Investing Journal: Books

Book Review: Creating a World Without Poverty

Wed, 09 Jul 2008 05:45:27 GMT

Creating a World Without Poverty: Social Business and the Future of Capitalism - by Muhammad Yunus

I listened to the unabridged audio CDs of Creating a World Without Poverty, in which Muhammad Yunus outlines his ideas for creating a new class of organizations called Social Businesses. Yunus sees a problem with the current situation where an organization is either not-for-profit, or profit-maximizing. He claims that those for-profit businesses that claim to also serve social needs will always be at the mercy of profit-demanding shareholders.

He says that what the world needs, is something that fits nicely into our capitalistic society. He outlines the social business, which is essentially the same as a for profit enterprise, but instead of trying to make a profit, they try to break even. He tries to make a case for a stock market, and for all business infrastructure to be created for Social Businesses. Although he doesn't really explain how a stock market would work (maybe more like a bond market?), he really makes a good case for non-profit companies to be more like normal businesses, creating products, marketing them, and being self-sustaining.

The book outlines Grameen's work with Danone to create Gameen Danone, a social business dedicated to provide better nourishment to poor children. The book is a little slow, compared to his amazing prior work, Banker to the Poor. That said, the idea outlined in this book to create Social Businesses is one that will probably significantly change the world. Just imagine if one suggestion he mentions in the book happened: If Warren Buffett spent some of his money he plans on donating, and obviously his wealth of knowledge in the insurance industry, to establish a Social Business to provide health care to the millions of Americans who don't have any. Good luck Muhammad on promoting your idea. I'm totally behind it.

Book Review: Banker to the Poor

Tue, 15 Apr 2008 04:13:53 GMT

Banker to the Poor: Micro-Lending and the Battle Against World Poverty - by Muhammad Yunus

I just finished the unabridged audio version of Banker to the Poor and I highly recommend it. The book details how in 1983 Yunus established a micro-loan bank devoted to the serving the poorest people in Bangladesh. Yunus has amazing stories to tell of the history of Bangladesh, including its oppressive culture, the struggles facing the poorest people in the world, and the role of government in his efforts.

He tells about how he realized that many of the poorest people just needed a few cents to get out of their current situation of borrowing from loan sharks, and buying meager amounts of food with any money earned after paying back the loan. Most of the borrowers at his Grameen bank are women, who otherwise would not be earners for their families. Yunus found that giving to women helped the state of families much more than giving money to men, who tended to waste the money or spend it on themselves. Lending to women presented a major challenge in Bangladesh because the women followed the tradition of Purdah, which limited their ability to do business. He got help from students at the local University where he worked, and started on his quest to convince them to take small loans that would enable them to dramatically improve their economic situation.

Yunus's experience with government has led him to believe that it should be as small as possible, and that non-profit organizations should be the preferred mechanism of helping the poor. He found that the government was very frequently a hindrance to all the good he wanted to do. Besides that, he found that the programs that they implement tend to not be targeted exclusively at the poorest, and when that happens, the non-poor tend to maneuver to receive the majority of benefits, and leave nothing for the poor.

I'd like to have seen more statistics, and implementation details, but that's not really the purpose of the book. Apparently 94% of clients are women, and repayment rates are nearly 100%. Loans are only given to individuals who've formed a group of 5 people who reinforce re-payment among themselves.

Yunus closes with inspiring thoughts on our real ability to live in a poverty-free world. He thinks that poverty belongs only in a museum, and that we should all work towards making sure that everyone has enough resources for their basic survival. He's dissatisfied at the ways in which current aids to the poor are spent, and thinks that a market infrastructure should be built up to aid in finding the best ideas to support the poor. Again, I highly recommend this insightful and inspirational look at the challenges and amazing results of the Grameen organization.

Book Review: Wikinomics

Fri, 28 Mar 2008 03:41:39 GMT

Wikinomics - How Mass Collaboration Changes Everything - by Don Tapscott and Anthony Williams

I finished the unabridged audio CD version of this book recently. In general I agree with the Amazon reviewers that this book covers the topic of collaboration much too superficially. The book discusses topics such as Wikipedia, open source software (particularly IBM's use of them), InnoCentive, Boeing, and Amazon.

I've grown accustomed to reading more academic books, and particularly economic books which really use a lot of data to back up their conclusions. This book really doesn't do anything of the sort, but instead seems to assume that since collaboration has worked in several recent cases, it's obviously the wave of the future. It's not that I disagree with the conclusion, in fact, I agree with it, it's that the authors don't go to any lengths to actually prove the assertion.

