Doty, Bloomberg Visual Guide to Municipal Bonds

A month-old article on the CNBC website—and by the way one worth reading, "Seven Ways to Spot the Next Big Thing" by Thomas Goetz, listed “demand deep design” as number six. The author wrote: “Too often in technology, design is applied like a veneer after the hard work is done. That approach ignores how essential design is in our lives. Our lives are beset by clutter, not just of physical goods but of ideas and options and instructions—and design, at its best, lets us prioritize. Think of a supremely honed technology: the book. It elegantly organizes information, delivering it in a compact form, easily scanned asynchronously or in one sitting. The ebook is a worthy attempt to reverse-engineer these qualities—a process that has taken decades and chewed up millions in capital. But still, despite the ingenuity and functionality of the Kindle and the Nook, they don’t entirely capture the charms of the original technology. Good design is hard.”

Whatever your take on ebooks, technology is slowly replacing ink with pixels. I have no doubt that sometime in the not too distant future digital reading devices will reach a level of deep design.

In the meantime the Bloomberg “visual guide” series demonstrates that even established technologies can fall victim to veneer design. Robert Doty’s Bloomberg Visual Guide to Municipal Bonds (Wiley/Bloomberg, 2012) is more difficult to read because of the book’s design. And that’s too bad because there is a lot of good information here for the would-be investor in munis.

Start with the matter of issuer concentration in the municipal market. The top five states—California, New York, Texas, Illinois, and Florida—account for almost 46% of the market. California alone has $585.7 billion outstanding, more than the bottom thirty states and territories combined (if my math is correct).

Despite Meredith Whitney’s doomsday scenario for 2011, municipal securities issued primarily for essential governmental purposes have a minuscule default rate of less than 0.1%. An investor is subjected to greater risk with securities issued for other purposes—for instance, those intended to fund infrastructure for real estate developments or securities payable from revenues of start-up or rapidly-expanding projects. Securities with significant private participation are also on the “warranting special care” list. (p. 80)

Doty’s book is for the most part a series of questions and answers. Some examples:
What is EMMA? Quick answer: Electronic Municipal Market Access, a
 helpful resource.
What are special tax and assessment securities?
How do I know when ratings of my securities change?
When should I consider mutual funds and ETFs?
Does my receipt of Social Security affect tax-exemption of my
 municipal securities?

Investors contemplating entering the muni market will most likely have all their questions—and many they didn’t think to ask, or didn’t know enough to ask—answered in this book. It’s a thorough, reliable guide.

Weiss, The Big Win

Just as whale watching is a popular adventure tour for nature lovers, reading about the whales of finance is a popular pastime for investors. In The Big Win: Learning from the Legends to Become a More Successful Investor (Wiley, 2012) Stephen L. Weiss profiles one woman and seven men who have truly excelled.

First, a caveat about what Weiss describes as “the ugly reality of whale watching,” by which he means “blindly following large, smart buyers into a stock or other investment.” (p. 25) Unless an investor has insight into the whale’s rationale for making a particular investment, his time frame, and his risk appetite, the investor is at a considerable disadvantage. It is critically important, as Weiss writes, to “understand the process. … The true value of these case studies … is in understanding each investor’s methods, not standing in awe of their results.” (pp. 32-33)

Weiss’s eight legends—Renée Haugerud, James S. Chanos, Lee Ainslie, Chuck Royce, A. Alfred Taubman, James Beeland Rogers Jr., R. Donahue Peebles, and Martin J. Whitman—each carved out a niche and developed an investing style.

