Well, here we are at the end of CFE week, although the 15% discounts on our online courses (use code CFE2018) and bulk book sales of The White Coat Investor book (57% off orders of 25+, email [email protected]) will continue through Monday, and I've got far more books left in my stack than I have time to read or space to review. Today I'm going to review three more, all of which are more advanced than the books we covered earlier this week. But first, let's list out all the books I'm not reviewing and give a quick thank you to those who took the time to write them and send them to me.
Quick Summaries of the Books I'm Not Reviewing This Year
- The Million Dollar Decision* – Choosing to do it yourself instead of paying 2% to the financial services industry will save you a million bucks.
- Make it, Keep it – A doctor turned broker and real estate investor gives doctors tips on making, investing, and protecting money
- Falling Short* – America has a retirement problem; we should fix Social Security, work longer, save more, and consider using home equity.
- Financial Freedom – I'm a great financial coach, hire me!
- Why Smart People Do Stupid Things With Money – I'm a great financial advisor, hire me!
- The Single Family Office – If you've got $30M+, we want to run your single-family office for you.
- Atheneum Protect Volume 1 – We're great financial advisors. Hire us!
- Fifty Shades of Pain – Don't take those opiates. They're addictive and don't do much good. Don't expect surgery to relieve your chronic pain either.
- Bye Student Loan Debt – You should probably learn something about your student loans and actually pay them off.
- Retirement Planning for Young Physicians* – A doctor says most doctors don't save anything. Don't be like them.
- Road Warrior Physician – Thinking about locum tenens? Here's how to go on the road with your practice.
- The Doctors Guide to Starting Your Practice Right – Minimize debt, evaluate your contract, and plan for the future.
- Physician Wealth Management Made Easy* – I'm a great financial advisor. Hire me!
- Wealth By Virtue* (the prettiest book I was sent this year) – I'm a great financial advisor. Hire me!
Whew! And after writing Monday's post, I had another one put in the mail. Needless to say, I didn't read every word of all of those books, but I did open them all. You don't have to read all of those or even all of those I reviewed this week. But you do have to read one financial book this year. Snide comments aside, the crop of advisor written books above are actually quite good this year, much better than usual and actually probably better than the doctor written ones above. (I've starred what I think are the better ones in the list above.) But the point remains that you really only need to read 1 or 2 physician-specific primers. We're just not that special. Beyond that point, you'll be better off reading books written for a more general audience. Today, we'll get into three more of those.
Review of From Here to Financial Happiness
Jonathan Clements put out another book this year. It is entitled From Here To Happiness: Enrich Your Life In Just 77 Days. I don't think it is as good as his How to Think About Money. But if you, like me, will read anything he writes, you're probably going to want to pick this one up too. This is a perfect toilet book. What do I mean by that? I mean this is a book you put in the bathroom and every time you go in there you read one of the 1-2 page chapters in it. Then, after you finish Chapter 77, you throw the book away because ick. In the meantime, you'll probably have dramatically improved your financial life.
The book has tons of little gems in it like these:
- You could carry a credit card balance — or you could toss dollar bills out the window. Same thing.
- Things that make us feel good today — spending, eating junk food, boozing it up –often leave us feeling worse tomorrow.
- Want to enjoy life more? Put down the remote, back slowly away from the television, and do something where you're a participant, not an observer.
- Today, we worry that stocks are a bad investment. Thirty years from now, we'll wonder why we owned anything else.
- Paying down debt offers a guaranteed return — one that typically outpaces bonds. No investment can make that claim.
- It's amazing how much our portfolios can grow when we aren't looking — and how that abruptly stops when we meddle.
You're not going to finish this book with a perfectly written financial plan. But you will have learned enough to avoid all of the big mistakes in finances and in life, one trip to the bathroom at a time.
Buy From Here To Financial Happiness Today! (because you certainly don't want my copy)
Review of Reducing the Risk of Black Swans
Larry Swedroe and Kevin Grogan are back with a new book this year, entitled Reducing the Risk of Black Swans and subtitled Using the Science of Investing to Capture Returns with Less Volatility. I think Larry publishes a book most years. I enjoy reading Larry's books because I find them full of evidence and new ideas. Most financial writers just mix around the same ideas over and over again. Larry specializes in taking the newest information in the professional financial literature and dumbing it down so the rest of us can understand it. Then, he makes specific recommendations on what he thinks we should be doing with it. I don't always agree with Larry and sometimes it turns out I'm wrong and sometimes it turns out that he is wrong. Sometimes he beats me to the punch writing about a new interesting asset class and sometimes I beat him. But I love the challenge of reading his arguments and trying to punch holes in them. His writing has certainly had some influence on my own portfolio, primarily how much I favor treasuries on the bonds side and small value stocks on the equity side.
