Category: Books

Oblivious Investing: The Book

Readers of this blog are likely familiar with the Oblivious Investor blog.  Its author, Mike Piper, is a frequent commenter here.  (He signs as ObliviousInvestor.  It’s an SEO thing.)  And it’s been on my blogroll for a long while now.

So, naturally, when Mike put out a book version of his blog, Oblivious Investing: Building Wealth by Ignoring the Noise, he bravely sent me aOblivious free copy in the hopes that I would say something nice about it.  You have to admire his courage. I rarely say nice things.

I was a little worried myself, but truthfully I have only two significant problems with this work.

1) It takes the form of a fictional narrative, which I find annoying.

2) It doesn’t fully explore some topics that I think are interesting.

In other words, it’s not written the way I would have written it, and that’s an objection I have to almost everything.

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What’s Wrong with The Millionaire Next Door

I put a passing reference to The Millionaire Next Door in my post Wednesday on The Tragedy of Impulse Saving.  A commenter asked about it and actually followed up to say that he would love to hear my opinion on the book.  I can’t bring myself to write a proper review of a 13 year–old title, but on the flimsy pretense that one person who comments must represent thousands of silent readers who feel  the same way, let me share why I don’t like it.  (That’s the problem with leaving comments here, I just read what I want to.)

MND To start with, Millionaire Next Door is poorly written.  Large sections just dump information on the reader without drawing any conclusions or giving any advice.  And the authors’ choices of topics, and how much ink to use on them, is peculiar, as if they just threw together the book from notes they happened to have had lying around.  So, for example, 70 pages (of 245 in my paperback copy) are spent on giving money to your children.  36 pages cover buying cars.  There isn’t much of anything on buying houses.  There’s a big section on selecting financial advisors, but little on investing as such.

The core advice in the 70 pages on giving money to your children is that you shouldn’t give money to your children.  Not only will it make you poorer, but it is bad for the kids. They will amuse themselves by spending it and not learn to be frugal like you. The authors cite data that shows that adult children who get money from parents are in general poorer and argue that giving your kids money will have the opposite of the intended effect. Unremarkably, they do not consider the possibility that maybe those children got money from their parents because they were poorer, not the other way around.

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The Wall Street Journal Guide to The End of Wall Street as We Know It by Dave Kansas, Part 2

[This is the second half of my review of Dave Kansas's The Wall Street Journal Guide to The End of Wall Street as We Know It.  If you haven't already, you might want to read part 1 first.]

According to Kansas, in September of 2008 the Bernanke-Geithner-Paulson troika thought that a government rescue of Lehman was unnecessary.  “They felt some confidence that they could let Lehman Brothers fail without causing too much of a wider crisis.”  If true, this will go down as one of the greatest misjudgments in financial history and suggests a shocking lack of understanding of markets by those supposed to regulate them.  But Kansas may be scapegoating the troika for a more systemic problem.  Regulators worked hard for weeks to avoid a Lehman failure.  But they did so without a clear legal mandate and without any kind of formalized fund to draw on.  When the Fed convened what turned out to be a weekend-long meeting of Wall Street’s leadership before the terrible Monday, Geithner kicked it off by announcing that “There is no political will for a Federal bailout.”  In other words, elected officials in Washington, afraid of a backlash from voters, would not acquiesce to a bailout and without them the regulators were powerless.

The horrible week that followed Lehman’s death was eventful.   Merrill Lynch was absorbed by Bank America.   AIG was bailed out.   Money market funds experienced panic redemptions.  The SEC banned short selling of financial stocks.   By Thursday afternoon the stock market was down nearly 10% on the week, before rallying on what turned out to be false hopes of a quick government bailout of the banks.  Kansas’ narrative peters out shortly after this, presumably because it is here that he started writing his book.