Haugerud, for instance, is a top-down investor. Her hedge fund, Galtere Ltd., has a five-stage investment process: taking the temperature of the global markets, developing a few themes, microanalyzing and selecting strategic investments, timing trades technically, and applying risk management. Her “big win” came in 1993. With gold trading as much as 40% above the world’s highest cost of production and the one-year bonds of Canada’s western provinces yielding 9 to 12%, she shorted gold for a rate of less than 1%, bought the bonds, and hedged her short gold position with undervalued small-cap stocks of mining producers in Australia that had high margins and low production costs. “’All three legs worked,’ as Haugerud puts it, and all kept working for a good long while. It was a simple trade, and the returns were good enough to carry that year’s performance to her stated goal and beyond.” (p. 50)

Chanos is a short seller, Ainslie a stock picker, Royce a small cap investor. Taubman and Peebles are both real estate developers, Rogers is a commodities investor, and Whitman is best known as a distressed debt investor.

What do all these legends have in common? Weiss catalogs seven traits: no emotion, no ego, long-term investors, discipline, thorough research process, passion and work ethic, and drive. Or, reduced to six words: “Drive. Passion. Process. Equanimity. Discipline. Humility. These are the commonalities between all those profiled in this book and the qualities that make for a great—and legendary—investor.” (p. 17)

The Big Win is an easy, thoroughly enjoyable read for those who want to learn from the whales.

Mauldin, The Little Book of Bull’s Eye Investing

As long-time readers of this blog know, I am a big fan of the “little book” series. Most of the titles in this series are wittily written distillations of major investment themes. Unfortunately, John Mauldin’s The Little Book of Bull’s Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets (Wiley, 2012) falls short of the mark.

Mauldin, who has written extensively about our muddle-through economy, believes that we are still in the secular bear market that began in 2000, that “we will not get to the real bottom of this bear cycle until after the next and third recession” (p. 147), and that we probably can look forward to another five to six lean years. What is an investor to do in this environment?

Buying gold is one choice; the author devotes a chapter to explaining why he’s bullish on gold. But the main thrust of the book is that the investor must buy value, preferably in small- and micro-cap companies. Referencing The Millionaire Next Door, he notes that “you are trying to find the right people to partner up with, those hard at work on becoming one of those next-door millionaires, who will take you along for the ride, even if in a small way.” (p. 138)

In fact, Mauldin, a self-confessed serial entrepreneur, seems conflicted between recommending that his readers invest in the businesses of others and encouraging them to start their own. As he writes, “Starting (or buying) and growing a business remains the single best way to create wealth. If you plan well and grow, maybe yours will become one of those small-cap value companies that will be perfect for Bull’s Eye investors.” (p. 177)

Mauldin spends much of this “little book” summarizing studies on a variety of topics such as market cycles, the macro scene, and behavioral finance. With so little space left for his own ideas, the book has an intellectually second-hand quality to it. And that’s too bad, because Mauldin doesn’t have over a million followers for nothing.

Anson, CAIA Level I: An Introduction to Core Topics in Alternative Investments

The Chartered Alternative Investment Analyst Association offers the CAIA Charter, designed for individuals specializing in institutional quality alternative investments. Attaining the charter requires a candidate to pass both Level I and Level II exams. This second edition of An Introduction to Core Topics in Alternative Investments by Mark J. P. Anson with Donald R. Chambers, Keith H. Black, and Hossein Kazemi (Wiley, 2012) was written primarily for those studying for their Level I exam. (The text geared to the Level II exam is Advanced Core Topics in Alternative Investments.)

For most folks, preparing for the Level I exam would definitely not be a weekend project. For starters, the text is almost 900 pages long. It is divided into seven parts: introduction to alternative investments, real assets, hedge funds, commodities, private equity, structured products, and risk management and portfolio management. Lest you think that the book is merely an overview of the field, the first part of the book takes up such topics as statistical foundations; risk, return, and benchmarking; correlation, alternative returns, and performance measurement; alpha and beta; and hypothesis testing in alternative investments.

Although I have no intention of becoming chartered in anything, I’m delighted with this book. It is a first-rate reference, bringing together in one well-structured, clear text a broad range of material that it’s probably taken me close to fifty books to cover, more or less. Although some of the material is intrinsically complicated, the authors have done a yeoman’s job of making it seem almost simple.

