Archive for February, 2011

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part 3

February 28, 2011 Leave a comment


But regarding these books, there’s another rub that if not treated preventatively can turn into a rash: Asset allocation.

Swensen’s Yale and other endowments (for the reasons listed above) can invest in non-liquid assets with a higher expected return than stocks because, again, they run no-time-horizon endowments. So for them, diversification into those things can actually smooth their returns over time—and potentially even raise their expected return. Gonzo!

But for regular folks, again, this can’t work. Forget the fact most folks already have most of their net worth in residential real estate (and we’re seeing just how illiquid that can be right now!). If liquidity is a virtue, then you can’t buy tons of those non-liquid things. And of the available highly liquid categories (stocks/bonds/cash), stocks are by far and away superior—they have a higher expected return (and thus are also more volatile).

This is all to say that Modern Portfolio Theory, genius as it is, has been contorted and perverted by the industry in many ways over the years. Among the liquid asset classes, anything other than stocks by definition lowers expected return because bonds and cash won’t return as much over time with the exception of very rare periods. You might be smoothing out returns by diversifying, but you’re also lowering what you can potentially get in return. Period.

Diversification was originally intended to be a way to maximize expected return within an asset class—not the mixing of them; different rules apply when you do that. One of the many conceits sold to most investors to diversify asset classes is that because of behavioral errors humans are prone to, you should diversify away from, say, stocks, because you’re still a chimp at heart, and you’ll panic and sell at the lows and buy at the highs. So you need something to smooth it out—you’ve got a low pain threshold for all the ups and downs of stocks.

I don’t believe this is good medicine. It’s a case of the tail wagging the dog. A good doctor (portfolio manager) understands these lessons—these basic disciplines of investing—and earns his pay by not making those classic behavioral mistakes. In fact, the express purpose in my view of a great money manager is to make fewer mistakes over the long run than you would. Investing’s ultimately a discipline. That concept alone can create more wealth for folks than any genius stock pick.

It’s unconventional to say as much, but you do NOT have to allow your human-error prone nature to dictate a lower expected return for yourself. Instead, what you need to do is find the right manager. Granted, this is also tough to do, but they exist. Swensen, et. al., admit as much: Active, effective portfolio strategy can be done by excellent professionals, but most professionals and non-professionals will fail.

Don’t try the surgery yourself; find the right doctor.  That’s my prescription from my desk at Fisher Investments.  Happy Monday.

If you missed parts of this book review, they can be found here:  Do as I Say, Not as I Do, Part I Do as I Say, Not as I Do, Part II

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part 2

February 26, 2011 Leave a comment


But Dave Swensen’s Unconventional Success is no half-wit’s prescription. This is a fantastic book for intermediate investors (it’ll be a tad too jargony for total neophytes). There are things to quibble with (mostly tied to how he views asset allocation, more on that in a moment), but for the most part, I can scarcely point to a better book explaining the investment landscape; from pithy and elucidating descriptions of boring product types (deadening boring TIPS), to (mostly) practical views on market timing and rebalancing, to the ills of mutual funds and other misaligned incentives in the industry. Swensen calls his book “unconventional,” and it is, but most of his dictums are intuitive concepts to be found daily on Fisher Investments MarketMinder’s editorial page.

And this is a guy you want to listen to. If you haven’t heard of Swensen, you’re probably not alone. He’s not one of the aforementioned gaga gurus. Though he’s got a few books to his name, he generally stays out of the spotlight. He’s run Yale’s Endowment (one of the largest in the world) for some years now and produced very good returns for them over the years.

Unconventional Success is geared toward the average investor. But one of the things that becomes immediately clear is it takes a tremendous amount of time and intelligence to navigate the investing territory adequately. Swensen moves with acrobatic clarity and lucidity from topic to topic, but goodness gracious, there’s no chance a non-professional could do the same. So the lesson of this book, ironically, is to seek out a good investment doctor.

