The investor’s guide to summer reading

By Larry MacDonald
Globeinvestor Magazine Online, July 18, 2008

The lazy hazy days of summer are here. What are you doing during your down time? For many, there is nothing better than curling up with a good book. And for investors, the plethora of financial books published in 2008 provides plenty of choice. Here, in concise form, are seven recommendations.

1. Fooling Some of the People All of the Time: A Long Short Story, by David Einhorn, is the gripping account of the bitter battle between the author and Allied Capital, a company whose shares Mr. Einhorn’s hedge fund sold short several years ago. The author questioned the company’s business model but his fruitless efforts to elicit action from regulators, analysts, journalists, and government officials left him with the impression the U.S. financial system doesn’t protect investors, taxpayers, and small businesses.

2. The Intelligent Portfolio: Practical Wisdom on Personal Investing from Financial Engines, by Christopher L. Jones, is another panegyric to the low-cost, index-fund approach – with enough unique content to give both beginning and experienced passive investors food for thought. The unconventional advice includes:

• use forward-looking models, not historical data, as the basis for portfolio allocations;



• don’t rebalance to target allocations;



• don’t tilt to small-cap and value stocks;



• minimize alternative assets, e.g. commodities, emerging markets, and REITs.

3. The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, by Charles R. Morris, is an easy-to-read narrative on the current credit crunch. Mr. Morris estimates the value at risk within the financial system to be 100 times that of the 1998 crisis sparked by hedge fund Long Term Capital Management. He also believes the trend of the past three decades toward deregulation will give way to an era re-regulation.

4. The Little Book That Builds Wealth: The Knockout Formula for Finding Great Investments, by Pat Dorsey, provides an in-depth guide to spotting companies with lasting competitive advantages, or wide “economic moats” as Warren Buffett called them. The four kinds are distinguished by:

• intangible assets such as patents or brand names;



• switching costs that make it hard to change to a substitute;



• network effects such as a distribution system;



• cost advantages arising from control over critical production processes.

5. The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means by George Soros, concisely explains the origins of the U.S. financial crisis (easing of lending/regulatory standards) and implications (e.g. death knell of the 25-year super cycle of credit expansion). The book also has one of the more accessible explanations of the legendary speculator’s philosophical views, particularly his notion of “reflexivity” and how it imparts a boom/bust pattern to financial markets.

6. The Ultimate Dividend Playbook: Income, Insight and Independence for Today’s Investor, by Josh Peters, offers a cogent case for dividend investing (for example, the 100 highest-yielding stocks in the S&P 500 earned 14.1 per cent annually from 1958 to 2003 compared to 9.5 per cent for the 100 lowest yielding). There is also a comprehensive guide to evaluating dividend stocks, which emphasizes:

• safety of payout (projected earnings exceed dividend by wide margin);



• likelihood of dividend growth (growth potential of earnings, etc.);



• total annual return (equals dividend yield plus annual growth rate of dividend).

7. When Markets Collide: Investment Strategies for the Age of Global Economic Change, by Mohamed El-Erian, may not be a terribly easy read but is still worth digging into given the author is widely recognized as a leading authority in the financial world (regularly contributes to the Financial Times of London and has done senior-level stints at the International Monetary Fund, Harvard endowment fund, and bond investing giant, Pimco). What’s value added in his book is the leading-edge thinking on global trends and model portfolios.

Special to The Globe and Mail