Thursday, October 20, 2011

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.  


  1. I think the best way to go, hinges on bet what you know. No point investing in Gold Gravel in Cromwell NZ or anyplace else for that matter unless you know and can price each shovel full of rock/dirt and the % of return relative to risk.
    And as to a diversified portfolio, what the heck does that mean in real language. Unless of course the Elephant species are sending over a dividend how does one diversify out of the cause of the risk, humans. Surely they mean 'never bet the farm'. Don't be greedy. And people always need to eat. Never invest in anything where your cash is covering existing debt, or debt finance, that's just a Madoff structure with legal scaffolding.
    And anything where the 'what goes around, comes around' should be avoided also. So nothing nasty like armaments, drug companies or huge alcohol corps. The micro beers are fine, ditto the vineyard. :-)

  2. Honestly? Every morning I watch at least an hour of (probably more) of TV on the financial channels and listen to learn. Been doing this for at least 10 years now, studied the lead up to the crashes of not only 28-29 but the other bubbles. Was expecting the hosing crash but not anywhere near as bad as it became. (I paid my mortgage off three years before the crash) Now i am not underwater I have simply come to negative value on the house IE three years worth of property taxes are more than the house itself is valued at.)

    My real suspicions of the markets began when the 401(k) began to be the way most people were forced to save for retirements replacing defined pension plans which they contributed to. The pension managers paid on the performance of the pension fund not regardless of how it won or lost.

    Nothing in the lead up to the depression changed between the depression and now except that now the pool of people forced into Wall Street fluctuations has grown. I don't trust investments, I look at them as one of those if it's to good to be true sort of things.

    Now with the 401's over it's lifetime 28% is taken by the portfolio managers in fees and charges which will never be recovered by them who are forced into it.

    I have come to understand that the wrong piece of news can send the markets flying or diving. And that 20 years ago a safe investment like a CD would pay you 15% over it's life but now you can stay liquid and only get .4% interest. yet with each fluctuation wealth is transferred and rarely is it transferred downwards.

    I am 80% liquid right now and the other 20% is either at a guaranteed rate or (my pension) beyond my control. The rest is cash and if the Fed quits printing money at least that liquidity will retain some value.

    No I do not like the market, and haven't for years.

  3. Roaring 40s (Vince?) diversification is not putting your eggs in one basket... not just having many securities, but securities in various sectors in a portfolio

    Walking Man: there is no doubt that the 401 industry has been a boom to the financial services industry. I seldom watch financial news programs... Personally, I'd love to see a tax structure that encourages long term investment and destroys abilities for taking quick profits and creating excessive markets swings.

  4. Yeppers, Roaring40s, a bit of whimsey with an edge a few year ago.

    I know what the terms mean; most of them anyway. But what should be clear as crystal has been made utterly opaque in an active attempt to hide the essential nature of what's going on. Even the inmates running the asylum didn't know the truth with some of those terms. I think it's something in the makeup of the human that the financial priesthood behind closed doors or behind closed language will cause the rest of us to believe all sorts of gobshitery.
    401s are your pensions ?, yes?. Well you need to look again at the numbers. The fund managers 'take' over the lifetime is well above 50%, closer to 80% when compounded and when taken as a function of the return not the notional fee for that year.
    This is the industry standard for fees here and in the UK. And given you are ahead in this game I cannot believe yours are charging less.

  5. Every time I pick up an investing guide, I start to feel like I'm reading "How Win At Roulette." I wonder if it all is just really a crapshoot.


  6. I'm that worst kind of investor. I want to make money but I don't want to spend any time or effort figuring out how to do it. I'm hopeless.

  7. Roaring 40s and Randall, I just thought I was cynical!

    40s: I don't know how you are coming up with your figures on the fees charged--most mutual funds charge in the 1.5% fee a year range and the index type funds charge much less. Some, but not all, have a front end load charge. Specialized funds do charge more--hedge funds (which I would be very leery of) often have a high front load fee and 20% of the profits. However, if they don't make a profit, they don't get paid any extra. I don't mind someone making money for work, but I am not a fan of how hedge funds often seek to make money. The purpose of the stock market, in my opinion, is to provide capital, not a legitimate form of gambling.

    In 2008-9, the market did not function as free-marketers say it should. The free market should "punish" those who make bad business decisions which means that credit rating agencies that gave bond funds that were full of crap Triple A ratings should have been punished by being forced out of business, but they have a monopoly (or oligarchy) and have all survived. Those folks should be in jail with Bernie.

    Luckily, I have both a define pension plan and a 401 type plan--needless to say I don't have nearly as much $ in them as I would have if it hadn't been for 2008-9

    Randall, I think it is only roulette if you are trying to hit the next Google....

  8. Charles, I'd recommend Light's book, but then personally I stick to mutual funds even thought there are limitations there, but the managers do the day to day trading inside the funds

  9. I learned long ago that if I wanted to make good financial decisions, I needed to do it myself. Since then, I'm like you and read lots of financial investment books. I have three parts to my funds. Part one is that I have a financial adviser that I pay to manage a chunk of money in hopes that because he is a professional that he will make more money with that money than I would have. This has proven to be not very true, especially over the last three years. The second part is money that I invest myself in a taxable account. Not as tax efficient but definitely doing better than my adviser. The third part and by far the largest part is money that is tied up in assets of being part owner of a handful of companies. That money, when I cash out my chips, I am planning on investing myself which is why I am practicing now and reading lots of books. The best book by far that I have read is "The Boggleheads Guide to Retirement Planning" by Taylor Larimore. It is my other bible.

    Since neither of these books that you reviewed have been ones that I have read, I will have to check them out.

  10. Ed, as an engineer, you might enjoy the math in the second book!

  11. I'll need some money to invest, huh? I guess that takes that game out of my playground

  12. haha...seriously i thought initially this was a joke when i saw wall street in the title...what is left of my retirement fun is with an investor...i really have little interest in the market these days...but nice review...

  13. Quite a bold move into new subjects, Sage! Cool!!

  14. My dad was a CPA. He taught me how to invest when I was a child so I would never be dependent on anybody else--though he didn't say that until I was older
    I have tried and failed to read Graham's book--but I own it and stare at it every now and then
    I expected the housing crash which is a big reason I sold my apartment. I should have seen the recession coming

    Now that there is "pre" trading and "after" (which always sounds like a club to me) I can't see an individual winning--and it is a game. None of the old rules apply and there aren't any new ones.

    I let a broker take too much control of my money shortly before everything happened. Now I'm playing catch up and it's not fun. But I have a paid off house--lost much of its value but still, live frugally (a concept really not known to me before and not unwelcome) and no debt so I'm very very lucky

    My parents were frugal--they only spent money on travel and sometimes restaurants. My father used to say my mother had the first dollar she ever made. I owe them everything--except my father made the depression sound so incredible my sister and I wanted one.
    We didn't want it that much!
    I hope this world for it is a world economy finds its way back soon

  15. Investing not so much on my mind these days, not now...Are you off chasing down the last bits of fall? Any hot and exciting autumn things going on in your area? Tomorrow we are all getting together for the fall festival outing for this's going to be a lovely day again they say. On the 30th I'll be off to Californa for 7 days! Can't wait, it won't be the excursion you had, but I hoping to have some adventures as awesome as you had! Have a great rest of the weekend Jeff!