This book is dense (although not that long); it should NOT be your first financial book. But if you're looking for something that skips the fluff and jumps right into the data, this one is for you. Chapter one contains Larry's usual focus on looking at portfolio performance as a whole, rather than putting too much focus on the returns of any given asset class within the portfolio. He argues that you should find a portfolio with a narrower dispersion of returns, i.e. fewer fat tails, given the same expected return. Hard to disagree with that.
Chapter two introduces the reader to modern portfolio theory and particularly the Fama-French three-factor model. Chapters three and four provides Larry's argument for what Bogleheads (and now Swedroe himself) call the “Larry Portfolio” – lots of short-term treasuries and a little bit of small value stocks. The idea here is that small and value risk are just as important as overall market risk and if you're willing to take on lots of small and value risk, then you can take less market risk and get the same overall return with a narrower dispersion of returns. I'm not as big of a believer as Larry is in this concept, but I must believe it at least a little bit given my portfolio.
In chapter five, we jump into alternative investments. The first one is Peer to Peer Loans. I beat Larry into this asset class and I apparently beat him out of it. To be fair, he now recommends a different approach than I took. I went straight to Lending Club, and over time, the institutional money began to get preferred treatment compared to the rest of us. Larry instead advocates becoming institutional money and even recommends a fund to use, LENDX. Like most of Swedroe's recommended investments, this one is only available through investment advisors. It shows a return of 6.49% per year. Not nearly as high as I managed to get picking my own notes, but I was also in earlier when frankly, it was a lot easier to get the good loans. In my opinion, 6.49% isn't nearly a high enough return for the risk being taken in this asset class. The fund is more liquid than the notes themselves, but nowhere near what you'd get with a typical mutual fund. I found the 4.57% annual fund operating expenses to be appallingly high as well. Tough to make money when you're paying that much. I can't quite figure out why Swedroe and Krogan find that asset class so attractive compared to hard money lending funds that make 50% more, cost 1/4 as much, and are actually backed by a real asset.
In chapter 6, we learn about reinsurance and in chapter 7 we learn about the variance risk premium. Hmmm….that's weird. Stone Ridge (LENDX) also has a fund for reinsurance and variance risk, with similar fees. And their founder wrote the foreword for this book. I'm starting to get curious about the financial relationship between Stone Ridge and the authors. At least the fees are a little lower (between 1.5% and 2%) on these two funds.
In chapter 8, the authors plug QSPRX, a long-short fund that uses the value, cross-sectional momentum, carry, and defensive factors for a mere 2.23% per year. The authors say they expect equity-like returns from it, but Morningstar reports 5-year returns of 4.64%. By comparison, the Vanguard Total Stock Market Fund reports 5-year returns of 10.51%. Maybe it takes more than 5 years for the equity-like returns to show up, or perhaps that 2.23% per year fee has something to do with it. Like Larry's recommendation a few years ago to invest in a commodities futures fund, I'm going to pass on these four funds. Not only is it not entirely clear to me what they're doing, but they're approximately 100 times as expensive as most of my portfolio.
Chapter 9 is about another factor, time-series momentum as exemplified by AQMRX. It only charges 1.11%, which seems downright reasonable compared to some of the other funds in this section. Unfortunately, 5-year returns are negative. Maybe the next five years will be better. Or maybe it isn't really a factor at all and it's just a result of data-mining like many of the new factors “discovered” by academics will turn out to be. Time will tell.
In the end, the authors recommend 10-30% of a portfolio be placed into these alternative asset classes. The problem with Swedroe's recommended portfolio is that the recommended portfolio changes every time a new book comes out. While the tax consequences of such frequent changes can be minimized by investing in retirement accounts, it's hard not to worry there is some performance chasing going on here, especially when the next 5-10 years after one of his recommendations seems to always show the recommended factor being “out of favor.”
The appendices in Swedroe books always have interesting stuff in them. They discuss some more complex math, some other factors, and a warning that future REIT returns are likely to be lower than past REIT returns. There are also some recommendations on how to evaluate index and passive funds. I think there was too little focus placed on expenses of the funds, which have been shown in the past to be the best predictor of future performance. I guess I shouldn't be surprised given some of the other recommendations in the book. I seem to recall Swedroe being far more cost-conscious in previous books. There is a nice chapter on “enough” and marginal utility and finally some recommended mutual funds at the end. The usual Vanguard/Fidelity/Schwab/iShares total market funds are found, then DFA and Bridgeway funds for small and value factors, AQR funds for momentum and multifactors, and Stone Ridge for the above discussed alternative funds.
