|
Softpanorama
(slightly skeptical)
Open Source Software Educational Society |
May the
source be with you,
but remember the KISS principle ;-)
|
Slightly Skeptical Books on Economics and Investment
Here are try to list the books that might be interesting for
people who can run simulations models in Excel and create a simple database
for checking the performance of a particular investment strategy.
Hardcover - 288 pages (1
March, 2000)
McGraw-Hill Education; ISBN: 0071354611
There's a joke going around the investment
community: "You know the definition of a long-term investment? It's a
short-term investment gone bad." In this absolutely delightful,
easy-to-read book, authors Andrew Smithers and Stephen Wright argue
downright investment heresy: maybe long-term, buy-and-hold strategy is not the
most winning strategy available to investors today. And while they do
not argue that in-and-out day trading is the answer, their suggestion is for
investors to use "Tobin's q" to determine when to be in or out of the market.
Tobin's q was devised by James Tobin in 1969, for which he won the Nobel Prize
in economics. The "q" is a measure of stock market value to the actual
value of the underlying assets of the firm. In times of high q, investors
should sit out of the market, whereas in times of low q, investors should wade
back in.
According to the authors, "the benefits
of long-term equity investment have been dangerously oversold by harping on
long-term returns, while failing to point out that this long-term is simply
too long for most investors". Indeed, their aim is not to tell you how
to make money, but instead to show you how to avoid losing it.
They claim that today's market q value is so dangerously high that
preserving wealth -- and not trying to find the next hot shot Internet penny
share--is paramount.
Valuing Wall Street
is a thought-provoking work which compares the use of price/earnings ratios,
dividend growth models and dividend yield models for their predictive power in
valuing markets. The authors, who have one foot in the real world (Smithers
run a market consultancy firm) and one in the academic camp (Wright is a
lecturer at Cambridge), dismiss stockbrokers' "Stocks are wonderful" mantra in
an amusing fashion. Any serious investor, and especially those nearing
retirement, would do well to read this book. --Bruce McWilliams
Book Description
The U.S. stock market is massively overvalued. As a result, the
Dow could easily plummet to 4,000 or lower losing more than 50% of
its value, wiping out nest eggs for millions of investors. So argue Andrew
Smithers and Stephen Wright in Valuing Wall Street: How to Predict and Plan
for Market Bubbles. Using the q ratio developed by Nobel Laureate James Tobin
of Yale University, Smithers & Wright present a convincing argument that shows
the Dow plummeting from its peak of 9600 to lows not seen...
read more
Stocks for the Long Run
Five years later, the Yale professor's bearish predictions about
real-estate valuations are enough to give any savvy investor or homebuyer
pause.
Shiller is one of several well-known economists and pundits who've begun
a running dialogue in the last few years around the drawbacks of unchecked
free markets. Few writers, though, dissect the phenomenon of bubble behavior
as clearly and thoroughly as Shiller does. As with the first edition of his
book, Shiller begins this one with reams of quantitative data around the
late 1990s stock-market runup. This new edition adds data on real-estate
price trends in the early 2000s, and points out the striking parallels
between the earlier stock-market boom and bust, and current trends with
housing prices in the United States. Shiller actually believes the two
phenomena are related; as investors lost confidence in the stock market and
moved their money into real estate, one asset class fell while the other
rose. According to Shiller's analysis, the pattern is destined to repeat
itself.
Speculating on a Bubble, March 25, 2000
Speculating on a Bubble
Taking his cue from Federal Reserve Chairman Alan
Greenspan, Yale economics professor Robert Shiller
delivers a dirge for the longest-running bull market in
American history. Irrational Exuberance tells the reader
why today's market is overvalued, how it got that way,
and what policymakers should do about it. Along the way,
he takes some well-aimed swipes at efficient markets and
so-called rational expectations. These latter theories,
derived by (and largely confined to) academia, would
have us believe that investors always behave rationally
and that stock prices always reflect all pertinent
information.
Professor Shiller is well known for his research into
behavioral finance, including his many surveys seeking
to uncover the thought processes of today's investors,
both individual and institutional. It is understandable,
then, that the bulk of the book, and its strongest part,
concerns the ways and means by which human behavior,
irrespective of economic fundamentals, leads to stock
market bubbles. Peer pressure, herding, emotions such as
regret and envy, perceptions shaped by personal contacts
and by the media, all contribute to a psychological
"positive feedback" loop whereby high stock prices beget
still higher stock prices.
My gripe with the book relates to Professor Shiller's
downgrading of the role played by mechanical "positive
feedback" dynamic hedging strategies which are based on
academic, Nobel Prize winning theories on the pricing of
derivatives. Shiller states (p. 93) that these
strategies are of interest to us "only because it shows
us concretely how people's thinking can change in ways
that alter the manner in which feedback from stock price
changes affects further stock price changes, thereby
creating possible price instabilities." My book, Capital
Ideas and Market Realities (Blackwell, 1999), finds,
after a thorough review of the role of dynamic hedging
in the 1987 crash and in the volatility in the 1990s,
including the downfall and Federal Reserve brokered
rescue of the giant arbitrage hedge fund Long-Term
Capital Management, that such trading strategies can be
crucial elements in both stock market bubbles and stock
market crashes. Rather than being merely symptomatic of
a psychological feedback loop, such trading mechanisms
create their own positive feedback loops, as well as
crystallizing and amplifying some of the psychological
factors cited by Professor Shiller.
