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Book Review: Rethinking Investing

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By Michael J. Wiener

Special to Financial Independence Hub

 

I liked Charles Ellis’ book Winning the Loser’s Game so much that I had to read his latest: Rethinking Investing.  It is very short at just over 100 small pages, but is packed with good advice.  Some of it is specific to U.S. tax laws, but most of it is useful for Canadians.

Ellis takes on three huge areas of personal finance.  The first is your portfolio allocation, or what you should invest in.

The second is your savings plan, and the third is your “spending rule,” or how to spend your assets during retirement.

A detailed treatment of these areas could easily run to thousands of pages, so this book is necessarily at a high level.  Ellis wants you to get the broad ideas right, so that you won’t make big mistakes as you fill in the details.

Ellis calls compounding investment returns “your power curve.”  He explains that most of your investment growth comes at the end, which provides motivation to begin early.  Saving is “your first priority.”

Saving

He offers thirteen specific suggestions for saving money, such as use employer matching, automate deductions from pay, invest bonuses, buy preowned cars, consider a smaller house, “self-insure for auto damages under $10,000 — or whatever you can comfortably afford to pay in the unlikely event of a major accident” — and use term life insurance.

Unlike recent popular advice to focus only on big expenses, Ellis says that “Lots of small-expense items can add up and cut your potential savings.”

Investing

Ellis repeats the main themes of Winning the Loser’s Game to explain why low-cost index investing is the way to go.  “The growing market dominance of expert professional investment managers … has made the market harder and harder to beat.”

There are three factors slowing down the “widespread adoption of indexing.”  Referring to index investing as “passive” has negative connotations for most people.  “Nobody wants to be known as passive.”  The second factor is that “most investors find it hard to believe that talented active managers with superb information won’t beat the market.”

These active managers “fought against indexing as though they and their careers were seriously threatened: as they surely were and certainly are!”  The third factor comes from the media, who know “that indexing’s persistent successes would not make for compelling or even interesting copy.”

When investors make active choices on market timing, they tend to perform poorly.  Unfortunately, Ellis points to reports from DALBAR for evidence of this pattern.  While it’s true that retail investors make poor market timing choices on average, DALBAR’s methodology for computing their losses is nonsense.

Bond allocation

Ellis makes an interesting pitch for investors to own more stocks and fewer bonds.  He asks investors to include the following as part of their bond allocation: “home equity, the present value of your Social Security benefits [CPP and OAS in Canada], and your future estimated savings plus any likely inheritance.”

While I think many people would be better off with a lower bond allocation during their working years, I have to push back on the future estimated savings and inheritances.  Maybe government workers can treat future savings as bond-like, those in the private sector have a lot of uncertainty in their future savings.

As for an inheritance, I see huge uncertainty in most cases.  A parent may end up needing the money for elder care, or may give it to someone else, or may have less money than you think.  The money I will leave to my sons is mostly invested in stocks, and they will get what’s left after all my spending.  The amount they will get does not have bond-like attributes.

All that said, if thinking about home equity, government payments, future savings, and an inheritance helps people tolerate the short-term swings in stock prices, then maybe Ellis is right to give this advice, even if it isn’t all technically correct.

Retirement spending rule

Ellis encourages people to think about drawing from their savings in retirement like a university endowment.  “First, average the year-end values of your assets over the prior several years (preferably more than five years) to dampen the impact of market fluctuations.”  Then choose a prudent annual withdrawal percentage, “likely 4–5%.”

“For example, if you settle on a 5% rate of withdrawal and a six-year moving average of the year-end value of your assets, a 30% drop in the stock market would lead to only a 5% reduction in your payout that year.”  This approach offers an alternative to “having a portfolio laden with low-return bonds.” Continue Reading…

3 books I just read that Retirees DIYing their pensions need to read

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My latest MoneySense Retired Money column looks at a must-read new book on Retirement as well as two related books on DIY stock-investing. You can read the full column by clicking on the highlighted headline: Who you gonna trust: Barry Ritholtz or Jim Cramer?

