While I like to think of books in the same category as groceries, an essential part of everyday life, they get more attention as the holidays approach. Newspaper coverage increases, the best titles from the previous year are highlighted, and gift ideas for book lovers are suggested. With this extra attention, the new release calendar gets crowded at the end of the year.
In following, I thought it might be interesting to examine a few books that have crossed my desk in recent weeks.
Investing at Level 3 – James Cloonan (AAII)
James Cloonan is the founder of the American Association of Individual Investors (AAII). Many people are aware of AAII through the market sentiment numbers that are noted by various financial outlets. The subscription based site (aaii.com, $29 per year) offers several resources for individual investors as well as local chapters and events.
In the past, I have remarked on the monthly updated stock screens based on the ideas of many well-known investors and thinkers. Available in spreadsheet form for further research, the strategies are also tracked for return and compared to market indices over time. Included are screens based on Buffett, Graham, Greenblatt, Piotroski, as well as Earning Estimate Revisions. Many of the successful approaches highlighted in the book What Works on Wall Street are also in the screen library.
The new book keeps in the spirit of the web site, offering long term approaches for active and passive investors. The author cites the advantages of long term individual investors which include the fact that they answer to only themselves, and can go in areas that institutional investors cannot.
Cloonan sees weakness in using volatility to measure risk much in the way value investors question it. He believes that standard deviation does not give a full enough picture of investment risk. The approaches he ultimately embraces address the factors that drag down a portfolio such as transaction and management costs, as well as tax considerations.
While the numbers he states that an investor can achieve may be criticized (12-13 percent passive, 15% active), he bases them on history. I tend to view the return assumptions as aggressive but that may be because I am a pessimist while Cloonan is an optimist. It comes down to how unique you view domestic performance over the last ninety years. The author does address the issue of a unique time-period where results fail to meet even the lowest expectations.
The passive strategy he proposes has grounding in data from U.S. markets over the last century. Small Caps have outperformed Large Cap stocks as one can see using information from the 2016 SBBI Yearbook (Wiley). From 1926-2015, the compound annual return for Large Cap Stocks was 10 percent while their Small Cap counterparts generated 12 percent. From the same data set and publication, small cap stocks were the highest performing asset in 61 out of 71 rolling 20 year periods. (Measured against Large Cap Stocks, Government Bonds, Treasury Bills, and Inflation)
Thus, Cloonan uses an equal weighting strategy with ETFs to get a small cap tilt without losing those benefits to transaction costs. He advises that an active long term individual investor can delve into smaller cap stocks and not face the same restrictions fund managers face. An extra benefit here is lower analyst coverage.
The active strategy he proposes adds a value tilt, which historically has provided another layer of return. There is a lot of material in the book and behavioral research is addressed as well. Ultimately, the idea that there is also a risk in being too conservative is one that needs to be thought about. That people never see alternative results probably minimizes regret, but a personal optimum path should be considered. Additionally, many people already have financial components in their life that have bond like returns and security such as defined benefit pensions. (Though this particular perk is rapidly disappearing.)
There are advantages to aggressiveness and Cloonan examines the costs and benefits of different levels of safety. While not everyone can pull it off, looking at investing this way can result in accumulating a lot more money.
For those who want to see whether Cloonan’s approach is for them, there is a good deal of information about the book at the AAII order page for the title. (www.aaii.com/level3). This includes an interview with the author as well as a detailed description of the contents.
Great Investment Ideas – William Ziemba (World Scientific)
William Ziemba is one researcher who has had his hand in both the gambling and investment areas throughout his career. Thirty years ago, he co-authored two well received books that delved deeply into the subject of horse racing pool arbitrage. His new book is part of a series of finance books by World Scientific. Three years ago, Mr. Ziemba co-authored a book in the series with his daughter Rachel culled from articles written for the magazine Wilmott. Called Investing in the Modern Age, that volume covered a variety of subjects including betting theory, horse racing, and stock market analysis.
Great Investment Ideas is a collection of research papers published in the last two decades pertaining to investing. There is a great deal of material on Kelly Capital Growth Investing which employs the famous formula devised by John Kelly and used for optimal bet sizing in the gambling and investment worlds. The book covers the plusses and minuses of the strategy in several chapters as well as the author’s response to Paul Samuelson’s objections to literature on the subject. The key takeaway is that while that while the approach can grow a portfolio to a huge percentage of starting capital that does not mean that it optimizes safety. Winning strategies can generate large losses using Kelly percentage bets.
