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Ian Robertson (West Vancouver, Canada)

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The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk
Price: CDN$ 21.98

4.0 out of 5 stars Intelligence Driven By Analysis Rather Than Philosophy, Dec 26 2014
Neurologist William Bernstein is an unlikely guide to experienced investors with both this comprehensive book and his excellent efficientfrontier website, but he succeeds admirably, perhaps in part because he is a Wall Street outsider with a keen eye for data viewed through a skeptic’s lens.

The Intelligent Asset Allocator - more than a dozen years old now - is very well organized, building logically from broad foundational concepts to practical advice for investors, with an helpful concluding section on further investment resources. Bernstein starts with a clear discussion of risk and return, and then outlines the theoretical (in particular the work of Fama & French) and actual behaviour of multi-asset portfolios. He then covers market efficiency and concludes with practical and precise (he prefers Vanguard whenever possible) recommendations of how best to invest.

Bernstein’s premise is clear from the opening pages, “Asset allocation is the only factor affecting your investments that you can actually influence.” He cites asset classes such as money market, short term bonds, long term bonds, emerging market stocks, and the value and growth options within domestic, foreign, and small company stocks. He notes both the unpredictability of their returns and that past performance is not necessarily a predictor of future performance (at least not over an investor’s time horizon), but nonetheless recommends different asset mixes based on these historic returns and their correlations. How can he not - it’s the central point of his book - though as Bruno Solnik observed “diversification fails us when we need it most” (i.e. in a market crash).

Though Bernstein is careful to highlight the inherent uncertainty in markets and that some of his analysis or recommendations are based on probabilities rather than facts, the book may still leave readers with the unrealistic impression of a paved road to financial success. In fact, it’s closer to sailing to a destination, unsure of the winds and weather, and of our ability to withstand them. As financial weatherman Nassim Taleb has noted, one hundred year storms seem to appear in markets with surprising frequency. To Bernstein, who is very comfortable with a spreadsheet, the forecast is perhaps too analytical and not philosophical enough.

Though much has changed since the book’s publication - it was written before the advent of fundamental indexing, and the number of Exchange Traded Funds (ETFs) available today is as large as the number of individual stocks - its principled approach ensures it stands the test of time well. Mr. Bernstein’s more recent publications are more philosophical and thought provoking, but knowledgeable investors would be hard pressed to find a better, more practical and comprehensive guide than The Intelligent Asset Allocator. An updated edition to include his recent work would be very welcome.

The Partnership: The Making of Goldman Sachs
The Partnership: The Making of Goldman Sachs
by Charles D. Ellis
Edition: Paperback
Price: CDN$ 16.30
40 used & new from CDN$ 2.87

4.0 out of 5 stars Ellis Tells The Partners' Story, Dec 26 2014
Charles Ellis has written the definitive history of Goldman Sachs, relying on candid insight from dozens of the partnership's current and former leaders. In many ways the firm’s history parallels that of Wall Street, as Goldman Sachs (GS) was either a leader or near the forefront in the development of many practices: advisory services; trading desks, block trading, proprietary (prop) trading, private client services, prime brokerage, commodities trading, forex, hostile takeovers, and of course the benefit of a truly global footprint. Readers will learn about the dozens of leaders who shaped GS, how they strove for excellence in all areas, and how and why our modern capital markets have developed. What they will not receive however, is any policy perspective on whether or not investment banks should undertake some of their activities at all - a glaring omission given the book’s length and detail.

Goldman Sachs is unquestionably the pre-eminent investment bank today, and Ellis’ admiration comes across in his text. He unabashedly chronicles the significant steps in its evolution, noting disagreements and differences in style within leadership circles, but never stooping to malign individuals. When the firm or partners find themselves offside with New York DA Rudy Giuliani, Ellis highlights the impact on the firm, its operations, and its strategic direction, but he neither moralizes nor impugns an individual’s character. In one notable instance Ellis actually rises to the defence of a former partner, methodically dismissing both the charges of New York DA Rudy Giuliani and the shoddy journalism at the time by James Stewart, who later added insult to injury by immortalizing his mistakes in his classic book Den of Thieves. In short, those looking for character assassination, muckraking, and an expose on the moral failings of Wall Street will have to look elsewhere, including William Cohan’s excellent Money and Culture: How Goldman Sachs Came to Rule the World, and Greg Smith’s highly edited (censored?) Why I Left Goldman Sachs.

