The front cover of Jackass Investing is adorned with images of hundred-dollar bills strewn about in haphazard fashion. The subtitle is “Don’t do it. Profit from it.” Inside, the content is structured not by chapters, but by “myths” that Michael Dever methodically busts one by one. He does this, he emphasizes time and time again, to save the reader from accumulating a “poor-folio.” Even the design of the book’s web site, http://www.jackassinvesting.com, seems one small nudge away from that of a low-budget Ponzi scheme.
So one can forgive me, I hope, when I confess that these elements immediately recalled for me the overly-gesticulative, used-car salesman aura of Mad Money‘s Jim Cramer. Dever, the founder of Brandywine Asset Management, is not gun-shy with his similes. But I soon learned not to conflate style with substance. Jackass Investing is a very useful book indeed, not least for the clear language Dever uses to rapidly rebut decades of conventional wisdom in the world of investments.
As a relative novice to active investing (I am, however, the proud owner of an E-Trade account and a quickly depleting “poor-folio” of international stocks), I would be hard-pressed to counter Dever’s claims with fact-finding of my own. But that, in a sense, is what makes this book so compelling: the common-sense nature of each of his principles is immediately obvious to financiers and laymen alike.
Dever is especially harsh on the oft-cited philosophy of “buy-and-hold,” a mantra often repeated by the chattering class on TV but which represents, in the author’s words, “neither rocket science nor sound investment advice.” Buy-and-hold is uniquely favorable to a bull market but not much else, and thus its usefulness to investors has “shriveled together with the values of their stock portfolios throughout the secular bear market that began in 2000.”
Jackass Investing is singularly concerned with “return drivers,” those forces pushing specific assets up in value. For much of the last several decades, both individual and institutional investors generally invested in stocks, bonds, and other assets based on the general upward trend of the market, without paying closer attention to the underlying problems. The price/earnings (P/E) ratio was usually increasing as well, signaling that investors were jumping on the bandwagon and were comfortable paying more for the same stock than they would have during a bearish run.
Dever opts instead for a novel trading strategy, one that is simultaneously intuitive and counter-cultural. He carefully explains why experts are not to be trusted, disavows readers of the myth that ratings agencies can protect them from bad investment strategy, and, perhaps most importantly, emphasizes that portfolio diversification is both absolutely vital and almost universally ignored.
“Portfolio diversification,” Dever declares, “is the financial equivalent of magic.” For years, diversifying one’s holdings has usually been defined as taking positions “across multiple asset classes in order to diversify their risk.” In reality, however, many stocks, bonds, and real estate assets are supported by similar return drivers, thus exposing themselves to “event risk.” If the underlying stimulus factor changes or shifts, all holdings — regardless of asset class — could decrease sharply in value.
True diversification, then, means dipping one’s toes into unfamiliar waters. Dever goes into great detail on home-team bias, the principle (unconscious or otherwise) by which investors stick to the familiar, better-known assets, leaving potentially high-value stocks and other financial instruments out of their planning with nary a second thought. “For example,” Dever explains, “while the U.S. equity markets account for just over 30% of the total capitalization of all the world’s equity markets, U.S. institutional investors allocate more than 50% of their money to U.S.-listed companies…Japanese institutions hold more than 80% of their money in Japanese companies, despite Japanese markets accounting for less than 9% of the world’s capitalization.” By shutting oneself out of foreign markets (or futures contracts, or commodities trading, or any other market conventionally deemed overly risky), one is severely limiting significant money-making opportunities.
Here’s where Dever’s approach becomes slightly ambiguous. As I see it, the continued existence of longstanding tropes such as buy-and-hold is due to the absence of a simple alternative. Fundamentally, Dever’s ideas fall into that category. But while the ideas themselves may be easy to grasp, the execution requires a lot more work than its buy-and-hold counterpart. Whereas the latter can be accomplished simply by purchasing a collection of assets and virtually ignoring it thereafter, the former necessitates a more hands-on approach, in which thorough research, investigation, and asset selection all play major roles. Dever would argue that such background work is required for all forms of investing, and that failure to do so will inevitably result in sub-par returns. The question, then, is whether his approach excludes investors without much time on their hands.
I also would have preferred to see more examples of actual trading strategies presented in opposition to the myths Dever debunks in each section. For this he continually refers readers to his web site instead.
Jackass Investing, then, far surpassed my shallow initial judgments and provided clear insights into investing strategies that, as Michael Dever writes, “should not be controversial, but…will be.” Hell, I even logged in to my E-Trade account a few chapters — nay, myths — in, sold off my under-performing BP stock, and loaded up on Renren, a Chinese social network. After all, if 1.3 billion people with rapidly increasing Internet access isn’t a damn strong return driver, I just don’t know what is.
- Walking With Giants: An Interview with Paul Merriman (businessinsider.com)
- Buy and Hold Investing Works (bargaineering.com)
- How much diversification do you really need? (money.cnn.com)