Others may consider of greater consequence the book's
failure to address the "two tier" nature of today's
market-the so-called "new economy"/"old economy" schism.
This is particularly troubling because much of Professor
Shiller's quantitative evidence of over-exuberance in
market pricing rests on various measures of corporate
dividends-which, of course, are notoriously shunned by
most "new economy" companies. As the book's overall
argument can be (simplistically) summarized as "the
future will eventually repeat the past," I would have
liked to see him grapple more explicitly with what
appear to be real qualitative differences between past
and present.
I liked Professor Shiller's concluding summary of
solutions and issues for investors and policy-makers.
Some of these, including his thoughts on Social Security
and on the need for diversification and diversifying
investment vehicles, deserve to be brought to the
forefront of public debate. It would also help matters
if, as Professor Shiller suggests, the so-called
"experts," as well as the media generally, raised the
level of public discourse on the stock market and the
economy-issues critical to all of us, whether we are
investors or not.
Bruce I. Jacobs (cimr@jlem.com), Principal, Jacobs
Levy Equity Management, and author of Capital Ideas and
Market Realities (Blackwell, 1999). |
|
Too much of not much new for most of us...,
February 2, 2006
If you already appreciate that markets (especially stock
markets) are prone to periodic "speculatory bubbles"
whose primary cause is greed and herd-behavior, then you
know most of what this book has to offer. Shiller
presents lots and lots of possible causes, but since he
can't demonstrate their relative, quantative effect, I
see little point.
There is no real investment advice save "diversify."
There was an interesting appendix on using commodities
as a diversification, but the conclusion is there are no
really good ways at present.
Perhaps the most interesting passage was where he
described how people hearing his warning lecture just
before the 2000 crash, some of whom agreed with him,
went out and bought anyway! This brings home the
extraordinary psychological power of these speculatory
markets.
I suppose that researchers or those in search of extreme
data might find some interest here, but it seems
much-too-much detail (to little avail) for most
investors. |
|
Heeeee's back, June 20, 2005
Irrational Exuberance 2nd Edition
Robert Shiller is at it again. After the timely
release of his original Irrational Exuberance
just one month before the stock market crash in
2000, he's back with the 2nd edition. The entire
second chapter is an attack on the runaway
housing market.
A main theme is how bubbleites or
bubble-addicts, not being able to live without
the thrill of participating in a runaway market
became disheartened with the slumping stock
market and headed to real estate.
Yes, it's a very interesting book, a bit scary;
proclaiming the stock market is still vastly
overvalued and the housing market could fall
apart at any minute. He points out that real
(inflation-adjusted) PE ratios are at the
highest point (with the exception of the 2000
peak and the 1929 peak) on the S&P Composite
Index when going back to 1860, and how real,
(inflation-adjusted) home prices have only
appreciated an average of .4% over the last 114
years.
If you Google Robert Shiller you come up with
hundreds of articles discussing the housing
bubble with his comments. Last week I read him
saying the housing market could take a 50%
clipping in some areas.
One thing is for sure, if the housing market
pops in the near term he will have called two
major bubbles within 5 years and will become the
famous bubble boogie man.
By Kevin Kingston, author of: A 20,000% Gain in
Real Estate |
|
A book only an economist could love, May
30, 2005
I don't as a rule read books on business and
economics. They are not my cup of tea. That
said, I did read this book for a class and find
it exasperating. As a scientist, I'm used to
looking at data and analyzing data for cause and
effect or the lack thereof. But here, the data,
especially the data on real estate, are highly
suspect. Even the author admits he has no real
checks on the data he has compiled. And as a
result, the subsequent analysis is to my mind a
case of garbage in, garbage out.
Going beyond the real estate chapter of this
book - which I suggest you completely skip
because while Schiller probably has wide
experience with Wall Street based financial
markets, he doesn't understand real estate or
construction at all - there is a lot of
speculation on the origin of financial bubbles.
If you're an economist, maybe this - rampant
speculation - is something you might be able to
get excited about. But all of this speculation
without data strikes me as the economic
equivalent of arguing about how many angels you
can fit on a pinhead.
This is a book whose main selling point is its
captivating title. But in terms of content there
is little meat. If you need to read this book, I
suggest you save some money and buy a copy of
the 1st edition used.
Yes, there was a stock market bubble a few years
ago. Yes, there were other stock market bubbles
in the past. And yes, in certain real estate
markets today prices are out of line with long
term trends and they will undoubtedly fall. But
this book yields precious little intelligent,
data based analysis as to why these bubbles
occur.
The topic of financial bubbles is an interesting
one. But the half-baked analysis here doesn't
really go beyond much more than academic navel
contemplation. Analysis needs data. It needs
testable hypotheses. And both are lacking here.
|
|
Antidote to Stocks for the Long Run,
April 28, 2005
Shiller explains why the incredible 225%
increase in the Dow Jones Industrial Average
from the beginning of 1994 through the end of
1999 was unsustainable: "as a rule and on
average, years with low price-earnings ratios
have been followed by high returns, and years
with high price-earnings ratios have been
followed by low or negative returns." Writing in
2000 when the price-earnings ratio on the S&P500
was nearly 45, compared to a long-run average of
about 20, Shiller was preparing us for a
bursting of the stock-price bubble. His message
was sobering and prescient then as well as good
education now. Caution: the reader will have to
whack through thickets of details in Chapter 1
such as "The average real return in the stock
market (including dividends) was -2.6% a year
for the five years following January 1966, -1.8%
a year for the next ten years, -0.5% a year for
the next fifteen years, and 1.9% a year for the
next twenty years."