Though Ellis doesn’t highlight them, careful readers will see some of the potential conflicts as they develop. For example, there is a short passage on an agreement between GS and British company Woolworths whereby GS would keep the price of Woolworths’ stock above a certain level, something that would be unthinkable in today’s public markets. Similarly, the realization by GS leadership that information from unrealized management buy outs (MBOs) could subsequently be used to help outsiders undertake leveraged buy outs (LBOs) would appear to cross a line, as would the development of proprietary trading (i.e for GS’ own benefit) while simultaneously executing clients' trades on an agency basis. With respect to the then new field of asset management, Ellis notes “[The major underwriting firms] were definitely not in the investment management business, and they were, back then, explicit that being an investment management would be a clear conflict of interest. But that simple … policy could not hold up once Wall Street discovered how very profitable the asset-management business really was.” Much gentler words than Rolling Stone Magazine’s Matt Taibbi’s description of GS as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money,” but with a similar message; if an activity can make money and it’s not illegal, it will be considered.

The book is littered with names that will resonate outside the walls of the partnership and Wall Street - Hank Paulson, Robert Rubin, Robert Merton, Fisher Black, John Meriwether, Jon Corzine, and Lloyd Blankfein - some of whom are celebrated for further achievement, some for subsequent spectacular failure, and some for both. Even though GS’ early leaders’ names have largely faded from common parlance, their achievements are still easily recognizable - for example the underwriting of Ford’s 1956 IPO (which subsequently sank about 25%) - as are the achievements of more anonymous groups such as the mortgage backed bond group who belatedly realized that their investments had an embedded option and a feature known as convexity, and that changes in interest rates would impact homeowners’ refinancing activities. Perhaps a bit esoteric, but it has subsequently been taught to all CFA Charterholders and it is not uncommon to find reference in more detailed economic and business writing.

The Partnership: The Making of Goldman Sachs is a worthwhile contribution to the history of Wall Street. A bit long and dry for casual readers, the book should be read by those with an interest in Goldman Sachs (new GS recruits, prospective GS partners, and those working for competitors), and by those with an interest in the development of investment banking and finance.

Family Matters
Family Matters
by Rohinton Mistry
Edition: Paperback
Price: CDN$ 15.67
31 used & new from CDN$ 2.33

5.0 out of 5 stars Outstanding Writer Tells Why Family Matters, Dec 26 2014
This review is from: Family Matters (Paperback)
Seven years after his outstanding and incredibly moving novel A Fine Balance, Mistry returns to Mumbai and weaves readers into the lives of Nariman Vakeel, a 79 year old retired professor, and his family. As the tapestry takes shape a complex thematic pattern emerges of aging, death, family, religion, politics, and duty. A truly immersive book; fantastic on every level, and a must read for lovers of literature.

Like a long, sinuous shot in the opening scene of a movie, Mistry plunges readers into 1990s Mumbai. No sooner do we have our bearings, though, than the family intrigue begins. Nariman’s health is in decline. He lives in the comfortable surroundings of his familial home, Chateau Felicity, along with his stepchildren Coomy and Jal. It is a situation Coomy resents, however, and when he suffers a fall she uses it as an excuse to move him to her stepsister’s - Nariman’s natural daughter’s - smaller and more cramped two bedroom home.

Nariman's biological daughter, Roxana, her husband Yezad and two young boys (Murad and Jehangir) live a short distance away, and his arrival brings out both the best and worst in their family. It strains their finances, cramps their space, and puts demands on their daily routine, and it precipitates some poor choices - especially by Yezad’s - with disastrous consequences. Paradoxically, though, the family treat’s Nariman with a humanity that was lacking at his step-daughter’s, and he is happy there.

