Sunday, March 1, 2015

Book Review

I recently read "The 5 Mistakes Every Investor Makes and how to Avoid Them" a 2014 book by Peter Mallouk. The book makes the case for a mostly buy and hold investment strategy using stock and bond index funds. This is reasonable but the arguments for it are familiar to me so I didn't find the book too exciting. The book assumes a certain basic familiarity with the financial markets, if the investing world is completely foreign to you this book would not be a good introduction.

Mallouk is an investment advisor and the book reads like an extended client pitch. It is good about ways to identify and avoid bad advisors, perhaps less good about how to decide whether you need an advisor at all and what constitutes a reasonable fee. The new robo-advisers (which offer automated advice from computer programs) are not discussed at all.

I would sum up Mallouk's advice about mistakes to avoid as 1) Don't try to time the market, 2) Don't try to pick individual securities, 3) Take the long view, 4) Be wary of biased advice and 5) Don't ignore taxes. (This merges two mistakes in Mallouk's list and adds another). This seems generally sound (although I personally don't follow it 100%).

I think Mallouk slightly overstates the case for stocks, although probably a good bet they aren't really a sure thing even in the long run. People pitching stocks generally reference the historical performance of the US stock market. As the US market has always recovered from setbacks to reach new highs this gives an optimistic outlook. But looking at foreign markets gives a more mixed picture. The Japanese market for example is currently at about 1/2 the level of its 1989 high (I don't think this counts dividends but even so its performance has been dreadful). In particular I believe (contrary to Mallouk) that there is something to be said for cash as an asset class. Mallouk concedes that although bonds have a lower expected return than stocks they have a place in a portfolio to moderate volatility. But the same argument applies to cash which in turn has a lower return and is less volatile than bonds. Or to put it another way if going from 10% cash to 0% is a no-brainer (as Mallouk suggests) why not go further to -10% (buy on margin)? Clearly at some point (which will vary with the individual) the added expected return is not worth the added volatility. That said many individuals probably do have too much cash. Me for example although more because of laziness (I am paid in cash and it piles up in my bank account out of inertia) than because of any considered decision to hold cash. Perhaps a sixth mistake to avoid is laziness.

To sum up while I think the advice in this book is largely sound I am doubtful there is enough of it to make the book worth reading particularly if you are already familiar with it from other sources. Of course some people (possibly including myself) may need to hear the same advice repeatedly to get up enough motivation to actually act on it so perhaps this book will be helpful in that regard.

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