I was surprised that the authors essentially dismiss non-open source software and how highly they praise IBM. I think things are heading the direction of open source, but I would have liked to see a better discussion of the pros and cons.

Regarding Boeing, the authors raved about how much better the new business model is for the 787--how Boeing gets help from its partners to design parts rather than do all the specifications in house. However, in reality this has led to the worst schedule slip in Boeing's history, and as I understand it, people internally aren't huge fans of the change because of the huge challenge in working with suppliers. This challenge was not discussed.

The authors also cite EBay's purchase of Skype as proof of the importance of collaboration. Well, since the book was released, EBay has pretty much admitted that buying Skype was a mistake.

In summary, this book does present some interesting facts that I wasn't aware of, such as Proctor and Gamble outsourcing 30% of the design for new products, or Gold Corp's idea to publish all its data to get people on the internet to help find the best places to dig for gold. However, the book spends too much time looking at collaboration through rose-colored glasses, and spends too little time on solid evidences and conclusions to warrant a recommendation. Despite the shortcomings of the book though, I definitely think it's wise to start looking for ways to encourage more collaboration in every business. Either through accepting more input from outside the company, or just increasing collaboration inside a company.

Book Review: The Long Tail

Sun, 04 Nov 2007 06:29:35 GMT

The Long Tail: Why the Future of Business is Selling Less of More - Chris Anderson

I listened to the audio CD of The Long Tail and I recommend it. I didn't expect too much from the book, after all, the principle seemed obvious: Now that the internet can be used to sell books, music, and used goods, people are able to buy more niche goods, rather than settle for more mainstream goods. However, Anderson is able to provide a good amount of analysis, including a history of media and hits, and statistical trends, and I think I actually liked the book more and more as I kept listening.

I thought the chapter entitled The Paradise of Choice was particularly interesting. He quoted Shwartz's book, and reinterpreted the results of the study. I haven't read The Paradox of Choice, but I watched the interesting video (1 hr) online, and its premise is that lots of choices make it hard to choose, and leave you less satisfied after you do choose. Anderson responds that it's not choice that is bad, but unfiltered choice. Typically we do have filters, even if it's just the amount of shelf space that an item takes up in the grocery store. Online, there are all types of filters to make our choices better and easier.

I think I'll skip a long summary or critique of the book aside this time (it's always hard when you can't take notes as you listen), and let you check out the Amazon reviews if you're interested.

Book Review: Irrational Exuberance

Sat, 19 May 2007 07:03:48 GMT

Irrational Exuberance - Robert Shiller 2005.

I just finished Irrational Exuberance by the Robert Shiller, the Yale Professor of Economics. In short, the book discusses the recent stock and housing market bubbles, their history and contributing causes. Since Shiller is a professor, the book is careful about citing each point made, and exploring opposing lines of thought. The book is fairly dry reading, as Shiller provides significantly more data than precise conclusions about the data. (Not that I disagree with this decision, it's just dry).

The first edition of this book was published in early 2000, right at the height of the stock market bubble, and was recently expanded in 2005 to cover the housing bubble. Pretty good timing. The first 2 chapters cover the recent stock and housing market bubbles, and the subsequent chapters cover the structural, cultural and psychological factors contributing to bubbles. It concludes with a somewhat critical analysis of Efficient Markets, and a mostly tame Call to Action.

The most important element in Shiller's stock market analysis that I see, is how he uses 10 years of trailing earnings when calculating P/E ratios. This smoothes out the choppy business cycle, and while his quoted P/E number will always appear higher than others, it is consistent over time. Unexpected Returns covered the problem with the business cycle thoroughly. In short, we're at a time of ultra-high margins right now, that makes the P/E ratio rational. However, once you realize that there's no way that earnings will be able to increase at a high rate from here, and typically they'll fall. It's worth it as an aside to note that the Beyond the Horizon article at Crestmont Research was recently updated with new data, and the following quote: "If profit margins return to the historical average, corporate profits in 2016 will be 10% higher than their lofty levels today. That represents 1% annual growth on average." In my mind there's no way that profit margins can remain significantly above their historical average for long--competition and politics being probably the 2 most significant reasons.

Anyway, at the time of writing in 2005, the trailing 10 year P/E ratio was 25, which is pretty much where the market was at the top of the bull markets of 1901, 1929, and 1966. The ratio surpassed 40 in the year 2000. From a historical earnings perspective, stocks are clearly overpriced.

