Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace Hardcover – Jun 19 2009
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The Wall Street Journal Bestseller - Hardcover Business
From the Back Cover
“Read Jack Ablin's ‘five factor' approach to investing and you not only will sleep better at night, you'll be a smarter, wiser human being. Ablin takes you on his twenty-year journey toward a unified, rational approach to investing that can help you weather even the most turbulent financial storms. This book may be one of the best investments you will ever make.”
--John Callaway, Senior Correspondent, WTTW, Public Television
“This book is based on verifiable data trends and years of experience with a broad array of economic and market numbers. Regret over investment losses need not lead investors to disengage their brains or to be robbed again by schemes hawked as ‘new and improved.'Reading Minds and Marketswill help jump-start an honest investment dialogue that has been sidetracked by excesses of greed and fear.”
--Bill Barnhart, Former Financial Editor and Columnist for the Chicago Tribune
“The author has taken the complex world of investing and provided an extremely practical approach to success where others have failed miserably. His grasp of the financial markets makes him eminently qualified to develop an extremely sound and practical approach in order to protect and enhance wealth for investors.”
--Edward (“Ned”) Riley, Jr., Former Chief Investment Officer for State Street Global Advisors and Chief Investment Officer, Riley Asset Management
“With nearly three decades of experience, Jack Ablin's superb intellectual thinking is reflected inReading Minds and Markets. This is great reading for the motivated investor.”
--Professor Israel Shaked, Finance and Economics Department, Boston University, School of Management
Youcando more to protect yourself from market risks and down markets. The secret: Understand the big picture and know when to shift money toward more promising industry groups, sectors, or asset classes. This strategy is called “global macro investing”--and, as Chief Investment Officer for Harris Private Bank, Jack Ablin has used it to deliver results for many of the world's wealthiest families and individuals.
InReading Minds and Markets,Ablin distills his techniques into a remarkably simple, commonsense five-step plan thatanyinvestor can use. You'll discover how to anticipate some of the more significant shifts in global markets and move investments toward areas that are more likely to grow. Equally important, you'll learn how to overcome bad habits that inevitably lead to failure--habits all too often reinforced by the financial media.
In today's unforgiving markets, you need to make smarter high-level decisionsandfewer mistakes: This book will help you do both.
- Why youmusttake a top-down view of the market--and how to do itSee all Product Description
Avoid getting caught off-guard in choppy, highly volatile marketsRespond to the market's powerful signals about relative risk
Master strategies for improving return without increasing riskDiscover the five factors that consistently tell you where to invest
Cut through the clutter of irrelevant data: find what matters and use itStop being your own worst enemy
Overcome the #1 obstacle to structuring your best portfolio: human nature
Most Helpful Customer Reviews on Amazon.com (beta)
These two questions are important because Jack Ablin's "global macro" strategy is not for beginning investors nor is it for people who are not able to make running their portfolio one of their core activities. Implementing Ablin's strategy will require a substantial amount of planning and setup activity and, depending on how complex your models become, probably a significant time commitment once things are up and running.
In addition, you must be able to commit enough capital to the strategy to make all the work worthwhile. The global macro strategy would be an insane amount of effort for portfolios that are smaller than the minimum initial investment (typically somewhere between $250k and $500k) for a customized account run by a professional manager.
OK--if all that didn't make you too discouraged--let's say you're game to check out the strategy. You'll find Reading Minds and Markets to be a good primer on how many big money managers, such as private bankers and high-net worth advisors, make asset allocation decisions. Ablin describes, in fairly broad terms, the five macro factors he uses to select asset classes, countries, and economic sectors. There is some useful discussion about edge and why it's important to invest globally, but the main focus is on explaining the key data that drive his strategy and tactics. It is left to readers to move themselves beyond these first theoretical building blocks and actually build a robust and useful model. Ablin doesn't provide much guidance on choosing benchmarks, portfolio diversification, or risk management either.
