Book Review | Portfolio Yoga

Book Review: Bull: A History of the Boom and Bust, 1982-2004

1982 to 2000 saw one of the biggest bull rallies in the history of the United States stock market and the book Bull: A History of the Boom and Bust, 1982-2004 follows the up’s and down’s of that journey.

While the Bombay Stock Exchange is the oldest continuously traded exchange in Asia, the markets have never really appealed to a large majority of common folk who would rather invest their hard earned savings in Bank Deposits, Gold or Real Estate.

Before 1982, the situation in the United States was somewhat similar with a lower percentage of folks investing in markets.

With falling interest rates and a rising stock market which was coupled with a boom in Electronic Media, investors overcame fears of the past as they rushed in to take advantage of the ability to make money with click of a few buttons.

India seems to be placed very similar to where US stood at that point of time when it comes to the catalysts required to goad investors from safer assets like Bonds and Banks into Riskier investments such as Equity.

“Knowledge of history is an investor’s best defence against Error” and as India finally is seeing a marked change in sentiment with investors choosing equity, the lessons there could turn out to be important as our markets mature over time.

Markets moving ever repeating cycles of bull and bear. Currently it seems that we are on a never ending bull market. But history says that this can and is never true for the longer a bull market, greater the possibility of a gut wrenching bear market.

Most Investors experience in Bear market these days are limited to 2008 when the only casualty was the financial market. A real bear market is when there is wide spread job losses and loss of confidence.

There were way too many quotable quotes in this book. You can check out this tweet thread for some of those which really hit hard.

When will large majority of people start investing in markets? This is how it happened in US pic.twitter.com/MQr6rI1CFy

— Prashanth (@Prashanth_Krish) July 15, 2017

Preparation is half the Battle – the question being, are you prepared enough?

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Book Review: Deep Work

There are books and then there is this book. Deep Work: Rules for Focused Success in a Distracted World by Cal Newport. One of the key reasons for me to read books is with the hope they inspire me (Directly by putting up ideas or Indirectly by showing the right path) to do better in my life and in that aspect I believe book comes among the top in terms of its ability to showcase the benefits of how we use our time and how we can better ourselves.

Malcom Gladwell in his book Outliers made the following famous quote

“In fact, researchers have settled on what they believe is the magic number for true expertise: ten thousand hours.”

Now, there has been a lot of debate on whether this is really backed up in terms of scientific evidence and whether you really need 10,000 hours. But what is missed is that its not hours that count – after all, if you spend 10,000 hours watching Television, you wouldn’t be any better a judge of Television than your Mom who watches multiple family dramas.

Lets take the stock market – who are the experts out here? Are the guys who sermonize all day long on Twitter (me included?) or Television make them a expert.

We all like to Quote Warren Buffett / George Soros among the other greats, but do we really work the way they do. Buffett for instance claims to read 5 – 6 hours a day. Below is a quote of his taken from Farmstreet Blog

But I read five daily newspapers. I read a fair number of magazines. I read 10-Ks. I read annual reports. I read a lot of other things, too. I’ve always enjoyed reading. I love reading biographies, for example.

As much as we want to be successful, the question is how much effort we are willing to put in for that effort. August – September is the season of Annual Reports out here in India and if you are a stock investor, you surely would have received some of them. If you think yourself a investor who looks at the fundamentals, how many have you read?

And then there is Soros. As some one once mentioned, if you can read and digest his “The Alchemy of Finance“, you really have achieved something. But then again, most of us are happy to just quote him and move along. Yeah, he is great, but I don’t think I can trade / invest like him.

Distractions are part and parcel of our lives and the book is all about how eliminating them provides us with the right context and time for what we really need / want to do.

Valuewalk has very detailed notes from the book, Do Read. Link: Notes

Save or Spend

Yesterday I finished reading, Pit Bull by Martin S. Schwartz which while being on the lines of the famous Jesse Livermore book hasn’t gained that much fame despite the fact that unlike Livermore who died broke, Martin has been a exceptionally good trader who never came close to Bankruptcy despite being a full time trader and one who while not swinging for the fences did take enormous risks in the course of his career.

I believe the book contains various nuggets of wisdom throughout which are applicable both for the trader as well for the common man. One of the things that appealed to me was his view to taste the fruits of success rather than investing the same elsewhere where it could have given even more gains.

Quoting from the book,

“Over the last two years there had been many times when I’d said to myself, gee whiz, why did I dump one third of my net worth into that beach house? If I’d put that money into mutual funds, it’d be worth well over a million now and that would have made my entire family more secure.

That was the trap that a lot of traders fell into. Most big-time traders didn’t taste the fruits of their labors until they’d climbed to the very top of the tree, and in some cases, they never tasted them at all. To them, making money was the fruit, because to them, money was power, and power was the only way they could feed their giant egos. I wasn’t interested in power. I wanted to taste my fruits all the way up the tree, which meant that I didn’t mind spending money, lots of money.

……………..

If Audrey and I wanted a beach house, we’d buy a beach house. If we wanted a twelve-room apartment on Park Avenue, we’d buy that, too. There came a time when you had to spend the money you’d been making so you could understand why you’d been killing yourself”

I was reminded of a recent advertisement by a Mutual Fund house where the child admonishes her parents for spending money on Handbag / Car when they could make it even bigger by putting them in a Mutual Fund (‘n’ years down the lane).

As I commented on Twitter upon seeing that advertisement, while saving is important, there also needs to be a balance in living a good life. After all none of us can carry over our savings to the other world, so what is the whole point in struggling throughout our lives to save more and more without a clue as to when we can actually start using it.

A secondary learning from the book was that there would always be some one who made more and not everyone can take the pressure required to accomplish that (without it coming at cost of family / health). Knowing one’s limits goes a long way in ensuing that we don’t get onto a race we know we cannot win even if we put everything on the line.

Martin is a wonderful trader (based on his record) but if some one takes the book to mean that day trading is the way to go, he is going to crumble very soon since its one thing to read about the success of one person and quite another to pass through the fire like many before him would have and yet not get burnt. Do remember, History is written by the Winners.

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.

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