Regarding housing, he shows his famous chart, which is replicated below from an unknown source, and I've created my own from public government data to compare. It needs very little explanation of the significance (but the book has a page long footnote describing the methods used). I'd love to also do the series deflated by average income.

Shiller's data:

Data I collected from govt websites.

Besides his interesting way of looking at the data, I found the psychological chapters pretty interesting. He cites several studies that "demonstrated that people are ready to believe the majority view or to believe authorities even when they plainly contradict matter-of-fact judgement" (Pg. 159). He also has an interesting take on the Efficient Market Theory, suggesting that markets have plenty of inefficiencies, but sometimes there's not a clear way for the "smart money" to eliminate such inefficiencies. (Such as Shiller's belief that the market will do poorly over the next 10-20 years). One good example he proposes relates to people analyzing neighboring restaurants. The first person sees 2 empty restaurants, and has no basis for making a decision, and randomly chooses one. The next people who come along will be persuaded by the fact that the one restaurant has a customer, and be more likely to choose it, which is a completely rational decision on their part. They all may end up eating in the same restaurant, but it wasn't their collective knowledge that came to this agreement, since the subsequent people were essentially acting on misinformation.

What do you think will happen to the green or blue line in the graph going forward? Are we at a permanently higher level, or are we going to see a massive decline in nominal or real prices?

Book Review: Unexpected Returns

Thu, 15 Feb 2007 07:22:16 GMT

Unexpected Returns: Understanding Secular Stock Market Cycles - Ed Easterling

In Unexpected Returns, Ed Easterling takes a look at what drives stock market prices, and what we can expect in the future. The book proves how stock and bond returns are tied to inflation, and are actually quite predictable long-term. I recommend the book if you're really into this stuff. Otherwise, checking out his PDFs on his website would be sufficient. Ed maintains a comprehensive website at www.crestmontresearch.com, and even publishes an executive summary of his work. His work revolves around the fact that Price = EPS x P/E, and EPS is predictable, and P/E is related to inflation.

EPS

He is absolutely convincing that EPS is directly tied to GDP growth, and thus that future EPS is predictable. This essentially means profit margins remain consistent over time, as shown by actual profits revolving around average profits in the image below. Profit margins are at an all time high right now, and analysts are predicting that businesses will have an even higher profit margin in 2007. The free market will not allow this to continue. New businesses will start in hoards, seeking this high profit margin, which will cause profit margins to decrease due to the competition.

Currently, total S&P 500 EPS is about $82 for 2006, and estimated to be $89 for 2007 (from S&P). According to historical profit margins (which have been remarkably consistent since 1900), the top line of the following table is what EPS would be:

	2006	2007	2008	2009	2010
SP 500 EPS (Historically Regressed)	$56	$60	$64	$68	$73
SP 500 EPS (Estimated)	$82	$89	?	?	?

As you can see, at the end of 2007, EPS is going to be 47% higher than it should be according to historical models. This is downright SCARY seeing how predictable this has been in the past. Another way of looking at this is that while today's S&P 500 P/E ratio is 17.74, using the historical model puts it at an expensive 26. Note that the EPS typically doesn't take too long to significantly undershoot the regression line after rising above it, which means we could see something like 2010 EPS < $70 (not a prediction, just an example). Also note that there wouldn't have to be a recession for EPS to decline, the E would just have to be shared by more companies, but I don't see how we could have a soft landing from this huge profit margin explosion.

P/E and Inflation

P/E ratios are related to inflation. The best inflation scenario, is when it is low and stable, like it has been for the last decade or so. The only time we've had stock market bubbles, and high P/Es, is when inflation is low. Once inflation goes negative, or high, people lose confidence in stocks, or seek higher or safer returns in bonds, and avoid the market, sending the P/E lower. The book gives the impression that inflation is going to stray from stability, as it always has. I'm not convinced, since we've only understood inflation well for the last couple of decades, and we're controlling it very aggressively now.

Random Facts from the book:

P12: Too often investors believe that higher returns are available by simply taking more risk.

Long term interest rates are based on the future expectation of inflation.

P56: The economy and the market often move in different directions. GDP has been 6.9% in bear markets, and 6.3% in bull markets.

P107: Between 1982 and 1999 earnings grew at 5.9%, dividends returned 3.1%, and P/E expansion caused 8% of market appreciation, for a total of 17%.

