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Book Review: Jackass Investing (Michael Dever)

Brandywine Asset Management founder Michael Dever's "Jackass Investing" is not only entertaining, but also filled with advice that is likely to strike the reader as counter-intuitive.  While most folks probably would agree that "buy and hold" is not an effective long-term strategy, readers might be surprised to learn that "buy low and sell high" is a recipe for disaster.  The whole book is filled with well-articulated conclusions that are likely to make the reader question his or her previously held conceptions about investing.

The book is organized into 20 "myths", each of which Dever tears to shreds. Along the way, the reader certainly learns what NOT to do, but the book ends with Dever's game plan for how to get a "free lunch" of higher returns with lower risk, with an in-depth description in an accompanying website.  

What I liked best about the book was not only the logic and data that Dever used to break down misconceptions about investing, but also the way he gets to the psychological root of these stumbling blocks.  For instance, Dever offers a persuasive argument that investing, as opposed to trading, can more resemble gambling.  He also shows how monkeys do a better job of predicting the future than so-called experts, yet people still continue to follow the advice of experts.  You will have to read the book to learn why!  

Dever tells some great stories as he destroys commonly accepted notions about investing.  Even if the reader doesn't get his central message, he or she will be thoroughly entertained.  I expect, though, that the reader will ultimately understand his key points regarding correlations and drawdowns.  Dever does a great job of explaining these concepts in an easy-to-understand way.  

After reading Jackass Investing, I think that the individual investor is likely to look at its tagline of "Don't do it.  Profit from it." with ambivalence.  On the one hand, it's easy to avoid the many mistakes Dever describes.  The reader should walk away from this book with a smarter way to think about risk.  On the other hand, though, I don't think it's so easy for the small investor to actually profit from the mistakes of the crowd.  Dever suggests several different "free lunch" portfolios in the accompanying website, some of which are quite complex.  To his credit, though, he slims it down with a "simplified free lunch portfolio" that consists of ETFs and mutual funds and requires just $65K minimum to pursue the strategy.  I am not suggesting that his portfolio won't deliver a better risk-adjusted return than more common stock/bond/cash strategies, but the reader is likely to hesitate in implementing it.  Fortunately, Dever is intending to update model performance going forward, which I think will be a great way to build confidence in employing his strategies.

I think Jackass Investing is a great read for individuals, but the real value may be for those who are responsible for allocating capital on behalf of institutions and for very wealthy investors who, as Dever admits, are in a better position to pursue some of the strategies he recommends.  In fact, after reading the book, I think that plan sponsors should ask themselves why they don't seek out uncorrelated strategies.  Dever is a big believer in commodities and futures, and I know from my experience that there is significant institutional bias against these instruments.  As Dever explains, volatility, in and of itself, isn't risk, and I think that endowments and pension plans would be well served to explore Dever's arguments more closely.

Disclosure:  I received a complimentary copy of the book

How to Avoid Becoming a Victim of Financial Fraud (Book Review: Financial Serial Killers)