All in all, CAIA Level I is a solid achievement and should be a core holding in the libraries of serious investors.

Davis and Nairn, Templeton’s Way with Money

Sir John Templeton was one of the most successful fund managers of the twentieth century. At his peak, during the two decades after his move from New York to the Bahamas in the late 1960s, he outperformed the market by 6% per annum. Over his career he outperformed by 3.7% per annum.

In Templeton’s Way with Money: Strategies and Philosophy of a Legendary Investor (Wiley, 2012) Jonathan Davis and Alasdair Nairn chronicle the principles that informed Templeton’s investing style, relying extensively on Templeton’s letters to clients of his investing firm. In a fifty-page appendix they reproduce some of his observations on investing. The result is a compelling portrait of an innovative thinker, a disciplined investor, and a principled human being.

Templeton was a global investor long before it became fashionable to look beyond national borders for opportunities. And, though known as a value investor, his first and most famous fund (initially domiciled in Canada) was the Templeton Growth Fund. He looked for bargains, but “In his analysis of individual stocks, he recognized that there were various combinations of value and growth that could produce a company that was ‘cheap’ on a five-year forward earnings view. It could be a slow growing dividend-paying company whose shares were simply too low, or it could be a fast-growing company whose shares did not yet fully reflect that rate of future growth. ‘Never adopt permanently any type of asset or any selection method’ was one of his maxims. … investors need to ‘stay flexible, open-minded, and skeptical.’” (p. 110) Put another way, as Templeton wrote in one of his sixteen rules of investing, “Success is a process of continually seeking answers to new questions.” (p. 128)

As an example of Templeton’s flexibility the authors cite his decision in the spring of 2000 to personally invest more than $100 million in U.S. Treasuries funded by cheap borrowing in yen and to short technology stocks. “Both positions produced handsome rewards; shorting the technology stocks made a profit of $90 million and the Treasuries produced a gain of more than 80 percent over the subsequent three years.” (p. 110)

Templeton’s advice is by and large commonsensical but nonetheless devilishly difficult to follow. There are no shortcuts. For instance, he disputes the claim of modern portfolio theory that diversification is one of the few free lunches in investing: “Everyone should read about modern portfolio theory, but honestly they are not going to make much money with it. I’ve never seen anybody that came up with a really superior long term record using only modern portfolio management.” As the authors comment, “His point here was not that diversification was wrong, but that the notion that building portfolios on the basis of unreliable and irrelevant statistical inputs, such as historical volatility, was doomed to failure.” (p. 129)

Investing is hard, and it requires hard work. Trying to figure out what a company’s P/E will be in five years is not a task for the slacker. For most of his life Templeton himself worked twelve hours a day for at least six days a week and exhibited an “ability to focus single-mindedly on the task in hand.“ (p. 24) Successful investing also requires “the temperament and patience to wait for superior results to come through.” Templeton was fortunate in this regard; he was “blessed with a temperament in which patience, forbearance, and confidence in the face of adversity were constants.” (p. 165)

Templeton’s Way with Money is a tribute both to an investing legend and to enduring investment principles. It’s a welcome addition to the literature of finance.

McIntosh, The Sector Strategist

Pension funds, wealthy families, and risk-averse dreamers with portfolios of stocks and bonds expect an 8% long-term rate of return on their investments. Timothy J. McIntosh quashes these expectations. Over the next ten years he thinks that 5% to 6% is the more likely outcome for a portfolio split evenly between stocks and bonds.

In The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns (Wiley, 2012), however, he offers tips on how to get to the magic 8% level of returns. His primary thesis is that “sectors are just as important, if not more so, than international or cap size exposure.” (p. 37) Moreover, “if investors are to consider sectors as a primary component to their investment strategy, three criteria should be used: superior historical investment returns, low correlations with other sectors, low volatility or beta.” (p. 48) The sectors that meet all of these criteria are health care, consumer staples, and energy. Runners-up, with higher risk, are financials and technology.