The must read and main focus of the MoneySense column is William Bengen’s A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More. If that sounds familiar it should: Bengen’s original book on the 4% Rule is considered the bible of retirement, with his famous “SAFEMAX” guideline of 4% a year being an annual amount of withdrawals that should be “safe” for retirees to continue for a full 30 years, even after inflation. The original book,  titled Conserving Client Portfolios During Retirement, was first published in 2006.

Never mind that even Bengen considers 4.7% be a more universal SAFEMAX. The original book was aimed at financial advisors and professionals while the new one ostensibly is aimed at retail investors and retirees. I say ostensibly because I was a little disappointed with it and found the plethora of complicated charts and tables a bit much for lay investors. Still, there’s a lot of common sense there: Inflation is big long-term threat to retirees as are bear markets. Withdrawing too much from portfolios can be disastrous if you are unfortunate enough to retire just as a bear market hits and/or inflation starts to bite.

On the other hand, sticking with the old 4% rule or even the smaller amounts of 3% or even 2% advocated by some cautious souls, could result in you withdrawing less than you really need to enjoy retirement, although the tax department and any heirs might commend your caution and frugality.

How to make money in any market

Amazon.ca

While it’s rare for me to buy new hardcover books because I receive so many “free” review copies of financial books, I actually did buy A Richer Retirement as soon as it was available on Amazon. Plus, unusually, I also bought two other brand new books on the related topic of investing and stock-picking.

One was Jim Cramer’s How to make money in any market, by the sometimes revered but often maligned host of  CNBC shows Mad Money and Squawk on the Street. It’s fashionable for some financial journalists who believe in efficient markets and indexing to diss Cramer but I am not in that crowd. In fact, Cramer recommends that newcomers to investing put the first US$10,000 into an S&P500 index fund or ETF.

However, for seasoned investors and even retirees, Cramer suggests putting half a portfolio in index funds and the other half in individual stocks. Where we part company is his recommendation that the bucket of stocks be restricted to just five names, which would mean 10% in each. For my money, that’s way too concentrated and risky, even though he often brags about how he is often accosted by Nvidia Millionaires who tell him they bought that stock as soon as he announced on air that he had renamed his dog Nvidia.

How NOT to invest

Amazon.ca

Finally, regulars to this site may already have read Michael Wiener’s review of Barry Ritholtz’s How NOT to invest, which appeared here in this blog a few weeks after appearing on his Michael James on Money blog.

To be sure, those who are fond of disparaging Jim Cramer might quip that should have been the title of his own book, seeing as there are actually ETFs out there that try to profit by shorting Cramer’s picks. As of this writing, my copy has arrived but I have not yet finished reading it, as it’s a bit longer than the other two.

But based on the book blurbs and Michael’s review, I have no doubt it will be worth reading, whether for younger investors or seasoned ones and/or retirees.

Finally, while I only just received my review copy, I note that David Chilton is publishing a new edition of his classic financial novel, The Wealthy Barber, which any young person just starting to invest should acquire.  I look forward to revisiting it.

 

 

 

How NOT to invest (Book Review)

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Special to Financial Independence Hub

 

Before reading Barry Ritholtz’s book How Not to Invest, I wondered if the “Not” in the title was a sign it would be filled with gimmicky ways of giving investment advice.

It isn’t.  Investing well is simple enough, but the world tries to push us towards many types of poor choices that lose us money.  The best advice is a list of the many things to avoid when investing.  This book gives readers the benefit of Ritholtz’s extensive experience with staying on the simple path to investing success.

The book is organized into four parts: Bad Ideas, Bad Numbers, Bad Behavior, and Good Advice.

Bad Ideas

Part of what makes it so easy to push investors toward bad ideas is that we believe secret ways to create wealth exist when, in fact, they don’t exist.  “We don’t like to admit it, but nobody knows anything about the future — not just you and me, but the so-called experts too.”

