Book Review: DIY Financial Advisor: A Simple Solution to Build and Protect Your Wealth

Link to Book: DIY Financial Advisor:  by Wesley R. Gray

Self Medication is harmful says the Doctor. Do not try this at home say media before it showcases mind blowing antics performed by stunt drivers. When you receive a legal notice, you really cannot do it yourself and would need the help of a lawyer to draft a reply.

But when it comes to finance, one does need to question whether the experts are any better. This book is written by the team that runs the website http://www.alphaarchitect.com/ which for me is a go-to site for the humongous amount of testing they do with regard to strategies that range from simple and is executable by a individual investor to the complex (not of the convoluted type, but strategies that will be tough for a non finance guy to replicate).

The book is more or less a continuation of the same and being a regular reader of the site (as well as other related sites), the data and the strategies weren’t something that surprised me.

The book is divided into three parts with part one being the easiest of the reads as it focuses on the failure of experts. While the book in itself limits to a few charlie’s, there is no dearth of those who have lost investor money by the bagful.

For me the most impressive fact was showcasing of the study by Professors William Grove, David Zald, Boyd Lebow, Beth Snitz, and Chad Nelson who have performed a meta-analysis—or a study of studies—on 136 published studies that analyze the accuracy of “actuarial” (i.e., computers/models) vs. “clinical” (i.e., human experts) judgment. (Link)

I am a strong believer in using Models for both Investment & Trading and the above analysis just re-emphasizes the fact. In fact, if you have read The Checklist Manifesto by Dr.Atul Gawande, you will remember him showcasing how even the experts get it wrong and how using models (in there, usage of lists) can reduce the same by a large margin.

Compared to other fields, in the field of finance, use of models is growing due to fact that professionals have recognized the advantages of using a model compared to using one’s gut feel given our biases.

The book (as is their website) is aimed for the American Investor since many of the instruments that are available for investing aren’t even available here. But its nice to see how simple momentum / value based strategies can provide a investor with a better return compared to just being a passive investor.

Another surprising data from the book was whether it made sense to stick to the original Benjamin Graham approach of buying cheap stocks or shifting gears and buying Quality stocks at a good price as described by Warren Buffett.

On almost all counts, simply buying cheap stocks beats buying quality stocks at a good price. Yet, today we hear more about Buffett strategy than the original graham strategy. Once again, we fall for a good story which it seems is not backed by data but by sentiment.

On the whole, found the book to be a good read with the takeaway being that you can beat the experts if you are disciplined enough to follow the simplest of models (a 60:40 re-balanced portfolio for example).

If you are a Indian Investor, i would suggest that you browse through the site as the book in itself is pretty expensive and may not be a worthwhile investment.