If you’re a true-to-goodness newbie to investments, read Goldie and Murray ’s Investment Answer instead, which is effectively a distilled and often didactic version of Swensen’s views. Like Swensen, they stress a high degree of discipline and admonish readers to seek help of a fee-based adviser. Good advice, indeed.

It’s tough though to recommend Faber and Richardson ’s Ivy Portfolio. It’s not a bad book per se, but you’re better served going straight to Swensen instead of experiencing a distilled version of him. The book’s virtue is it describes the endowment investing world, which is an interesting subject, but only for a narrow audience.

The supreme irony about all three books is they tell you (mostly) the right things to do…and then proceed to say you can’t do them. It’s “do as I say, not as I do,” because you, as an average retail investor, can’t reasonably do the things Swensen does. This isn’t just a matter of skill—endowments are just different than you. They have no end date, which means they can lock their capital up in stuff like buyout and private equity funds and real estate for decades without worrying much about liquidity.

Regular folks can’t do that. Liquidity is the unsung hero of equity capital markets—we should marvel at the high expected return they provide in addition to lightning-fast liquidation. Most folks need to be able to sell their assets, or at least parts of them, on a fairly regular basis—and it’s still better if you more or less get the actual price that’s quoted to you and quickly. For that, you need stocks, bonds, or cash.

To be continued…

Fisher Investments Analyst’s Book Review: Do as I Say, Not as I Do, Part I

February 25, 2011 Leave a comment

This is the first installment of a 3 part series. Books discussed in this review:

Unconventional Success: A Fundamental Approach to Personal Investment – David F. Swensen

The Investment Answer – Daniel C. Goldie and Gordon S. Murray

The Ivy Portfolio: How to Invest like the Top Endowments and Avoid Bear Markets – Mebane T. Faber and Eric W. Richardson

How Doctors Think – Jerome Groopman, M.D.

Better: A Surgeon’s Notes on Performance and Complications: A Surgeon’s Notes on an Imperfect Science –Atul Gawande


All analogies are imperfect, but to compare investment professionals to doctors is apt. In both cases, customers should consult a professional—self medication is perilous. Except there’s no Hippocratic Oath for investing pros, which means there’s a lot of voodoo advice out there.

If you have a minor ache, you pop an Advil, ask the pharmacist, or just consult WebMD. But if you need major surgery, you need a doctor—and you want the best. And not just the best, you need the best specialist. If you’ve got a brain tumor, you don’t want a cardiologist.

Also, doctors are wrong quite a lot! Even in medicine, situations are contextual and the body sometimes does things against expectations, and there are fewer ironclad rules than we’d like to believe. So the quality of the doctor matters—the best ones are sometimes wrong, but are generally less wrong than the bad ones. You listen to your doctor—even if you think he might be wrong or what he prescribes is counterintuitive. Why? Because you know your doctor has a better chance of being right than you do. Atul Gawande has recently become something of a guru in popular medicine writing. And I’m always delighted to read his books and compare what he does with what professional investors do. (It’s not always the same, of course, but a wonderful analogy nevertheless.)

It’s all the same thing with investments and planning your financial life. It’s absurd for the vast majority of folks to believe they can handle their investments on their own. You need to find a good professional to help you—someone who knows what they’re doing and isn’t just a salesman. If you need stocks, you need to find a stock specialist, and so on. And, yes, just like a great doctor, the reality is the more complex your circumstance and needs, the more that service will cost you. (This won’t be a review about how to pick the best adviser, but I can direct you on how to avoid the legit crooks: Read CEO of Fisher Investments Ken Fisher’s How to Smell a Rat: The Five Signs of Financial Fraud.)

The landscape is littered with investment advice books of the self-medicating variety, particularly, those ultra mass-market guru tomes admonishing you to “revolutionize” or “make over” your money. This is sort of an over-the-counter style of investing—fine enough for some basic tips. But let’s face it, to plan your financial life you need more than an ultra-commercialized set of tautological (and often fairly condescending) tips, like being told to “save more.” Well, duh.

To be continued…

A Great Tradition

February 24, 2011 Leave a comment

David Brooks in the NYT recently wrote about an ebook that’s getting some buzz: The Great Stagnation by Tyler Cowen.

