Book Review – Black Edge

I just finished reading Black Edge, by Sheelah Kolhatkar and I give it a 4/5 star rating.

The book focuses on the hedge fund industry and insider trading, specifically at SAC Capital. SAC Capital started in the early 1990s by Steve Cohen and has enjoyed ~30% annual returns for more than a decade. Black Edge outlines some of the methods by which these massive returns were generated.

What exactly is Black Edge?

White Edge refers to information that gives some advantage but is already publicly available. Gray Edge refers to information that is not widely known and could influence a stock price once widely known. Black Edge, however, is information that is clearly illegal to share or to trade while in possession of the information. In this book, traders would try to get Black Edge like detailed quarterly earnings and drug test results.

On Wall Street, traders are always seeking some type of edge. A great example of this can be read in this article from the Wall Street Journal a couple of years ago. Did you know you can subscribe to a service that will fly a helicopter over oil storage facilities to measure inventory levels with advanced cameras? These subscriptions can cost over $300,000 per year, but can be worth millions to traders.

This book also talks about ‘Expert Networks’ used by SAC to get access to company insiders. These networks allow individuals with expertise to tap into a network that will pay them handsomely for consulting. Investment management firms can use these experts to refine their models and assumptions. These conversations are supposed to avoid discussion non-public information. It’s a pretty good arrangement on its face but it opens the door for information to be shared that shouldn’t be. Those who might want to profit from knowing something big before anyone else can use these networks to their advantage.

The Bottom Line

The story is very well researched and written and provides a window into a secretive area of the market. Although I read it for entertainment, I still tried to learn something. My takeaway was yet another reminder that I have no business picking individual stocks and competing with folks like this. I’ll just stick with index funds for the bulk of my investing.

Book Review – The Introvert Advantage

In our household we spent several years where we only got books from the library and hardly purchased any books. Ever since finishing my MBA, we’ve budgeted $40 a month for books, allowing each of us to buy roughly one book per month. My wife and I both just finished reading ‘The Introvert Advantage: How Quiet People Can Thrive in an Extrovert World’ by Marti Olsen Laney and think it’s worth checking out. I almost gave it four stars but settled on three since I lost interest about 2/3 of the way through the book after the main points were delivered. This is likely because the target audience for the book is introverted people and while I too have many introverted tendencies, I don’t consider myself an extreme introvert. Those with stronger introvert leanings may get a lot more out of this book.

On the other hand, Mrs. DIY$ is an extreme introvert, I am the more outgoing person in our relationship by far. We’ve found that we balance each other out well, causing each other to occasionally experience things that we may not have done on our own. I tend to be the one who wants to go to social gatherings or explore new things where she is generally content to do things she is comfortable with and already knows. Her introversion strongly contrasts with some of our friends who seem to be constantly on the go and never taking time to relax.

As a result of her introversion (and both of our disinterest in being part-time chauffeurs), our kids are not involved in pretty much any extra-curricular activities or sports. If they express interest in joining we’ll support them, but aren’t actively pushing anything other than my teaching the occasional piano lesson or a monthly, one afternoon STEAM (science, technology, engineering, art, and math) club challenge. Our home is her sanctuary and since I do most of the grocery shopping she could easily go a week without leaving the house. We’ve always joked that she is a bit of a hermit but this book helped us both recognize that some of these traits aren’t necessarily unique to her but are shared by many introverted people. It also helped me to understand her better and to understand how and why she can be ready to leave a party when I’m just starting to get into it.

Perhaps the main thing I took away from this book is how to spot an introvert and the various tips for engaging introverts or using ones’ own introversion to advantage in personal as well as professional relationships. Introversion is often confused with shyness, but they are not the same thing. Introversion is most easily identified by what types of activities are needed for someone to ‘recharge’. Introverts can be outgoing and social and many public figures are actually introverts. The key is that social activities drain energy from an introvert while they may energize their extroverted counterparts. Introverts require longer periods of rest to recover from social interactions where extroverts feel antsy if they go too long without one.

I consider a book good if I learn something new and great if it is written in such a way that I can’t put it down. This book passes the first test and is good for anyone looking to better understand introverts, either yourself or someone close to you. If I were closer to the target audience of introverts I think it could have been more engaging, as shown by my introverted wife commenting while reading that she felt that the author was writing specifically about her and some of her innermost thoughts and feelings.

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Book Review – Hillbilly Elegy

I just finished reading Hillbilly Elegy, by J.D. Vance and highly recommend it. Although the author is only in his early 30s he has a gift for self-reflection and has analyzed his upbringing in such a way that I felt I was able to more easily understand some of the real struggles facing America’s poor.