P202: The reason why the majority of advisors currently recommend a diversified buy-and-hold strategy is because of how well the market has done for the past 25 years. The 17% return quoted above has made even advisors not take market risk seriously.

Book Review: Rich Dad's Prophecy

Wed, 16 Aug 2006 05:58:59 GMT

Rich Dad's Prophecy: Why the Biggest Stock Market Crash in History Is Still Coming... and How You Can Prepare Yourself and Profit from It! - by Robert Kiyosaki

Not recommended. Keeping with Kiyosaki's tradition, Prophecy is a more inspirational than factual book on the risk of stock market decline in the future thanks to the retiring baby boomers. I actually couldn't finish the book, because the whole time I was reading, I felt like he was wasting my time with filler, and that I had to skim uninteresting stories to get to the good stuff. But there never was any good stuff. I don't want to waste too much time on a bad book, so I'll jump straight into a few insights that I thought were good in the book, and then point out some bad advice, and quote from some Amazon reviews that were spot on.

Good info:

Kiyosaki writes about two major flaws in the pension reform act (ERISA). 1) The law requires participants to begin selling once they hit 70.5 years old. It is said that in 2016 more money will be coming out of the stock market, than going in. 2) Individuals were now responsible for their own investment decisions, but finance is not taught in schools.

Bad info:

The book makes use of edge-cases as scare tactics throughout the book, to convince you that conventional wisdom is wrong, and to try to give the book more credibility than other financial advice you may have received. One such example, is that the book states that the 401K can be bad for two reasons: 1) Because it defers taxes to a later date, and rich people hope to be making more money during retirement. 2) It compares capital gains taxes (18-20% at time of publication) to ordinary income taxes (38%), with no concession that you would have already had to pay the ordinary income taxes before you pay the capital gains tax. This misinformation is so bad I should have stopped reading at this point. I can think of some reasons why investing in a 401K might not be the best idea, but to state edge cases that would only apply to less than 1% of the population, and not discuss the more mainstream usage of 401Ks is totally unacceptable.

Amazon Review:

Repetitive & Misled, August 17, 2004

Reviewer:
M. Kennedy (USA) - See all my reviews

I read Mr. Kiyosaki's first book and felt it was generally solid and a good start for the 90% of the population that is not focused on their personal finances.

This book takes his "buy income producing property" mantra a step further. He identifies a potentially real issue (massive decline in the value of the stock market) and offers his solution (buy assets that produce cashflow).

The book didn't offer a single solid idea on how to prepare for this disaster (except for repeating the idea of investing in income producing real estate over and over again). I find his brand of financial education very misleading and, based on the back pages of the book, he appears to be hocking a slew of additional "get rich quick" merchandise to gullible consumers.

He seems to equate value to the amount of cashflow that is produced and proclaims stock investments to be just paper value that can evaporate. I disagree heartily as a real estate investment is just as risky and can evaporate just as quickly.

I think he oversimplifies the process of investing in real estate rental properties. If the stock market does crash and the unprepared Baby Boomers will have to live poorly, then it is safe to assume that rental income from real estate investments could be reduced. In addition, there are hundreds of pitfalls to real estate investments that could turn them into losers that Mr Kiyosaki ignores or assumes away.

In addition, he professes to make money by receiving rental income on from his investments that provide 15-30% returns as well as profiting when he sells or re-finances the property when its value increases. He ignores that the real estate boom experienced over the last 20 years is in large part due to affluent baby boomers. If their affluence disappears, the demand for real estate will also disappear and the real estate market will experience a decline in value similar to the stock market. In the same manner, the rental income that is earned could be reduced if usage goes down or costs go up. In fact it could turn negative requiring the owner to put up more cash to save the investment.

None of this is discussed, as this world of investing is for serious real estate investors who spend all of their time on these types of opportunities. These people usually are able to avoid the bad investments and make the good investments (leaving all the bad investment to those amateurs who try to follow the book's advice).

Overall, I find it difficult to believe that there are investment opportunities available to 'Joe Public' that offer 20% returns without risks that justify those potential returns. I reminded of a saying of how if something sounds too good to be true ........

Book Review: Eat the Rich

Wed, 09 Aug 2006 05:38:46 GMT

Eat the Rich, by PJ O'Rourke

I have to confess, that I bought this book at a big sidewalk clearance sale because it was $2.99, and because the concept of the book looked interesting. O’Rourke, who is a conservative journalist, who typically writes humor pieces on politics, takes on the question: “Why do some places prosper and thrive, while other just suck?”

