Archive | Book reviews

What Would Buffett Do?

When I set out to educate myself about investing, Larry Swedroe was one of the most influential authors I encountered. What I loved about his books (including The Only Guide to a Winning Investment Strategy You’ll Ever Need and, more recently, The Quest for Alpha) was that every argument was backed up by academic research.

So I was surprised to see his latest book, Think, Act, and Invest Like Warren Buffett, is a slim volume with only a few scattered footnotes. And knowing Swedroe’s passion for passive investing, I wondered why his title invoked the world’s greatest stock picker. I recently had the pleasure of speaking with Larry Swedroe via Skype, and he shared the backstory:

“I’ve learned over the years that relatively few people are interested in the evidence and the data. Maybe 10% of the audience wants that stuff: engineers love my other books, and they wouldn’t like this one. Then there are those you might call investment geeks who want all the research, and they will even read the original papers. But for the vast majority it’s, ‘Just tell me the answer,

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An Interview with John De Goey

On Monday, the UK implemented new rules banning embedded commissions on investment products. We’re still many years away from that in Canada, but it’s not for lack of effort on the part of John De Goey. For a decade now, the associate portfolio manager at Burgeonvest Bick Securities in Toronto has been a thorn in the side of the industry. Like almost all his contemporaries, De Goey started out selling mutual funds with deferred sales charges, but later become one of the early adopters of the fee-based, no-commission business model.

I chatted with John about his recently published book, The Professional Advisor III: Putting Transparency and Integrity First, a passionate plea for changes to the advice industry. Here’s an excerpt from our interview.

The first two editions of your book were published back in 2003 and 2006. A lot has changed in the investment industry since then.

JDG: When I wrote the first two editions, I knew more people in the advisor media—Advisor’s Edge, Advisor’s Edge Report, Investment Executive—and they were the ones writing about the book.

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What Investors Can Learn From Weather Forecasts

I’ve never made a secret of my opinion that acting on market forecasts is destructive to investors. Nate Silver’s fascinating new book, The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t includes some telling examples from the world of finance, but he drives home this idea even more forcefully with his insights about the weather.

Silver explains that meteorological forecasts are quite accurate if they’re made just a few days in advance, but the further out you go, the less helpful they become. Forecasts made eight days in advance are useless, and beyond that they’re actually harmful: “They are worse than what you or I could do sitting around at home and looking up the table of long-term weather averages,” Silver writes. Yet despite being aware of this evidence, The Weather Channel and AccuWeather make forecasts for 10 days and 15 days into the future, respectively.

The book also describes how for-profit weather services are more concerned with the perception of accuracy than with accuracy itself. This gives them an incentive to be bolder than they should be. If their models forecast a 50% likelihood of rain,

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Perfect Portfolio E-Book Now Available

The MoneySense Guide to the Perfect Portfolio—my how-to book for Canadian index investors—is now available in electronic formats. If you have an iPad, Kobo or Kindle you can now become a Couch Potato without even leaving the house. You can buy your very own e-book for just $4.99 by clicking one of the links below:

 Apple iPad Edition

 Kobo Edition

 Amazon Kindle Edition

You can rebalance next week

In other international news, US stock exchanges are closed for the second day due to the dangers posed by Hurricane Sandy. If you were planning to make any ETF trades in your portfolio this week, you should be aware of how these closures might affect you. The Canadian ETF Association released the following notice yesterday:

Investors should expect wider than normal bid/ask spreads while the U.S. markets are closed and we recommend all investors exercise caution if trading.

Most Canadian listed ETFs which have exposure to U.S. securities can be traded today. Investors need to understand that the price they pay for these ETFs may not reflect the underlying net-asset-value of the ETF which cannot be accurately determined with U.S.

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Review: Abnormal Returns

Tadas Viskanta’s blog, Abnormal Returns, has gained a large and prestigious following during its seven-plus years. His new book of the same name also deserves a wide readership. Abnormal Returns (McGraw Hill, 2012) is not so much an argument for a specific strategy as a catalogue of wisdom. “This book should be read more as an exploration of a series of investment topics as opposed to some sort of doctrinaire investment philosophy,” Viskanta writes.