I’ve had the experience of getting people to agree that the future is unknown, and then they immediately ask what I think will happen with interest rates.  It’s hard to get people to really believe the future is unknown.  Ritholtz does an excellent job of going through some high-profile examples of the futility of forecasters.  Instead of searching for the right seer, he suggests having a “financial plan that is not dependent upon correctly guessing what will happen in the future.”  “Don’t predict what will happen, but rather, assess the range of possible outcomes — what could happen.”

So much of the information we see about investing is just noise.  Ian Cassel said “The maturation of every investor starts with absorbing almost everything and ends with filtering almost everything.”

It is freeing to admit we don’t know what will happen and to plan for a range of possible outcomes.  What too many people do is “Make predictions, then marry those forecasts.”  If they’re wrong, “This usually leads to catastrophic results.”

Bad Numbers

This part of the book starts with a good section on economic innumeracy that discusses denominator blindness, survivorship bias, mathematical models, and the fact that we respond better to anecdotes than data.

Part of what makes this book a pleasure to read is Ritholtz’s optimism.  Paul Volker once said “The only useful thing banks have invented in 20 years is the ATM,” but the author lists 20 useful financial innovations, including index funds, ETFs, low costs, fast trade clearing, and cash-sending apps.  The challenge for investors is to benefit from these innovations rather than lose money with them.

The author sees bull and bear markets as secular periods characterized by either high price-to-earnings (P/E) ratios or low P/E ratios.  I’m not sure how he thinks investors should use this information.  In my case, I use P/E levels to make modest formulaic adjustments to both my asset allocation and my expectations for future stock returns.

Sometimes people overestimate how much the news of the day will affect markets.  Some industries were devastated by Covid-19.  However, it turns out that these industries represent a small fraction of overall markets.  If in “mid-2020, the 30 most economically damaged industry categories were delisted, it would have shaved off just a few percentage points from the S&P 500.”

There is a winner-take-all tendency in many areas, including stocks.  “Just 1.3% of the public companies listed in the United States account for all the market gains during the last three decades.”  We can “find the best-performing stocks by buying them all” in an index fund.

“Simplicity beats complexity every time.  A portfolio of passive low-cost indexes should make up the core of your holdings.  If you want to do something more complicated, you need a compelling reason.”

Bad Behavior

“Bad behavior leads to bad investing outcomes.”  Ritholtz categorizes bad behaviour into ten areas, and he illustrates some of them in an amazing story about a billionaire family called the Belfers.  They lost money with Enron, Madoff, and then FTX!  “Has there ever been a greater, more unholy trifecta than this?”  Even billionaires make some terrible choices.

“If only we made better decisions, we would all be so much better off.”  If we could eliminate all investing mistakes for everyone, we might be better off on average, but there is a zero-sum aspect to investing mistakes.  Your loss is someone else’s gain.  The main overall benefit of eliminating all investing mistakes is that those employed exploiting such mistakes would move on to do something useful for society. Continue Reading…

Bullshift and Misguided Beliefs

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John De Goey, a financial advisor and portfolio manager with Designed Securities, and long-time commentator on the financial services industry, was a keynote speaker at The Money Show recently held at the Metro Toronto Convention Centre.

Author of the book ‘Bullshift – How optimism bias threatens your finances’ (Dundurn Press, Toronto, 2023) and host of the popular podcast Make Better Wealth Decisions, De Goey delivered a presentation called Bullshift and Misguided Beliefs.

‘Bullshift,’ the term De Goey has coined, refers to his view about how the financial services industry makes people feel bullish in order to do the industry’s bidding. To make his point, he noted full-page ads appearing in such publications as The Globe and Mail; one of them ran under the headline ‘Be bullish.’

As for misguided beliefs, De Goey says there is ample evidence that Canadian mutual fund registrants believe things which are patently untrue. To illustrate the latter, he referred to Brandolini’s Law.