Throughout the book, PJ writes about his visits to various places around the world that represent different success and failure stories, which I’ll quickly cover. (2005 GDP Estimates from IMF, given in per capita at purchasing power parity):

Albania (Bad Capitalism, GDP $4,762) – “Albania shows what happens to a free market when there is no legal, political, or traditional framework to define freedoms or protect marketplaces. Of course there’s lots of violence… and lots of poverty.” Communist rule ended in 1992, and when capitalism took over, the above mentioned frameworks weren’t developed, and created chaos.
Sweden (Good Socialism, GDP $29,898) – Swedes pay higher taxes than most other nations, and receive more benefits from the government as well. While in the 1950s, Sweden was one of the richest and fastest growing countries in the world, as it started enacting more and more socialist laws (“Same pay for any kind of work”, “entitlements that weren’t dependent on holding a job and were often dependent on not holding one.”), its growth rate declined, and deficit grew. Sweden has now fallen from the richest European country, to the 19th richest country in the world. The problem simply seems to be that productivity has been slowed thanks to the lack of incentives to excel.
Cuba (Bad Socialism, GDP ~$1000) – PJ was amazed at the lack of work happening in Cuba: “The Cuban government has not only eliminated the concept of unemployment, it’s eliminated the concept of jobs.” It’s simply a case of the government trying to control everything, and clearly not being able to do it. There are shortages of everything, and laws against everything. Cuba’s estimated per capita GDP is somewhere in the $1,000 range, puts it in the range of most African nations.
He covered Russia (trying to reform, GDP $11,041) and Tanzania (poorest country, GDP $723) and had similar reactions: The government simply mishandled resources. Public projects were wasteful, and lack of property rights halted investment.
Hong Kong (Good Capitalism, GDP $33,411) – Hong Kong is a place where they “make everything from nothing.” “How a conflict-ridden, grossly overpopulated place with no resources whatsoever gets rich is simple. The British colonial government turned Hong Kong into an economic miracle by doing nothing. Hong Kong is the best contemporary example of laissez-faire. The economic theory of “allow to do” holds that all sorts of doings ought, indeed, to be allowed, and that government should interfere only to keep the peace, ensure legal rights, and protect property.”

There are several nuggets of good economic information that I’d also like to quote:

“A fundamental principle of economics [is]: Wealth is created when assets are moved from lower- to higher-valued uses.”
What should you do with your money? Trade on asymmetrical information. That is, the information that you know, that most other people don’t know. Don’t guess.
He also says to watch the baby boomer generation. When that generation born in 1946 retires in 2011, they’re going to be withdrawing from the market instead of the presently adding to the market.
“It may seem like an even trade, but each trader gives up something he values less in order to receive something he values more. Hence the wealth of both traders grows.”
“Economics is not zero sum. There is no fixed amount of wealth. Your money does not cause my poverty. Refusal to believe this is at the bottom of most bad economic thinking. …Wealth is based on productivity, and productivity is expandable. In fact, productivity is fabulously expandable. … If we want the whole world to be rich, we need to start loving wealth. In the difference between poverty and plenty, the problem is the poverty, not the difference. Wealth is good.”

As a summary, poor countries seem to be caused by:

Lack of enforcement of property ownership.
Lack of freedom to build a business and innovate.
Lack of incentives to be productive.
Waste caused by inefficient government spending.

Actually, the 4 things above are pretty much the same thing. The government should have a capable police force and fair rights laws to achieve the first, and essentially do nothing to foster the last 3.

Perhaps one of the more interesting findings from this study is what’s missing from the above list. It’s not about the amount of foreign investment, or the natural resources. It’s simply governments messing up.

Applied Economics: Thinking Beyond Stage One

Tue, 25 Jul 2006 05:54:34 GMT

Applied Economics: Thinking Beyond Stage One - Thomas Sowell

I recently finished listening to this audio book on economics, continuing my recent economics reading. I find it hard to write a good review/summary of a book I listened to in the car, because I can't highlight parts, or copy them down as I'm listening. I didn't like this book quite as much as Friedman's book that I reviewed previously, but I definitely like the concept given in the title: Thinking beyond stage one.