Family history is unveiled bit by bit via daydreams, recollections and dialogue, which adds context to the present day’s unfolding events. Mistry’s strong writing skills foster a sense of intimacy with the family, even as we simultaneously get caught up in the sweeping vastness of India and its culture and current events. Through the omniscient narrator we watch family members make their choices, understanding that forces far from their control and events far in their past have led to each decision point. Nariman, for example, drifts into a daydream and we learn of his past - “his ill-considered liaison with that Goan woman” - but with that behind him, he had agreed to settle down. “That Goan woman,” his true love, happened to belong to the wrong religion, and his parents forbade the liaison. Although Nariman later ended up a good father to his unappreciative step-children, Mistry guides readers to ponder the implications of India’s religious, political and social barriers.

In addition to his exceptional character development, Mistry is a master of symbolism and evocation. For example, shortly following Nariman’s relocation from Coomy and Jal’s home to his Roxana’s place, he is disoriented from a sleep and turns his head to look “for the familiar bars on his window, and saw his grandson’s cot instead.” His family home had been a prison, but his daughter’s home - despite the emerging strains - was full of nurturing and life. As with King Lear, who Nariman at one point compares himself to, it is the simple acts of love that endure in family matters, while self-serving actions lead to tragedy.

Family Matters is an excellent addition to Rohinton Mistry’s prize-winning bookshelf (shortlisted four times for the Man Booker Prize), and is storytelling at its literary best.

The 100-Year-Old Man Who Climbed Out The Window And Disappeared
The 100-Year-Old Man Who Climbed Out The Window And Disappeared
by Jonas Jonasson
Edition: Paperback
Price: CDN$ 12.26
31 used & new from CDN$ 7.00

5.0 out of 5 stars Disappear into 100 Years of Adventure, Dec 26 2014
I purchased Jonas Jonasson’s book because I had heard it was good, because it had a captivating title and enticing but simple cover sketch, and because it was a modest length and therefore likely to be read cover to cover, even if it didn’t live up to the promise of my rigorous analysis. Sometimes - as on Disneyland’s pitch black Space Mountain roller coaster ride - not knowing what to expect enhances the ride, and Jonasson delivers a rollicking series of twists, turns and sharp corners spread out over 100 years (no surprise there) and a vast geography (to say more might spoil some of the surprise).

Unsurprisingly, the book begins with the hundred-year-old man climbing out his window, after which a series of unlikely events quickly transpire to hook the reader. Characters are introduced via their chance meeting with the hundred-year-old man, and their quirky backgrounds are explained with just enough detail to bring them to life, but with a humour and brevity that keeps the focus on the unfolding story. The protagonist is 100, after all, and one had better not dawdle when time might be short.

As with the best oral storytellers, Jonasson's main aim is to hold the audience's attention via the storyline.  The book's dedication sums up his goal well.  “No one was better at captivating an audience than Grandpa, when he sat on his favourite bench telling stories, leaning on his walking stick and chewing tobacco. ‘But Grandpa … Is that really true?’ we grandchildren would ask, wide-eyed. ‘Those who only says what is the truth, they’re not worth listening to,’ Grandpa replied.”

Jonasson learned much at his grandpa’s knee, and he introduces a second set of characters – well-known historical figures – in the hundred-year-old man's backstory. For them of course no introduction or background is needed, but they add an element of the fantastical and introduce a second plot-line that careens its way from 100 years ago into the present day and the 100-year-old man’s decision to climb out the window.

Just as characters are humorously drawn but serve primarily to advance the plot, fine details about the setting are spare, mostly adding humour rather than rich detail. For example, an aside about Iranian-British relations in the mid-twentieth century tells readers, “Oil provided fantastic wealth to both England and Iran. Mainly England, if truth be told, but that was only fair because Iran's sole contribution to the project was cheap labor – and of course the oil itself."

The book is an unusual blend of styles: with the humorous plot twists of a John Irving novel; a blend of fact and fiction as written by James Clavell or Ken Follett; the irreverence of Woody Allen; and a central character whose life resembles cinema’s Forest Gump, so grab a seat on the bench beside Jonasson as he tells a tale well worth listening to.

