Book Review – The One Page Financial Plan by Carl Richards

It’s been a while since I did a book review. I have done a lot of reading on the internet (blogs, articles, etc.) but not many new books. Recently I saw an article on this new book The One Page Financial Plan, and it intrigued me. So I took the opportunity to purchase the book and read through it. So here goes.

First of all, those who are hard core FI people will find little for their number crunching here. The book is rather small on calculations, ratios, etc. If you are looking for a book to go through your investment strategies or net worth calculations, then there are other ones which will do a better job than this one. That is not the objective of the writer. Instead, he offers a less-number oriented, more “touchy/feely” type of financial plan book, as one might expect from the title.

The first part of the book is the “discovery” phase, where the authors uses some questions and exercises to help the reader determine the “why” for their financial planning (the most important question), the where (where you want to go, i.e. goals) and where you currently are (net worth, assets & liabilities, etc.). Again, very few numbers are discussed or worked through here.

The second part of the book works through spending and saving. He discusses simple ways to determine your current spending and how to create a basic budget. He then ties that back to the goals developed in the first section, and uses that to motivate the reader to save.

The third section discusses investing and other finance topics, including insurance (buy as little as necessary, but buy it), debt (good and bad), and basic, beginner investing – with a heavy emphasis on index funds, and buy & hold strategy. He finishes with some good information on the need for rebalancing. As before, there is a startling lack of numbers in these chapters – just basic common sense for the beginning investor.

The final section covers avoiding big mistakes that can sideline you (not hiring a good financial advisor to help teach you, always making the decisions instead of trusting the advisor, not panicking at market dips, etc.). His lesson is one of basic, boring investing over time.

In the end, I believe this is a good book for folks who are just getting interested in the FI journey, or for those passionate FI people that are trying to interest another (a spouse, a family member, etc.) in many of the concepts and ideas. It’s a great book for someone to get started, and then as they grow in interest and knowledge, they can seek out additional, more detailed information for those topics that interest them.

 

Mr. 39 Months

Book review – Meet the Frugalwoods

Recently Elizabeth Thames, more commonly known as “Mrs. Frugalwoods” came out with a book detailing their path to financial independence and a new life on a farm in central Vermont. Most readers know the basic story, as they have been following her blog (see link to right) for years.

The book is told entirely from Mrs. Frugalwoods point of view (she does include conversations with her husband often). It tells the story from her college graduation, her first job (making $10,000 while living in Brooklyn and working for Americorp), and then on to other locals, jobs and adventures. Along the way, she manages to save a large percentage of her income by living a frugal, but not extreme, existence.

After the two of them marry and move to Boston for work (and after they have bought a house) they decide to pursue Financial Independence. The two of them are having coffee/tea at a shop, and Mr. Frugalwoods shows her a spreadsheet with reveals that, based on cutting some of their current expenses (they were already saving about 45% of their take home pay), and then renting their house in Cambridge, MA, in 3 years and 5 months. they could purchase a farm in Vermont and be financially independent.

It is at that that the Frugalwoods blog starts, and they “kick it into high gear” and start to really save. It is this part of the book where she goes into some detail on how to trim expenses even more, and some of the steps they took to move towards extreme frugality. She even gave up her haircuts and had her husband start cutting her hair! As a budding FI person, this is the part that I like, the concrete methods used, the things I could learn from and copy.

The conclusion of the book has them reach their FI number, and at the same time, give birth to their first child, and buy their farm in central Vermont. All a happy ending, though the adventure for them is really only just beginning. I’m sure as you read her blog, you will get to learn more about their new lives.

As far as a finance book, I would have to say it was lacking a lot of the math and calculations that folks in the community are used to seeing. The book is lacking in net worth calculations, expense ratios, etc. As a numbers geek, I was hoping for more concrete examples of how they reached their goals.

If you look a good story of how one woman and her family reached FI and found a life that they wanted, it’s a good yarn.

 

Mr. 39 Months.

Book review: The Simple Dollar

One of the earliest FIRE books, written by a Trent Hamm, a Gen Xer who found himself buried under a boatload of debt and without a real plan for where to go (sound familiar to so many). Trent’s book goes through his initial struggles to get a handle on his debt and start a new plan, and then sequences into a series of “how to” and short idea chapters to help the reader identify numerous ways to save money, invest, reduce debt and move towards financial independence.

I’ve read some financial advisor reviews that really critique the book, because it is full of short, simple ideas for saving money and practicing frugality. Still, that is a key part of what we FIRE people have sought for, and many of his ideas are mirrored on the blog postings and podcasts that form the community. Each of his chapters concludes with a list of steps for how to put the ideas of the chapter into practice and move forward.

Some highlights:

  • Chapter 1: Trent finds himself with a new child, a wife, and under a mountain of debt. The chapter goes through his realization that there is a better way, and concludes with the steps he used to work his way out.
  • Chapter 4: Good chapter on goal setting, identifying to real dreams, and making plans to achieve them
  • Chapter 7&8: Chapters on Frugality, budgeting, and “minding the gap” between income and expense. A good start for folks just starting out trying to get a handle on their spending and to budget
  • Chapter 13: Dealing with friends, family and your newfound money situation
  • Chapter 17: What is holding you back, and preventing you from moving forward on the path towards financial independence and life tranquility.

