Book Review: "Your Money & Your Brain"

"Your Money & Your Brain" explains just how stupid you really are  

I've heard this mentioned a couple of times and so, when I saw it on the shelves at the local library (what, you don't cruise the 332 section of the library just on spec?) I picked up Jason Zweig's "Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich."   I liked it.

I dislike the subtitle, though.  I bet there was a huge battle about it between the author and the publisher.  "I'm not telling them how it will make them rich!"  "You have to pretend to say that to sell the book!"  It's really not about how to make you rich.  It's how to try to keep you from being so stupid that you lose your money.  His basic premise is that human brains did not evolve to handle investment decisions and will almost always reflexively choose the wrong solution to every financial puzzle.  He wants you to fight these reflexes and use your REFLECTIVE brain, instead.  He points out common thought traps and some solutions for navigating around them.  This book is all about staring at human frailties and then dealing with them.   He starts out each chapter with a homey little anecdote: does bread always land butter side down?  How come?  And then he goes into the science of what ever he's talking about.  It kept my attention almost the entire way through.  Just when it started to drag a bit I discovered that the last quarter of the book are appendices.  (He and his publisher probably fought about *that*, too.)

The author is a journalist, not a scientist, and I think it's important to realize that pop science writing like this is probably about as accurate as Wishbone's version of Don Quixote.  But, speaking as someone who learned most of the opera she knows from an episode of Gilligan's Island, sometimes pop culture *is* the best lens through which to learn this stuff.  I thought this book was worth the read and his warnings were well worth heeding.

In brief, he wants you to stop and think.  If you like a stock at $x, why wouldn't you want to buy more when it goes on sale?  Instead, people tend to sell when a stock drops.  Don't do that.  Buy the company, not the stock.    He writes:

Take the global view.
Hope for the best, but expect the worst.
Investigate, then invest.
Never say always.
Know what you don't know.

The past is not prologue.
Weigh what they say.
If it sounds too good to be true, it probably is.
Costs are killers.
Eggs go splat.

Think twice, get it?

By the way, he thinks you should stick all your money in a Vanguard Target retirement fund and be done with it.   I'm inclined to agree.

Book Review: "Show Me the Money"

First, buy a stock right before it goes up...  

One of my clients passed along a book for me to read: "Show Me The Money: Covered Calls and Naked Puts for a Monthly Cash Income" by Ron Groenke.    It was all about the uses of covered calls and naked puts and how much money a few good stocks you have in your portfolio could make for you by selling these options to other people, essentially making money renting out the option to buy your stocks to people.  What a grand idea: ignore dividends and capital appreciation, just make money because you OWN the stocks.   I read it with some interest.

It goes like this:  first you use your superior stock picking skills (or buy his software) to pick good stocks that are about to go up.  You can tell which ones those are from their technical charts, they're the ones currently at their 52 week lows, among other criteria.

Then you sell options at a high premium, something like 10% of the stock's underlying value, knowing that it's likely to expire.  Apparently someone will take the other side of this trade because someone somewhere wants to pay high premiums for things that are likely to be worthless to them.  Which is interesting, because every time I've looked at this the premiums are so low that the commissions eat a significant portion of their value.   But, anyway, the way he tells it you just buy these great stocks and sell people the option to buy them from you for good money.

Then you sit back and let the money flow, putting on new covered calls every month or three on the same stocks as they keep expiring worthless, picking fruit from your money tree.  (Without, of course, the premium people are willing to pay being reduced.)

The book thoughtfully takes you through a gedanken exercise where some of your stock picks go bad.  After all, it happens to the best of people (although what could go wrong when you buy a stock at its 52 week low?  It's already low!  It must be about to make a sine wave shape!)  The author allows that maybe 15% of the time you could lose a little money.  He figures that you'll make some capital gains along the way when you have to produce a stock for an accepted call at prices above your cost, and that will more than offset any commissions you might have to pay on these calls so he discounts that in his calculation.