I read it last night and can’t for the life of me tell why it’s gotten any notoriety other than it’s a first entry in the new phenomenon of shorter books (or, perhaps, longer essays) being published as ebooks and sold for a few bucks. This “invention” is being touted by Amazon and others, and is a good thing—most nonfiction books these days are about 40% too long but editors pad them so they seem more substantial. The essay is the right form for most business and economic non-fiction these days. So I applaud Cowen for being a pioneer here.

As for the book itself, it ultimately amounts to another in a long and great tradition of Americans telling each other how we’ve gone wrong as a society/economy. You’ve got to love it: it’s the hallmark of a strong and great people that openly derides itself. But there are oodles of books out there telling us how bad we are right now, and they’re all mostly myopic to the present moment even if they claim not to be. (For instance, Cowen claims we’ve been on a multi-decade run of decline in creating jobs, but forgets that US unemployment was at or near historical lows for most of the last decade.) Reading this book, you’d have no sense that US GDP is already back at inflation adjusted new all-time highs, that global stocks are ~100% off their lows, or that the US is leading the developed world’s growth right now. To Cowen, we’re not innovating, we’re not really productive— Stuff like iPods and smartphones, Facebook and other social media, though they’re catching on like wildfire globally and were created on US soil, are written off as not really useful for society.

With all due respect to Mr. Cowen, the fallacy of this kind of thinking is easy to see when you realize the basic fact that the US is a developed economy—in fact the most developed in the world! It’s not a matter of “eating the low-hanging fruit” anymore—that’s precisely what developed economies are supposed to do, and we did it very well thank you very much. Cowen compares now to times like the 1890s. Why? We’re a service based economy now, still innovating better than basically anywhere. You’re not going to get huge swaths of folks rising precipitously in standard of living brackets because our country is already way high as it is.

Cowen ultimately offers something of an optimistic view about the far-flung future. That’s good, but if you want to see a more optimistic future, I still contend Matt Ridley’s Rational Optimist is second to none. It’s far better to recognize the most recent recession—bad and deep as it was and still with lingering effects (like high unemployment)—was still an example of the cyclical nature of free economies and markets.

At the very least, as I see it, the continued appearance of books like these among the intelligentsia reminds us there’s plenty of pessimism still out there.

Whizz-Bang Futurism Does Nothing for Stocks

February 18, 2011 Leave a comment

The Economist’s piece this week on 3D at home printing and manufacturing is fascinating and just generally awesome to contemplate. Who knows when we get there (which I think we will) what form that’ll actually take. But what a concept!

And there’s the rub. Investors have this tendency to get all giddy about stuff (it’s usually technology, but can be industrial or energy based, like biofuels) that seems great but won’t actually benefit earnings for companies in any significant way for years or maybe even decades.

Which means, thinking such high concepts as investment opportunities is perilous stuff. Part of the discipline of investing includes being able to differentiate cool ideas from those that will bolster bottom lines in the here and now or very soon. Don’t let your imagination get away from you. Very often, what works best is the boring, staid stuff that really drives how the world works—heavy industrials, rails, shippers, parts manufactures, and so on. Those don’t get a lot of ink in Fortune magazine, but they matter a lot, don’t forget them.

On a separate note, congrats to the greatest living pop rock musician/technician/song writer of his era for finally making it into the Smithsonian–long overdue in this Analyst’s opinion. Eddie is surely a national treasure.

Reminder: The World Didn’t End

February 18, 2011 Leave a comment

Remember when stress tests were all the rage and we felt the world economic order was hanging on the results of such things? I do, it was the spring of 2009—not so long ago. Back then, this headline would have incited mass consternation at best, and mild panic at worst.

Fed Tells U.S. Banks to Test Capital Against Recession Scenario

Nowadays, it’s barely worth a shrug. We’re over it. “Systemic failure”, that ubiquitous catchphrase of the last couple years barely gets a shrug any longer. Now, I know what you’re thinking: “Here comes the didactic tirade about how we’re about to repeat the same mistakes as just a couple years ago.”