Alberto Brandolini was an Italian programmer who developed the term in 2013 and his rule goes like this: The amount of energy required to refute BS is an order of magnitude bigger than what was needed to produce it in the first place. Or, put another way, it compares the considerable effort needed to debunk misinformation to the relative ease in creating that misinformation.

American writer and humourist Mark Twain had a take on this at a much earlier time, and De Goey cited that. Said Twain: “It’s easier to fool people than to convince them that they have been fooled.” The point beyond all this, said De Goey, is that people must unlearn what they think they already know. No easy task.

His presentation at The Money Show covered a number of topics including:

  • The difference between misinformation (an honest mistake) and disinformation (saying something that is deliberately false), and how to unlearn the latter and think for yourself.
  • How behavioural economics and social psychology affect your investing decisions.
  • How the industry uses motivated reasoning and tribalism as opposed to critical thinking and evidence.
  • Why 90% of our financial decisions are based on emotions, not logical thinking.
  • Why governments and financial advisors like optimism over realism.

De Goey, always a student of history, observed that the market is 30% more expensive now than it was in 1929 just before the stock-market crash that led to the Great Depression. He mentioned the Smoot-Hawley tariffs of 1930 and their catastrophic impact on the U.S. economy, not to mention worldwide economy, and compared this to today’s on-and-off tariffs coming out of the Trump White House. He also noted recent credit downgrades and their effect on the U.S., and, of course, the very real pain of the tariffs which he believes will be much worse in the fourth quarter of 2025. What’s more, De Goey says this will be accompanied by higher inflation.

Bear market looming?

De Goey said the current bull market is “taking its final bow” and the bear market is “waiting in the wings.” In fact, he warned that gains made over the past six years could be entirely wiped out in the next four years if the historical regression to the mean for CAPE occurs. For those who are retired or nearing retirement, this would be devastating news indeed.

One of De Goey’s pet peeves – ‘optimism bias’ – refers to a) people thinking the good times will continue despite blatant warning signs, and b) the very human sentiment that bad things happen but only to other people. Not true, says De Goey. The trouble, he says, is that optimism can sometimes put you in trouble.

Normally, a presentation about money, economics and investing doesn’t get into wisdom imparted by such luminaries as Mark Twain, but De Goey didn’t stop there. He also took a page from Carl Sagan, notably, his 1997 book ‘The Demon-Haunted World. Said Sagan: “If we’ve been bamboozled long enough, we tend to reject any evidence of the bamboozle. We’re no longer interested in finding out the truth. The bamboozle has captured us. It’s simply too painful to acknowledge, even to ourselves, that we’ve been taken. Once you give a charlatan power over you, you almost never get it back.” Continue Reading…

Book Review: Tightwads and Spendthrifts

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By Michael J. Wiener

Special to Financial Independence Hub

 

In his book Tightwads and Spendthrifts, marketing professor Scott Rick promises advice for “financial aspects of intimate relationships.”

What got my attention early is that his guidance “is rooted in rigorous behavioral science.”  Applying the scientific method to human interactions is challenging, but it is generally better than relying on opinions.  The book gives useful insights into how people think about spending money.

The introduction gives a four-question quiz designed to place the reader on a scale from 4 to 26.  Those at the low end of the scale are called tightwads, and those at the other end are spendthrifts.  Roughly half the respondents fell in the middle third of the range and are called “unconflicted consumers.”  Most of the book deals with tightwads, spendthrifts, and their interactions; little is said about unconflicted consumers.

Demographic differences

Extensive surveys revealed some interesting demographic differences between tightwads and spendthrifts. “Tightwads are slightly older than spendthrifts,” but it’s not clear why.  Do people become tighter with money over time (perhaps from getting burned by debt), or are there differences between generations?