See, it can't go wrong!  o.O

As a tax accountant I truly hate the options markets.  My clients always lose money.  Always always lose money.  It's like the new Amway pyramids: someone somewhere made it work for a while and passed along a rumor that they got rich and it just sends droves of pawns into the market.  Oh, there'll be wins.  Short-term capital gains wins, that is.  In MA short-term capital gains are taxed at 12%, so someone in the Federal 25% bracket will pay 37% of their winnings to taxes.  But, of course, they don't have winnings over time, because options premiums are NOT priced irrationally.  So eventually they slink away with their losses, leaving survivor bias to carry the banner.  And they are big honking carryforward losses until they have no more portfolio left to generate any corresponding gains.  In MA you can only use capital losses against investment income, which of course there isn't any if you aren't bringing in any dividends or interest because your money is tied up in short-term stocks.  You never even USE those losses.  Sigh.

I can see *MAYBE* doing a naked put if I'm sort of maybe interested in buying a stock if it goes low and I'm too lazy to keep an eye on it myself.  But here's the thing: it's utter hubris to think that I can pick a stock.  I pick stocks just about the same way I picked horses at Churchill Downs: I look over their information using my own personal training (as a CPA with a MBA for financial statements on the one hand, and as the daughter of a man who raised and raced thoroughbreds on the other) and then I listen to my hunches and make my pick.  I am right just about the exact amount of time that random odds suggest I would be.  Maybe I'm fooling myself about my level of ability to evaluate, maybe I'm not.  The markets can stay irrational longer than I can stay solvent.

But I'm trying to understand and appreciate the wonders of options.  I really am.  But I just keep getting stuck on the initial premise: that you can look at history and it will tell you the future.  Yes, that works in some arenas.  But stock picking?  Really not.

Oh, and I hate it when my clients raise horses just as much as I hate it when they play the options markets.  Don't even get me started on the folly of the thoroughbred industry!

Three book reviews on investing

Pie and Pie Charts  

I'm reading up on retirement planning both because I'm trying to rationalize why I bought a vacation property (it's part of my retirement portfolio!  Really!) and because I'm supposed to be making a living counseling people on financial matters.  (Perhaps I should be quiet about the cottage.)

I've recently read three books that say the same thing in vastly different ways.

The first is "The New Coffee House Investor: How to Build Wealth, Ignore Wall Street, And Get On With Your Life" by Bill Schultheis.  To say that this book is fluffy is putting it mildly.  He's supposed to be inspirational as he gives you his simple message.  Hmmm.  I mostly just noticed a simple message.  Very simple message.  Really really really simple message.  "Save some money and put the stock portion of your savings in index funds."  I wish I could say that the 192 page book expands on that somewhat, but it really doesn't.  There are two pages in which he says, "Hmmm, you should probably get some bonds, too."  And there's one page where he says, "You might want to add up what you're spending now."  But then he talks about his golf game and his mountain climbing and how much he likes pumpkin pie and to sit with his friends and drink coffee in the coffeehouse.  His credential for writing this book is similar to Suze Orman's: he was a failed stockbroker who made a bunch of mistakes in his life and wants to tell you about them, possibly to help him feel less dumb.  I guess I could recommend him for anyone who would aspire to read Suze Orman but is put off by her aggressively X chromosomes.  Personally, I'm keeping it on my shelves because I like the pumpkin pie recipe he puts in it.


The middle version of this theme is "The Investor's Manifesto: Preparing for Prosperity, Armageddon and Everything in Between" by William J. Bernstein.  It's not too light and not too heavy, just right for most people.  It's a pro-indexing book that talks more about asset allocation and talks about the value of your human capital in your asset allocation, the annuity value of your social security and the value of delaying taking it. and about the burn rate you choose.

His idea of Armageddon is decidedly different than mine, though: he appears to mean the Dow might drop 30%.  He says, "Gold and gold stocks have also become an asset class du jour, with high recent returns and a good deal of publicity.  Unless you are going on the lam, buying gold bullion itself, gold coins, or an ETF that invests in them is rearely a good idea.  The long-term, real return of the yellow metal itself is zero - an ounce of it bought a fine men's suit in Shakespear's time, and still does today."  He says that like it's a bad thing.  I wonder how much a men's suit costs in Confederate Dollars?

