Monday, December 6, 2010

Smarter than the Street

Gary Kaminsky was a successful money manager and is now co-host of the CNBC show Strategy Session. His new book Smarter than the Street lays out an ambitious goal of teaching readers to do what he did:

“We did it constructing a specific strategy and adhering to that strategy, regardless of the investing climate. It is a strategy that almost anyone can learn. One of the primary goals of this book is to reveal this strategy, step by step, to individual investors.”

Kaminsky makes big promises in the Introduction that go largely unfulfilled in the rest of the book. The “specific strategy” turns out to be quite vague and relies heavily on gut feel. A large block of the book is devoted to advising investors to read company annual reports, look for big changes, and pay attention to how companies use excess cash. How to use this information to pick stocks is left unstated except for some examples.

Some parts of the book are more specific, such as the recommendation to own between 15 and 30 stocks. The difficult part is figuring out which stocks to own, but the book isn’t much help on this point despite the claim that “as you have seen in the last several chapters, I have some very specific rules for buying stocks.”

The section on deciding when to sell a stock is a little more concrete. Kaminsky describes how to look for changes in the economic environment, industry outlook, company fundamentals, management strategy, and stock valuation. Once again, though, the sell decision comes down to gut feel.

The book has a few points that were good. The author is down on trading too much and in particular day trading. He describes market timing as a “failed technique” and recommends choosing stocks with the expectation of holding them for 2 to 5 years. As for what money to invest, he says “you should not invest any money that you will need back within a three-year period.”

On analysts who produce price targets for stocks, the author says that they are “wasting my time, their time, and your time.” He calls these price targets “another by-product of the Wall Street marketing machine.”

On a couple of points, Kaminsky seems to be self-contradictory. Averaging down is bad, but “adding to a winning position when the stock is priced at a more reasonable level” is good. Buying on dips is bad, but going against the herd is good.

The author completely loses his way with a couple of blackjack analogies. He says “buying stocks because over the long term they always go up is like saying, ‘I’m going to play blackjack every day because ultimately I’ll have to have a winning hand.’” Long-term investors don’t buy stocks because they know they will have one good month or year, but because the total returns over a long period of time have been positive. The opposite is true with blackjack where over the long term players lose money.

Kaminsky believes that to invest successfully, you have to think about how other investors will react to news. He tries to explain this with a blackjack analogy where he claims that when other players at a table are playing foolishly, it lowers your chances of beating the dealer. This is nonsense. I don’t trust the analytical ability of anyone who can’t get this right.

Kaminsky justifies the need to beat the index with a detailed prediction that we will have another “lost decade” for stocks. I have no idea whether stocks will be flat for the next decade and I don’t believe he knows either. Given that so many money managers have lost money over the last decade, the author appeals to the reader’s ego: “surely you believe that you can do better.” I can also do worse, ... and don’t call me Shirley.

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