In his chapter on equity investing, he discusses the surprising relationship between the stock market and the economy. From listening to the news, it’s easy to infer that a weak economy produces poor market returns, but the last three years have shown it’s not that simple. The US, he writes, “continues to operate with generally tepid economic growth, headline unemployment rates well in excess of 9%, and a budget deficit well in excess of a trillion dollars,” yet the S&P 500 has more than doubled since 2009. The lesson is that weak economies are a bit like value stocks, while the burgeoning emerging markets are closer to growth stocks. For the patient investor, it is value that outperforms.

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The Second Coming of the Perfect Portfolio

The anticipation has been palpable, I know, but the waiting is over. The second edition of The MoneySense Guide to the Perfect Portfolio is now available.

The first edition of my handbook for do-it-yourself index investors, published last October, sold out quickly as Couch Potatoes stampeded to their local newsstands to demand a copy. The revised second edition should now be available across Canada on magazine newsstands at Chapters, Shoppers Drug Mart, Walmart and Loblaws. It’s also available online, and if you order 51 copies or more, you get a hefty discount. Order 99 and you save even more. [Update: Perfect Portfolio is now available in Apple iPad, Kobo. and Kindle editions.]

While the second edition is very similar to the first, there have been a surprising number of developments since last fall. Vanguard arrived in Canada, Claymore was bought by BlackRock, and three brokerages now offer commission-free ETFs. The guide has been updated accordingly.

Now with improved performance!

I have long wanted to compile more complete historical performance data for my model portfolios,

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A New Book for Beginning Investors

Last fall, Glenn Cooke approached me with an idea. In addition to his work as an online life insurance broker, Glenn manages the network that includes some of Canada’s most popular money bloggers. He wanted to bring together several of those bloggers to collaborate on a book, and I agreed to help out as editor.

After many months of work, I’m happy to announce that The Beginner’s Guide to Saving and Investing for Canadians is now available. The 100-page book is divided into five chapters, each written by a contributor with expertise in a specific area of personal finance. I’m sure you’ll recognize the names and the blogs:

Krystal Yee, a columnist at Moneyville and the blogger behind Give Me Back My Five Bucks, shows you how to create a budget. This may be the most important step in a financial plan, because investing won’t help you if you’re spending more than you earn.

Jim Yih of Retire Happy Blog explains where to save your money. He covers the basics of pension plans, RRSPs, Registered Education Savings Plans,

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Carl Richards on Performance Chasing

A couple of posts ago, I asked why everyone isn’t beating the market when there are a dozen or more strategies that promise long-term outperformance. I argued that the problem wasn’t so much that the strategies themselves were flawed: the more important issue is that investors tend to quickly lose patience when their strategy isn’t working. What often happens is they move to another strategy that worked well recently, and soon they fall into a pattern of doing what Larry Swedroe calls “driving forward but looking in the rear-view mirror.”

I had an opportunity to sit down with Carl Richards, author of The Behavior Gap, when he was in Toronto for a presentation on May 22. Carl shared a couple of illuminating stories that make this point far more effectively than I did:

“I had been in the business maybe five years, working a brokerage that will remain unnamed but has a bull as its symbol. Part of what we did there was manager search and selection, and I remember this one occasion when we hired the Davis New York Venture Fund,

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Market Timing Goes to College

In recent years, the so-called Yale Model has been extremely popular with investors. The model is an attempt to mimic the investment strategy used by Ivy League endowment funds, which have an outstanding track record of beating the market indexes. David Swensen, the superstar manager of the Yale endowment fund, delivered returns of 10.1% annually from 2002 to 2011, a decade when stocks returned 3.9%. The Harvard endowment returned 9.4% over the same period and has grown 12.9% annually over the last 20 years.

The Ivy Portfolio, by Mebane Faber and Eric Richardson, describes how Yale and Harvard use an asset allocation model that is broadly similar the Couch Potato strategy. The key difference, however, is that the endowments include a number of asset classes that are not available to retail investors, including private equity, hedge funds, and direct ownership of timber resources and commercial real estate.

The first half of Faber and Richardson’s book is a fascinating look at how individual investors can mimic the Yale Model. The authors quote both Swensen and Jack Meyer (Harvard’s former endowment fund manager), both of whom recommend building diversified portfolios with low-cost index funds.

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