Capital in the Twenty-First Century
Capital in the Twenty-First Century
Price: CDN$ 11.22

0 of 1 people found the following review helpful
5.0 out of 5 stars A Capital Contribution to Economics and Public Policy, Nov. 19 2014
Have you wondered if "the dynamics of private capital accumulation inevitably lead to the concentration of wealth in ever fewer hands?" Many have, though until now most have answered the question based on either their station in life (I worked hard to get here / I can't seem to get ahead...) or their political views (government should stay out of citizens' lives / government should play a redistributive role and should help people who fall on hard times....) Thomas Picketty, a French economist, attempts to answer the question definitively, using rich but previously untapped historical data - data which has been long available as economic snapshots, but which he links together to form for the first time an illuminating and comprehensive time series.

Picketty spent fifteen years assembling the data for use in his longitudinal study, and though the longest series are for England and France, Picketty includes additional countries, such as the US, Germany, Japan, Italy, Australia, and Canada, as statistical records become available. The central conclusion drawn from the data is that capital grows more quickly than the broad economy (in economists' terms `r > g'), so those with capital - either self-made or inherited - maintain a natural and ever-widening gap over wage earners, who seldom are able to save enough to ride the capital growth train upwards.

The book is a curious mix of primary research and broad conclusions, directed at both professional economists and a lay audience. It is long - just under 700 pages including tables and notes - and divided into four sections: Income and Capital; The Dynamics of the Capital/Income Ratio; The Structure of Inequality; and Regulating Capital in the Twenty-First Century. The first three sections are an expansive discourse of the data, some underlying theory, and the logical economic conclusions that can be drawn from the data. The fourth section offers prescriptions for policy makers' consideration, including a global tax on capital, an estate tax, higher progressive income tax rates, and some consideration of the role of public debt in the distribution of wealth. Lest lay readers fear the book is too technical, there are only two short equations in the book, and Picketty explains both well.

The first equation (First Fundamental Law of Capitalism) links a country's capital stock (excluding human capital) to the flow of income from that capital. If we know the capital/income ratio, we can also determine the portion of per capita income from labor and from capital. For example, Picketty tells us that the average wealthy country had a per capita GDP in 2012 of about 30,000 Euros, with about 21,000 from labour and 9,000 from capital. Of course, some receive far more than 9,000 from capital, and many receive nothing - even having a negative income from capital once rent and other payments are considered. What is true as an average for the aggregate economy can produce wildly different incomes from capital amongst the populace - a much wider distribution (i.e. concentration) than could ever be true for income from labour.

The second equation (Second Fundamental Law of Capitalism) relates the capital/income ratio to the savings rate and the growth rate. "A country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income), which in turn can have a significant effect on the social structure and distribution of wealth." In other words, "in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire disproportionate importance." A very thought provoking equation for economies such as Japan and Western Europe where growth has slowed significantly and the average person has access to neither current wealth nor to significant growth opportunities.

Picketty explores the importance of both equations, including the evolution of capital and labour over time and their role in a modern economy. He includes some wonderful literary references (mostly Jane Austin and Honoré de Balzac, though with other literary and even some contemporary pop culture references), which highlights the central points for readers without a background in economics.

With the theory and history established, Picketty examines its impact, including the inequality of labor income, the inequality of capital ownership, and the conundrum of merit and inheritance. For example, Picketty spends a full subchapter on inherited wealth, and after examining the historical data he notes that "... it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime's labor by a wide margin, and the concentration of capital will attain extremely high levels - levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies." An interesting conclusion in light of the two equations noted above. Inheritance tax policies vary both amongst countries today and within a country over time; Picketty shows that the choice each makes has an impact on the dynamics of inequality.