The second half of The End of Wall Street is taken up with advice for readers  on what to do now with their own finances in light of the “new world order.”  This personal finance advice is undoubtedly the marketing hook for the book, the reason its creators imagined that people would buy it, and the reason they hired Kansas to write it.  (He is Editor at Large at and the author of The Wall Street Journal’s Complete Money and Investing Guidebook.)  Unfortunately, it is also the weakest part of The End of Wall Street.  The advice is not unsound, indeed with regard to reasonableness it is above average.  But it is generic and vague.  Pay down your debts, particularly credit cards.  Young people should invest mostly in stocks, older folks less so.  Do not obsess over the value of your home and think of it as a roof over your head, not as an investment. Read more »

The Wall Street Journal Guide to The End of Wall Street as We Know It by Dave Kansas, Part 1

Of the passel of hastily written books now on the shelves discussing the financial crisis and what to do about it, The Wall Street Journal Guide to the End of Wall Street as We Know It by Dave Kansas may have the best title. But like the other members of its micro-genre, it is not likely to become an enduring classic. Kansas is a web and newspaper reporter by trade and the entire book can be usefully thought of as an extended magazine article, what in an earlier age might have been called a pamphlet. It was written over a few weeks in the last months of 2008, was on shelves as a paperback by the end of January, and will probably outlive its usefulness by late summer. It will next be seen many years from now when unearthed by a graduate student doing research into the contemporaneous reaction to the Panic of ’08, or whatever it is that the current crisis winds up being called.

But as a long magazine article, the book has its merits. If you weren’t paying close attention to events in the financial world last year and now feel at a disadvantage at dinner parties, The End of Wall Street will help. Even relatively close readers of news accounts will find tidbits and pieces of the big puzzle they have missed. For example, the book points out that the average FICO scores of sub-prime borrowers actually improved as the housing bubble grew. While the sub-prime borrower of ten or fifteen years ago might have been sub-prime due to a bad credit history, by 2006 a sub-prime borrower typically had adequate credit but was buying more house than he could truly afford.

Kansas also provides a modicum of analysis and reflection, roughly what you would expect from a reporter given a book to fill but only a short time to do it. He deftly points out that the troika at the helm of the government’s handling of the crisis in the fall of 2008 was made of Fed Chairman Ben Bernacke, New York Fed President Tim Geithner and Treasury Secretary Henry Paulson. Kansas does not say it, but he clearly means the reader to notice that the new administration has merely contracted that troika into a duo.

And although he cannot resist blaming the Usual Suspects of crooks and overly clever bankers, Kansas does so with a light hand. The fiasco in mortgage bonds was propelled by the same forces that propel the economy in good times, avarice and optimism. As Kansas deadpans, “Creating new regulations that will eliminate greed is practically impossible.” Nor, he might have added, is it necessarily a good idea.

The fuse for the powder keg was lit in June 2006 when, according to the S&P Case-Shiller Indexes, house prices in the US peaked, having gone up 190% in ten years. It took some time to play out, but after years of aggressive lending and borrowing on the almost universally held theory that house prices never go down, the result was nearly pre-ordained. There are wrinkles that made it worse, such as the peculiar structure of the mortgage bond market, but as Kansas makes clear, these are complications to the core disease. A truly vast number of bad loans got written and, due to the nature of the beast, they all went south at the same time.

It is what happened next that made our current situation dire. As Kansas tells us, within living memory there have been several large-scale financial crises that failed to destroy Wall Street, and some of those failed even to cause a recession. The tech-telecom bubble burst at the start of this decade, vaporizing trillions in stock market wealth and littering Wall Street with worthless telecom debt. That came only a few years after the Asian Crisis and Russian Default Crisis culminated in the collapse of Long Term Capital Management, which caused dramatic late night meetings of the leaders of Wall Street, but not, apparently, any long term repercussions. And a few years before that, almost the entire S&L industry went up in flames.

Kansas calls these disasters Dog That Didn’t Bark moments, events that historians will realize hold significance for what did not happen rather than what did. Indeed, the fact that no really terrible damage was done only encouraged further risk taking. But in retrospect, the financial system was lucky to weather those storms as well as it did. The seawalls were just strong enough and the ad hoc and somewhat haphazard government rescue efforts were just adequate enough to see us through. When a slightly bigger hurricane made landfall it was revealed just how insufficient the financial system’s defenses had really been all along.