I’ve noticed that one of the interesting consequences of the internet is that in general we tend to be more aware of poverty around the world than we are the poverty that exists in our own communities. When I worked as a financial advisor I felt fortunate that outside of work I was involved with my church and lived in an area with a congregation that spanned the gamut of economic demographics. I feel that these interactions helped keep me grounded since at work I only really interacted with people who had over $1 million in investments and could easily have lost touch with the economic realities facing most people. This book took me even further into the lives of Americans that struggle financially and helped connect the other life decisions that are made and how they affect the rest of their lives.

In this book, the author shares stories from his life growing up in a poor household in the Midwest, in a city with many similarities to a place I once lived. Middletown Ohio was once a promising company town that is now a shell of what it once was as manufacturing jobs have been automated or exported. J.D. grew up in a poor white family in Middletown and provides some very well thought out analysis of the problems facing his home town, friends, and family members. I’ve read a lot of news articles and stories about the decline of rural America but this story is different because these are stories from the authors’ actual life and family, not something he experienced while trying to investigate for a story.

This book is not necessarily a finance book, but I will just highlight two interesting things related to finance from the story.

  1. Throughout college and his time in the marines, the author periodically used payday loans as a way to bridge the gap for short-term needs. While I will never recommend anyone take out a payday loan, this book is worth reading simply to read his compelling defense of the industry. While there are certainly abuses within this industry, I have read that many users of payday loans can accurately predict how long it will take them to pay off debt and how much they are paying in fees and they enter into these agreements fully aware of the costs.
  2. As the holidays approach, it broke my heart somewhat to read about Christmas in a poor household and how common it is to make bad financial decisions just to provide what the parents consider a good Christmas even when the kids may not care or appreciate it. Our children are young enough that they still haven’t asked for a lot of things for Christmas, and while we can often provide most things for our children we have made it a point to not be extravagant in our gift giving. This book helped me understand some of the thinking that goes on in households that feel the need to splurge on Christmas even if it they’re just hoping to hang on and pay for the gifts with their tax refund at the beginning of the new year, crossing their fingers that it will be enough.

I highly recommend you pick up a copy of this book. It kept me engaged and interested throughout the story and my wife and I both read it within a week. I consider books to be worth recommending if I feel that after reading it I have learned something new, developed empathy for others, and feel a call to change something I have been doing. For me, I find that there are times when I may be too quick to judge those in poor economic conditions as victims of their own decisions. While I still believe this to be somewhat true, this story helped me recognize that there are many instances where people may not know any better (some of the things he didn’t know until very recent in life are things I take for granted, such as that one should wear a suit to a job interview or that finance is an industry that people work in).

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Book Review – The Opposite of Spoiled

I recently read The Opposite of Spoiled by Ron Leiber and found it to be a thought-provoking read on ways to focus on raising kids that are ‘the opposite of spoiled’. Similar to the author, I find it hard to come up with a good adjective that adequately describes this behavior, but you probably know exactly what I mean. I give the book 4/5 stars and would suggest you read it if the topic is one of interest to you.

I’m glad I came across this book, because I really didn’t care for the last book I read on the topic (Piggybanking). Although the overall topic of teaching kids about money is similar, the approach and advice between the two books is very different. While Piggybanking seemed to focus more on tactics and mechanics, The Opposite of Spoiled focuses more on the general topics of teaching principles that are applicable at any level of income or wealth.

I think for me one of the big takeaways is to teach contentment. Like many others, we are blessed to the point where we are able to provide our children with most things they want. But just because we can doesn’t mean that we should, so we don’t. We try to live a simple life relative to our surroundings, and teaching our children contentment will continue to be more and more difficult as they begin to be invited to over-the-top birthday parties, start wanting their own electronic gadgets, or notice all the luxury cars in the high-school parking lot. I’m not going to say that people should deprive themselves of things they want to buy, especially if they’ve worked hard and can afford it. What I will say though is to stop and think about the messages we send to our children with our purchases. If one friend has a huge birthday party, then the next friends parents throw an even more extravagant party, you may feel pressured to splurge on your own child’s next birthday. The only way to win the keeping up with the Joneses’ race is to make the conscious decision to not play at all. They say ‘Mo Money, Mo Problems’, but in this case what we see is ‘Mo Money, Different Problems’.