One of the many benefits of being a member of a local chapter of the CFA Institute is the weekly luncheons that feature guest speakers on a variety of topics that help financial professionals stay on top of important issues. I have to admit that I don't take full advantage of the many offerings, but I was grateful for the opportunity to meet with Tom Ajamie in early February, when he addressed his home-town crowd in Houston. Ajamie, who, with financial journalist Bruce Kelly, co-authored Financial Serial Killers: Inside the World of Wall Street Money Hustlers, Swindlers and Con Men, is a lawyer who deeply understands his subject matter, as he has devoted himself to fighting for victims of financial fraud successfully for many years. Sadly, he has many stories to share. While Bernie Madoff grabbed headlines in 2008 and certainly introduced the term "Ponzi" to anyone not previously familiar with the scheme, this book addresses crimes that have been taking place long before the largest swindle ever and that continue to be uncovered afterwards. While the book is probably most useful to readers who aren't particularly savvy financially, the authors point out that even Alan Greenspan was taken in by Madoff. Investment professionals can read this book in order to understand the mind of the con man who might be preying upon his clients or potential clients. I would go so far as to suggest that investment professionals might benefit not only by reading the book, but perhaps gifting it to their clients as well. Unfortunately, a few bad apples have created an atmosphere of mistrust, and the laundry list that Ajamie and Kelly include near the end of the book should help make the clients of reputable professionals more comfortable. The book is organized into chapters regarding specific swindles and interludes entitled "The Investment Industry Speaks" that address the reader from the perspective of investment industry executives. Each of the stories is very different in its details, including the type of perpetrator, the type of victim and the type of fraud, but Ajamie and Kelly do a good job of tying each of these vignettes into their broader message. A few of these stories may be familiar to you, like Ponzi, Bre-X (a famous gold scam) or a few hedge-fund collapses, but most of these are smaller scale and focused less on the general public than on a particular individual. My guess is that every reader will be able to relate to at least some of the victims. Ajamie and Kelly cover several big-picture topics, like mortgage fraud, elder abuse, and private placements, among others, but Wall Street is certainly the genesis of most of the stories. The last chapter is one of my favorites - they cover the topic of "Why we Fall for Scams". It's not an answer that will flatter the reader, but it's important to understand how we put ourselves in harm's way potentially. The authors certainly don't ever blame the victim in the book, but this is as close as they come. I highly recommend this book to those who are financially savvy and especially to those who are not. While the scale of Madoff's deception was certainly beyond comparison, con men and swindlers continue to victimize the innocent. The book does a good job of explaining the psychological issues that drive both the criminal and his victim, and we can all learn from the tragedies that are detailed and the specific advice that the authors share. The laundry list at the end of the book can help you avoid becoming a victim of financial fraud. Unfortunately, we can't count on the regulators to stop the inevitable scams. Kudos to Ajamie and Kelly for empowering the reader to avoid becoming a potential victim.

Vitaliy Katsenelson's "Sideways Markets": A Little Book Big on Sound Advice

Vitaliy Katsenelson's second book, The Little Book of Sideways Markets:  How to Make Money in Markets that Go Nowhere, is written for the layman but should appeal to a broad range of investors, from novices to professionals.  While I don't necessarily ascribe to his central premise that we are stuck in a sideways market for the next several years, the philosophy of investing that he describes resonates with me.  He calls it "Active Value Investing".  Translation:  Buy low and sell fair.

Katsenelson lays out the case for a sideways market in the first few chapters in the book.  I believe the weakness in his argument is his use of "reported" earnings to describe the valuation of the market.  He actually averages it with "operating" earnings.  The book was written in mid-2010, and both sets of numbers have increased since then (ahh, the perils of publishing a book).  In any event, he describes the market as "19 PE", which, of course, sounds anything but cheap.  His thesis is that the PE ratios will continue to compress until they reach a historically low level.  My view is that we saw those numbers already - the PE compression is likely over.

In his last chapter, he states that even if he is wrong about the state of the market, the lessons he shares are still valuable, and I agree.  I don't want to steal his thunder, but Katsenelson shares so many valuable nuggets of advice.  His words of wisdom range from very specific ways we can judge the quality of a company, characterize its growth prospects and determine its valuation, but some of the more surprising but truly compelling though uncommonly spoken ideas include turning off business television (I never watch these shows myself), keeping a watchlist of stocks that have great appeal but might be too expensive to own and maintaining corresponding prices where they would offer an appropriate margin of safety, and some very specific advice on how to maintain humility in bull markets and self-confidence in bear markets. 

While this may be a "Little Book", I found it big on ideas yet a very easy read.  Katsenelson is funny, and he has some terrific analogies.  He apologized profusely for the single equation that he included early in the book.  Whether one knows very little about investing or a lot, I suspect his readers will benefit from the ideas he shares.

Disclosure:  Vitaliy's publicist provided me with a free copy of the book

Book Review: Entrepreneur Journeys - Innovation: Need of the Hour

Don't worry if you haven't read any of the three previous volumes, as this latest in the series is a great read in and of itself.  Author Sramana Mitra, a noted contributor to Forbes magazine and a veteran of the VC industry and the world of entrepreneurship once again lets her subjects tell their great stories. 

