This is the second part of a review of the book “Worry-Free Investing”, by Zvi Bodie and Michael J. Clowes. This review began here . Once we factor out the heavy emphasis on low-risk (and low return) investing, this book contains a vast amount of useful unbiased information. For example, Chapter 3 shows how to plan for retirement including figuring out how much money you will need to retire, minimizing taxes, and minimizing investment fees. Chapter 4 covers saving for college. The cost of education beyond high school has been rising faster than inflation for some time. Whether this will continue is anyone’s guess. The authors discuss the many different college savings plans available in the U.S. In Chapter 5, the authors discuss investing in a home and the various ways a home can be turned into a retirement asset including a reverse mortgage. There are many things to consider when it comes to reverse mortgages, and the authors do a good job of explaining them. Chapters 8 throug...

This is a review of the book Worry-Free Investing (Prentice Hall, ISBN 0-13-049927-7), by Zvi Bodie and Michael J. Clowes. This book is aimed at Americans, but many of the ideas are relevant to Canadians as well. The authors are clearly very knowledgeable about a wide range of practical investment matters as well as academic work on investing. The book contains a lot of useful information and practical advice explained clearly. In this regard, it is much better than most investing and personal finance books. The main drawback of this book is the overemphasis on safety. The authors recommend extremely safe investments that, unfortunately, offer low returns. To meet typical goals such as an adequate retirement income and paying for children to go to college, the safe investments recommended by the authors require people to save large amounts of money every year because they will get low returns. The particular investments the authors recommend are Inflation-protected Bonds (I Bond...

In the previous post , I discussed the idea that a stock has an intrinsic value that is different from the current price of the stock. The stock market can become irrational and sometimes value a stock well above or well below its intrinsic value creating profitable opportunities for knowledgeable investors. So what? Most of us can’t figure out the intrinsic value of a stock any better than we can pick lottery numbers. If you’re like most people who fall into this camp, your best bet is probably to avoid individual stocks and invest in low-cost broad index funds. (See this post for more about index funds.) There are index funds that allow you to own a small slice of an entire economy. You can own your share of stocks in the US, Canada, and other countries. The better index funds have very low Management Expense Ratios ( MERs ). The stock market as a whole has an intrinsic value just like an individual stock. U.S. markets dropped about 10% in the first 3 weeks of January. Is it r...

What is a stock really worth? One answer is “whatever the stock is trading for in the stock market.” Unfortunately, this is not a useful answer. The stock market just tells you the price at which people are willing to buy and sell a stock. The true value of a stock (also called the intrinsic value) is determined by the value of the business represented by the stock. If a business is worth $10 million, and there are a million shares, then each share is worth $10. But, how do we determine the value of a business? Suppose that we know what is going to happen to ABC Company. ABC will pay a $1 dividend per share each year for the next 50 years and then close down. Now each person can decide how much to pay for a share that will pay $50 over 50 years. Some might be willing to pay $10 and others $15. This amount that you are willing to pay is your assessment of the intrinsic value of the business. Suppose that you decide that the intrinsic value is $15. If you find that the majority of people...

I don’t usually write about consumer items, but I just had an interesting experience. I bought a scanner from a well-known chain store. When I opened the box, it contained a note from the last sucker who bought this scanner with an explanation of what is wrong with it. The note came with actual pictures of scans gone wrong. I’m grateful to this anonymous person who took the time to help out the next sucker to buy this scanner (me in this case). The two pages of explanation were not exactly hidden. They were the first thing that I took out of the box. Obviously the store employees never even looked inside. They just put it back on the shelf to sell it to someone else. Nice. I don’t see much point in naming the product or the store. But, I do like the consumer strategy of including a note any time you are forced to take a defective product back to a store. For your altruistic side, you are helping out other people. For fun, you could even include an email address with your note ...

We are starting to see the fallout from the actions of a rogue trader , Jérôme Kerviel, in France who lost $7 billion of bank Société Générale’s money. Bank officials insist that this rogue trader acted on his own. The bank’s investors aren’t so sure. I don’t see what difference it makes. Huge bets were made that put all of the bank’s assets at risk. What difference does it make whether Kerviel acted alone or not? Either the bank officials are guilty of authorizing these huge bets or they are guilty of running a bank with such lax safeguards that a junior trader could put all the bank’s assets at risk. The end result is the same for the bank’s investors: they could have lost much more money, and the bank officials are to blame. Even if these bets had made money, instead of losing $7 billion, bank officials would deserve to be held accountable for taking unwarranted wild risks. If it turns out that Kerviel made fraudulent trades, he would deserve to be punished. But this p...

A rogue trader working for a bank has managed to lose a record $7 billion making unauthorized trades. The trader, Jérôme Kerviel, worked at the bank Société Générale in France. He lost the money trading in the European stock index futures market. Stock index futures are essentially side bets between two parties on whether the stock market will go up or down. This rogue trader made about $40 billion in bets that the stock market would go up, and as we have seen over the last week, those bets didn’t work out very well. When the bank discovered the huge bets, they sold them off quickly and ultimately lost $7 billion in the process. There have been many stories about rogue traders over the years. One thing all the stories have in common is huge losses. Don’t these rogue traders ever get lucky and make money? My guess is that many of them do make money, at least for a while. What would bank management do if they discovered a rogue trader who risked billions, but had made a bill...