Nope, the opposite. This is to remind folks that not only did the world not end in 2008, but actually much of the system proved much stronger than many believed (the economic and capital markets recovery simply couldn’t have happened so strongly and for this long were it otherwise), and that much of the doomsday talk never materialized. It’s vogue to want to hold folks accountable (Why Isn’t Anyone From Wall Street in Jail?) for the bear market, but why not call out the folks who kept investors out of the now ~100% run up in stocks since the bottom?

I’m being facetious, of course. But only a little. The world didn’t end; it wasn’t different this time.

Bears Are Cornered into Secular Talk

February 16, 2011 Leave a comment

You should never believe in the concept of “secular” Bear or Bull markets (the idea that there are +20 year super cycles for stocks). There just aren’t enough data points to be significant, and even if there were it’s folly because if you get just one of these so-called secular cycles wrong, you basically have ruined any chance of achieving your investing goals. Better to take it one year at a time—markets don’t price in the expected future much more than a few years at the most anyway.

But it is telling when others start evoking the secular argument. This generally happens when things aren’t going certain forecasters’ way. So, global stocks are about 100% higher than their nadir in March 2009, and that has the heels-dug-in bears saying this has all merely(!) been a secular bear market. Hogwash.

This isn’t just a bearish sort of thing. Back in 2000, when the market was beginning to roll over, you can find many a perma-bull saying it was a bull market correction. Nope. 2000 to 02 was a full fledged bear, and 2003 to 2007 was a period that saw new all-time highs in stock prices—I call that a bull market.

Ignore the secular theorists. I suggest to take it one year at a time instead.

Quantifying the Qualitative

February 15, 2011 Leave a comment

Malcolm Gladwell’s newest article from the New Yorker on “what college rankings really tell us” is an accessible and quintessential case study in the perils of quantifying the qualitative. There are so many abstract elements in the process of ranking colleges, so many value judgments, the actual rankings ultimately become mere a reflection (read: biases) of what a specific group of folks thought anyhow.

More, the article speaks to the dangers of seeking ever greater mathematical sophistication when trying to parse information that doesn’t naturally or easily categorize. We have observed that often the mathematical process itself can produce unintended skews in the results. Investor sentiment rankings, for one.

Nuts! But in a Good Way.

February 11, 2011 Leave a comment

Most investors won’t have heard of Ray Kurzweil—a noted American inventor and theorist of the last ~30 years. He’s nuts, but in a really good way. One of the things mathematicians do foremost is view something in the real world, take that problem and run it through abstract mathematical logic, seek relevant patterns using the clean symbology of numbers, and spit those back out into the real world to see if they’ve got something that actually works.

Kurzweil is great at this. His basic, but stunningly powerful view that the law of accelerating change (what many will recognize as “Moore’s Law”), is everywhere in world history—from evolution to the rise of cities and civilization, to capital markets, to how computer power increases over time.

His seminal work, the Singularity Is Near, is full of the crazy (he is absolutely convinced humanity can become immortal by 2045), but also tremendous. There are few better theoretical views that describe how capital markets expand over time than this book in my view.

If you don’t want to take the +500 page plunge, Time Magazine yesterday published an excellent article about the Kurz and his theories.,8599,2048138-1,00.html

Fisher Investments Analyst’s Book Review: How to Read the Wall Street Journal

February 10, 2011 Leave a comment

Books Discussed in this Review:
Restless Genius: Barney Kilgore, The Wall Street Journal, and the Invention of Modern Journalism – by Richard J. Tofel
War at the Wall Street Journal: Inside the Struggle to Control an American Business Empire – by Sarah Ellison

Investors never actually experience firsthand most of what they act upon. The vast, vast majority of information is obtained secondhand—via newsfeeds of all sorts, be they scuttlebutt (that Phil Fisher favorite), blogs, TV, newspapers, journals, magazines, even Twitter. In some sense, financial statements are a kind of secondhand account—10Ks, earnings calls, and balance sheets are not direct experiences of a company and its goings on. They’re descriptions; not the thing itself, but something describing the thing.