Picketty also highlights the concentration of wealth (the share of a nation's wealth that the richest 10% or 1% own) over time. Compared to other points in history the US now has a particularly high concentration in the hands of the wealthy, which Picketty shows is in part due to the very generous pay of the top wage earners today. Top executives in the US, and to a lesser extent Britain, now earn such outsized wages compared to the average worker that they have leap-frogged into the capital class eschewing their historic role as part of a broader continuum of wealth distribution and instead ensconcing themselves at the rich end of a barbell. Slow economic growth or not, a very small subset of labour has found a way to beat their economic odds.

Those on the political right might be dismissive of the book - it's just a few sentences into the Introduction that the author references Karl Marx - but the work is so robust and comprehensive that they ignore the analysis at their peril. To be sure, Picketty uses Marx as a bit of a touchpoint, with sympathy for his sentiment but a critical eye to the areas he either ignored or got wrong. And while some of the author's array of policy prescriptions to counter capital's natural advantage will be anathema to current capital coddlers, they bear consideration because an ever-widening gap between rich and poor is unstable, and instability also threatens the monied class.

Like economists Galbraith and Hayek, Picketty writes with an engaging style, and his inclusion of occasional charts and graphs highlights the data and supports well his conclusions. The book is aptly titled, for it is about the role of capital in society, but if Picketty had chosen to emphasize the book's prescriptive fourth section, he might have chosen to call it "Stabilizing and Unstable Society", echoing economist Hyman Minsky rather than Marx. Like Minsky's seminal work thirty years earlier, this book takes some effort to read, but unlike Minsky's it is written with a lay audience in mind. An important work that will reward persevering readers, and that inevitably will add rigor to policy debates in all countries.

Divergent (Divergent Trilogy, Book 1)
Divergent (Divergent Trilogy, Book 1)
Offered by HarperCollins Publishers CA
Price: CDN$ 11.99

2.0 out of 5 stars hi, July 27 2014
This was a really short book. It also started in the middle of a story. It needs way more work!

Flash Boys: A Wall Street Revolt
Flash Boys: A Wall Street Revolt
Price: CDN$ 7.37

33 of 35 people found the following review helpful
5.0 out of 5 stars Wall Street Trades Integrity for Profit, April 1 2014
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In his first book, Liar's Poker, Michael Lewis sketched colourful and entertaining characters to show us the excesses of a Wall Street titan - Salomon Brothers - at the peak of its game. Later, in The Big Short, he used his considerable storytelling abilities and yet more colourful and entertaining characters to help explain the financial collapse of 2007. With his latest book, Flash Boys: A Wall Street Revolt, Lewis again weaves a compelling story with still more wonderful characters, but rather than chronicling a market excess or explaining post hoc a financial crisis, this time Lewis investigates, uncovers and reports on systematic Wall Street shenanigans by a small group of High Frequency Traders (HFT), their complicit and enabling stock exchanges, and the perverse regulations that permit or encourage the activity.

While the book is enjoyable and entertaining to read, what Lewis reports will anger and sadden most readers, for it becomes very clear as the book progresses how enormously the odds are stacked against most investors. In the beginning even "the most sophisticated investors didn't know what was going on in their own market. Not the big mutual funds, Fidelity and Vanguard. Not the big money management firms like T. Rowe Price and Janus Capital. Not even the most sophisticated hedge funds."

Flash Boys engages readers immediately with a story; the laying of a new and secret fibre optic cable between New Jersey and Chicago. The cable's sole purpose is to be straighter, and therefore shorter and faster, than the existing phone company links used by futures traders. Time is money, and the prohibitively high cost for the new fibre line is more than offset by the financial advantage (via an edge in trade execution) to the few firms who lease the line.

From this Lewis shifts to the integrity of programmed and algorithmic trading, then on to dark pools and several other trading strategies. Readers should not be put off by the industry jargon or the esoteric corner of finance that Mr. Lewis exposes. Each concept is introduced in turn and in the most concise and entertaining way possible. As both a liberal arts major and a former Wall Street insider, Lewis bests all other financial authors in taking complex issues and distilling them into memorable and understandable passages.