The seriously heavy book is "Getting Started in a Financially Secure Retirement: Pre- and Post-Retirement Planning In a Time of Great Uncertainty" by Henry Hebeler.  Apparently Hebeler hung out in the coffeehouse with Bill Schultheis and got frustrated and wrote the book Bill Schultheis couldn't.  Oddly, the forward to this book is by Bill Schultheis and his two page forward has more actual content than Schultheis put in his entire 192 page book mentioned above.

The Hebeler book is really wonkish.  It keeps throwing in worksheets and annuity tables and references to websites and his own online worksheets.  It's *GREAT*.  This is the book I was waiting for, the one written by one of the smartest people I'll ever meet who just cast his attention to this subject when he got old enough to have it be his top priority.  (He has three degrees from MIT and spent his career being a rocket scientist and economic advisor on citizen advisory counsels.)

The only down side to this book is the sternness of his lecture.  He is really adamant that you aren't saving enough.  He doesn't know how much that is, but save more!  Much more!  Doom is coming!  No matter how much you plan it will NOT be enough, so step to it and do more!  Now!  It's a bit off-putting, really, except it comes from someone who actually *is* retired and reporting from the trenches.  He reports on the unexpected things in realistic ways. 

For example, one of the main threats to people's retirements is turning out to be their forty year old children who are out of work and asking for hand-outs from their "rich" parents who are only "rich" because they saved up so they could stop working for the next 30 years and probably haven't saved near enough.   Oh, and real estate taxes, utility bills and travel expenses to go see family are likely to be a lot more than you expect, too.  Not to mention medical expenses.  Which he does mention.  This man mentions everything.  How's your roof, he asks?  Got a replacement fund going for those 20 year shingles?

I kind of love Henry Hebeler.  I'm going to spend a lot more time with his website and then use this to teach my own clients.  I just have to figure out how to make the message sound a bit more fun, to inspire people to do this rather than drive them to it out of fear. 

I've also got the Boglehead guides I'm picking my way through chapter by chapter.  I like that about them: they are a series of articles that are well-written and well-edited on subjects I want to read on.  I have a couple of books by Jack Bogle but I find him annoying to read.  I much prefer the works of his acolytes.  Honestly, I wouldn't need to buy the books if I had an iPad and could just browse the webforums.  But I still read books.  Which, by the way, is why I get to make money teaching people this stuff.

Book Review: "The Great Depression Ahead"

Public Service Book Review: I read this crap so you don't have to  

Here's a quick review of a book that I got out of the library to leaf through.  I'll admit to having given it a shallow reading.

It's "The Great Depression Ahead: How to prosper in the crash following the greatest boom in history" by Harry S. Dent, Jr.  This is book is such utter crap that the fact that he's predicting a great depression is the most hopeful news I've heard in a long time.  The entire book is a series of discussions about Krondratieff cycles, with a whole lot of extra cycles thrown in: Presidential election cycles and Revolutionary Cycles and 5000 year civilization cycles... plus many more, overlaying each other in chart after chart.

He had sentences like, "Martin Luther came along at this point in the cycle"... as if Martin Luther were pre-ordained in the 5,000 year sine wave.  (And as if there *is* a 5,000 year civilization sine wave!)

He wrote this in 2007 and somehow missed issues like Peak Oil and monetization of the debt when discussing the next 70 years.

All in all, the man is an utter fool who spews 340 pages of bullshit before he quit nattering on.  Skip it and read Freakonomics instead.

LOL: one of the reviewers said, "Both AIM and Mass Mutual once had mutual funds based on the Dent philosophy and were sub-managed by him. Both have gone bust as being some of the worst performing mutual funds in recent history. If you followed his investment advise over the last 5 years you would be flat broke by now."