20 of 21 people found the following review helpful
Not as good as I expected,
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This review is from: Smarter Investing 3rd edn: Simpler Decisions for Better Results (Financial Times Series) (Kindle Edition)
I bought this book because it was recommended in an investment email newsletter I receive and the great reviews on Amazon for an earlier edition.
Unfortunately I can't see what people are getting so excited about and thought it made a dull read.
I agree with the author that many people have bad investment habits that cause them to reduce their investment returns because of the bad habit of "buying high and selling low" as they chase last year's big winners.
I also agree that high charges are a big drag on returns. Correctly the author focuses on real (after inflation) returns and suggests that 5% is achievable from equities. He cites some research that backs this up and some more that suggests that it's closer to 3%.
Paying 1% to 2% in charges makes a big dent in what you can expect.
The rule of 72 is a useful guide to compounding. You divide 72 by the % change so at a 5% growth rate an investment would double in just over 14 years, and another 14 years to double again (up to 400%). If you only net 3% because of charges, it takes 24 years to double. i.e the financial services industry gets rich but you don't.
Where I disagree with the author is over market timing.
The 2013 Nobel Prize for Economics went to three people - Eugene F. Fama, Robert J. Shiller and Lars Peter Hansen.
Fama supports the efficient markets hypothesis which says that the current price reflects all known information and is the most appropriate value under current assumptions.
Shiller on the other hand criticises the efficient market hypothesis and believes that markets can get irrational exuberant and prices soar to levels that can't be supported. This is the world of investment bubbles that burst, losing late investors, huge amounts of money.
History supports bubbles. It took the stock market many years to recover the value after the 1929 crash, in Japan, the Nikkei 225 index peaked at just under 39,000 in December 1989 and even now is only just over 15,000 and the main American and British stock markets have suffered a lost decade and a bit after the dot com boom.
Why does this matter? Because the world is awash with "funny money" created by the central banks and combined with interest rate suppression, it has pushed up asset values to levels that are difficult to support.
The book therefore doesn't cover the difficulties of knowing how to invest sensibly in 2013 when America and Britain are struggling for growth, fears grow in Europe of deflation and prolonged recession, Japan is determined to inflate its economy and is creating a potential currency war and who really knows what the truth is behind the remarkable growth in China.
I believe a more thought provoking book is The Permanent Portfolio: Harry Browne's Long-Term Investment Strategy which explains the idea of building a portfolio for all possible economic outcomes. Even that doesn't cover these strange times when investment asset values look artificially high as the Federal Reserve in particular continues its experiment in Quantitative Easing.
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Showing 1-6 of 6 posts in this discussion
Initial post: 27 Dec 2013 06:23:02 GMT
Edward Lynch says:
Thanks for this review. The second half of which nicely summaries my own concerns with traditional investment strategies at the moment and I was wondering if this book provided any further insight that might be useful in these strange times.
One observation: In your sentence "Shiller on the other hand criticises the efficient market hypothesis and believes that markets can get irrational exuberant and prices soar to levels that can be supported." I think that "can" should be "can't". I would not normally point this out but it rather changes the meaning for those unfamiliar with the concept of bubbles.
In reply to an earlier post on 2 Jan 2014 14:29:20 GMT
Thanks for pointing out the typo. I've corrected it.
Posted on 6 Jan 2014 13:06:53 GMT
Thought-provoking review. I must say I found Hale very readable. (I have the previous edition)
On the Permanent Portfolio: it assumes there can be deflation, but recent history shows that governments are prepared to go to great lengths to prevent it (through QE), so I wonder if that actually applies.
Hale does insert a caveat about inflated assets - cautioning that one must be aware of that possibility if investing a lump sum, if I remember rightly. Shiller provides a method for identifying asset bubbles (CAPE10).
Perhaps one could combine the methods of all three? Would Hale choose gold as a defensive asset I wonder?
In reply to an earlier post on 13 Jan 2014 13:30:12 GMT
Rick the experience of Japan over the last 20 years suggests that deflation is hard to avoid although the massive money printing in Abenomics might finally induce long term inflation although adverse demographics make it a difficult fight.
Personally I find QE a big, scary experiment and I have no faith in the central banks to steer the economy.
Posted on 17 Feb 2014 15:25:56 GMT
Last edited by the author on 17 Feb 2014 15:26:28 GMT
T. J. Jones says:
I think you've missed the benefit of this book, which is to make the clear case for buy and hold diversified portfolio, plenty of equities, don't get distracted by trading or by expensive actively managed products. For probably 90% of people this is a very valuable message, and the evidence Tim Hale lays out gives the investor confidence when the spivvy salesman is pushing some active product. Sure, if you want to play with a bit of market timing you can have some fun, but most people (a) don't have any actual information to tell them when to get in and out (b) are then also likely to get caught up in the emotion of trading, and (c) don't want to spend their lives thinking about their investments.
In reply to an earlier post on 19 Feb 2014 12:47:32 GMT
Perhaps I did. My normal investment style is to buy and hold rather than jump around from one hot topic to another so I'd have taken that advice as common sense.
I'm also aware that I'm giving a lot of thought to investment in the 2013/14 economic environment because I don't like what's happening. The more I learn, the more I believe that we're in for tough times.
Unfortunately long term health issues have also made me cautious and defensive.
It looks like a difficult time to invest (or save) at the moment with market prices badly distorted. That may be fine if you've got a 20 year plus investment horizon and can ride out the troughs and peaks. When I was young, I didn't particularly care what the market was doing. In fact, if it fell, it meant my latest purchases were buying more and I had faith that paper losses would be recovered before I needed to sell.
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