Sometimes (actually, often) a secondhand view can be quite useful. A well-wrought story distills and focuses otherwise chaotic events as they happen—it makes sense of things for you and highlights the important features. That’s the ostensible function of journalism—objectivism but also a better shaping of things for more efficient understanding.

That’s in theory. At this point, we’re all well aware of the inherent biases and subjectivity of any publication. This gets to one of those philosophical issues that has major practical implications for investors—is it possible to get clear information to make cogent decisions out of secondhand accounts like newspapers? Is it possible to really “know” what’s going on in the world just by sitting in an office and reading words on papers and screens?

Mostly, yes. But the onus is still on the reader to get to the “truth”—that is, one cannot leave all the interpreting to the journalist. Particularly in the internet age, there’s no doubt in my mind it’s possible to obtain all the needed information to successfully invest globally. And it’s mostly free of charge, for that matter. It takes work though. For one thing, the right information’s not all in one place—you’ve got to read a wide variety of stuff. Also, you must be constantly vigilant of the content you’re reading. Journalism and news generally are by definition a selected presentation of facts—there’s no way to communicate all the information. That means all journalism is subjective. Just the editorial choice to run a story at all is a choice. So an investor cannot sit back and ask the world to tell him/her what is important—they have to make that determination themselves and seek it out within the sea of information.

But there’s another factor. An investor doesn’t just need to know the right information to invest, an investor must also know what the world is thinking. It’s a reflexive kind of activity, what I call in my book 20/20 Money being “the layer on top of the layer.” You don’t just have to know; you have to know what others think about what is known. That’s because all investing is relative—most known or widely believed information is already reflected in prices. To make a market-beating investment, you have to determine what’s not reflected yet in a price. So reading the news is also about seeing what the world is thinking—what the most salient issues are; who’s saying what, and why.

On that basis, there is no more indispensible, indubitable investing resource than the Wall Street Journal. Any and every serious investor must read it daily (even Saturdays). It’s what the investing public reads and therefore is what you must read to know what others are thinking.


Barney Kilgore took the Wall Street Journal from a glorified newsletter to one of the best journalistic periodicals in the world. A cub reporter in the Depression era, Kilgore did everything at one time or another—from editorials to on-the-ground political reporting, from economic analysis to earnings analysis.

Kilgore hailed from South Bend and had ties to Notre Dame and the country’s robust middle—very American, workman-like, a Calvinistic/puritan worldview. He valued hard work and long hours as virtues in themselves. Yet he was an adventurer and regaled himself in the adventures of city life—from San Francisco to New York.

As a reporter, he cut his teeth in the Depression and covered the ailing banks, reporting heavily on complex regulations like the Glass-Steagall bill. His market education was almost purely experiential (no textbooks here). Not just following the news, but commenting and reporting on it as Kilgore did, hones you, toughens you, sharpens your investing mind. For me, there was no faster or better learning process I underwent than my days editing MarketMinder and writing our daily commentary.

Kilgore came all the way up through the ranks: he wrote, edited, and published at the Journal. Mostly, he was a visionary and innovator. All those little things the Journal is famous for—the front page “What’s News” column which briefly highlights the day’s important news, the daily “Review and Outlook” editorial section, known for its biting political wit—all came from his mind. He saw the paper go national, then international, and its basic form is still retained today.

His ideological roots skewed heavily toward free markets. He believed in Irving Fisher’s insights (even after his disastrous prediction of further and indefinite stock market climb in 1929). Kilgore believed markets ultimately held more wisdom than the individual and were the only possibility for forward information about the economy. Indeed, amid the deluge of information available today, the market is still the surest forward indicator of the economy. All that ethos still exists in the paper now.

But part of Kilgore’s charm was his dual mission to educate and entertain—he wanted the Journal to be a thing regular folks could read to both enjoy and learn a few things about the vagaries and intricacies of the economy. This attitude is what allowed him to shun tradition and innovate the paper into prominence. These days we think of it as an institution, but its roots are about unconventional-ism. Enter Rupert Murdoch.


