Two Books on Investing

Larry Light, Taming the Beast: Wall Street’s Imperfect Answers to Making Money (Hoboken, NJ: John Wiley & Sons, 2011)

G. Timothy Haight, Stephen O. Morrell, and Glenn E. Ross, How to Select Investment Managers & Evaluate Performance: A Guide for Pension Funds, Endowments, Foundations and Trusts (Hoboken, NJ: John Wiley & Sons, 2007), 260 pages including an index

I am not a professional investor, but I do read a book or two year on investing primarily because I sit on two boards that manage portfolios and also hope that one day I will be able to retire.  Larry Light, in the first book, does a wonderful job explaining the various investment strategies, while providing strengths, weaknesses and limitations for each. Light begins each chapter (every chapter looks at new strategy) with a brief biography of a leading proponent or the founder of the strategy and then he goes into detail (in a non-technical manner) as to how such tactics are designed to work. In the twelve chapters, he covers value and growth investing, indexes, bonds, real estate, international, alternatives, asset allocation, short selling, hedge funds and behaviorism. Although Light never suggests that one is strategy is always better than another, he does tend to favor the idea of value investing (while acknowledging that at certain times in a market cycle, growth stocks out-perform value). He seems to be enamored with Benjamin Graham, who developed a process of evaluating investments in the depths of the great depression. Warren Buffett is perhaps Graham’s best known disciple. Light also appears to be interested in behaviorism, especially since markets are not rational, but tend to reflect the emotions of investors.  Over all, Light suggests that investors be aware of the opportunities and the pit-falls of various types of investing and to be well diversified. 

Taming the Beast is well written.  It is easily read, which is rare in genre that is often overly complicated. Light shows that there is no magic or science in making money through investments. It’s more of an art that requires the investor to be aware of what’s happening, but also to be leery of emotional pulls and irrational actions. No theory can cover the vast options available today for investors. On a personal level, I found it useful how he points out flaws in the “Efficient Market Hypothesis” (which assumes people will act rationally) and the Monte Carlo theory (a computer generated graph of the impact a portfolio might experience in various market scenarios). One of the strengths of this book is that it was published after the 2008-9 market failures and he is able to draw upon that period as he evaluates various asset classifications and investing styles. I recommend this book both for individuals looking to understand the often overly complicated world of investing and to others who sit on boards that must evaluate the investment advice given to them by investment consultants and stock brokers. 

 G. Timothy Haight, Stephen O. Morrell, and Glenn Ross, How to Select Investment Managers & Evaluate Performance: A Guide for Pension Funds, Endowments, and Trust contains a wealth of information for those who sit on the boards of foundations.   As with Light’s work, this book covers the basics of investment strategy, however, this books goes into much greater detail.  To fully appreciate this work requires more of an understanding of mathematics that I continue to possess thirty years after college.  Generally the formulas are not complicated for one security, but when you started grouping securities together into a portfolio it becomes complicated.  Evaluating portfolios require the ability to pull data from numerous sources and to run complex equations, something that’s really only manageable with computers.  Such work is not generally done by individuals within a foundation board, but is supplied by the professionals who manage the funds.  However, it is helpful for board members to understand how returns are measured (dollar weighted” verses “time weighted”) and risk evaluated (“standard deviation,” and “regression analysis,” etc).  A basic knowledge into how such evaluations are made will allow board members to better understand what fund managers (or managers of fund managers) are saying when they present such data.  

Haight, Morrell and Ross provide a more detailed treatment of how hedge funds and private equity funds (which are designed for use by “accredited investors”) operate.   However, even here such tactics are beyond the scope of the book and they only scratch the surface. The book also has several helpful chapters (which are not as technical as the rest of the book) on the make-up of an investment committee, the construction of an investment policy statement, the search process for an investment manager and how investment committee meetings should be conducted.  I did feel that the last chapter on committee meetings was fairly broad and therefore not as helpful.  However, as each foundation has different needs, I’m not sure how they could have improved the chapter (unless they provided me with an answer of how to better organize one of the meetings I regularly attend, but the book wasn’t written just for me).

I recommend Light’s book for anyone new into the investment arena.   It is easily read and he provides useful information that will help an individual investor or a member of an investment committee know what managers are talking about when they discuss various strategies.  Haight, Morrell and Ross’s book is a useful sourcebook.  I see it being a long-term resource book (or a college textbook) that can be pulled off the shelf when one wants to delve deeper.   Unfortunately, the work of Haight and colleagues came out before the 2008-9 market crash and does not have the insight gained from the market chaos of that period.

Disclaimer:  The publisher of Taming the Beast provided me a copy of the book for review, but I was under no obligations as what to say.  The executive director for one of the foundations asked that I read the second book and to make a recommendation.