Thursday, May 24, 2012

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.

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