It seems no exposé of Wall Street's shortcomings is complete without an appearance by Goldman Sachs, and Lewis doesn't disappoint. Goldman's role, however, is modest. First, like all of the major investment banks, they employ `dark pools' where clients can trade anonymously and ostensibly for better execution, but where either the investment bank or, for a fee, an HFT firm will game the system to deliver poorer execution. The difference between good and poor execution is a small profit to the bank or HFT firm, repeated millions of times per day.

Second, Goldman saw there was even more profit in speedier execution and HFT, and to this end hired a Russian born computer programmer. Unfortunately, Goldman's systems were built atop years of antiquated and bloated code, and they never did realize the profits of smaller, sleeker HFT firms with all new coding. In any case, the Russian left Goldman and was subsequently convicted of stealing trade secrets. Just as Bob Dylan sang about Hurricane Carter, Lewis waxes poetic about the injustice, the ineptitude of investigators, and perverseness of Goldman's position in the matter.

The heroes of the book are Canadians: the Royal Bank of Canada in general, and Brad Katsuyama in particular. Of RBC, their `nice guy' image, and their desire to enter Wall Street, Lewis says "It was as if the Canadians had summoned the nerve to audition for a role in the school play, then turned up wearing a carrot costume." An inauspicious start to RBC's Wall Street push, but a perfect setup to Katsuyama's role in exposing the HFT inequities and eventually setting up his own rival stock exchange where investors cannot be fleeced.

Forty years after Bernstein and Woodward's investigative journalism changed the American political landscape, perhaps Lewis' sleuthing will foment change in capital market structure. An excellent book by a master at the top of his game.

Deep Risk: How History Informs Portfolio Design (Investing for Adults Book 3)
Deep Risk: How History Informs Portfolio Design (Investing for Adults Book 3)
Price: CDN$ 5.20

1 of 1 people found the following review helpful
5.0 out of 5 stars Deep Thinking on Deep Risk, Jan. 29 2014
This is the third installment in Bernstein's series of monographs for experienced investors. Looking back at a century of economic and financial data, Bernstein identifies four deep risks: inflation, deflation, confiscation, and devastation. These risks are different from the shorter term volatility of markets; they are the unlikely risks that traditional investors and ordinary folk will not recover from. In particular, he feels the Weimar Republic's hyperinflation is instructive - recall the images of German citizens hauling wheelbarrows of currency in order to buy bread - and the most relevant to today's potential inflationary pressures. Bernstein dedicates most of his effort to this risk.

Triumph of the Optimists: 101 Years of Global Investment Returns, an excellent but expensive book covering a hundred years of market data for 19 developed nations forms the basis of Mr. Bernstein's inflationary worries. The sweet spot for stock valuations - a P/E of about 17 - is when inflation is between 0% and 4%. Bernstein wisely cites correlation rather than cause and effect, during years "with the highest inflation, stocks did badly, losing an average of 12%, but bonds did even worse, losing 23%."

Looking at multi-year periods of high inflation though, the two major asset classes' returns couldn't be more different, with stock returns actually turning positive. "Although suffering from inflation in the short term, [stocks] protect against it in the long run." "Put another way, stocks protect against deep risk, but exacerbate shallow risk."

Stocks bring short term pain for long term gain, and the added bonus of a long term hedge against inflation. But as Bernstein points out in the first book in this series, The Ages of the Investor: A Critical Look at Life-Cycle Investing, holding stocks is easier said than done. The 83% drop in the market during the Great Depression would have been a numbingly deep risk for those going through it at the time. But that's Bernstein's point, after all, that we've been through enough of this before that thoughtful investors can step back and use history to guide them in guarding against certain risks.

Deflation, a second risk identified by Bernstein, is a terrible deep risk as central banks and governments have few tools to combat it, but thankfully its only real manifestation has been the 20 plus years of stagnation in Japan. Counter to conventional wisdom, Bernstein states that "although gold bullion provided little protection against inflation, it did superbly with deflation." It seems that investors hoarding the precious yellow metal may be hedging a different risk than they think.