The levees were breached on Monday, September 15, 2008. That was the day Lehman Brothers failed, defaulting on its debt and turning what had been an atmosphere of fear and foreboding into one of panic. Investors reasoned that if the debt of a firm as significant as Lehman could become worthless then nothing was safe. All of a sudden everybody started hoarding cash, refusing to lend to anybody under any circumstances.

Lehman had been widely known to have been in serious trouble for some time, so a person might wonder why its failure could have come as such a shock to the system. As late as the Friday before, the credit default market was pricing the likelihood of a Lehman default in the following year at only 7%. This apparent incongruity can be explained by the fact that almost everybody on Wall Street believed that even though Lehman was probably insolvent, the government would never allow such a key player to default. Of course, that is exactly what happened.

[Stay tuned for part 2 of this review early next week.]

Suze Orman’s 2009 Action Plan, Part 2

[This is the second part of a two part review of Suze Orman's 2009 Action Plan. If you haven't already, you might want to read Part 1 first.]

In general, Suze Orman’s lack of candor can only be inferred from the advice she gives. For example, at several points in 2009 Action Plan she brings up the idea of taking out loans from a 401(k) plan and using the proceeds to, for example, pay down other debt. (For the uninitiated, a loan from a 401(k) plan is just what it sounds like. You allocate some of your 401(k) account to a loan to yourself, which you pay back with interest.) In every case she is firm in her rejection of the idea, even to pay off credit card debt charging 32% interest (p. 59.)

On its face this advice is nuts. Taking out a loan from your 401(k) frivolously, to go on a cruise perhaps, is clearly a poor idea. But within the realm of debt a 401(k) loan is almost certainly the best deal going and using it to pay off a loan with a Tony Soprano interest rate is just about as clear a no-brainer as you can find in personal finance.

So why does Suze Orman wave you off this strategy? Is she nuts? She gives the feeble explanation that in these uncertain times the risk of losing your job, which might mean the loan would be due in 60 days, is too great. That would be a lot more convincing if she did not, in the two ”situations” that immediately follow, discuss withdrawing funds from your retirement accounts for living expenses if you become unemployed.

Reading between the lines, the real reason Orman thinks this is a bad idea becomes clear. She thinks that if you take out the loan and pay off the credit card it will only be a matter of time before you run up the credit card balance again, leaving you with both a large credit card debt and a loan from your 401(k) to pay off. She’s not nuts. She thinks you are. But she can’t say that. So she tells a little white lie and moves on.

Very similarly, she calls using a HELOC (Home Equity Line of Credit, or a second mortgage) to pay off credit card debt “a dangerous mistake. You are putting your house at risk.” (p. 30.) That’s a common bit of folk wisdom, but it’s wrong. Short of bankruptcy, you are going to have to pay back all the money you owe sooner or later, and it would be helpful if the debt had a lower interest rate in the meantime. If you do go bankrupt, you may or may not be able to keep your house (and if you do it will be without much equity) but whether the debt in question was a second mortgage or unsecured loan will not change the outcome. Again, Orman gives the advice she does because she assumes you have a serious willpower problem. If you refinance your credit card with cheaper debt you will only start spending even more and dig the hole deeper.

Do all of Orman’s millions of readers have that sort of psychological dysfunction? For all I know, they do. She certainly has a devoted following who apparently find her advice useful. Even so, I would be a lot happier if somewhere near the beginning of her books she said something like “this book isn’t for everybody” and explained the sort of self-destructive behaviors her work was meant to address. Like they say, the first step is admitting you have problem. But Suze Orman admits nothing. She is like the wife of the compulsive gambler who tells her husband she doesn’t want to visit Las Vegas because she doesn’t like the desert climate. While preaching the importance of honesty and being realistic about your finances, she gives advice that is, in fact, an elaborate and disguised work-around to compensate for her readers’ presumed shortcomings.

Suze Orman’s 2009 Action Plan ends with the platitude that you should “always choose to do what is right, not what is easy.” Sometimes what is right is hard and uncomfortable. It might be hard to hear that your favorite money guru occasionally gives bad advice or that you are acting irrationally, but if it is the truth, it needs to be said. Like the lady says “The lies need to stop.”

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