In Part 3: Psychological Factors, Shiller
outlines principles of behavioral finance. For
example, past prices and stories help form
people's views of the stock market. He reviews
classic experiments in psychology, which
documented the significance of peer pressure and
trust in experts. Shiller's interpretation is
that people take uncritically what experts on
the stock market offer, presumably that stock
prices will continue to rise, which encourages
them to be overconfident.
The author puts forth a good explanation of
efficient markets theory but applies much
criticism. He proclaims: "I see no reason to
doubt the thesis that smarter people will, in
the long run, tend to do better at investing."
Reading and understanding Irrational Exuberance
will help put the individual investor in the
company of those "smarter people."
|
|
Pros: historical perspective, dose of reality
Cons: flat style, lack of current topical analysis
Timing is everything. If Irrational
Exuberance had appeared during the wild stock market ascents of the last three
years, traders would have dismissed Shiller as another naysayer who just didn't
get it. Appearing weeks before the crash-let of the NASDAQ, he looks like a
prophet. But investors should understand and heed his underlying point,
regardless of the vagaries of the market.
Contrary to the random walk and efficient market hypotheses, stock market prices
sometimes lose touch with underlying economic values. Shiller demonstrates this
primarily by analyzing four previous speculative bubbles in 20th Century
America. They display strong similarities. First, in each, the price to earnings
multiple soars just prior to the collapse. Second, the bubbles all coincided
with the rise of a dramatic new technology that (1) captured the public
imagination and (2) the economic potential of which was difficult to evaluate.
Third, contemporaneous analysis offered ready and seemingly plausible
explanations as to why each bubble wasn't, why this time it was different. Most
important to current investors, in three of the four crashes, recoveries were
long and painful, requiring a decade or more to return to former peaks.
Unfortunately, the one exception is the 1987 crash, the only one that current
investors can recall, where previous values were restored within months.
One graph in Shiller's book is worth the purchase price. Describing it would
deprive it of its impact. Suffice it to say that every investor who has seen the
graph has had the same reaction--Wow!
The book has two weaknesses. First, the style is flat. This is perhaps
predictable in a book by an academic published by an academic press, but it is a
bit disappointing nonetheless. Second, Shiller could have spared a chapter
specifically to debunk some of the claims made by cheerleaders for this bubble.
The weaknesses in their arguments are not overly difficult to expose. Shiller
instead relies on the historical analogy: "experts" have made similar arguments
during every previous bubble, and a crash has always ensued. It will this time
as well.
Related book: Mackay and Tobias, Extraordinary Popular Delusions & the Madness
of Crowds
If the idea that the stock market might be
overvalued is strange to you, or if you wonder how anyone could know or
determine the proper value for the stock market, then this book is a must read.
Although I've long been aware that the current stock market is ridiculously
overpriced, I nevertheless learned some interesting new facts from this book,
and read some interesting explanations for why bubbles happen.
Robert Shiller begins the book by showing how the current stock market is
extremely overvalued. The author primarily relies on the ten year trailing
price/earnings (P/E) ratio of the S&P index as the measure of the market's
valuation. The ten year instead of the one year P/E is used based on the theory
that the economy being as cyclical as it is, using only the previous year's
earnings would distort the picture.
The chart of the P/E ratio over the last 120 years is interesting indeed. The
ratio hit 32.6 in 1929 before the big stock market crash and the Great
Depression. But the P/E ratio hit 44.3 in January of this year. It's pretty
scary, indeed, to discover that the current stock market is 36% more overvalued
than the stock market of 1929.
The author then presents various theories to explain the surging valuation of
the stock market. Some of the explanations are quite interesting and creative.
There are some interesting comparisons between the 1990s and the 1920s. The
1920s was a period of new technologies, and investors in the 1920s overvalued
all companies involved with new technologies, just as we do today. It's easy to
laugh at the idea of the radio or the automobile or the telephone being a new
technology, but if you think about it, the introduction of these technologies
was probably even more dramatic for the people living in the 1920s than the is
the introduction, in the present, of the computers and the internet.
The author gives a detailed look at other speculative bubbles throughout
history. Of course the well known story of tulipmania in Holland is talked
about, but there is also an examination of overvaluations in recent years of
many other stock markets. The Nikkei average (that's the average of the largest
Japanese stocks) is still significantly lower today than it was at the peak of
its bubble in 1989. This debunks the theory that if you are a long term
investor, you don't have to worry about stock prices. Who wants to make an
investment that will be worth less in ten years than it's worth today?
Where the book falls short is in prescription, either for the individual
investor or for society as a whole. In fact, he seems to recommend doing
nothing, on the grounds that any major action to lower stock prices would
precipitate a big crash that could have a devastating impact on the economy. One
wonders if such a crash and the likely severe recession following it is
inevitable.
As an individual investor, this book merely made me very queasy about owning
stocks, but there are no practical solutions about how one can survive, or even
profit from the coming bear market. Alas, as far as I know, no one has written a
good book about how to profit from the inevitable bear market. However, I'd
recommend all the good books on value investing, such as The Intelligent
Investor by Benjamin Graham (an oldie but a goodie), Contrarian
Investment Strategies: The Next Generation by David Dremen, and Graham
and Dodd's Security Analysis, 5th Edition (which is no longer written by
either Graham or Dodd). If you are intimidated by the big size of Security
Analysis, then check out Value Investing Made Easy by Janet Lowe.