In Volume 4, Mitra structures the interviews around the central thesis that we have a societal need to innovate our way out of the challenges we face today.  She digs deep into the past as well as finding more recent examples of the type of creativity that we can only hope will not be stifled by regulation and taxation.  Once again, she hits lots of different industries, including Clean Tech, software, alternative energy, healthcare and many others.  A feature that I like, given that I am an analyst who researches public companies, is that many of her interviews are with entrepreneurs who have taken their companies public.  In this volume, she profiles several who may reach that achievement in the next couple of years but also Tom Leighton, one of the founders of Akamai (AKAM) and Jonathan Bush of athenahealth (ATHN).  While I am not sure that her profiles match the reality of entrepreneurship in America, I like that she features so many women and immigrants too.  As always, she brings out the background of each of her subjects as well as their stories, with careful attention to the challenges they may have had to overcome to achieve success.

The structure of the book allows the reader to progress as slowly or as quickly as he or she wishes.  There are four main sections, each with 2-5 conversations.  I was captivated, so I read it very quickly, but it's so compartmentalized that it could also be read over several weeks with the same impact to the reader.

As with the other volumes, Mitra's direction of the interviews adds a lot.  I liked that she addressed some really big issues and tied that theme through the book.  This volume too left me hopeful that we as a society can rise to meet the challenges of the big problems with energy, the environment, healthcare, etc.  Hopefully, risk-taking will not be a victim of the Great Recession and Mitra can describe in one of her future works what great companies arose from the ashes.

Disclosure:  I received a complimentary copy from Mitra's p.r. firm

Sramana Mitra's Entrepreneur Journeys Volume 3 Kicks SaaS

It seems like a different world when I reviewed Sramana Mitra's first book, Entrepreneur Journeys, last year.  For those not familiar with the venture capitalist, business consultant and frequent Forbes contributor, she has taken a serial approach to sharing her unique and insightful views on the whole process of starting companies and succeeding.  Her first book was really an overview, and it concluded with an indication that it was just the first volume in what would be a series.  I should have known that her schedule for other volumes would be quite aggressive!  Positioning:  How to Test, Validate and Bring Your Idea to Market, her third volume, actually includes titles and a time-frame for volumes 4 and 5 in the coming months.  While I skipped Volume 2, Bootstrapping:  Weapon of Mass Reconstruction, I must say that I am looking forward to Innovation:  Need of the Hour this winter.

As I mentioned when I reviewed her first book, her content appeals to entrepreneurs who want to leverage her deep knowledge, but her case stories have a much broader reach.  As one who likes to understand the factors that influence the success of companies in general, I found once again a lot of specific lessons in Volume 3.  What makes the book work, once again, is that Mitra asks the right questions of very interesting people.  While some of these companies are now public or have been acquired since her interview, there are also several interviews with dynamic entrepreneurs whose stories most of us don't know at all.

Mitra devotes the first part of the book to "Going Vertical", with interviews of the folks behind TheFind, Kosmix, Stardoll and Glam Media, each of which is focused on a very narrow domain.  While I found these success stories interesting, the real appeal of the book for me was the focus on "Cloud Computing".  The interviews in this section included LucidEra, Fabrik, Salary.com (SLRY), InsideView, PayCycle (acquired by Intuit (INTU)), and Emergence Capital (an early investor in Salesforce.com (CRM)).  Mitra's interviews with these successful SaaS (Software as a Service) entrepreneurs helps the reader to understand the appeal of that business model.  She uses this section to warn Indian outsourcing companies that they risk being supplanted by technology solutions.  If you are an investor in any of these companies, this conversation alone merits a read of the book.  The balance of the book touches upon collaboration (ON24 and DimDim) and content publishing (iUniverse, Shutterfly (SFLY) and Playfirst).

I enjoyed "Positioning" as much as her first Entrepreneur Journeys despite its being more narrowly focused.  It's quite an easy read given that it is essentially a collection of short stories used to illustrate some key insights.  For those curious about what makes companies successful, how technology can lead to solutions or perhaps the more specific goal of Mitra - how to "go to market", "Positioning" delivers.

Disclosure:  I received a complementary review copy.

Review of Sramana Mitra's "Entrepreneur Journeys"

Many of you may already be familiar with Sramana Mitra through her Seeking Alpha contributions or perhaps her columns in Forbes.  I have enjoyed her perspectives in those venues, so I am not surprised that I found her first book, Entrepreneur Journeys, to be so captivating.  I liked it so much that I sent it to all of my clients as a year-end gift.