The third and fourth risks, confiscation and devastation, have happened many times in the past, though there is little investors can do about it other than owning assets and businesses in foreign jurisdictions. Americans' restrictive tax reporting requirements on foreign bank accounts has acted as a sort of soft capital control, dissuading foreign banks from serving American clients, so in Bernstein's view real estate is likely the most practical hedge, though it requires ongoing upkeep. Bernstein notes that the US has confiscated assets in the past, for example in 1933 when citizens were required to turn in almost all gold holdings for $20.67 per ounce, and that today's ultra low interest rates are a form of confiscation for net savers who own any fixed income (i.e. almost every retiree).

There are a few typographical errors, at least one of which is substantive. In addition to gold as a deflation hedge, Bernstein recommends "treasury bills and bonds," which for some may conjure images of short term instruments, but what he means, as becomes clearer in the following paragraph, is long dated bonds. While the monograph is well written and concise, the author loves to use his own acronyms as shorthand, which can send readers flipping to previous pages to remind themselves of the meaning.

After his excellent analysis, Bernstein concludes that while all should be aware of the deep risks, many of the potential mitigating actions are impractical to implement or require an extremely long time horizon. Food for thought, and though many will be unable to dine, it is worthwhile to peruse the Deep Risk menu.

Skating Where the Puck Was: The Correlation Game in a Flat World (Investing for Adults Book 2)
Skating Where the Puck Was: The Correlation Game in a Flat World (Investing for Adults Book 2)
Price: CDN$ 3.27

5.0 out of 5 stars Bernstein Scores With Timely Insight, Jan. 20 2014
The second monograph in Bernstein's series of for experienced investors takes its title from Wayne Gretzky, who took his father's advice to "skate where the puck's going, not where it's been" to become the greatest hockey player of all time. Very few have been able to follow the same advice to investment success - Sir John Templeton and Yale's David Swensen are two examples - and sadly most end up skating to where the puck was, accepting market risk and market performance (less fees). The dual goals of market outperformance and lower risk are available in theory but not practice.

Bernstein explains why this is naturally so. Templeton with international investing and Swensen with non-traditional asset classes were pioneers who had considerable first-mover advantages. As others copied their successes the higher returns were whittled away, and the diversification benefits were eroded as the formerly non-correlated assets became more and more correlated. Swensen, who in his pioneering years enjoyed outsized returns for Yale's endowment, suffered just as much as the rest during the recent financial crisis as all asset classes - traditional and non-traditional alike - became highly correlated. In the words of MIT professor Andrew Lo, over time "alpha becomes beta". Any innovation leading to outperformance (alpha) eventually becomes widely available and part of regular market performance (beta).

Bernstein includes some very interesting perspective on commodities and precious metals futures, which have been used as both inflation and deflation hedges. Investors may want to rethink both their strategies and their convictions. With respect to investors' ability to take risk at all, he notes that it "may be a matter of character rather than training," and that those who can't stick with the market-based portion of their investments in downturns are part of the natural pendulum of asset prices, as they swing from unknown to popular to undesirable. Though he doesn't spend much time on it, his points will have readers reflecting on the merits of value and contrarian investing.

Still, the conventional wisdom about diversification is much better than the alternative (i.e. not diversifying), but it is unlikely to insulate portfolios from downturns (short-term risk, in Bernstein's words) in the way investors hope (see Swensen above). In a prelude to his third monograph, Deep Risk, Bernstein cautions investors to resign themselves "to the fact that diversifying among risky assets provides scant shelter from bad days or bad years, but that it does help protect against bad decades and generations, which can be far more destructive to wealth.

The Ages of the Investor: A Critical Look at Life-Cycle Investing
The Ages of the Investor: A Critical Look at Life-Cycle Investing
by William J. Bernstein
Edition: Paperback
Price: CDN$ 13.77
17 used & new from CDN$ 8.04

4.0 out of 5 stars Bernstein Bares Strategies for Retirement, Dec 16 2013
Verified Purchase(What's this?)
The first book in Bernstein’s “Investing for Adults” series is for those already “familiar with Gene Fama, Zvi Bodie, Jack Bogle, and Burton Malkiel, and understand that a mean variance optimizer does not blend vegetables.” At 43 pages it is more of a monograph than a book. It is not intended for the general public, but rather for practiced investors, financial practitioners, financial theorists, and perhaps some regulators and policy makers. Of the aforementioned groups, financial practitioners will find it most useful.