A Random Writing Regarding Wall Street, January 31, 2001
Reviewer:
Lance Mead (see more about me) from Traverse City, MI USA
"I believe the stock market is fundamentally logical." This quote by Burton
Malkiel from his book A Random Walk Down Wall Street is the one of the main
tenets of the Random Walk Theory. Randomaniacs (my pet name for those who
boldly hold to the Random Walk theory) believe the market instantaneously, and
efficiently, prices all known news into stock prices at all times, making it
futile to search for exploitable stock market situations. Analyzing trends,
economic conditions, interest rate levels, etc., is pointless. The market is
so efficient one cannot find anomalies or trends that can offer market-beating
performance without accepting loads of extra risk.
Malkiel would also have you believe that
- You cannot consistently outperform the
market without increased risk
- It is better to hold an index fund rather
than individual stocks (unless the stocks are a true proxy for the index)
- Markets get irrational (but not inefficient)
and attract unwary investors
- The disciplines of fundamental and technical
analysis are not effective analytical investment tools "...a blindfolded
chimpanzee throwing darts at the Wall Street Journal can select a portfolio
that performs as well as those managed by the experts."
- The risk in most investments decreases with
the length of time the investment can be held
Being ex Wall Street, I have had a chance to
make a living within our "efficient markets." My practical experiences have
taught me that there are efficiencies, but the market itself is not efficient
to the degree most think. While there seems little doubt that a certain amount
of randomness or "noise" does exist in all markets, it is just unrealistic to
believe that all price movement in random.
How, for example, would a buy and hold
strategy fare in the futures markets where timing is so critical? How
would investors know the difference between bull and bear markets if prices
are unpredictable and don't trend? In fact, how could a bear market even exist
in the first place because that would imply a trend? Give these questions some
thought:
1. Has the market been efficiently pricing
Internet stocks (are they really worth that much)? 2. Why does the market have
"curbs" or "circuit breakers" to temporarily cease trading when it has dropped
too far? 3. If you buy a stock at $12 share, and it drops to $6 shortly
thereafter, are you going to sell it when it gets back to $12 (come on, be
honest!)? 4. If a large number of investors are technicians (use charts to
determine entry and exit points from stocks), won't their analysis have a
fundamental effect on the market?
Is history a good teacher (I touched the hot
frying pan, I burned my finger...I wont do that again!)? Sure it is. Why can't
it be a good teacher for the stock market (ergo the use of charts and other
technical indicators)?
Malkiel regularly alludes to the element of
risk and beta. He believes that beta (a stocks relative volatility or
sensitivity to the market) does capture at least some aspect of what we
normally think of as risk. His conclusion is that "Investors should scoop up
low-beta stocks..." but not use beta as a "...substitute for brains and cannot
be relied on as a simple predictor of long-run future returns." Surely, if by
definition beta is a backward-looking measurement of a stocks movement
relative to the market, couldn't other historical measuring sticks (technical
and fundamental analysis) be useful tools also? It is these inherent
contradictions that weaken the Randomaniacs theories.
Should this book be bought? Not in my opinion
(although, I bought it...).Even though Malkiel tries, he does not
statistically prove the Random Walk theory. In reality, it seems doubtful that
statistical evidence will ever prove or disprove Random Walk. But, to invest
successfully, one must understand how other investors and traders are
thinking. Knowing about Random Walk (not intrinsically believing it) should
help you make better investment decisions. However, it is not necessary to
plow through the hundreds of pages in this book. So, put your darts away and
embark on a less-random investment strategy.
Interesting even if cheerleading, May 26, 2000
Reviewer:
professor joseph l. mccauley (see more about me) from Houston +
Augsburg
"Poets are the unacknowledged legislators of the world....Let those who will,
write the nation's laws, if I can write it's textbooks." (P. Samuelson, quoted
by Berstein)
Bernstein has written a fascinating pre-LTCM (pre 8/98) book
on the history of econometrics and finance, beginning with the origins of the
Cowles foundation as the consequence of Cowles' personal interest in the
question: Are stock prices predictable? This book is all about heroes and
heroic ideas, and Bernstein's heroes are Adam Smith, Batchelier, Cowles,
Markowitz (and Roy), Sharpe, Arrow and Debreu, Samuelson, Fama, Tobin,
Samuelson, Markowitz, Miller and Modigliani, Treynor, Samuelson, Osborne,
Wells-Fargo Bank (McQuown, Vertin, Fouse and the origin of index funds), Ross,
Black, Scholes, and Merton. The final heroes (see ch. 14, The Ultimate
Invention) are the inventors of (synthetic) portfolio insurance
(replication/synthetic options).
This book consists largely of a pre-LTCM (pre-10/98)
cheerleading for option-pricing mathematics based on lognormality, and
corresponding synthetic portfolio insurance. Osborne and Mandelbrot are
mentioned. The book is not error-free: e.g., Mandelbrot's ideas on stock
prices are stated as being the origin of chaos theory (!), and Mandelbrot (of
random fractals fame) is misportrayed as an 'articulate proponent' of chaos
theory! Another error (page 182): "..persistent forces are constantly driving
the market toward (Modigliani-Miller) equilibrium." The evidence for the EMH
is supposed to constitute the 'proof' for this nonsense. So much for 'proofs'
in economics. So ingrained is the false, misleading and inapplicable notion of
"equilibrium" in the minds of economists that it is hopeless to expect to
educate them out of their own morass. Even Black, who was educated as a
physicist as an undergrad, did no better:
"When people are seeking profits, equilibrium will prevail."