McIntosh examines these five sectors in some detail, complete with case studies of stocks he purchased for his own clients using fundamental analysis.

Rounding out McIntosh’s recommended portfolio are corporate bonds, some gold, and REITs. McIntosh directs those investors with small accounts (under $30,000) to ETFs and mutual funds rather than individual stocks and offers specific suggestions.

He also presents three model portfolios by asset class: the aggressive, moderate, and balanced. The moderate portfolio, for instance, designed for those between the ages of 40 and 55, contains 25% health care stocks, 25% consumer staples stocks, 10% energy stocks, 7.5% technology stocks, 2.5% financial stocks, 20%BB- to BBB-rated corporate bonds, 5% REITs, and 5% precious metals. The balanced portfolio increases the weighting of bonds to 35%. Over the period 1986-2010 the aggressive portfolio had an annualized return of 11.94%, the moderate portfolio 11.73%, and the balanced portfolio 11.51%. The S&P 500 index had an annualized return of 10.36% and an equally weighted portfolio of stocks and U.S. Treasuries 9.34%.

McIntosh’s asset allocation method is grounded in academic research, but this book is thoroughly practical. For investors going the ETF or mutual fund route, it provides turnkey portfolios. For those who want to be stock pickers, it describes how to winnow down a list of stocks to find the most promising candidates.

Thomsett, Bloomberg Visual Guide to Candlestick Charting

Bloomberg Press, an imprint of Wiley, has launched a new high-end paperback series that stresses visual learning. Michael C. Thomsett’s Bloomberg Visual Guide to Candlestick Charting (2012) is the first book in the series.

I rarely write about book design even though I spent many years working with some of the top book designers in the country (and, yes, some painfully mediocre ones as well). But since Bloomberg’s new series is essentially a design statement, it is worth spending a little time on layout.

I have two books from this series here for review, so I think I have a pretty good sense of how the series is being structured. Each book is 10” x 7”—that is, it’s wider than it is tall. This extra space is necessary to accommodate marginal boxes with white text on color-coded backgrounds. These boxes contain key points, definitions, smart investor tips, step-by-step tutorials, and do-it-yourself worksheets, formulas, and calculations. The boxed text can be very difficult to read, especially when the background color is light. The task is even more difficult when the text is italicized.

Personally, I find these boxes distracting. The key points, for instance, are “designed to help the reader skim through definitions and text.” But why does the reader need to squint to read the key points from a perfectly lucid two-paragraph text? I’m not exaggerating; there are several such examples in Thomsett’s book. Thankfully, this book isn’t cluttered with boxes in all the colors of the rainbow; by and large the only distractions are orange boxes with white text. (But just wait for the second volume in the series.)

So if you, like me, skip the boxes, what’s left? In the case of Bloomberg Visual Guide to Candlestick Charting, a great deal. The bulk of the book is devoted to individual candlestick patterns, presented alphabetically. Facing pages describe the pattern and its significance in words (verso) and present the pattern graphically (recto). The graphics are absolutely first-rate. The pattern is first shown in a stylized form and then highlighted on a large, clean chart.

Another major section of the book addresses noncandlestick confirmation indicators and terms. For the most part, it deals with chart patterns and technical indicators, some of which are appropriately illustrated. But there’s also a “kitchen sink” element to this section. One finds entries, for instance, on day trading, paper trading, and technical analysis.

A final design quibble. If you’re hard on books, you’ll break the binding of this paperback in no time because the inner margins are very tight. If you prefer to go the e-book route, you’ll get extras: video tutorials and “special pop-up features.”

The book’s core (that is, the text and charts, especially in the candlestick pattern section, sans marginalia) is beautifully executed. It is an invaluable reference guide to candlestick charting. In fact, were it not for the extra “helpful” learning aids, I would unequivocally recommend Thomsett’s book to anyone interested in an elegantly presented catalogue of candlestick patterns. The ill-conceived pedagogical ideas on display in this book only modestly temper my recommendation.