Sowell writes that polititians tend to get votes by promising voters benefits, which often sound really good, but can end up doing more harm. Take for example a polititian who decides that subway trains are too dangerous, and decides to impose more regulations on them by making the trains run more slowly, have less cars, or run farther apart--all of which would reduce the number of train accidents. The politian then can release statistics years later about how there have been fewer accidents thanks to him. Usually, with these types of regulations, there are hidden costs that often go unmentioned. Clearly, the trains were made more safe by reducing the number of passengers served. How many more people would have had to drive, and thus been at more risk and also put other cars at risk, because of the new train regulations?

The above principle isn't very economic-related, but it clearly applies to economics as well. What is bound to happen when we pass laws to protect open space? House prices are bound to increase. A good exercise followed in the book is to state what a new regulation would do, and then ask yourself "And then what would happen?", and then keep asking the question as many times as necessary. As an exercise, you can think of where new companies would likely be organized if companies were required by law to have a distribution of workers that matched the distribution of races in the population of the place of business... think about it... It would not be in areas with a higher percentage of the race that the law was trying to protect. Thus it actually harms the race the law was intending to protect.

I feel that the book spent far too much time making specific points to highly recommend. It was just too dull has he made really long explanations. I did like how he talked about how the system makes it so difficult for polititians to enact good, long-term economic policies. Often the best thing for business, is for the government to stay out of everyone's business--but then how do you get reelected if you don't do anything? I also liked how Sowell dove deeper into the long-term cause and effect of regulations. It really makes you think about the motivations of polititians, and how our system rewards short-term thinking.

Book review: Free to Choose

Wed, 07 Jun 2006 06:11:20 GMT

Free to Choose - by Milton and Rose Friedman.

Free to Choose is a persuasive book about the benefits of a free economy. The book does a great job at explaining the benefits of free trade, versus the "tyranny of controls." While I haven't read Adam Smith, this book makes me want to know more about "the invisible hand." The following quote from the first chapter pretty much sums up the book:

The key insight of Adam Smith's Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another. (P. 13)

Tariffs, minimum wages, subsidies, government handouts, and all other forms of government intervention simply take money away from certain people, and give it to others. Not only does this obviously hurt those from whom money is taken, but money is spent performing this "service."

The book covers the Great Depression, and proposes that while the majority of people think that the depression was caused by the free market, it was really caused by the failure of the government to fulfill one of its few tasks, namely managing the money supply. The Friedman's propose that the depression would not have been nearly as bad if there had not been a monetary collapse, which the government should have prevented.

The book covers in its remaining chapters what has happened since the great depression and how things should work in a free market economy. The people decided that the lack of government assistence was the cause of the depression, and enacted many laws enlarging the government. The government decided that it needed to protect people from "cradle to grave" and ensure equality of outcome, not simply equality of opportunity. The Friedman's state that "government measures to achieve “fair shares for all” reduce liberty. If what people get is to be determined by “fairness,” who is to decide what is “fair”?" (P. 134-135).

The Friedman's propose the following concepts, which I will not cover in detail. If it sounds like one of these couldn't work, check out the full chapter on most of these in the book, or leave a comment to discuss it below.

The systems of Social Security, Welfare, Unemployment, and other handouts should be replaced by a negative income tax for the lower brackets. Private charity and family will pick up wherever this is insufficient.

The school system should not be run by the government, and as a way of transition out of government control, they propose the voucher system. A voucher system would give to each student a coupon for the current cost of education by the state, which he could redeem at any school of his choice, public or private. This would allow more choice in school selection, improve existing schools through competition, and draw excellent teachers/businessmen into the profession who are turned off by government control. This is the area that I feel most passionate about, because it's such an easy, obvious thing to do, that would clearly benefit everyone. Competition clearly drives innovation and improvement, and not having it in the education system, which is practically the most important thing in our lives, is absurd.

The consumer protection agencies are unnecessary, such as the FDA, the Department of Energy, and the Interstate Commerce Commission. The market should regulate itself, and where there is demand for intervention, the market will provide it through private ratings agencies. It was reported that the FDA does more harm by making it harder for new drugs to come on the market, than good by keeping bad drugs off the market. Who would look out for the consumer? Well, Walmart and Premera Blue Cross would if they want my business, or independent private rating companies such as Consumer Reports.

Labor protection is also unnecessary. Unions generally try to get government help to enforce high wages and low supply of laborers. The American Medical Association is an example of a union that restricts the supply of doctors in order to keep wages high. Minimum wage laws end up hurting the poor more than helping. "The government first provides schools in which many young people... are educated so poorly that they do not have the skills that would enable them to get good wages. It then penalizes them a second time by preventing them from offering to work for low wages as a means of inducing employers to give them on-the-job training. All this in the name of helping the poor." (P. 238). And we wonder why the bums don't get jobs... it's because no one will pay them over $7 an hour.