“Women were somewhat more likely than men to be spendthrifts, and somewhat less likely than men to be tightwads.  Tightwads were somewhat more likely to be highly educated, and they tended to opt into more mathematical majors, such as engineering, computer science, and natural science.  The most popular college majors among spendthrifts were social work, communication, and humanities.”

How tightwads think

Being a tightwad is not the same as being frugal; “the highly frugal love to save, and tightwads hate to spend.”  “The highly frugal are generally much more at peace in their relationship with money than are tightwads.”

It might seem intuitive that people are the way they are because of how much income they have available to spend, but “in survey after survey, we find no income differences between tightwads and spendthrifts.”  However, “tightwads have far more money in savings and significantly better credit scores than spendthrifts.”

Having higher savings “offers no guarantee that tightwads feel financially comfortable.  Subjective feelings of financial well-being are only loosely related to objective aspects of financial well-being.”  For many tightwads, financial “anxiety stems from economic conditions early in life.”

Tightwads tend to think in terms of opportunity costs when considering spending some money.  In one experiment where some participants had opportunity costs highlighted to them and others didn’t, “spendthrifts were twice as likely to buy the cheaper option” when opportunity costs were highlighted.  “This framing did not influence tightwads.”

While tightwads spend less than spendthrifts in almost every area, “the amount of money both types had donated to charity was the same.”

How spendthrifts think

“Spendthrifts report high susceptibility to shopping momentum and what-the-hell effects.  They commonly report going to buy one thing, then getting carried away.”  “Spendthrifts are significantly more impatient than tightwads.”  Interestingly, spendthrifts tend to understand these facts about themselves, and are not surprised when they later regret their purchases.

“Spendthrifts and compulsive buyers might spend similarly on any given shopping trip, but their underlying psychology differs significantly.  Spendthrifts do not appear or report to be driven by anxiety management or mood repair.”

“Spendthrifts score slightly lower than tightwads on a financial literacy quiz.”  However, Rick says that this is not a defining difference between tightwads and spendthrifts.

Is “spendthrift” an oxymoron?

The word “spendthrift” appears to blend contradictory elements: spending and thriftiness.  However, “thrift here is used as a noun — meaning ‘savings ’— as it was in the seventeenth century.  So spendthrifts are traditionally defined as people who recklessly spend their savings.”

Compensating for financial tendencies

Rick offers ways for tightwads and spendthrifts to compensate for their feelings about money.  The first is to change “payment salience.”  The book offers ways for tightwads to feel the pain of paying money less, and for spendthrifts to feel it more (e.g., by using cash more often).

Tightwads can reframe high-end purchases to think of them as a means to get high quality items.  They can add a line item for indulgences into their budgets to make spending a “to-do” item.  They can also reexamine their finances to confirm that all is well and, hopefully, reduce financial anxiety.

Spendthrifts can be mindful of opportunity costs, try to delay spending (e.g., sleep on it), and set saving reminders for themselves.  Interestingly, spendthrifts might understand “better than tightwads” that “the excitement that comes with a new product usually fades over time,” but this knowledge doesn’t appear to help them reduce spending.

Relationships

When we consider marriages among tightwads and spendthrifts, but not including any “unconflicted consumers,” 58% are between a tightwad and a spendthrift, and only 42% are between two people at the same end of the tightwad-spendthrift scale.  “We tend to marry people who share characteristics that we like in ourselves.  However, a key insight about tightwads and spendthrifts is that they do not particularly enjoy being tightwads and spendthrifts.”

Although some prominent people who advise their followers on personal finance topics consider any money secrets between spouses to be “financial infidelity,” Rick thinks there is room for a small amount of secrecy as long as it’s not the cause of financial shortfalls.  How much secrecy is desirable or tolerable probably varies from one couple to the next.

“Latte factor myth”

Rick adds his two cents to the endless debate on whether we should engage in small indulgences by siding with those who say it’s fine to buy expensive coffee.  Like most others, Rick approaches this debate as a binary choice: lattes are either universally good or universally bad. Continue Reading…