Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market [Hardcover]

This book asks where the stock market will be in ten years' time, and how you should invest as a result of that. It's potentially important, because discussion of long-term investment strategy (as opposed to next quarter's earnings) is so rare - yet obviously critical for investors. For that reason, I'm going to write a more detailed review than most of the others you'll find here. I'll summarize Mauldin's key arguments, briefly discuss his recommendations, and finally give you an honest appraisal of whether you should buy the book.

SYNOPSIS. In the first half of the book, Mauldin sets out to prove that in ten years' time the US stock market will likely be no higher than it is now, and possibly significantly lower. The stock market's future level will be determined by (a) earnings growth and (b) the value the market places on those earnings (ie. P/E ratios), so Mauldin focuses on these two elements. First, he argues that earnings growth will be disappointing. Companies' earnings will be depressed by the adoption of stricter accounting standards, the expensing of options, and higher pension costs. Combine that with anemic economic growth due to the aging of the population, the current account deficit and the budget deficit, and earnings are unlikely to exceed their historical growth rate of under 6%. Next, Mauldin argues that P/E ratios are unlikely to rise over the coming decade, and may in fact fall dramatically. He assembles a battery of arguments to prove his case. Secular bull markets have never started from times when the market's P/E ratio was as high as it is today. The market is currently overvalued according to multiple measures, and will likely revert to its historical mean. The risk premium is currently low, and a recovery to more sensible levels would depress P/E ratios. Finally, P/E ratios fall as inflation rises or an economy slips into deflation; so given the US economy's current inflation rate (close to zero), there's nowhere to go that would result in a higher P/E ratio for the market. With mediocre earnings growth and falling P/E ratios, the market is therefore headed nowhere or a lot lower.

If the market will be flat or down over the next decade, how should you invest? That's the subject of the second half of the book. Mauldin recommends that you buy value stocks or a mutual fund run by a value-oriented manager, since value stocks have historically outperformed growth stocks. Stocks that pay dividends are particularly attractive, as a large part of the total return from the stock market has come from dividends. You should also assemble a laddered bond portfolio, buy real estate, and buy gold or gold stocks if you have the expertise. His key recommendation, however, is that you should put your money into hedge funds, since hedge fund results are not dependent on the market rising.

HOW CONVINCING IS HE? Mauldin supports his argument that the stock market will stagnate over the next decade with data, academic studies and a reasonable description and rebuttal of opposing viewpoints. He comes unstuck, however, with the practical recommendations in the second half of the book. Three quick examples: (1) The first half of the book suggests there's a reasonable likelihood of deflation. In that case, cash would be a better investment than most of Mauldin's recommendations. (2) If the stock market is really heading down, as Mauldin suggests with his assertion that the market's P/E ratio could go to 10 or below, the best strategy for most investors is simply to buy long-term index put options; but he doesn't mention this. (3) Hedge funds have lousy tax efficiency, so returns for taxable investors would be a lot worse than Mauldin seems to suggest. These points deserve more discussion than this space allows, so I'll address them in more detail (and provide practical alternatives) on the TechUncovered web site. Suffice it to say that despite his honesty, Mauldin's viewpoint is likely skewed by his profession: acting as an introducing broker to hedge funds.

SHOULD YOU BUY THE BOOK? Despite these criticisms, Mauldin asks important questions and assembles and summarizes a lot of material. But here's the problem. Much of the content has been reproduced from Mauldin's free emails, which are available on his web site, and some of the key arguments are available for free elsewhere, such as Grantham's letters and Bogle's speeches. (I've provided links to these sources on the Market Resource Page on the Seeking Alpha web site.) Worse, unlike the emails, the book has been poorly edited. A couple of the chapters are co-written with a colleague, and read like stand-alone hedge-fund marketing material, while others repeat points in earlier chapters. So the book misses the opportunity to integrate the content of the emails into a readable, methodical argument. Whether you decide on the email archive or the book, though, Mauldin is definitely worth reading.

I am not sure what this book is trying to enunciate or whom it is targeted to, as you will see from my discussion below:

The first 8 chapters of this book are excellent and I am sure I will refer to them time and again.

The next chapters 9-14 enunciate, in excruciating detail, why the present decade will not be such a balmy one for equity investing.

The next chapters, 15-17 deal with investment psychology.

The next chapters, 16-18 deal with investing in stocks and bonds.

The balance of the chapters 20-24 deal with investing in hedge funds, gold etc.

The author shows that blindly investing in stocks and assuming that the future is always going to be rosy is misleading and unhealthy. His analysis was indeed instructive and I gained a lot from it.

He then meanders all over the place to prove that the coming decade will not be a bullish one for stocks.

He then presents alternatives, primarily using hedge funds and states time and again that this is for an "Accredited Investor" having net worth of $1,000,000 or more.

I am not sure how an average investor can use his recommendations or whether an Accredited Investor would bother to read this book and follow his (sometimes completely unrealistic) advice!

Get the book for a library, read the fist 8 chapters and leave it at that.

John Mauldin writes as a cool "just the facts" analyst. If this book doesn't convince you that you need to tread carefully in the next decade, then nothing will.

"Bull's Eye Investing" is a full frontal assault on the perennial bullishness of Wall Street. Mr. Mauldin comes armed with a wide array of studies from other authors. No, Mr. Mauldin does not bring his own guns made by his own hands. What he has done is assembled a vast array of weapons and assembled them in a way that makes the whole greater than the sum of the parts. (Many of the chapters are co-written with other authors.)

The entire book can be boiled down to one conclusion: the next decade will see a predominately declining market. Most of the book is spent detailing why this must be. Nothing written is new or ground breaking. Many of the cited studies use old premises, updated with the newest data. Trailing price-to-earnings ratios, for example, have long been cited as an inverse predictor of future returns. If you are familiar with such studies and already accept their conclusions, then you do not need to read this book as you will find the book rather repetitive. But for those who are not familiar with such evidence, the depth of arguments that he piles on will be impossible to deny.

The title of the book suggests a discussion of methods to invest in uncertain markets. It is worth noting that Mr. Mauldin is neither a professor nor a money manager - he is an advisor who helps his clients select hedge funds and other investing vehicles. Thus, as before, his investing recommendations are an assemblage of various studies and newsletters by other authors as well as his own experience with the world of hedge funds. The practicability of these recommendations is debatable. On the one hand, some of the cited studies provide strong statistical evidence that a particular investing strategy will work and he argues convincingly why these strategies make sense. On the other hand, Mr. Mauldin does not address how well such strategies might work with the strong headwind that he takes such great pains to establish.

"Bull's Eye Investing" is reminiscent of "Irrational Exuberance", written by Professor Robert Shiller at the peak of the technology bubble. Dr. Shiller was ridiculed as someone who "doesn't get it." Those who still believe so can skip "Bull's Eye Investing", as these two books could be kissing cousins. Similarly, those who accepted the premise of "Irrational Exuberance" will simply find more evidence for the same thesis in this book. This book is for the undecided - read this book now before Mr. Mauldin, like Dr. Shiller before him, proclaims to the world "I told you so!"