New Books Pitch Investment Strategies
The market's crash during the past year has discredited many of the informal rules that investors rely on. Safe havens such as health-care and utility stocks dropped almost as much as the rest of the market, and many supposedly low-risk bond funds cratered because of the credit crunch. With conventional wisdom so upended, it's worth perusing the latest crop of investment strategy books to sort out which ones offer fresh guidance.
Some of the most recent continue to present standard stock-picking advice. Money manager James Altucher's The Forever Portfolio and hedge fund manager Howard Lindzon's The Wallstrip Edge: Using Trends to Make Money both include solid suggestions about how to research individual stocks and long-term demographic trends, as well as details on deciding when to buy or sell. But both also feel slightly dated. Altucher's chapter on the strength of ultra-luxury brands in a recession, for example, hasn't proved true in this market downturn.
Money manager Alexander Green offers a more systematic approach in The Gone Fishin' Portfolio. Green gets off to a good start, accurately noting the long-term benefits of diversification and of minimizing fees by using index-based funds. But his suggestion that investors use a fixed allocation to 10 different exchange-traded funds (including U.S. stocks, high-yield bonds, and real estate investment trusts) didn't look so great once markets across the world started to fall in unison last year.
The Green portfolio would have lost 28% in 2008, better than the Standard & Poor's 500-stock index's 37% loss but considerably worse than a portfolio of 60% stocks and 40% bonds. Using that mix with two total market ETFs Green recommends would have brought a 19% loss. And while gold was a bright spot last year, Green included an ETF of gold-mining stocks, which performed dismally, instead of an ETF investing directly in the precious metal. It's fair to argue that Green's portfolio should be judged over longer periods, but making up losses on the scale of the current bear market could take a decade or more.
The most useful recent book could be The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, by money managers Mebane Faber and Eric Richardson, who work at Cambria Investment Management. They analyze how the endowments of Harvard and Yale posted such world-beating performance. Then they offer a simplified model that regular people can adopt.
Their system starts with an equal mix of funds investing in U.S. and foreign stocks, bonds, real estate, and commodities. Although the universities include hedge funds, leveraged buyout funds, and venture capital plays, the authors excluded them because they aren't generally available to individual investors. And instead of staying fully invested at all times, the authors offer a useful warning system: If at the end of a month any fund is trading for less than its average price over the previous 10 months, move into cash until the price exceeds the 10-month average again. That average price could be higher or lower than when you bought, but it's a good measure that an upward trend has run out of steam.
The great irony of the book is that Yale and Harvard are suddenly suffering from their worst performance on record due in part to losses on hedge funds and LBO funds. Faber and Richardson's system, thanks to the timing element that put 80% of assets in cash last year, actually did far better, gaining 1.3%. Maybe the investing gurus at Yale and Harvard should take heed.