Book Review

Book Review: The Elements of Investing

April 15, 2010

10 comments
[Front Cover of The Elements of Investing]

The authors of this slim volume need no introduction. Burton Malkiel’s A Random Walk Down Wall Street is a classic that was first published in 1973 and is still in print. Charles Ellis is a legendary portfolio manager and author of Winning the Loser’s Game (I reviewed it here). They have combined forces to boil down investing to its elements in this short book that you can breeze through in a couple of hours. The authors say the book follows the format of The Elements of Style, a short classic on the art of powerful writing, which I confess isn’t a title I had heard about before.

In the book, the authors lay out a super simple approach to investing that can be profitably employed by anyone. They call it KISS Investing and it includes the following steps:

  1. Save regularly and start early.
  2. Use company- and government-sponsored retirement plans to supercharge your savings and minimize your taxes.
  3. Diversify broadly over different securities with low-cost “total market” index funds and different asset types.
  4. Rebalance annually to the asset mix that’s right for you.
  5. Stay the course and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes. Focus on the long term.

If you’ve read other popular tomes on investing, you won’t find much that is new here and can safely skip this one (and thank me for saving you $17 or so). But investors of all ages who are new to investing will be delighted to learn that the basic principles for achieving financial success are not exactly rocket science. The book is published by John Wiley and has a cover price of $23.95.

Book Review: Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today

January 21, 2010

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[Front Cover of Rob Carrick's Guide to What's Good, Bad and Downright Awful in Canadian Investments Today]

Respected Globe and Mail personal finance columnist Rob Carrick has followed up How to Pay Less and Save More For Yourself: The Essential Consumer Guide to Canadian Banking and Investing (read my review), a guide to getting the best deals in banking and investing, with another book with an equally long title. But don’t let the long title deter you. This is a rather short book (roughly over 200 pages), written in a breezy style and in a format that is perfect for random reading because the book is filled with handy lists such as “Six crummy mutual funds that make the industry look bad”, “Five great deals in fundland”, “Five key considerations in choosing a discount broker” and “Ten traits of a great adviser”.

I found it refreshing that Rob Carrick pulls no punches and tells it like it is. Take the “Three Examples of Fund Industry Shenanigans”, in which Rob lists the mutual fund industry practices that really bug him. Here’s what he says about making a big deal about management fees:

You may now have grasped the idea that management fees are nothing but a component of the total cost of owning mutual funds. In quoting management fees in its marketing material, then, a mutual fund company is giving you only a partial view of what it costs to own its products. Why do fund companies do this? My cynical view is that it’s to fool people.

After all, the term management fee can easily be mistaken for management expense ratio. Publicize management fees all by themselves, and maybe some people will be fooled into thinking your funds are cheaper to own than they actually are.

This is not merely a book about fund industry shenanigans, though the industry does come in for heavy criticism (and deservedly so). There is a lot of ideas for investors of all stripes, from beginners to the pros, from picking an adviser to avoiding principal-protected notes. The toughest part in investing is avoiding big mistakes. Rob Carrick’s Guide will help in avoiding some pretty big ones that could set back your finances by years. Too bad if the fund industry’s feelings are hurt in the process. After all, you can’t make an omelette without breaking eggs.

Rob Carrick’s Guide is published by Doubleday Canada and has a cover price of $19.99 and is available on Amazon for about $15. Thanks to Rob for mentioning this blog as one of the “Five blogs that will make you a smarter investor”.

Book Review: Winning the Loser’s Game

January 12, 2010

57 comments
[Front Cover of Winning the Loser's Game by Charles Ellis]

Charles Ellis is a Wall Street legend and Winning the Loser’s Game ranks as one of the classics of investing. I read an earlier edition many years back and when McGraw Hill offered to send a review copy of the fifth edition of the book, I jumped at the chance to re-read and review the book. And I’m glad I did because this book does contain, as the subtitle suggests, “timeless strategies for successful investing”.

Mr. Ellis famously likens investing to a game of amateur tennis, which is typically not won by the player who tries to hit winning shots. Instead, the player who makes the least number of unforced errors usually ends up in the winning column. Therefore, the amateur tennis player should eschew the fancy shots and concentrate her game on simply landing most of her shots in her opponent’s court. Likewise, an investor should focus her energies, not on potentially winning strategies such as timing the markets or picking the right stocks, but on defensive strategies such as cutting costs, paying attention to taxes and sticking to a well-thought out plan.

As you might expect from a director at Vanguard, Mr. Ellis is an ardent proponent of index investing. He points out that the much-maligned mutual fund manager finds it so difficult to beat the benchmarks because the market is dominated by institutional investors who are equally smart, equally hard-working and backed by equally good research and resources. If all Mr. Ellis had to offer was indexing and a caution against trying to beat the market, you can obtain it elsewhere in books by John Bogle and Burton Malkiel. The key message in the book, in my opinion, is Mr. Ellis’ recommendation that all investors develop a carefully considered investment policy and commit it to writing:

The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself — helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.

Quite correctly, the author says that the responsibility of crafting an investment policy rests with the investor; it’s far too important to be delegated entirely to a financial advisor. But that’s not all there is to the book. Every page drips with wisdom gathered from a lifetime of experience in the investment trenches. I did have some minor quibbles, including an entire Appendix running more than 30 pages on Serving on an Investment Committee. If you are interested in another opinion, Michael James recently reviewed this book and found that Mr. Ellis “provides consistently solid investing information from beginning to end”.

The book is published by McGraw Hill and is available on Amazon.ca for $23.79.