The book also talks about how inflation is caused by the government's control of the money supply, and that it is a form of taxation. Poor countries often use inflation to collect taxes, despite the pain it brings to the economy. "Inflation occurs when the quantity of money rises appreciably more rapidly than output (quantity of goods and services)." It is not because of high prices of oil, weather, greedy businessmen, or anything other than the printing of money.

As a solution to all these problems, the Friedman's propose several amendments to the constitution to restrict the government, and give the liberty back to the people. I highly recommend the book.

Other selected quotes:

P. xiii - "Experience should teach us to be most on our guard to protect liberty when the government's purposes are beneficial. Men born to freedom are naturally alert to repel invasion of their liberty by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding."

P. 114 - "The more bureaucratic an organization, the greater the extent to which useless work tends to displace useful work."

P.115 - Regarding National Heath Care - "The people of the country must pay the costs one way or another; the only question is whether they pay them directly on their own behalf, or indirectly through the mediation of government bureaucrats who will subtract a substantial slice for their own salaries and expenses."

P. 137 - "Life is not fair. It is tempting to believe that government can rectify what nature has spawned. But it is also important to recognize how much we benefit from the very unfairness we deplore.... It is certainly not fair that Muhammad Ali should be able to earn millions of dollars in one night. But wouldn't it have been even more unfair to the people who enjoyed watching him if, in the pursuit of some abstract ideal of equality, Muhammad Ali had not been permitted to earn more for one night's fight... than the lowest man on the totem pole could get for a day's unskilled work on the docks? We doubt very much that he would have been willing to undergo the arduous regimen of training that preceded his fights... if he were limited to the pay of an unskilled dockworker."

The Successful Investor - William O'Neil

Sat, 03 Dec 2005 07:33:09 GMT

The Successful Investor: What 80 Million People Need to Know to Invest Profitably and Avoid Big Losses by William O'Neil

In this book, and his prior, How to Make Money In Stocks, O’Neil discusses how to buy and sell growth stocks. His strategy differs greatly from the value-oriented books I’m accustomed to reading. His strategy is outlined below:

Buy stocks as identified by the CAN-SLIM strategy.
Only buy stocks in a bull market
- Bull Market – Identified by a “follow through” day (a much higher price on high volume) on the 4^th to 7^th day of an attempted rally.
- Bear Market – Identified by 3-5 days of distribution (high volume price declines) or of stalling (high volume days with a new high, but closes near the prior day close).
Use chart patterns to identify buy points.
Selling Stocks:
- Use a stop loss at 7-8% below the buy price.
- Sell at 20-25% gain with exceptions for those that rise this fast in less than 3 weeks, at which point you should hold for ~8 weeks as long as it stays above its 50 dma.
- When the Relative Strength rating drops below 60-70.
- When it makes a climax top.
Buy leaders of industry groups.
Average up, never down. Averaging down is arguing with the market.

Although the advice seems relatively sound in my opinion, the presentation of the book was rather poor. O'Neil comes off as a bit of a know-it-all, making it sound as if it's easy to beat the market, even though most people don't. He's often wordy when citing examples for his points, but he never uses any counter examples. Personally I think there's as much to learn from the failures than the successes, but O'Neil seems to want you to think that the method is flawless. I also often got the idea that he wasn't telling the whole story, just the parts that agreed with his strategy.

Overall I think I learned a lot from reading the book, but I'm not sure I'll apply much of it. To apply his strategy you pretty much have to only apply his strategy. You have to always be watching the market to know if you're in a bull or bear, which is a great thing to do anyway. The problem I have with the strategy, is that you can only buy at specific entrypoints, and sell at specific exit points. I also tended to notice that these entry/exit points were in the same time frame for many of his examples. What do I do with my money during a bear market, or in a bull market when none of the stocks I'm tracking are making the patterns needed for a buy? I guess I'd have to go find some new stocks. There seems to be a lot of overhead in this method. Especially since he also states that 60-65% of successful stock investing comes from knowing every key fact about the company and its industry. Then you have to sell at most 25% gains, and at most 8% losses.

Contrast his methodology to Buffett or the Motley Fool. In Hidden Gems, Tom Gardner recommends owning over 30 stocks, but doing enough research on them before you buy to hopefully never have to sell them. For example, 1 of Tom's recommendations is up 333%, while 2 lost 50% before he sold.