(F. Black, quoted by Bernstein)
Among the interesting and entertaining stories that are told
are: the displacement of Graham and Dodd's 'value theory' by the EMH, the
revolutionary role played by Wells Fargo Bank in using the 'new finance math',
and in creating index funds. The importance of the Miller-Modigliani 'theorem,
which 'proved' that the (not-uniquely-defined) 'value' of a corporation is
independent of it's debt. Then, there is the wild-haired idea of 'portfolio
insurance', how to eat your cake and have it too (a free lunch, derived from
the assumption that free lunches don't exist). No portfolio can be insured
against extreme deviations, especially those that occurred in 10/87 and wiped
out confidence in LOR (Leland-O'Brien-Rubinstein Associates). But this failure
of finance theory produces no crisis for Bernstein, whose book is the history
of heroes, not villains. His last chapter, which can be ignored by the reader
without loss, is states his ideology: free market ueber Alles. Or: equilibrium
will prevail, even without restoring forces ( I like to put it this way: there
are no "springs" in the market). I did get something important from this book:
the origin of America's spend-spend-spend ideology in the Modigliani-Miller
'theorem'.
If the optimal portfolio is not risky enough, borrow to
finance it's purchase. (Wells Fargo's application of Tobin's idea, quoted by
Bernstein)
(This is a shorter version of a longer review that appeared
in fall(...).
The Intelligent Asset Allocator How to Build Your Portfolio to Maximize Returns
and Minimize Risk
Wonderful book but too "static" and skeptical of timing, March 6, 2002
Reviewer: A reader from Missouri
This is an extremely well-written introductory text for the
investor thinking about how to allocate assets. There is no filler and no
fluff, and everything is to the point.
However, the author's view of allocation seems to me to be too "static,"
namely, that if you have decided to allocate, say, 50/50 between stocks and
bonds, then you don't want to change this ratio simply in response to market
conditions. However, everybody knows that at the beginning of an expansion
cycle, stocks tend to outperform bonds, and when the Fed is aggressively
raising interest rates, then bonds will become safer bets than stocks. In this
respect, Martin Pring (The All-Season Investor) and Mark Boucher (The Hedge
Fund Edge) offer a more dynamic view of asset allocation to take advantage of
the changes in the market cycle.
Besides, my technical analysis background tells me that timing the market,
albeit never an exact science, can be done. If you can combine Berstein's
approach with market timing techniques and money management discipline, I
believe you can achieve better returns with even lower risks. (The irony is
that he also wants the investor to buy low and sell high, but how are we going
to determine when to buy low and sell high if we don't look at the charts and
decipher the price and volume patterns such as "head-and-shoulders,"
"ascending triangles," etc.? In this respect, he has to admit that timing the
market is necessary--at least to a certain degree.)
A Good Summary of Recent Research on Investing, March 22, 2001
Reviewer:
Ron A Rhoades (see more about me) from Lecanto, FL United States
Larry Swedroe presents in 357 pages a broad overview of much of the recent
research and discourse presented by rational observers of Wall Street. For the
individual investor the author cuts through the hype of Wall Street and
forcefully feeds a diet of statistics and research in support of low-cost
index funds. For investment advisors this book can be used as an introduction
to much of the recent research on stocks and investing. Fans of the writings
of John Bogle (Common Sense on Mutual Funds), Jonathan Clements (Wall Street
Journal columnist), and Burton Malkiel (A Random Walk Down Wall Street) will
particularly enjoy the many reinforcing concepts presented in this text.
Larry correctly argues that to maximize the investor's
chances for success the investor should take into account his or her time
horizon, allocate assets among categories accordingly, and then diversify
using low-cost and (where appropriate) tax efficient index funds or
tax-managed mutual funds. Through successive chapters he notes: (1) markets
are efficient; (2) active managers of investment accounts cannot add value
over the long term, considering the burdens of their fees and taxes; (3)market
timing is not a strategy that works over the long term; (4) investors in
stocks and stock mutual funds decrease their risk level as their time horizon
is extended to 20 years or more; and (5) investor behavior, driven by the
emotions of fear and greed, often interfere with good long-term investment
results. The real gems of the book are saved for the last chapter, when he
brings it all together with some asset allocation recommendations. The
appendices should not be overlooked, especially his brief discussions of: (A)
selling when a low tax basis is present; (B) why investors should generally
avoid variable annuities; and (C) the all-too-common hype today that high net
worth investors are better off owning individual stocks than stock mutual
funds.
I agree with the comments by other reviewers that DFA is
hyped too much. Individual investors who choose to go it alone, without a
registered investment advisor, should probably confine most of their index
fund search efforts to passive index funds offered by Vanguard (and perhaps a
few other select fund companies), and not worry about missing out on the DFA
offerings. Larry's discussion of value stocks vs. growth stocks could be a
little more focused and reasoned, but the statistics presented on choosing
value stock mutual funds are interesting.
This is a good text for those investors desiring an overview
of the rational behind passive (index fund) investing. John Bogle's book,
Common Sense on Mutual Funds, is a better book for the beginning investor, as
it more patiently presents the basic concepts of investing. This book should
be considered as one of the next books to read by investors. Larry Swedroe's
book gives investors the insight to see beyond the hype of Wall Street. After
reading Larry's book (and perhaps others), the investor should then turn to
Bruce Temkin's recent text, The Terrible Truth About Investing, especially if
the investor thinks he or she has learned all there is to know.