Bottom line: Reading Minds and Markets describes, at a 30,000-foot level, an investing strategy that is used by professional money managers. As such, the book will be most useful for readers who have some experience managing their own portfolios and are ready to move beyond indexing by rote, choosing individual equities on gut feel, or relying on mutual funds. Also, keep in mind that this book is just a starting point and doesn't contain the sort of granular detail a full how-to guide would have as a matter of course. 3.5 stars, rounded up to 4 for to a data-centric, hype-free approach to investing.
Additional books to read if the global macro strategy appeals to you:
The Only Three Questions That Count (Fisher)-another top-down strategy
Unconventional Success (Swensen)-all about asset allocation from the manager of Yale's endowment
Trend Following (Covel)-why bother forecasting and building models?
Beyond Greed and Fear (Shefrin)-influential book about behavioral finance
Fooled by Randomness(Taleb)-were you good or were you just lucky?
Ablin accurately identifies the major misconception among small investors that the way to invest is by stock picking. He spends a good deal of time showing the futility of the exercise for any little guy because he is up against highly sophisticated investors in NY and elsewhere. Instead he teaches why focusing on the big picture is best and how that is the path best taken by prudent do-it-yourself investors. One of the things I really liked was the author's intense effort to remind the reader that this is not a get rich quick book. He lays out how his strategy of identifying what he calls "metrics" is for finding long term trends for various asset classes in an attempt to ride multi-year type moves. If you want to know if you should buy IBM or McDonald's you have the wrong book but if you want to decide between the US market and foreign markets this is the guy. I think both weekend warriors and the pros would be well served to crack open this book.
Specific deficiences include:
* He promises a new world of "global macro" then spends exactly two pages on international markets. There is no insight here into global or macro. (you'll want to admire the shiny globe on the cover because that's the last global thing you'll find here)
* The asset allocation offered is absolutely ancient: decision 1 is "stocks or bonds," decision 2 is "which kind of stocks (foreign is listed but no insights), decision 3 is which sector or style (style + sector), decision 4 is which funds. That's fine, but brings nothing new to this framework and nothing on alternatives (commodities) or options or ETF (okay a half page, not helpful). In other words, the asset allocation strategy here is both ancient and not really actionable. I dare you to actually construct a portfolio with this recipe.
* Here is the worst problem, in all seriousness: because this is offered as advice and because the advice is absolutely routine, this is a recipe for following the crowd. I wouldn't mind that if it were fundamental, value-based strategy that truly does minimize risk but the metrics include P/E. His promotion of P/E metric as-it-appears is so lazy (bordering on malpractice) that your average finance undergrad can surely write you something more informative about the modern use of P/E ratio. To promote P/E ratio investing (buy low PE) without some meaningful color or detail (his incessant equivocation doesn't count!) on the associated challenges (e.g., which flavor? earnings-based distortions? benchmarking challenges?) is not good.
* The first factor (momentum) is probably important, but as it equivocates without meaningful guidance, it is absolutely not actionable.
* Also, as the author works in private banking, the total omission of suitability (i.e., recognizing the portfolio needs to adjust to your individual needs and risk appetite) and tax perspectives is just unforgivable.
... I am not criticizing the strategy per se, but rather the lazy presentation of a half-backed strategy. If liquidity, momentum, and P/E ratio are seriously your metrics, you should take them seriously.
...and don't get me started with the Fed model...I understand there can be a debate and some will use it to allocate, but lordly lord, you've got to situate these ancient metrics against their devil's advocate.
The book is filled with equivocations (follow the trend but be careful; buy low P/E but be careful it's not always right). Equivocation per se adds no value; investors already know that no rule is iron clad. You gotta be specific.
In short: a breezy brochure of an aging sort of asset allocation, sans global, sans alternative perspectives; promotes P/E, momentum, Fed model; not a single fresh insight; not informed of modern practices; if it were a formula (and thankfully, it isn't specific enough to be actionable), it would be a formula for following the herd, or the herd running thirty years ago.