The book is a collection of interviews with entrepreneurs organized into five sections:  Bootstrapping, Taking on Giants, Disrupting Business Models, Addressing Unmet Market Needs and Tackling Planet Scale Problems.  In all, she interviews 12 dynamic entrepreneurs.  I think that one of the things I liked best about the book is that it is so optimistic - several of these leaders overcame what seemed to be insurmountable odds.  With the financial markets in disarray, several of these vignettes inspired me to see past the current gloom.

I recall reading Michael Lewis' "Liar's Poker" when he published it almost 20 years ago.  At the time, I actually worked in the world that he depicted and knew several of the "characters".  I felt that Sramana serves as a similar type of insider in the world of venture capital who is able to really hone in on the essence of the culture.  When I read these interviews, I felt like I was overhearing an intimate conversation.  As an equity analyst, I certainly appreciated that Sramana asked the right questions, which got right to the crux of the issues at hand. 

I was familiar with some of the ventures featured in the book, certainly the public ones, but the breadth and global nature of her subject fascinated me.  Crunching numbers and trying to spot trends is what many of us do as analysts or investors, but trying to capitalize on the somewhat abstract concept of "management quality" is something that I believe sets apart the pedestrian analyst from the valuable one.  This book really helps the reader to appreciate the qualities of a leader who plans for the long-term but navigates through the challenges of the short-term.

Sramana covers the bases with respect to pre-bubble and post-bubble entities.  She leads of with one of the most interesting interviews of all, Jerry Rawls of Finisar (FNSR).  After a meteoric rise during the bubble, the business almost evaporated, but Rawls took the steps necessary to keep the company alive.  The other "bootstrapper", Sridhar Vembu of AdventNet, is taking on Salesforce.com (CRM) with 600 engineers in India, 6X the number of engineers at his rival. 

The "taking on giants" section leads with Steve Hafner of Kayak.  Hafner started Orbitz (OWW) and started Kayak to fulfill the original mission he felt Orbitz failed to ultimately address.  The next entrepreneur, Gautam Godhwani of SimplyHired, tells how he has used technology to differentiate and to become the number 5 player rapidly in a highly competitive job search market.  Finally, Russ Fradin shares how Adify is taking on Google (GOOG) in the online advertising space.  Any investor should appreciate the threat of competition after reading these dialogues.

The next section ("disrupting business models") features a company out to be the "next VMware" (VMW), Qualys, as well as one of my favorite interviews with Steve Singh of Concur (CNQR).  The CEO of Qualys, Phillipe Cuortot, has so much experience with big blundering companies that he can't help but succeed outside of them.  Singh discusses the challenges of distributing product to customers across the entire spectrum with respect to size. 

The next section ("addressing unmet market needs") features a fascinating interview with the young Stanford MBA, Marcos Galperin, who created a Latin American "Ebay", MercadoLibre (MELI).  My wife is a teacher, so I was very excited about the interview with HotChalk founder Edward Fields.  Anyone interested in learning about how technology can be applied to make education work better should read this interview. 

Finally, Sramana concludes with three entrepreneurs trying to solve major global problems.  Energy Recovery Inc. (ERII), which just went public this year but has been around for decades, uses reverse osmosis to create energy.  Obopay has created the infrastructure for micro-finance in developing countries (using mobile phones).  SELCO provides solar panels to poor workers in rural India.  It is this last section that really leaves the reader optimistic that we humans will ultimately overcome any obstacle.

I really enjoyed learning about the people behind these enterprises and what makes them tick.  Sramana does a great job of placing everything in context.  She links their past efforts and weighs their successes and their challenges in both their present endeavors as well as past ventures, all seemingly with the goal of understanding the factors that can lead to success.

This book was an easy read, as it isn't technical at all and could appeal even to someone without a background in business or finance, especially the final part highlighting entrepreneurs tackling major social issues.  Given that it is essentially a collection of short stories, it is a great book for the busy reader who has to cram in time for reading.  Good luck putting it down!

Disclosure:  I have no positions in any stock mentioned in this book review