The book contains sections on seasonality in investing and calendar anomalies. There is a chapter on using different approaches depending on the party of the current President as well as taking advantage of the election cycle. Another subject covered is the author’s attempts to develop a formula superior to the Sharpe Ratio in identifying great investors. The Sharpe Ratio punishes both upside and downside volatility and the model Mr. Ziemba builds addresses this. The issue of market timing and methods of identifying bubbles also get some ink here.
In late November this title was available as a Nook book at Barnes and Noble for $16.99 and as a paperback for 26.76.
2017 marks the 50th year of the Stock Trader’s Almanac, authored by Jeffrey and Yale Hirsch. For those unfamiliar with the book, it combines a wealth of market seasonality information with a daily planner. There is a lot of data here on market performance both historical and tailored for different time periods. Each day includes an interesting or inspirational quote along with a probability of an up day for major market indices based on the historical record.
The presidential cycle has often been represented here and there are several pieces throughout the year devoted to it. If there is something that is lost in the move to electronic planners and calendars, it is probably history. I often find myself looking back at previous year’s planners just to get a feel for what was going on in my life at the time. One quibble I have is that with the current publication being spiral bound like most planners, I kind of miss the sturdier book format of year’s past.
The UK Stock Market Almanac 2017 (Harriman) fulfills much the same function with the focus on Europe. It offers the chance to learn about a new market while tracking your daily comings and goings. Where each day in the Hirsch publication has inspirational quotes, this version offers a mix of history and scheduled market and economic events. Positive historical percentage, average return, as well as standard deviation for the FTSE 100, FTSE 250, S&P 500, and Nikkei 225 is presented in daily, weekly, and monthly form. The second section of the book contains statistical data, sector information, and performance data for UK companies.
As much of the material in specific almanacs is repeated each year, alternating types of planners will allow exposure to different markets. The books are useful in that as you schedule appointments, track investment ideas, etc.; you find seasonal approaches for the months that you are in.
Of course, if you have totally moved to using an online calendar, the format is less useful. In any case, if you are the type of person who uses a planner even just for to-do lists, these are a couple of nice options
Now in its fourth iteration, Champions strength has always been a chance for racing enthusiasts to look through the past performances of the best horses from the 1890’s to the present. As in previous versions, the decades are catalogued and illustrated, but the heart of the volume is those familiar PPs. The lifetime records of every divisional champion over the time frame are presented. For veteran handicappers used to reading the format each day you can trace a lifetime of wagers, as well as the opportunity to witness history.
The past performances track the changes in the game over the years. What stands out the most is race frequency. Even looking back 30 years to the champion Lady’s Secret the opportunity existed to see her run every three weeks. In the middle of 1985, she won five graded stakes in a span of a little over a couple of months. Then there are the non-Triple Crown winners like Native Dancer whose Eisenhower era exploits look amazing in the light of today’s reduced race schedules.
When the first version of Champions appeared in 2000, speed figures were not included because they were not a part of the Racing Form until the last decade covered. There are now over twenty years of figures and it is interesting to compare numbers across generations. In the new book, figures appear for races from 1992 to 2015. The work of Beyer and Associates can spark conversations over which horses were truly the best of the decade they represent. For those retired early the numbers hint at what might have been.
You can also compare current year contenders to the Champions of the past. It is useful for gauging career arc and remembering the seemingly invincible often fail.
It is a fun read for anyone who has bet on horses over the decades. The coffee-table book is available through the Daily Racing Form website.
On the Horizon
Ed Thorp has an amazing resume, straddling the worlds of gambling, trading, and investing. He solved the puzzle of 21, and wrote about it over 50 years ago in Beat The Dealer. He moved into the world of finance and investing and Jack Schwager states in Hedge Fund Market Wizards (2012) that his hedge fund generated a gross return of greater than 19% over a period of close to 20 years. Along the way, Thorp was a pioneer in option pricing methodology.
In addition to being interviewed for the Schwager title, Thorp has been featured in Fortune’s Formula (2005) by William Poundstone; which traces the history of the Kelly type wagering and investing. He also a major player in Scott Patterson’s The Quants (2010).
Mr. Thorp will relay his own story in A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market. The scheduled release date is late January with a foreword by Nassim Taleb.