Previous Column
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 and bonds.
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.

Bernstein asks, "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 Bogle’s 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 ability.)

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 advisor.

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? It’s 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. Click here.

6. The New Finance, the Case Against Efficient Markets, by Robert Haugen. If you’re 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 quirky—Ben 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 today’s 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.

Favorite 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 city’s 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.

Sirius 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:

Sirius' market 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 ...

The 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."

Perhaps 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 to salt."

Concerned, James asked: "What happened to the flea?"

Hot stocks update:
Most of yesterday's list rose yesterday. Two stocks to add to the list: TiVo and Turbochef (TCF).

Harry Newton

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 AdSense, click here and here.
Go back.