fared so far (as of this writing):

CAPS Ranking: 731 out of 10819
CAPS Rating: 93.25 out of 100.00
Accuracy: 100% (100% of my picks are beating the S&P 500)
Best Stock Pick’s Performance: AAV (22.08% vs S&P’s 1.29% same period)
Worst Stock Pick’s Performance: UTSI (2.26% vs S&P’s 0.33% same period)

I realize very well that I’m just been lucky. I’ve been able to enter into some good bottoms on my picks so far. I’m hoping I can climb higher in the rankings, but the competition gets really tough the closer we get to the top. Would you like to join me and have some fun as well?

Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports – Reviewed

This post originally appeared on ThinkingAboutMoney.com on June 15th 2006

What a treat for investors or business owners! I wish I had this book when I started my first business – it would have certainly sped up my learning process at the time. And for investors who want a good solid background on reading financial statements, it’s hard to imagine a better introduction.

Financial Statements” by Thomas Ittelson does a spectacular job of introducing the three basic types of financial statements to beginners, while providing an easy to read refresher to those who might be a bit rusty on the topic.

The book begins with an in-depth review of income statements, cash flow statements and balance sheets, showing how they relate to each other. This section also includes an introduction to the basic principles of accounting.

The strongest part of the book is the second, where the author walks you through a year in the financial life of a fictional company. A wide variety of transaction types are covered from initial raising of equity, to asset purchases, to hiring, and ultimately to manufacturing and booking income. Careful attention is paid to the process of handling inventory and dealing with cost of goods (and the entire manufacturing – sales – income cycle), including the difference between fixed and variable costs. The author even discusses several approaches for determining a business’s value for possible sale (though he does discard the discounted cash flow method as being too complex).

There is enough information here for someone starting a business to handle their own bookkeeping (with practice and perhaps a bit of hand holding by a friendly CPA at first to answer specific questions). Certainly enough to understand what the bookkeeper and accountant are doing and speak with them intelligently about the state of the business.

The third part of the book is especially important to investors, covering common ratios for evaluating the health of a company and discussing techniques that can be used to “cook the books” or otherwise bias financial reports. This part of the book is all too short. It left me convinced that there was a lot more to learn in this area.

If you are comfortable creating and reading financial statements, this is not the book for you. But for everyone else, I highly recommend it. The book is clear, well written, and breaks complex topics into simple steps that are easy to understand.

See more: “Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports” by Thomas Ittelson

Reading List for the Investing Master

I have been a student of the stock market since my father and great uncle Andy sat me down in 1974 and started teaching me the beauty of investing in Exxon. This was during the oil embargo and my father’s restaurant “The Highland Diner” was situated right next to a gas station. I saw first hand the theory of supply and demand in action as cars where lined up 15-20 deep to fill up. In that year I bought my first shares of Exxon with $100 and eventually opened a dividend reinvestment plan with the company.

Working in that restaurant I also saw that every table had a Heinz ketchup bottle on it and my job at the ripe old age of ten was to manage the bottles and make sure that their were no “empties” on the tables. I saw with my own eyes the power of the trademark and invested in Heinz as well.

For the next ten years I invested most of my pay in those two companies and then went eventually big into Coca-Cola in 1984. I did this after going to college in Europe and seeing how addicted everyone was to their products.

Getting a Real Education by Reading
About every three months I would get quarterly reports from Exxon and Heinz and I would sit for hours trying to understand them. This was way before the age of personal computers and if you wanted to use a computer you needed punch cards and to work in a room the size of a cafeteria . The Internet was at least 15 years away and asking your Dad was as close as you could get to Googling an answer. In those days if you wanted to understand what “Book Value” meant in an annual report you had to go to the library and research it.

Many of you probably feel sorry for me for having to labor so and not having the technology available that everyone takes for granted today. But you should not do so, because I was forced to read in order to find out what price earnings ratio’s and return on equity meant.