I wholeheartedly recommend Larry Swedroe's new book as an
essential addition to every rational investor's library.
A must have book for today's investor., October 25, 2001
Reviewer:
Nicholas Ripostella (see more about me) from Ossining, NY USA
This book should be required reading for every active investor today. Too
often pundits throw out terms like market leader,growth stock, value stock,
recession resistant as reasons to buy a stock, and try to predict where the
"market" will go for the next six months. Expectations Investing will help you
learn to throw away these lazy investor labels and instead provides a
framework for evaluating a particular stock in terms of what the current price
is saying about how good or bad the future for the company may be and whether
it merits your purchase or sale. You will learn that every stock, market
leader or not, has a whole set of assumptions embedded in the current
valuation- this book will help you learn to think in these terms and evaluate
whether those assumptions embedded in the current price are reasonable. The
book debunks some popular myths and provides highly illustrative examples that
make some technical issues easy to understand. For the pro, coverage of
executive compensation, option analysis as well as key chapters on competitive
strategy and other operating issues will definitely stimulate the thought
process. At the same time the basics of valuation are covered in an easy to
read fashion. Finally, the Notes section itself can lead the intellectually
curious to a "pot of gold" of information. Turn off the business TV and put
your popular financial magazine on the coffee table and read this book instead
!
Excellent read, January 20, 2002
Reviewer:
Elizabeth Spiers (see more about me) from New York, NY United States
Rappaport and Mauboussin expertly utilize the often misapplied DCF model to
identify and analyze market assumptions that determine stock price. In the age
of irrational exuberance, the disparity between market value and intrinsic
value is often dismissed as the product of a fickle and unpredictable market.
Rappaport and Mauboussin, however, remind us that the market is indeed
rational in the long term and changes in stock prices are the result of
changes in market expectations. The "Expections Investing" methodology helps
investors to understand current expectations and anticipate expectation
revisions.
A financial model is only as good the assumptions behind it.
The forecasting process invariably reflects the assuptions of the analyst,
which tend to be biased by experience and preconception. "Expections
Investing" teaches investors to avoid predilection by reverse engineering DCF
models from stock prices, allowing them generate figures that reflect market
assumptions rather than their own.
This value-agnostic process produces greater accuracy in
many areas that are frequently overlooked. Rappaport and Mauboussin expose the
fallacious nature of models based on forecast periods and discount rates that
are assigned in an arbitrary fashion. They correctly state that the
finger-in-the-wind approach is not sufficient and can greatly distort the
final analysis. "Expectations Investing" also highlights topics (i.e.,
valuation of employee stock options) of which the significance is often
underestimated or ignored in traditional valuation analysis.
This is *not* a quant/behavioral finance book...., February 19, 2002
Reviewer: A reader from Taipei
This book starts off on the premise that 1) companies can manipulate eps but
not cashflow and 2) rather than engage in all sorts of scenario analysis, look
at the securities price and determine what growth rate this implies for sales
etc.
Great start, but they then begin a long discussion that
basically involves stock selection. Now, i though they spent the first 50
pages of the book saying that stock selection and analyst engaged in this
activity are swimming upstream...
Very dissappointing. Another "How to Pick 'em" book.
heard the stuff, read the stuff, and lived the stuff, February 4, 2002
Reviewer:
Michael Benevento (see more about me) from New York, NY United States
Mauboussin was far and away the best professor I had at Columbia Business
School. His security analysis course is consistently rated tops by second year
students at CBS and I recommend it to every student I come in contact with. He
is insightful, knowledgeable and a master of security analysis. This book
allows the general public the opportunity to learn Mauboussin's thoughts
without the rigorous admissions process and $30,000 per year price tag of CBS.
I have worked at Gabelli & Co. as an analyst for Mario Gabelli and am
currently an analyst at a bulge bracket firm in New York. I attribute my
success to a few people along the way and Mauboussin ranks right up at the
top. Bottom line: Outstanding Work.
Books like Mark Dempsey's Tricks of the Trade (LJ 1/98) have exposed the
ways of brokers. In this new cautionary work, financial writer Cole focuses
his attention on financial analysts, who are supposed to evaluate objectively
the investment potential of securities. Cole contends that in the best of
times analysts were never very successful in making predictions, but in recent
years they have become shills for their investment banking departments. He
further points out that the 1975 deregulation and consequential reduction of
brokerage fees forced brokerages to make most of their money through
investment banking. Analysts, while theoretically giving independent opinions,
in reality now exist to help their firms' client companies to sell new stock
and support their stock prices. Cole argues that this has led to almost
incessant optimism among most analysts. His book is easily read, and his
points would be useful for all investors to consider. Recommended for all
public libraries and to academic libraries where there is interest. Lawrence
R. Maxted, Gannon Univ., Erie
Sell-Side Analysts Chase the Quick Investment-Banking Buck, October 17,
2001
Reviewer: A reader from a management consultant in Boston
Let the investor beware of sell-side analyst recommendations!
This book is a little late in arriving. Ten
years ago few reporters and almost no individual investors understood that
brokerage firm analysts got a lot of their income for bringing in investment
banking business (IPOs, mergers, debt financings, and fair value opinions).
Then Wall Street Journal reporter, John Dorfman, broke the story. In the old
days, sell-side analysts were supposed to be ignorant of what was going on
with investment bankers (the so-called Chinese wall) so that the analysts
could write objective reports without being compromised by inside information.
That Chinese wall doesn't really exist any more.