The Seven Stages of Money Maturity - George Kinder

Sun, 19 Dec 2004 02:25:08 GMT

(in progess)

I've been really looking forward to this book because I've been spending so much time learning about investing that I need to make sure I have the proper focus in my life. The second part of the title of the book is: "Understanding the spirit and value of money in your life."

Key Points

"Money skills are the survival skills of the twenty-first century." - Dick Wagner.

In my Books category I'll create one post per book with ideas that strike me as worth remembering, along with a synopsis of the book. I'll update this one post as I progress through the book.

Rich Dad's Guide to Investing - Robert Kiyosaki

Sun, 19 Dec 2004 02:19:36 GMT

Recommended for those interested in learning systems and business management.

Robert makes the point in this book that people don't fully understand investing, in that they have a very limited view of what investing really is. Owning real estate, and owning a business are also investing. There are many vehicles. The book consists of 16 lessons to prepare you to be a good investor (mostly psychologically) and also focuses mostly on how to manage a business successfully.

Key Points:

If you want to get richer faster, simply look for ideas that are better than the ones you are using today. True investors look for problems, not answers, because in problems lie opportunities.
So many people do not become rich because they are limited by their self-confidence rather than the limitlessness of faith.
The B-I triangle is a concept to help businesses succeed. It is based on a mission statement, strong leadership, and teamwork. It consists of the following elements and skills: Cash flow, Communications, Systems, Legal, Product.
The world is filled with great ideas for new products. The world is also filled with great products. But the world is short of great businesspeople.
The number one rule in becoming an entrepreneur is to never take a job for money. Take a job only for the long-term skills you will learn.
Most of the lessons (there are 16) are more psychological and thought provoking as with all his books. A few interesting points are
- When we invest we do it for one of the three fundamental reasons: 1. security; 2. comfort; 3. to be rich. If you really want to be rich, you must be put it above security or comfort.
- The world has an abundance, not a scarcity of money.
- Investing is a plan. Just follow a good plan to become rich.
The most important part of a business or investment is not the product, but the system behind the product.

In my Books category I'll create one post per book with ideas that strike me as worth remembering, along with a synopsis of the book. I'll update this one post as I progress through the book.

Cashflow Quadrant - Robert Kiyosaki

Tue, 14 Dec 2004 20:48:35 GMT

A discussion of which types of occupations/businesses tend to allow you to become rich, and how businesses succeed. Also how to invest... (book in progess)

Key ideas:

The four quadrants are:
1. Employee - You work hard, and the government takes a huge portion of your money, and you don't have much control.
2. Self-Employed - Similarly, you have to work hard, and the government still takes a lot of your money, but you can also get deductions for many expenses. You're in control.
3. Business Owner - Other people work hard for you, and you earn passive income which is taxed at a lower tax rate (no Medicare/Social Security taxes). Many of your expenses will count as deductions.
4. Investor - Your money works for you, and your passive income is taxed at lower rates.
His preferred path in life is to start as an Employee, learning everything you can. Work to learn, not for money. Then start your own business by creating a system (or buying a system) and having other people implement it (you're a leader not a manager). Then you'll have a cash flow, and can move into the Investor quadrant.
He notes that products don't make a better business, a good system does. Anyone can make a better hamburger than McDonalds, but few can turn that into a better business.

In my Books category I'll create one post per book with ideas that strike me as worth remembering, along with a synopsis of the book. I'll update this one post as I progress through the book.

Rich Dad, Poor Dad - Robert Kiyosaki

Wed, 08 Dec 2004 20:51:13 GMT

Highly Recommended.

This book is inspirational in nature, encouraging you to get a financial education and let your money work for you instead of working for money.

Key ideas:

Don't work for money, let your money work for you.
Money doesn't solve money problems. Intelligence solves problems.
The key to being wealthy is increasing your assets and reducing your liabilities, and knowing the difference.
Controversial idea: A house is a liability, not an asset for the following 3 reasons:
1. Loss of assets - A large mortgage payment is an expense and prevents you from buying assets that will give cashflow.
2. Increase in expenses - Houses have lots of miscellaneous expenses such as furniture, upkeep, and utilities.
3. Loss of education - A large mortgage doesn't leave you with as much left over to invest, so you'll lose out on learning experiences.

In my Books category I'll create one post per book with ideas that strike me as worth remembering, along with a synopsis of the book. I'll update this one post as I progress through the book.