One stock market, two books with unconventional approaches
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NEW YORK, April 17 — With the stock market up substantially since the first of the year, and technological innovations continuing to roil the corporate landscape, how should you invest right now?
Two new books offer very different answers, with each taking an unconventional approach.
In the far better one, Money Machine: The Surprisingly Simple Power of Value Investing (Amacom, US$27.95/RM123.33), Gary Smith, a Pomona College economics professor, says you should concentrate on value stocks.
In contrast, in The Truth About Your Future: The Money Guide You Need Now, Later and Much Later (Simon & Schuster US$26), Ric Edelman says you need to figure out how to capitalize on trends disrupting how business is typically done.
Let’s begin with Smith, who does an excellent job explaining his position.
“Instead of trying to predict short-term zigs and zags in stock prices, value investors evaluate individual stocks and the market as a whole by looking for good companies that have low stock prices relative to their dividends, earnings and assets,” he writes.
Smith uses an analogy to make his case.
“Think of a stock as a machine that generates cash every few months — cash that happens to be called dividends,” he writes.
“The key question is how much you would pay to own that machine in order to get the cash. This is the stock’s intrinsic value. Value investors buy a stock because it is an inexpensive money machine, generating bountiful cash it is hoped over many years.”
Throughout the book, Smith provides financial formulas to help you identify value stocks, and his writing is clear and often clever.
· “Bargains are not going to be found when investors are optimistic, but when they are pessimistic.”
· “Value investors do not buy metals — no matter how precious — because metals do not generate cash.”
· “It’s tempting to confuse a great company with a great stock.”
The book, however, does have its flaws — one major, a couple minor.
The big one first: It is perfectly defensible to pick one approach to investing — such as loading up on value stocks, companies with solid revenues, earnings and dividends that are trading at a relatively low price — over all others.
As Smith points out a number of times, Warren E. Buffett is a value investor. And this reviewer understands that Buffett has done quite well.
But financial mavens like Buffett, the maestro of Berkshire Hathaway, are rare, and as Smith points out, “very few investors think they are below average, even though half are.”
Most of us would be better off with a widely diversified portfolio, something Smith barely acknowledges.
As for the minor nits, Smith tends to digress, mentioning academic papers he wrote that are at best tangential to the concept of value investing. For example, he says that stocks with ingenious ticker symbols, such as MOO for VanEck Vectors Agribusiness ETF, tend to outperform the market. That is a fun fact — especially for us financial nerds — but I am not sure what it has to do with the matter at hand, and I would not recommend an investment based solely on a cute name.
Similarly, while it is possible that a home could be viewed as a value investment, as he explains, I am not sure the discussion was worth 20 pages of a 300-page book.
These are small quibbles. For the most part, he states his case well.
“The value-investing philosophy is simple,” he writes.
“Look for great companies whose stocks are inexpensive relative to their dividends and earnings.”
That clarity and brevity are lacking in Edelman’s book. He is a financial planner, but readers expecting detailed investment advice will be disappointed.
For example, after writing that it is vital to diversify your investments among stocks, bonds, cash and perhaps other investments such as real estate, how does Edelman respond to his rhetorical question “how much of your portfolio should be placed into each” of those assets?
Like this: “The answer is ... it depends. I wish I could provide you a more specific answer right now, but this is just a book on personal finance — it’s not a private, in-depth meeting with a financial planning professional.”
He doesn’t even offer general guidelines. He just moves on.
This is already my pick for the most frustrating personal finance book of 2017. And one of the reasons I am so annoyed is that the premise was so promising.
“Financial planning is all about anticipating and preparing for the future,” Edelman writes.
“So to understand what your future will be like, you need to understand why it’s going to be so radically different from what you have been assuming.”
He then devotes about two-thirds of his more than 300 pages to underscoring things we know but can easily forget: Medical advances could make us live longer, ever-evolving technology will provide more engaging entertainment options, and rapidly evolving workplaces will require continuous education, perhaps extensive enough for us to have to leave the workplace for a while to concentrate on learning new things.
So far, so good. But what do these changes mean for the way we invest?
Well, when it comes to leisure and learning, for example, Edelman’s advice is just this: “Expect to spend lots of money on travel and recreation — and this will need to be factored into your financial plan.” How? There are no details.
About as specific as he gets is to say: “Invest in a globally diversified portfolio. Maintain that portfolio for a very long time. Strategically rebalance the portfolio as needed,” and “include companies that are using or developing exponential technologies.”
The “what” to invest in, how much of your portfolio it should represent, and what’s “a very long time” are left to you.
That isn’t much help when you are trying to determine how to invest today. — The New York Times