Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Friday, January 7, 2005:
Aaron Brenner was mutual funds editor of my failed Technology Investor Magazine.
I asked him to talk to me about this week's task -- My Annual Portfolio
Rebalancing. He made two recommendations.
First, look only at the fund families of Vanguard, Dodge & Cox and
Dimensional Fund Advisors.
Second, read this book:
I ordered it from Amazon and started reading. I wanted to finish it before writing
about it. But it's too good. You have to buy your own copy and read it
this weekend. Here are his basic conclusions:
1. The key
to long-term success in the stockmarket lies in a coherent strategy for allocation
among broad categories of assets, principally foreign and domestic stocks
2. Asset allocation is the only factor affecting your investments
that you can actually influence.
3. Nobody consistently calls the market, i.e. no one consistently times
the ups and downs of the stockmarket.
4. "Market timing and stock or mutual fund picking are nearly impossible
long-term. They are at best a distraction."
5. Asset allocation policy was 10 times as important as stock picking and
market timing combined, according to two studies Gary Brinson did of 82
large pension funds in the late 1980s.
"So how do you arrive at the allocation that will provide the most return
with the least amount of risk? You can't. But don't feel bad, because neither
can anyone else."
He writes, "If you tire of reading this book and simply want a recipe
for a serviceable portfolio, consider the following:
Buy index funds. Put one quarter each in U.S. large and small stocks, foreign
stocks and a short-term bond fund." He recommends Vanguard. "At
the end of each year, rebalance your accounts so that each of the four parts
are again of equal size."
Of this strategy, he concludes: "Setting up the account should take
about 15 minutes and the annual rebalancing should also take about 15 minutes.
You can forget about investing for the rest of the year. If the next 20 years
are anything like the last 20, then you will outperform the portfolios of 75%
of all professional money managers."
For those of you who think he's pushing his own little wicket (like all authors
peddling their book), he recommends reading. Here's his list and his comments.
Most of my savvy, rich friends would not disagree with Bernstein, even those
most haven't read his book. Thank you Aaron.
Recommended Reading List:
Bernstein writes, "Those of you who are seeking investing
enlightenment are not going to find much of it on the Web. I suggest you log
off, power down your computer, and read some books. Take your time. The months
you spend perusing this list will be well spent. I'd recommend reading at least
the first four books listed before even thinking of getting your hands dirty
with real investing:"
1. A Random
Walk Down Wall Street, by Burton Malkiel, is an excellent investment primer.
It explains the basics of stocks, bonds, and mutual funds, and will reinforce
the efficient market concept.
2. Common Sense
on Mutual Funds. Replaces Bogle on Mutual Funds, by who else, John Bogle.
It provides as much detail as you could ever want about this important investment
vehicle. Mr. Bogle is the founder and retired chairman of The Vanguard Group,
and has been an important voice in the industry for decades. Beautifully written,
opinionated, and highly recommended. (The book also demonstrates the democritization
which has swept the investment industry in recent years. Until a decade ago
the sort of sophisticated mutual fund analysis described in his book was the
brief of just a handful of professionals with access to expensive proprietary
databases and mainframe computers. Almost all of Bogles work was done
with a subscription to Morningstar and a statistically competent assistant,
and could have been performed by any small investor with similar software and
3. Asset Allocation,
by Roger Gibson, covers much of the same ground as my own book with more
emphasis on the qualities of individual assets. Oriented towards the financial
4. Global Investing,
by Roger Ibbotson and Gary Brinson. This is a beautifully written volume on
the history of investible assets. An informed investor cannot know enough about
market history, and this is the best single source in this area. Want to know:
what the returns for US stocks have been in each of the past 200 years? The
price of gold for the past 500 years? Interest rates and inflation for the past
800 years? Its all here. As implied by the title, the authors also provide
an excellent perspective on the place of foreign assets in a diversified portfolio,
and provide some worthwhile insights on portfolio theory and the efficiency
of the marketplace.
5. What Has
Worked in Investing is a free pamphlet from Tweedy, Browne. A low-key sales
pitch for their funds, it is also the best compilation I've seen of the data
supporting the value method. Their phone number is 800-432-4789.
6. The New
Finance, the Case Against Efficient Markets, by Robert Haugen. If youre
intrigued by the Tweedy pamphlet and wonder why value investing still works
after all these years, this is your book. The prose is breezy, even quirkyBen
Graham meets Hunter Thompson on bad acid.
7. Value Averaging,
by Michael Edleson. An extremely useful how-to guide on deploying a lump sum
of money among multiple assets. You won't find this book for sale anywhere except,
amazingly, at Four Star Books in Grant's Pass, Ore. (Oregon natives will appreciate
the humor here.)