In the beginning of the book, the author attacks the efficient markets hypothesis (EMH). This was to be expected from a professional money manager, because even the weak form of the EMH states that you cannot make money off technical or fundamental analysis. There have been tons of empirical evidence showing support that US markets are at least weak form efficient, and plenty of research supporting that US markets are semi-strong form efficient (i.e., prices incorporate all publicly-available information). In addition, the author selectively cites evidence (including a quote from Warren Buffett) to show that EMH does not hold in practice and, like many anomalies that have been reported, selectively chooses certain events that would be contrary to market efficiency. However, as previously mentioned, the book does not discuss the magnitude of evidence that shows the US stock market is efficient.
The author once again name drops Warren Buffet and how Buffet describes the existence of "pockets of inefficiency" that canny investors can take advantage of. However, the author fails to realize that this argument IS consistent with market efficiency. In fact, the behavior of investors to trade on these inefficiencies eliminates such profit opportunities, and causes the market price to move to its correct value. Hence, such inefficiencies only last for short periods of time and then they vanish. Therefore, for all practical purposes, a non-professional investor cannot make money of these inefficiencies and professional money managers cannot consistently find these.
This book contains lots of figures and data and starts off with the difficulty that individual investors have in accessing such information. The author describes how expensive the data sources are (which is true), and how professional money managers have access to such information. This seems to imply that one should leave investing to the professional money manager. However, this argument fails to consider whether the individual's ability to choose investments is worse than the individual's ability to choose a money manager. To see why, if the individual does not know how to choose a money manager and chooses one that runs a Ponzi scheme, then he or she would have lost all her money. On the other hand, if the investor had invested by himself or herself it would probably be unlikely that his or her entire investment would be wiped out.
With all the discussion of data and how the data can be used, the author does not include what is the most important lesson from the recent financial crisis - correlation between assets increases substantially during stressful market conditions. What does this mean? In the past, data is used by backtesting over several years (e.g., 10 years or 20 years). However, analysis over such long periods do not show the substantial increase in the correlation during economic downturns. In particular, we have learned during the latest financial crisis that correlation between asets is substantially greater during downturns than they were during normal market conditions. In other words, as one asset falls substantially, other assets follow suit. For example, people thought that by purchasing securities backed by houses in California and Florida their investment would not have been that highly correlated. However, people failed to realize that the same underlying determinants of value affected both markets, which caused sharp simultaneous declines in California and Florida housing prices during stressful market conditions.
Now, let's go to the "meat" of the book - the so-called "Five Factors." The first factor is called momentum, and the author advocates the use of moving averages. Buy and sell decisiona are done based on the trend relative to the moving average. However, one has to be careful about using trends to predict how stocks are going to react. Stock prices have been shown to follow a random walk. A mountain of evidence has been published that show stock returns are not predictable from one period to the next.
The second factor is the economy, and I would have to genearlly agree with the author on this factor. Finance theory tells us that investors are compensated for taking on market risk, because market risk cannot be diversified away. Therefore, one has to pay attention to which stocks are more or less sensitive to the movements in the market, or what is known as beta.
The third factor is liquidity, which I would agree is important because if funding dries up then defaults occur. When defaults occur, many other problems arise. Also, if a big enough company defaults, then a systemic problem may ensue.
The fourth factor is psychology, which does plague many individual investors. The author devotes 28 pages to discuss this topic and then warns the reader "not to succumb to the temptation to use market sentiment indicators." I understand that this should not be the sole factor, but he goes on to say that this should not be the "primary factor in your decision-making process." There are only five of these factors among the hundreds of possibilities that the author chose to include in his book, if psychology should not be a primary factor then why even spend the time to include it.
Finally, we have fundamentals and valuation. The author advocates the use of relative valuation in determining which investments are attractive. I would agree that relative valuation is the tool to determine whether one asset is cheap or expensive relative to other similar assets. However, the author fails to explain how difficult it is to find perfect competitors to a company. Therefore, judgment needs to be used (preferably by someone with expertise) to determine which comparables are used and what adjustments, if any, need to be made to make the comparison of values between firms meaningful.
