Monthly ArchiveJuly 2006



Non-fiction 28 Jul 2006 17:16

The Four Pillars of Investing

coverThe Four Pillars of Investing
William Bernstein

For those interested in investing for the long term and, as the author puts it, not dying poor (and everyone should be), this book is an essential resource. It will teach you to evaluate the value of investment options and their expected returns, how to spread your money so as to take in the advantages of a proper diversification (and to deal with the disadvantages of a proper diversification — it works whether you want it or not) and, most important of all, to realize that the market is much, much smarter than you.

The author follows very much the line of Burton Malkiel’s Random Walk Down Wall Street, but this book seems to have a better foundation. He also stresses the importance of investing in index funds, and points the reader towards Vanguard as a great example of a customer-centric fund manager, but he steers the reader towards a proper portfolio allocation based on his/her current situation; this will mean not only a broad stock index fund, but potentially foreign stock, real estate investment trusts etc. Note that the book is very much US-centric; if you are outside the USA, you will have to adapt his portfolio to your local conditions. Vanguard, in particular, is not available in most of the world.

Much of the advice in the book goes against normal human instincts, but it makes sense when you think about it (and when you follow the author’s explanations). For example, when a stock has gone up recently, it’s not a good time to buy: a high price necessarily indicates a lower expected return. For the same reason, the best thing that can happen to a young investor is a generalised market crash: prices will be low and future returns will be high. You don’t see many investors hoping for crashes, though.

For the record, the four pillars are the theory of investing, the history of investing, the psychology of investing and the business of investing. Trust me, your broker doesn’t want you to read about the last pillar. Any investor who doesn’t want to rely on his/her luck to have enough money to retire safely should, though.

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Non-fiction 20 Jul 2006 14:11

The Long Tail

coverThe Long Tail
Chris Anderson

This book emerged from an article published in Wired in October 2004, which followed onto a blog while the book was being written (and the blog goes on, of course). The main point, as described in the original article, is that the digital economy and the amazing increase in the amount of choice offered to consumers are ending the era of “hits” and “blockbusters” and allowing consumers to have their most unusual tastes satisfied. This is where the subtitle of the book (“Why the Future of Business Is Selling Less of More”) comes from: instead of selling large numbers of units of a few “hit” products, businesses are increasingly selling less and less units of more and more different products.

The main examples centre around entertainment, as this is an “easily digitised” industry. For example, the amount of music tracks available on iTunes or Rhapsody is much, much larger than what is offered by Wal-Mart, and every single track sells – even if only once or twice a quarter. It may look like selling one unit of a product every three months is not much of a business advantage (especially if you’re not selling 767s, but a product that costs $0.99); but, when you have close to a million different “products”, the amount of money you make on hits will be seriously challenged by the money you make on “non-hits”. Wal-Mart can’t offer this many tracks because it costs too much: each track (actually, each CD) has to earn enough to pay for the space it uses in stores and distribution centres, and thus only the hits get displayed. A digital business does not have this problem.

The book contains several case studies of “long tail” companies (Amazon, Google, Rhapsody, among others), and goes to lengths to show that consumers like choice; every one has non-mainstream tastes, and these are usually not catered for by “normal” retailers. “Long tail” businesses do cater to all tastes, but an important point is made: choice is useless – harmful, even – if the consumer has no way of finding what he wants and assessing its relative quality. Hence the success of recommendation engines such as found in, for example, Amazon.

Chris Anderson, of course, does a much better job of talking about this than I do. The book is very well written, very entertaining and filled with well presented and well analysed data. Like Anil Dash, I had read the original article and had been following the blog, so I was a bit worried that reading this book would simply give me more of the same (or just plain the same); that’s not so. The book nicely complements both the article and the blog, and is essential reading to anyone involved with/interested in business – digital or not.

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Non-fiction 17 Jul 2006 11:45

The Millionaire Next Door

coverThe Millionaire Next Door
Thomas J. Stanley & William D. Danko

The stated intent of this book is to describe the “hidden millionaires” that live around us, so that we can become like them. It’s a very well-researched book, but after a few chapters it starts to get boring: there’s just not that much information in it. It can be abridged in a few sentences: millionaires don’t always look like they’re rich, and the way to become affluent is to spend money wisely (be frugal). And that’s it.

Sure, there’s loads more data in the book, but not much more useful information. You learn that most millionaires are entrepreneurs; that most of them do not receive, and have never received, financial aid from their parents; and so on. Plus, to be honest, some of the data is of very questionable value: a table with the cost per pound of a few hundred models of American cars, while interesting, doesn’t really add much value to the book.

And, honestly, I felt that some of the conclusions the authors reach are a bit odd. Some of the numbers presented don’t really lean that much in the direction the authors point, and some others really look like “data mining”, in the bad sense of the expression (that is, mining the data until one finds some correlation that points in the direction one wants). Plus, the appendix on how the authors selected the millionaires for their survey seems to contradict some of the conclusions reached in earlier chapters (they targetted affluent neighbourhoods, but they also claim that most millionaires do not live in affluent neighbourhoods).

So, for emphasis, the only real message of the book is: in order to become a millionaire, be frugal.

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