8. The Intelligent
Investor, by Ben Graham. A popularized and more readable version of his
earlier classic, Security Analysis, written with David Dodd. Although it has
great relevance to the markets in general and should be read by any serious
investor, it is particularly pertinent to those who feel compelled to buy individual
stocks. Many of todays most successful money managers obtained their original
financial inspiration from these two books. It is always fun to look at excesses
in the marketplace and ask, "What would Ben say about this?" (By the
way, if you get bitten by the Graham bug and decide to do Security Analysis,
make sure you read the original 1934 edition, recently reprinted by McGraw-Hill.)
9. Devil Take
the Hindmost, by Edward Chancellor. You simply can't learn enough about
market history, and Chancellor's story of boom and bust in the capital markets,
beginning in the 17th century, is pure mind candy. Supersedes Mackay's Extraordinary
Popular Delusions and the Madness of Crowds.
charity. Watch CNN Sunday: The Innocence Project gets innocent
people out of prison (often on death row) by using DNA. It has exonerated 154.
It is also focusing on the sorry state of crime labs. CNN has a documentary
on crime labs this Sunday, January 9th. "Reasonable Doubt: Can Crime
Labs Be Trusted" airs at 8PM and 11PM eastern time. "Reasonable
Doubt" will highlight some of the Innocence Project's work to uncover
misconduct, negligence, and fraud at crime labs that have lead to wrongful convictions
in jurisdictions across the country, most notably in Montana, with the case
of Jimmy Ray Bromgard, and in Houston, where the citys lab has been plagued
by a number of scandals. For more on the Innocence Project, click
here. Read, watch, then send them some money. I do.
Satellite Radio is a scam: It's not, of course. It delivers a plausible
product. Revenues are going up. So are its horrendous losses. I stole these
financials from the Wall Street Journal's site:
(really net losses)
cap last night was $9.5 billion, a little under a third of Microsoft's
and about two-thirds of Intel's. Sirius is so egregiously over-valued it gives
egregious a whole new meaning. What got me started on this tirade against Sirius
was the "interview" Sirius' CEO Mel Karmazin gave on BubbleVision
(CNBC) yesterday. It was the worst on-screen hype I've ever heard from any executive
of any public company. He talked about 70 million potential subscribers -- one
in every car, SUV, truck, etc. And he talked about his three channels of TV
he'll be broadcasting to cars and SUVs for the kids in the back seat to watch.
Mr. Karmazin was the executive who outright lied in front an investor conference
I was attending. But, of course, none of this stopped the stock from rising
nearly threefold in 2004. It remains one of Wall Street's darling stocks. And
Mr. Karmazin to his credit is giving wonderful hype. Just what Wall Street wants.
My favorite "Karmazin:" He asked a CNBC reporter (I think it was David
Farber) if he had Sirius radio? David, who was skeptical of Karmazin's ridiculous
projections, said he didn't. Karmazin offered to loan Farber the money... It
was so condescending ...
State of the Airline Industry:
A minister was seated next to a Marine on a flight to Huntsville, Alabama. After
the plane was airborne, drink orders were taken.
The Marine asked
for a whiskey and soda, which was brought and placed before him. The flight
attendant then asked the minister if he would like a drink.
He replied in
disgust, "I'd rather be savagely raped by brazen prostitutes than let liquor
touch my lips."
The Marine then
handed his drink back to the attendant and said, "Me too. I didn't know
we had a choice."
you'll see your grandkids this weekend:
JACK (3) was watching his Mom breast feeding his new baby sister.
After a while he asked: "Mom why have you got two? Is one for hot and one
for cold milk?"
MELANIE (5) asked
her Granny how old she was. Granny replied she was so old she didn't remember
any more. Said Melanie, "If you don't remember you must look in the back
of your panties. Mine say five to six."
STEVEN (3) hugged
and kissed his Mom goodnight. "I love you so much, that when you die I'm
going to bury you outside my bedroom window."
SUSAN (4) was
drinking juice when she got the hiccups. "Please don't give me this juice
again," she said, "It makes my teeth cough."
DANI (4) stepped
onto the bathroom scale and asked: "How much do I cost?"
MARC (4) was engrossed
in a young couple who were hugging and kissing in a restaurant. Without taking
his eyes off them, he asked his dad: "Why is he whispering in her mouth?"
CLINTON (5) was
in his bedroom looking worried. When his Mom asked what was troubling him, he
replied, "I don't know what'll happen with this bed when I get married.
How will my wife fit in?"
JAMES (4) was
listening to a Bible story. His dad read: "The man named Lot was warned
to take his wife and flee out of the city but his wife looked back and was turned
asked: "What happened to the flea?"
Most of yesterday's list rose yesterday. Two stocks to add to the list: TiVo
and Turbochef (TCF).
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons:
Writing is good for sorting things out in my brain. Second, the column is research
for a book I'm writing called "In Search of the Perfect Investment."
Third, I encourage my readers to send me their ideas, concerns and experiences.
That way we can all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam.
I have no role in choosing the Google ads. Thus I cannot endorse any, though
some look mighty interesting. If you click on a link, Google may send me money.
That money will help pay Claire's law school tuition. Read more about Google
here and here.