Bernstein focusses on three ages: young investors; middle age; and retirement. Because of their considerable human capital, “it’s virtually impossible for young workers to employ their capital too aggressively," he says. Bernstein then highlights various methods to actually increase risk above that of a 100% equity portfolio: leverage and leveraged funds; options; and tilting equity holdings to small value stocks (following Fama & French), plus some exposure to emerging markets.

Using historical data, the strategies would have worked well, but Bernstein cautions that beginning investors are more risk averse - they have less experience and less wealth (greater wealth increases risk tolerance, Bernstein claims) - and are unlikely to stomach his prescription.

Bernstein also spends some time on the math involved, and unfortunately, even with a long time horizon the strategy he recommends is not foolproof. "Risks experienced in multiple time periods over a long time horizon multiply, not cancel out." “The probability of semi-bad outcomes decreases over time, but the probability of very bad outcomes increases.”

For those who are truly risk averse, Bernstein notes that it is likely impractical for them to save using purely risk-free assets. "If you want 30 years of retirement, and you want to do it with ... Treasuries ... you'll need to save half of your salary during the three decades you are working." Yikes - an even worse outcome than the uncertainty and volatility inherent in the leveraged equity prescription.

Further, most return scenarios work best starting with a lump sum rather than an ongoing series of periodic investments (in particular when there’s a high equity risk premium). Alas, large lump sums are, inheritances aside, beyond the reach of most young investors. As Churchill is reported to have said, “saving is a very fine thing, especially when your parents have done it for you,” but even then the inheritance often comes in middle age.

Bernstein tackles retirement next, leaving the middle years to last. Those preparing for retirement should first look to hedge as much risk cash flow as possible (liability matching) beyond any defined benefit pension plans they may already have, using annuities and TIPS, and by deferring social security (an incredible deal, Bernstein says).

As for the balance of retirees’ investments, in volatile markets the need for regular withdrawals poses a challenge opposite to the ‘dollar-cost-averaging’ opportunity presented to young investors. Bernstein warns "If you've counted on your stock holdings to see you through retirement, you're likely to be seriously disappointed." Even balanced investors need to take note. “The theoretical retiree who began to draw down on his or her nest egg at a real rate of 7% on January 1, 1966 ran out of money in about 13 years, no matter what his or her stock/bond mix was." Yikes again.

The middle years are harder to pin down, and Bernstein wisely leaves advice to this group to the end. So much depends on the results of the earlier years (excess or deficiency of savings) and one’s target retirement age and life expectancy - in essence a residual of the younger and older plans.

Bernstein draws on the good work of other authors, and cites frequently from CFA Institute’s Financial Analyst Journal. His retirement scenarios are illustrative and draw together well much of the work presented earlier in the book.

Despite the book’s many strengths, Bernstein unfortunately ignores the impact of taxes on different asset classes and the significant impact this will inevitably have on compound growth or spending. As well, he is selective with his input numbers in order to underscore points. In one example he shows the impact of three different real yields on the depletion rate of a portfolio. In another, he cites the impact of a 3% inflation rate. Why three variables in the first example and one in the next, emphasizing variability in the first case but certainty in the second.

Ages of the Investor is thought provoking, and a reminder of how capricious are many of our modern retirement assumptions. The sobering reality is that many, many people will not save even close to what they need to retire in the manner they've become accustomed to. And like our early years’ risk aversion, Bernstein notes that in our accumulation years we succumb to hedonistic needs - a desire to ‘keep up with the joneses’ - which makes it even more difficult to forgo current spending and save enough for retirement. With the vagaries of future inflation and market returns, striking an optimal portfolio mix is a challenge for even the most thoughtful investors. Bernstein’s book, at least, will help set readers on the best possible path.

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