Many view Murdoch’s purchase of the Journal in 2007 as an atrocity of the paper’s independence and integrity. I say hogwash. Both Dow Jones (publisher of the WSJ) and the New York Times Company were/are majority-owned by families (the Bancrofts and Salzbergs, respectively), and, as such, over the decades have become stodgy, turgid, anti-innovation publications. These were dying animals. True, the Journal was the only major newspaper to successfully get its readership to pay for online access, but that was more a function of its indispensability as a business resource than the paper’s innovation.

I think Kilgore would be much pleased with Murdoch so far. Murdoch has already livened the paper by adding more color photos (something the New York Times for years has done better), decreased the width of the paper, and mandated more international and political news. These are all to the good, especially tied to Kilgore’s desire for the WSJ to be the de facto paper of the US. Kilgore believed any well-informed citizen should understand business, the economy, and how markets work.

These days, the Journal is gaining in circulation and subscribers. But make no mistake: The newspaper business is rough, competitive, and has been in recession for more than a decade. In order to survive blogs and the Internet, newspapers have had to jettison high-cost talent and experienced journalists/editors for cheaper, less experienced writers. The average age of a writer for the Journal these days is much younger than ever before. This creates a problem of perspective—headlines seem to take a more breathless, sensational overtone from those with younger pens. Indeed, the panic of 2008 may well have seemed and felt like the end of the world to those reporting their first true downturn. Even the emergence from the most recent recession seems something of a revelation, when it’s really part of a very normal cyclical pattern through time. Murdoch, a businessman first, has surely taken advantage of this cheap labor, and in an era where newspapers must compete with so many new sources of information, he probably also doesn’t mind a little higher sensationalism, too, to move papers.

Beyond that, the Journal is no less good than it was before. Yes, the ideological bent of the publication will out no matter what. But the WSJ was well known as the most conservative of the major papers long before Murdoch anyway. It’s hard to believe editorial and op-ed veterans of the Journal like Henninger, Jenkins, Stephens, Noonan, and others, can get any more free market than they already are.


Here’s one man’s strategy for WSJ reading:

If you only have five minutes, read the front page, especially the “What’s News” section. The major economic releases and political news are all there. (But remember it’s a newspaper, so anything that happened in the morning won’t be in the paper till tomorrow. The online edition is updated constantly though.) Then skip to the “Review and Outlook” at the back of the “A” section. This will have a right-wing bent, but will tell you immediately the salient political/economic issues of the day.

If you have 15 extra minutes, read the op-eds. The most important economic and business personas in the world write there. Barack Obama did just a couple weeks ago. So do Treasury Secretaries, foreign heads of state, prominent CEOs, and so on. Their views shape policy and the economy.
If you have 30 minutes, read the entire “A” section—which is global news with an economic skew.

Important tip: Murdoch likes his journalists to leave certain important information toward the middle of a piece to keep people reading. But the headline and first third of basically any story are enough to get about 90% of the important information. You can skip the anecdotes and repetition otherwise.
If you have 45 minutes, also scan the Marketplace and Money and Investing sections. But even if you have a lot of time, still skim these unless something really catches your eye that’s pertinent to your own dealings.

If you can round out the hour, it’s well worth looking through the market data at the back end of the Money and Investing section. Take one small piece a day, as possible, and figure out what all that stuff means. Within a few months you’ll know all about options markets, forward commodities contracts, bonds, stocks, funds, and so on.

Generally ignore the Personal Journal section. There’s seldom much there of interest outside mundane fare and pieces about the art and high-end real estate markets to make people feel finance can be cultured and sophisticated.

If you can’t read the weekly edition, the weekend Journal has really improved under Murdoch. It’s a great rundown of the week’s action, and the new book review section is starting to come into its own with some of the best critics and voices commenting.

Most importantly for serious investors, no matter what, subscribe to the thing and at least scan the headlines daily. Make the time. Even for curious citizens, there are few better avenues out there for the daily news.

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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