When kids ask for something and you can’t afford it, it’s easier to say no. But if you can afford something your kids ask for, the answer doesn’t automatically need to be yes. It can actually be harder to say no, but I believe we miss out on a teaching opportunity if we don’t have a further conversation on why we said no. Our kids are young enough that we are able to afford anything they ask for, but we have already had several conversations with our 5-year-old about why we decided not to buy something even though we have the money to do so. Don’t get the wrong idea, our children are not deprived, but we do say no more than we say yes to things. I hope and believe that these lessons will be impactful and that over time our children will be able to remember these lessons and make similar decisions to practice self-control and restraint in their spending.

If we don’t teach our kids about sex and drugs they will eventually learn about them on their own, and maybe not the way we would want them to learn. Money is very similar. If we don’t talk about money with our children, they run the risk of learning money lessons the hard way. Just like you wouldn’t want your kids to learn about sex and drugs from a loser friend at school, you wouldn’t want them to learn about money from a broke friend or someone selling financial products. I believe that home is a testing ground for decision making, and that learning money lessons at home is critical so that the right decisions are made after kids leave the house when the stakes are higher.

One last point I wanted to make actually comes from the authors note preceding the actual book. In the preface, the author points out that this book is written with the assumption that readers have a household income greater than $50,000 but that the principles can be applied at lower income levels or for the extremely wealthy. The message overall is one of optimism and hope, and perhaps this is why I liked the book so much. As I read the book thinking about the intended audience, it got me thinking about who the intended audience may be for other books. I now believe that one of the reasons I didn’t like the last book I read (Piggybanking) was because the author may have intended the audience to be less affluent or lower income earners. If this is true, I like that book even less. I agree with Ron Lieber that sound money principles can apply at any income level. Borrowing money for things you can’t afford is a bad idea whether you make $30,000 or $300,000 per year.

Book Review – Piggybanking

1 starSorry Jeff Opdyke, I didn’t like your book. I hesitated on whether to review it here at all since I don’t recommend it, but figured I would write this up to hopefully save some readers from wasting a few hours and subjecting themselves to some pretty poor advice. It’s been on my ‘to-read’ list for a few years and I finally picked it up from the library since I’ve been looking for more ideas on things to teach kids about money.

Overall, I felt that the book was well written and that the author’s intentions were good, but following the teachings in this book will really help readers and their children achieve financial mediocrity. Sure, I guess financial mediocrity is better than being destitute and impoverished, but I’d like to aim higher.

This book spends an inordinate amount of time focusing on teaching kids how to build credit, borrow money, and pay interest. Little, if any, talk is given to teach your kids how to save up and pay cash for big purchases, avoid paying interest, and develop other habits of wealthy individuals. In fact, he even proposes loaning your children money at high interest rates with the idea that it will teach them to not borrow. It is my belief that what this actually teaches kids is that there is no need to wait to get what they want. Even at high interest rates, they still have the thing now.

All of this was largely excusable, but what turned this from “this book is ok, even though I won’t really follow the advice” to “are you kidding me, what is this guy thinking?” was when he recommended buying a whole life insurance policy for your kids as a way to build up cash value. This is wrong on sooooo many levels. Anyone who spends 10 minutes comparing whole life insurance to other investments will tell you what a terrible investment it is (some examples are here, here, and here). That is, anyone besides the people who sell it. Buying whole life insurance is a bad idea for you or for your kids and I’m proud to say that in 10 years of holding a life insurance license, I never once sold a whole life policy. You will be much better off if you remember that Investments are not insurance, and insurance is not an investment. Mixing the two will result in below average performance.

If I wasn’t clear, I don’t recommend this book. I have a few others on this same topic that I should get to soon and hopefully they are better.

Book Review – Simple Wealth, Inevitable Wealth

I recently finished reading ‘Simple Wealth, Inevitable Wealth’ by Nick Murray and highly recommend it. This book had been highly recommended by a respected source, but it sat on my ‘to read’ list for a year or so. I’m glad I finally got around to reading it, because it really caused me to re-think and re-evaluate some of my investment strategies unlike many other personal finance books I’ve read. I won’t give away all the details, but I definitely recommend you pick up a copy. It’s worth adding to your library, but you’ll probably have to buy a used copy since I doubt any libraries will have it.

Below, I’ll highlight some of the key takeaways I got from the book and what I intend to do (or keep doing) as a result.