If you're interested in the latest research into factor investing and want to be able to participate in discussions with your fee-only financial advisor buddies, this book will bring you up to speed. But for heaven's sake, steer clear of the new investments being recommended. Simplicity and low costs are still worth a lot in investing, no matter how sophisticated the numbers look.
Review of The Ascent of Money
I think being familiar with financial history is a critical aspect of an investor's education. The past might not repeat, but it certainly rhymes, and knowing what happened in the past gives you a pretty good idea of what could happen in the future. My recommended volume this year is Niall Ferguson's The Ascent of Money: a financial history of the world. It wasn't published this year (it's actually a decade old) but was a NYT Bestseller at that time. It is 365 pages and fairly dense.
From the introduction:
Are you angry that the world is so unfair? Infuriated by fat-cat capitalists and billion-bonus bankers? Baffled by the yawning chasm between the Haves, the Have-nots — and the Have-yachts? You are not alone. Throughout the history of Western Civilization, there has been a recurrent hostility to finance and financiers, rooted in the idea that those who make their living from lending money are somehow parasitical on the ‘real' economic activities of agriculture and manufacturing. This hostility has three causes. It is partly because debtors have tended to outnumber creditors and the former have seldom felt very well disposed towards the latter. It is partly because financial crises and scandals occur frequently enough to make finance appear to be a cause of poverty rather than prosperity, volatility rather than stability. And it is partly because, for centuries, financial services in countries all over the world were disproportionately provided by members of ethnic or religious minorities, who had been excluded from land ownership or public office but enjoyed success in finance because of their own tight-knit networks of kinship and trust.
Despite our deeply rooted prejudices against ‘filthy lucre', however, money is the root of most progress….Far from being the work of mere leeches intent on sucking the life's blood out of indebted families or gambling with the savings of widows and orphans, financial innovation has been an indispensable factor in man's advance from wretched subsistence to the giddy heights of material prosperity that so many people know today….Banks and the bond market provided the material basis for the splendours of the Italian Renaissance. Corporate finance was the indispensable foundation of both the Dutch and British empires, just as the triumph of the United States in the twentieth century was inseparable from advances in insurance, mortgage finance and consumer credit.
The book is divided into six lengthy chapters. In the first, Ferguson examines historical financial institutions and history and makes the case for his premise:
Credit and debt, in short, are among the essential building blocks of economic development, as vital to creating the wealth of nations as mining, manufacturing or mobile telephony. Poverty, by contrast, is seldom directly attributable to the antics of rapacious financiers. It often has more to do with the lack of financial institutions, with the absence of banks, not their presence.
Then the majority of the book is contained in the next four chapters, one on the bond market, one on the stock market, one on the insurance market, and one on the real estate market. In each case, Ferguson goes back for centuries and brings us to the present day. Each subject is covered thoroughly, and you will gain a newfound appreciation for each of these markets and the wealth they have provided for you, your family, friends, and neighbors.
The final chapter focuses on the last hundred years, and particularly on the rise of the relationship between China and America. At the end, he makes the case for studying financial history:
One important lesson of history is that major wars can arise even when economic globalization is very far advanced and the hegemonic position of an English-speaking empire seems fairly secure. A second important lesson is that the longer the world goes without a major conflict, the harder one becomes to imagine (and, perhaps the easier one becomes to start.) A third and final lesson is that when a crisis strikes complacent investors it causes much more disruption than when it strikes battle-scarred ones. As we have seen repeatedly, the really big crises, come just seldom enough to be beyond the living memory of today's bank executives, fund managers, and traders. The average career of a Wall Street CEO is just over twenty-five years, which means that first-hand memories at the top of the US banking system do not extend back beyond 1983, ten years after the beginning of the last great surge in oil and gold prices. That fact alone provides a powerful justification for the study of financial history.
I agree that the study of financial history is a critical part of the education of the competent investor. Get up to speed by checking out The Ascent of Money.
Thanks to those who sent in books for review consideration this year. If you want to send us your book, you may do so. I prefer print copies to Ebooks and obviously no promises of a positive review, and as you can see, you may get no review at all and you almost surely won't get one before next November!
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What do you think? Have you read any of these books? What did you think of them? What was the best financial book you read in 2018? What do you plan to read for your CFE this year? Comment below!