More than ten years ago, few institutional
portfolio managers and buy-side analysts paid much attention to what sell-side
analysts have to say. They pay even less attention now.
As the book points out, a sell-side analyst "is
just a banker who writes reports." Those reports usually just regurgitate the
latest line from the company.
Mr. Cole embroiders the consequences of this
long-past fundamental shift with a history of how investment banking fees came
to dominate the securities business relative to trading commissions, scam
artists posing in different roles, underwritings of lousy companies that later
failed, the nasty tricks of short sellers, and how institutional investors can
make a few bucks from flipping IPOs.
Although all of the material is accurate, the
book's other problem is that it views what is going on from the outside in,
rather than the inside out. A lot of the mistakes that happen occur because
everyone relies on the companies to explain what earnings will be (thanks to
Regulation FD), analyst coverage is very thin, and many analysts are extremely
inexperienced. These "analysts" will become even more investment banker-like
in the future. What temporarily resuscitated the role of the sell-side analyst
as stock picker was the arrival of the on-line individual trader during the
Roaring 90s. A long bear market will continue to undermine any economic role
for sell-side analysts other than as advisers to company executives. Most CEOs
still think that sell-side analysts are important (mostly because of the
short-term momentum reports can temporarily create) and court them. Mr. Cole
failed to pick up on this point. That's the reason why Jack Grubman at Solomon
Smith Barney made $25 million in one year. Was he worth it? You decide.
I was pleased to see that the book included
several studies that showed the weaknesses of both the estimates and
recommendations of sell-side analysts.
Will the financial media continue to flock to
sell-side analysts? Darn right they will. Everyone else in the industry has
real work to do, and there's lots of air time to fill up.
Where else is advice not very helpful? How
much do you rely on used car sales people? Vinyl siding sales people? Fortune
tellers?
Look straight at the facts . . . and take the
right action. Be sure to read John Bogle's book, Common Sense on Mutual Funds,
if you want to beat almost all other stock investors.
A cautionary tale of routine [trickery], May 23, 2001
Reviewer:
Midwest Book Review (see more about me) from Oregon, WI USA
In The Pied Pipers Of Wall Street: How Analysts Sell You Down The River,
financial journalist Benjamin Cole draws upon his more than twenty years of
experience and expertise to give the reader a candid, nitty-gritty, and
accurate picture of how the stock market brokers and consultants really work.
A cautionary tale of the offhand, everyday, and routine [trickery] that lurks
within in too many "buy" recommendations from the analysts, The Pied Pipers Of
Wall Street reveals the inherent conflicts of interest that work against the
investor. It is also a clarion warning against blindly trusting brokerage
analysts as the sole source of "objective" guidance on investing in stocks,
bonds, and mutual funds. The critical importance of The Pied Pipers Of Wall
Street has been lately underscored by the bursting bubble of the dotcoms and
the wild rides provided by the technology stocks. If you have money in the
market, or are considering buy and sell advice from market professionals, you
need to read what Benjamin Cole has to say!
Why Wall Street Analysts Can't Be Trusted, May 4, 2001
Reviewer: A reader from Los Angeles, CA USA
This is the first book that I've read that clearly explains the conflicts of
interests that make most Wall Street analysts untrustworthy. Using studies,
anecdotes, and analyses of the stock market, Benjamin Cole clearly shows why
most investors shouldn't trust recommendations by the talking-head analysts on
CNBC. The book also recommends where to go to get good advice -- Web sites,
etc. Lively, quick read. Check it out.
It made me laugh, it made me cry......, July 30, 1996
Reviewer: A reader
**** I read this book in my last undergraduate year of college. At that time,
Lewis provided me with an eye-opening, first-hand glance of life in the
high-flying world of finance (1980's) and the personalities that drove that
period forward. It was relevant reading material since I was intending to
pursue a career in the financial services industry, and here was a book
written by a former bond salesman in the New York and London offices of
Salomon Brothers. **** Nevertheless, this book is not limited to only those
interested or involved in the world of business. This book is for anybody who
is curious how the S&L crisis emerged; how the Reagan administration's
deregulations affected the salaries of a select few in the US financial
industry; how much the tax burden of the average American citizen grew as a
result. This book is perfect for those who dislike the dry writing found in
historical textbooks. **** Lewis's anecdotes will leave you in stitches! I am
now working in the financial services industry. Most of the people I run into
seem to have read this book at an earlier age and most enjoyed it as much as I
did. **NOTE** Other "financial history" books that could be compared to
"Liar's Poker", but written with very different writing styles: "Merchants of
Debt" by George Anders; "Barbarians at the Gate".
dejavu all over again, May 10, 2000
Reviewer: A reader from USA
Dr. Shiller has performed a service for those investors who have never
endured a bear market and who have forgotten the meaning of risk. He makes
a strong and convincing argument for the overvaluation of the stock market,
however, he fails to explore in depth the similiarities between the state
of the current market and the psychology prior to the crash of 1929. John
Templeton once said that the most expensive words in the English language are
"this time its different". The internet mania, the day traders, the popularity
of CNBC,the massive increase in margin debt, the number of books proclaiming
"Dow 36000, Dow 40000 and Dow 100,000, the intense interest in "How to Be a
Millionaire", the lionization of Alan Greenspan, the internet millionaires,
the bad breadth in the stock market and proclamations of a new era while
interest rates are rising should give cause for concern. Dr. Shiller has
written an excellent book but it stops short as to historical parallels which
support his hypothesis. The problem with theory and practice, is that it is
difficult to predict the timing of a crisis from psychological data. Markets
continue to flow against the tide of human reason far longer than is
anticipated from evidence to the contrary. Like Babson, who predicted the
crash of 1929 for many years prior to the actual crash, the markets seem to be
responding to Shiller's words of caution. There need not be a crash but a
return to normalcy in the marketplace. This is a major contribution to
investors. --This text refers to the
Hardcover edition.
