Adventurous Investor

November 12, 2010 4:43 pm

The best books for bears and bulls

We live in a golden age for finance and investment books with authors as diverse as Raghuram G. Rajan (Fault Lines) and Noriel Roubini (Crisis Economics) writing for the layman on what went so horribly wrong in the recent financial crisis.

There is also a series of excellent, though lengthy, discussion pieces in the New York Review of Books by Paul Krugman (a hate figure for many on the right).

But all of these are pitched at the macro level and contain very little in the way of concrete ideas for ordinary investors trying to navigate their way around the wreckage of the last few years.

Luckily, in the last few weeks, a gaggle of books has come along that frame some strategies for the wary investor. For the bears amongst you, the must read title is The Gathering Storm, a slightly patchy collection of essays and articles by “the minds that predicted the crunch” such as Albert Edwards and Dylan Grice from SG, James Ferguson (a strategist at Arbuthnot) and Jon Mauldin.

I’d suggest focusing on two new chapters by lesser known figures – Danish strategist Thomas Thygesen and Peter Tasker,
a Japanese-based emerging markets investor.

Thygesen’s essay reminds us that, in the “new normal” world described by Jon Mauldin, investors must navigate their way around three probabilities: that trend growth will remain subdued in the UK and the US, that low interest rate environments tend to fuel excessive volatility as asset classes boom and bust and that investors find it increasingly difficult to diversify in markets where risk is being taken on and off the table at terrifying speed.

Unlike many of the gold bugs featured in this book – with confident predictions of gold hitting $6000 – Thygesen focuses on building a range of sensible insurance policies that might help with the likely blow outs, focusing on a buy and sell strategy that involves active asset allocation and risk management. He also looks carefully at new alternatives including increasing exposure to non-OECD currencies.

Tasker’s chapter is more focused on the perils of investing in emerging markets – in particular, he calls on investors to observe a number of rules in the coming years. First, buy the busts not the booms. Second, “when there is ‘blood on the streets’ you can still lose 100 per cent of your capital but you may stand to make considerably more”. Third, GDP growth has “little if anything to do with investment returns”. And lastly, be wary of narratives in investing. Excellent advice!

I’d also suggest reading Andrew Lees’ excellent primer on the economics of energy production in the next few decades – he suggests focusing on the growing cost of acquiring tomorrow’s energy reserves.

For the more bullish, I’d thoroughly recommend Debunkery by the constantly entertaining Ken Fisher, ably abetted by Lara Hoffman. Fisher is one of the great popularisers of investment in the US and he’s always focused on providing practical advice for ordinary folks. His latest oeuvre looks at 50 bite-sized myths, all of which he thoroughly debunks. If I were a novice investor, I’d make sure I read this book and memorised the first 32 lessons: such as why forecasting is a mugs game, why passive investing may make sense but is not easy, and why running stop losses can be a tricky business.

The best all round book for both bears and bulls comes from Anthony Boeckh, who rose to prominence in the US as the editor in chief of the Bank Credit Analyst and has since specialised in providing advice to family offices and wealthy individuals. His latest book The Great Reflation is an essential step-by-step guide to building a portfolio that might be able to navigate the next decade of diverging growth trends, financial deleveraging and constantly ballooning fiscal deficits and monetary easements. Boeckh picks up on some of the ideas mooted by Thygesen and looks at everything from property and commodities through to core equities and bonds. This a is superb starter for investors looking to build a portfolio that may survive turbulent, risk on/risk off markets.
adventurous@ft.com

Stategies: Systematic stock picking

I have just released my own small contribution to the debate on what investors should do next, in the shape of a new FT book called Smarter Stock Picking. It’s aimed at investors who side with strategists such as Thomas Thygesen and Dylan Grice at SG. Both of these value-orientated thinkers maintain that a portfolio of passive index-tracking funds will fail in a volatile marketplace and that active management of risk and entry prices is crucial. If you accept this logic (check out the work of Jack Bogle in the US for a counter view) the key is to focus on stocks in a systematic way, constantly checking the hard numbers and academic debates. For a taster of what’s inside, look at our Portfolio101 section online (www.ft.com/portfolio101) where an excerpt looks at how sensible stock screens could help you build a better portfolio.

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