Thursday, February 12, 2009

Book Giveaway

Gail Bebee, author of No Hype: The Straight Goods on Investing Your Money was kind enough to send me a review copy of her book. In addition to reviewing it, I will be having a draw to give away this gently-used book.

The Draw

Parts of the book are specific to Canada, and so the draw will be limited to Canadian addresses. To enter, send an email with the subject “Book” to the address shown on the upper right corner of this blog. The draw will close Sunday Feb. 15 at noon. I will contact the winner to get a (Canadian) postal address.

Book Review

On the whole, this book lives up to its “no hype” title. Bebee covers many important subjects for investors giving clear explanations of advantages and disadvantages of different investment products and approaches. A common theme throughout the book is “think for yourself,” which is very important if you don’t want others to take advantage of you financially.

Bebee is not a financial industry insider, which is a plus. She tells it as she sees it rather than showing bias for products she sells. My biggest criticisms are the tendency to steer readers past index investing to individual stock picking and the treatment of technical analysis.

Chapter 5 gives an extensive list of information sources you should read, and pages 184 and 185 list the work that you should do to monitor your investments. Bebee is correct that all this work should be done by stock pickers, but if most people are honest with themselves, they know that they won’t do one-tenth this amount of work. Index investors can eliminate the need for most of this work. Bebee does discuss index investing, but I would prefer to see the frightening amount of work required to monitor investments broken down into what must be done by the different types of investors, i.e., index investors versus stock pickers.

Chapter 20 deals with market timing and technical analysis. Bebee believes that “investors can improve investment returns by market timing.” It’s simple mathematics that the average market timer must lose out to the index. Good market timers can only take money away from bad market timers, and they all pay more in trading fees and taxes than index investors. To keep up with the index, you must be an above average market timer.

Technical analysis is a form of market timing where one studies charts of stock prices and trading volumes to try to guess whether to buy or sell a stock. Bebee’s treatment of this subject is far too flattering in my opinion. I see no reason why a stock’s movement in the near future should have anything to do with the shape of its chart. Even if there is a slight correlation, any advantage would have to overcome trading costs and taxes. An investor who is considering using technical analysis might want to consider horoscopes as well.

Getting back to the many positives of this book, here are some of its important messages:

- Think for yourself.
- Focus on low-cost investments. Fees matter.
- Educate yourself at least enough to evaluate the advice from a financial advisor.
- Avoid momentum investing and day trading.
- Financial advisors may steer you toward investments that pay them the highest fees.
- Buying stocks on margin is risky.
- A good exercise for mutual fund investors is to add up all the fees they pay each year.
- Be wary of hedge funds, resource limited partnerships, and stock options.

Overall, this is a good book for the beginner to learn the basics of investing. For another review of this book, see Canadian Capitalist's review.

2 comments:

  1. "Be wary of ... stock options."

    Same old, same old. People who have no idea how to use stock options as risk-reducing investment tools warn others to stay away.

    What a shame.

    The intelligent and conservative use of options could have saved most investors from last year's financial disaster.

    ReplyDelete
  2. Mark: The potential for stock options to do great financial harm if used improperly is enough to justify telling novices to be wary. But, I take your point that novices are being warned away from the risk-reducing uses of stock options as well.

    The two problems I see with stock options are the potential for high-leverage gambling and the often very high bid-ask spreads when trading them. I'd be pleased to publish a guest post from you that covered the following points (plus others if you want):

    - Risk reduction with stock options
    - Risky uses of stock options
    - How to avoid getting a poor price due to wide bid-ask spreads

    ReplyDelete