Good insight to market as whole, August 5, 2000
Reviewer:
David Husch (see more about me) from Berkeley, CA USA
The book does provide a lot of evidence to show that the stock market is
overvalued compared to historical levels. The other reviews do a good job of
highlighting what is in the book. I think the point about how Americans
are becoming a nation of gamblers is right on.
What is missing is analysis of any individual stocks or
sectors. While technology, for example, may be overvalued; many other
sectors and individual stocks are selling for historically reasonable
valuations. After reading this book, the reader is left with the
impression that the entire market is overpriced and all stocks are heading for
a crash.
Insightful, but heavy going, February 16, 2002
Reviewer:
grumpygorilla (see more about me) from United States
Having plowed through this tome last summer, I sold my portfolio then wondered
if I'd fallen victim to my own irrational exuberance until the market fell in
the autumn. Shiller makes a convincing case for being more aware of what is
driving the market and stocks, while investing in the long run by buying low
and selling high. The key is listening to your own common sense about
overheating and investing in a VARIED portfolio rather than 25 tech stocks.
The book would have been better had it been lighter and less turgid to read,
but the information was insightful and well thought out.
Looking pretty smart right now..., November 19, 2001
Reviewer:
crankcase (see more about me) from Hoboken, NJ
Shiller points out the factors contributing to the biggest bull market in U.S.
history, which by now are obvious to nearly everyone. However, if you're in
want of technical, quantitative research, you'll be disappointed. Shiller
relies on market inefficiency to advance his argument, but makes his case with
more "squishy" arguments, and writes at length about behavioral and
psychological factors. His concept of a "cascade of information" that
contributes to long-term bull or bear trends is especially interesting.
Shiller debunks market efficiency by pointing out that
Malkiel, Fama and the rest of the new finance crowd depend on the concept of
the rational investor seeking the efficient frontier. Shiller gives us plenty
of reason to believe that the majority of investors in the stock market are
not rational at all (and often completely idiotic).
Disturbingly, however, Shiller winds up his treatise by
taking pity on the fools that were dumb enough to pay $200 for Yahoo! and
engages in a rather unbecoming of flailing and hand-wringing about what should
be "done" about a stock market bubble. That is, what should the GOVERNMENT do
about NASDAQ 5000?
This spoils the book. The answer, clearly, is that the
government (Shiller uses the more benign term "public policy) should not care
one iota about the stock market in a capitalist system. The fact that the
question was even raised left a horrible taste in my mouth and induced me
never to buy a Shiller book again.
In any case, it's bound to become a classic for its timing
(March 2000) more than any other reason and is certainly worth a read.
Points to ponder..., June 25, 2001
Reviewer:
Jeremy (see more about me) from little north of golden gate bridge...
I'm still mulling over what to make of this book. There are certain things
which make a lot of sense and stand out from the rest of the stuff we read and
hear about, be it on TV, internet, or magazines. The most important thing this
book presents is the argument against the common notion of stocks as the best
long term investment option when compared to bonds etc. It is definately not
something I'm used to hear or read. Even the champions of long term investing,
the Motley Fool, believes in stocks as the best long term investment. This
book has compelling arguments to suggest otherwise. For instance, the lack of
factoring in inflation factor while comparing performance of stocks vs bonds
etc over any period of time. I'm still thinking about it and need to read some
more stuff before I fully agree/disagree with the author.
Besides that, the book talks about various
personal, social, and psychological factors affecting the moves in stock
market which underneath has nothing to do with economy in general. There are
some interesting observations about the social/political/economic climate at
the time of two stock market crashes of 1929 and 1987 and what was the general
feeling of people about the stock market before and after the crash.
The book also talks about the media frenzy and
how 'celebrity' guests on CNBC and the like play a role in stock market
behavior and how the so called guests can never really tell the truth because
of their vested interested in the inflated stock market. This should not come
as a surprise to anyone who catches even few minutes of CNBC before heading
out for work in the morning!
There is another interesting argument presented
against the hoopla surrounding the 'new economy' and the author talks about
how internet has not really played a big role in the current stock market
booms (well speaking of when NASDAQ was @ 5000 level). Again, I don't fully
agree with his explanation but some does make sense...
Oh well, a refreshing and thoughtful book, will
give you something to tinker upon and perhaps diversify! and go back to the
old fashioned 'savings' rather than messing with your 401K by putting 100% in
stocks (sounds familiar?).
Copyright © 1996-2007 by Dr. Nikolai Bezroukov.
www.softpanorama.org was
created as a service to the UN Sustainable Development Networking Programme (SDNP)
in the author free time.
Submit
comments This document is an industrial compilation designed and created
exclusively for educational use and is placed under the copyright of the
Open Content License(OPL).
Original materials copyright belong to respective owners. Quotes are made
for educational purposes only in compliance with the fair use doctrine.
Standard disclaimer: The statements, views and opinions presented on
this web page are those of the author and are not endorsed by, nor do they necessarily
reflect, the opinions of the author present and former employers, SDNP or any other
organization the author may be associated with. We do not warrant the correctness
of the information provided or its fitness for any purpose.
Last modified:
February 28, 2008