In summary, this book follows the following general style: We have been taught X. Oh, look at what recently happened which shows evidence that X is wrong. I did Y and it did better than what these people following X did. So, X must be wrong and you should use my Y. Then, they find reasons why Y is the right thing (Ironically, this last step is what the author calls as "deductive reasoning," which he finds flaws in (see pages 53-4).)
Might an individual investor try to implement a rough version of this strategy within a mutual fund family that allows no/low-cost transfers? Maybe. But the book assumes investments at the granularity of individual stocks and doesn't touch upon the issue of having multiple "baskets" of stocks whose compositions are controlled by someone else with different objectives. And there is still the significant knowledge and effort required of the investor. Similarly for ETFs.
Might this book be a good introduction for someone who has suddenly acquired a large portfolio, such as an inheritance, and needs to choose and then interact with a professional investment advisor? Probably not: There is no advice relevant to this aspect.
This book has the feel of an extended version of the sales presentation that the author would give to potential customers of his bank's investment services. It feels like it was dictated to McGee, who then had time to clean it up only the basics. One sign of this is that sections of the book come across as an infomercial. Another is that virtually all of the supposed "how-to" advice on implementing the strategy comes across as "This is so knowledge- and labor-intensive that it needs a team of professional analysts." The author repeatedly talks about how he and his team build a model and then assembled and analyzed data covering many years (typically about 20 years) to find a helpful signal. Note: This is about areas where the book says the investor needs to be working, not the areas where it (legitimately) points out that you cannot compete with professional analysts.
While the book makes an argument for this strategy ("You should"), it provides no help in even starting to pursue it ("How to"). The anecdotes mention various categories of data, but the book provides no advice on how an individual investor might get practical access to that data. For example, it talks about using the 200-day moving average. While it is trivial to check this for an individual stock, the strategy involves monitoring hundreds of stocks (owned and under consideration) as just a small part of what you need to do. Neither does the book mention, much less assess, any investing tools/services that are a good fit to this strategy.
How to use the data is almost always in the form of a basic definition and then a few anecdotes, as are the cautions about interactions ("Metrics A and B were giving me opposite signals about stock X so I realized C."), leaving the reader in the dangerous position of not knowing how much they don't know. In discussing using momentum, the author claims that the 200- and 50-day moving averages can be used to signal buys and sells. This is inexcusably simplistic advice, especially at a time like this: In a recovery, the momentum signaled can be that of the general stock market itself, not the individual stock. Even in normal times, these averages are unreliable signals and should be used only as a filter to alert you to stocks that warrant a closer look.
I normally read a book in one or two days, and I rarely stop within a chapter. This book took me two weeks to finish, and that was only because I pushed myself so I could write this review (to satisfy my obligation to the Vine program). I kept putting the book down because it wasn't telling me anything new or useful. Note: Books that cover old ground can be useful/entertaining if they cause you to think about things in a different way, for example, the interaction of two things you learned separately. I found none of that in this book.
---- Optional: examples on why I say it is written for an absolute novice ----
Half the book (6 chapters, 96 pages) is an introduction to investing based heavily on anecdotes (versus using anecdotes to make more memorable what has been presented). It will not help a novice get started, but by mentioning terms and concepts, it might reduce the memory load during subsequent presentations. However, I would recommend the novice simply skip this book and start with a better introduction.
This book repeatedly explains the events of 2007-2008 (housing crash, CDOs, credit freeze ...) as if it was new information to the reader. The sophistication of the explanations is at or below the level in the Main Stream Media (not including the serious financial press).
The chapter on "Metrics" starts by defining the term, then argues that metrics are important, and then providing a very few examples. I suspect that a reasonably intelligent novice would find this chapter obvious and worse.
Analogies that are mentioned but not developed, thus providing no explanatory or mnemonic value. Intent seems to be to simply reassure the (novice) reader. Examples: Building a portfolio and a house; the economy is like a ship; liquidity is like gasoline.