  1. Everyone needs a good financial advisor.

    The author believes that no matter how much you think you know about investing and the markets, you need a financial advisor. The main reason for this need is to protect you from yourself. Even the savviest of investors, without a good advisor, may fall into the trap of making THE BIG MISTAKE, which is to sell stocks based on fear. If a good advisor ever talks you out of doing this, they are worth whatever expenses you pay them (typically no more than 1% of your assets annually). I wholeheartedly agree that you should avoid THE BIG MISTAKE, and will concede that most people could use a trusted confidant to occasionally talk sense to them. Although I consider myself to be a complete DIY investor, I still do have a financial advisor. My advisor is a close friend who works for my former employer that I don’t have to pay for because of the amount of assets I have invested. While I don’t rely on him as much as many of his other clients, and he isn’t actually managing my investments on a daily basis, it has come in handy to have a single point of contact with whom to discuss my strategies and to get recommendations for ways to implement said strategies.

    This advice is especially timely considering the recent 500+ point decline in the Dow. These types of big movements in the markets always seem to cause investors to want to sell out of stocks and sit in cash “until things get better”. The problem is that once you’re in cash, it’s feels so good not losing any money that you won’t typically get back into the market until it has recovered all the losses you potentially avoided and more, such that you buy in at a higher price than where you sold. I used to call sitting in cash the ‘warm safety blanket that is secretly smothering you and killing your wealth accumulation potential’. This behavior is common enough that an annual study is published each year showing that the average mutual fund investor significantly underperforms the market, largely due to poor timing. See here for an example of the DALBAR study.

  2. Asset allocation is a poor strategy for wealth accumulation – true wealth can only come from disciplined investing in 100% equities.

    This part of the book was one that I had to sit and think about for a bit. I agree that over time, stocks (in the form of mutual funds) outperform bonds or cash. Therefore, adding bonds and cash to a portfolio will necessarily reduce your long term returns. That being said, it is also true that adding bonds and cash to a stock portfolio will reduce your short-term volatility, which can make it easier to continue to hold your investments and not make THE BIG MISTAKE. Stocks are a great long term investment, but I have generally advised that you would be better off avoiding stocks if you aren’t able to stay invested through volatility. Asset allocation, to me, has been a way to get some of the benefit of stock growth in a long-term portfolio, while minimizing the short-term volatility that causes investors to want to abandon ship.

    I clearly remember the last major downturn in the markets of 2008-09. I did not sell out of my portfolio, but I have held bonds in my portfolio for a long time. I have never been the type of investor to panic or sell, and my wife has been a strong voice of reason if I ever lament about short-term losses. Since I know that I am unlikely to sell stocks at inopportune times, and given that I have a good relationship with a trusted advisor and level-headed spouse, why then do I continue to hold bonds in my portfolio that is designated as ‘long-term’? The only difference between now and then is the magnitude of the potential losses, a 40% decline for me now would be 10x the dollar amount as it would have been just 7 years ago.

    Just as important as it is to not sell stocks, it is also important to have a disciplined approach to investing. The simplest example of a strategy to avoid is to change your investments every year to be whatever funds did the best in the previous year. This strategy is generally a poor one because there is no individual sector or investing style that is consistently the best to invest in, and chasing the latest hot fund will cause you to get in to an investment after the gains have already been made (and not by you).

    Since reading this book, I have begun the process of shifting some assets from bonds to stocks, with the intention of permanently and significantly reducing my bond holdings. I don’t know that I’ll go 100% to stocks, but definitely will be increasing my stock exposure. Because of this, I welcome the recent sell-off in stocks. I generally would be indifferent with short-term market sell-offs, but it pleases me to see things getting cheaper as I have begun to re-allocate some of my bonds to stocks.

  3. Investors should stick with stock mutual funds and not individual stocks.

    No convincing was needed for me to agree with this thought. The odds of an individual building a diversified portfolio with individual stocks that could outperform even a poorly managed stock mutual fund are extremely low. The few instances where I’ve see client accounts with good historical performance that were all in individual stocks, the portfolios tended to be not very diversified and heavily concentrated in just 2-3 stocks, which means it was luck that it had done well and there was a high risk of a future devastating blow to the portfolio. The majority of the time when I would see a lot of individual stocks, the performance of the overall portfolio was generally unimpressive.

In summary, I recommend this book to anyone looking to learn more about the philosophies and long-term strategies of investing. I’d also recommend it to financial advisors looking to hone their craft since the author was once a financial advisor himself, but now has made a career coaching financial advisors. Don’t read this book if you are expecting specific details on how or what to invest in. He gets into some basics, but the book primarily discusses financial missteps to avoid and some of the emotion and fear based decisions that could negatively impact your wealth building ability.