While in the library I stumbled across 100’s of books on investing and read everyone I could get my hands on. By the time I was 20 years of age I knew about Benjamin Graham, Warren Buffett and Philip Fisher and was a big fan of Malcolm Forbes Sr.. I would do spreadsheets by hand and can you believe it on paper! It was not until 1990 that I converted to my first PC so I had a good 15 years of reading books in order to learn my trade.

What was I reading? Well the following list is what I consider essential reading for anyone who wants a strong foundation in investing. I will not detail each book, but just list them and provide links to Amazon so you can read the details on each one, (If they are still in print). By reading these books you will learn to not just be an observer of the markets but to become a true participant. You will never again have anyone pull the wool over your eyes and sell you some ponzi scheme or tell you that you can be a successful investor by just doing his system 15 minutes a week. Successful Investing requires hard work and a keen understanding of the terminology that is used. Without it you are flying blindfolded and will make many mistakes. The worst thing one can do in this business is to learn by trial and error. The following books contain the vast experiences of money masters and will save you thousands of dollars in mistakes. The following are the best investments you will ever make.

The Daily Regiment
First I would subscribe to the following:
The Wall Street Journal = To learn in depth stuff on companies in real time.
Investors Business Daily = A quick visual way to examine 100’s of companies a day.
The Economist = The master information source for international investing.
Forbes = A great source for in depth information on management of companies.

The Weekly Regiment
– The Library Periodical Reading Room = Despite what everyone thinks one can find 100’s of articles on companies that are not on Google, which may shed some light on a company that you are ready to invest in. You can spend a few hours at the public library and read past articles of the Wall Street Journal or trade magazines to give you a fuller picture on a company.

Value Line Investment Survey = Most public libraries have this guide available or you can subscribe if you have the money. It is the best data source for information on over 7300 companies that you will find anywhere.

== THE READING LIST ==

Books by John Train:
The Money Masters
The New Money Masters
Money Masters of our Time
Preserving Capital and Making it Grow
The Craft of Investing
The Midas Touch
Famous Financial Fiascos

Books by Benjamin Graham
The Intelligent Investor
Security Analysis -1934 edition
The Interpretation of Financial Statements
Benjamin Graham : Memoirs of the Dean of Wall Street

Books by or about Warren Buffett
The Essays of Warren Buffett
The Warren Buffett Way by Robert G Hagstrom
Buffett: The Making of an American Capitalist by Roger Lowenstein
Buffettology by Mary Buffett and David Clark
The Warren Buffett Portfolio by Robert G. Hagstrom

Books by Philip Carret
The Art of Speculation
A Money Mind at Ninety
Common Sense from an Uncommon Man

Book by Philip Fisher
Common Stocks and Uncommon Profits

Books by George Soros
The Alchemy of Finance
George Soros on Globalization
Soros on Soros: Staying Ahead of the Curve

Books by Jim Rogers
– Buying Commodities
Hot Commodities
Investment Biker
Adventure Capitalist

Books by Peter Lynch
One Up On Wall Street
Beating the Street
Learn to Earn

Miscellaneous Reading
The Wealth of Nations by Adam Smith
Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay
Margin of Safety (Out of Print) by Seth Klarman

The above is a great list to build a strong foundation as an investor. In those books you will find theories that have worked and not some “You TOO can be a great investor” books like the majority of the writings you see today.

To master the art of investing requires knowledge which must be gained on ones own. Understanding the terminology of the stock market is just as important; so spend some time and master the art so you don’t follow the crowd. Most of Wall Street acts in unison, those (like the authors above) have made their fortunes by acting independently of the lemming mentality that is found on Wall Street. Do your own homework and concentrate the limited time that you have to devote to investing by concentrating on what has worked in the past. Those above have not reinvented the wheel but have mastered the art of investing and the methods of their predecessors. They have then taken those ideas and have spent their lives trying to improve on them or make them relevant to the time they live in.

Civilization advances by passing the torch to the next generation, so grab that torch and master these writings and then innovate. That’s what makes life worth living in my book.