Overall, the book had a lot of “conventional wisdom” that the FIRE community already knows. I believe it’s an excellent book to give to new people who are first getting interested in our ideas, and want to gain additional knowledge. For that purpose, I believe it’s an excellent book.

What books have you read that you’d recommend?

 

Mr. 39 Months

Book review: Multiple Streams of Income

The classic book, by Robert Allen, written in 2000. Many consider it the book that is the father of the “side hustle.” Written in 2000, the book tries to distill all the lessons and ideas from Robert Allen’s 20 years of books and seminars. He attempts to show you how to earn multiple streams of lifetime income, using a variety of strategies – each of which he goes into a great deal of detail on.

The key parts of these strategies is that they can be used:

  • On a part-time basis
  • Working right from home
  • With little or none of your own money
  • With fewer no employees
  • Using simple systems that have a proven track record

 

Sounds like its right up the FIRE community’s alley, right?

 

Robert starts off with some basic explanation on the time-value of money, compound interest, and how to leverage that towards financial independence. He then covers some basic money skills you will need (valuing money, controlling it, saving it, using it to achieve financial independence). He finishes up by covering the three “great money mountains” that his streams of income are built on:

  1. The investment mountain (screening and filtering, timing in, timing out)
  2. The real estate mountain (finding, funding, farming)
  3. The marketing mountain (internet, network marketing, infopreneuring, licensing)

 

Streams of Income

  1. Stock Market Success: Here Allen goes through some basic lessons on investing (invest for the long haul, how index funds beat 4/5’s of money managers, and how you should start investing sooner, rather than later). His thought is to place at least 50% of your investment dollars in index funds, and just let them grow. He provides links to common index providers (vanguard, TRowePrice, etc.) as well as additional reading on the subject.
  2. Accelerated Stock Strategies: For 30% of your investment dollars. Here Allen goes into more aggressive stock strategies, He covers four basic systems to gain enhanced returns above & beyond index strategy, and goes into detail on each of them. They include:
    • Invest with Warren Buffet
    • Select Mutual Funds with the longest-term track record
    • Select Financial Advisors with the longest track records
    • Consider high-powered sector funds
  3. Options trading: For the final 20% of your investment dollars. This covers the highly leveraged strategy of covered calls, and call/put options. This particular chapter might be worth the cost of the book, as this particular type of investing can be very confusing. Allen takes the time to explain how to do it in detail, and provides links and methods to performing the trades. If you’ve ever wanted to find out about this type of investing, here is a short and simple 28-page chapter that can get you started.
  4. Real Estate: This chapter covers the basics of real estate investing, both for those who are looking to be landlords, and those trying to fix& flip. Excellent chapter to provide the basic tools and techniques for real estate. Allen divides the chapter into three areas:
    • Finding: How to do the research to find bargain properties in the right area
    • Funding: How to fund your real estate investing with minimum up front money
    • Farming: How to create cash from your real estate, primarily through buying & holding/renting
  5. Foreclosures and Flippers: Allen discusses short-term bargains here, primarily gained through foreclosures. He discusses some of the methods to acquire foreclosures (pre-foreclosure, Post-foreclosure, tax sales, etc.). He then discusses the benefits to be gained with quick flipping of properties. Much of this has been written of in much more detail on the internet and through TV shows, but he does cover a lot of the basics and pitfalls of the strategy.

In the next chapter, Allen goes into more refined real estate strategies, providing a good summary view of them (though you will want to do your own research on some of these complicated plans). They include:

    • Wholesale real estate (you identify and setup deals, then pass off to another)
    • Angel real estate investing (you provide capital)
    • Bird dogging (another investor provides capital)
    • Split for cash (splitting property up and selling portion)
    • Conversion (converting from one class of real estate to another)
  1. Paying other people’s taxes: In this way, Allen shows how you can purchase tax lien certificates on other people’s property for pennies on the dollar. You can then use the leverage of these liens to either get your full payment of tax funds, or repossess the property. Often this amounts to 16%, 20%, 25% or greater return. Depending on your state and local laws, the profits can be very good
  2. Network Marketing: Yes, network marketing can be another tool in your toolbox towards reaching a continuous stream of money. Allen goes through some of the problems in the past with network marketing, and some of the issues to be on the lookout for (need to buy inventory, etc.). He provides a list of questions to ask for potential markets you might get into, and strategies to select the right company, compensation plan and marketing system. Network marketing has proven itself to be lucrative for some in the past, so it should be something to consider.
  3. Infopreneuring: This is one that the FIRE community is very familiar with. It involves using your expertise/passion/hobby and turning it into a lifetime cash-flow stream. It could be a book, a how-to series of podcasts/videos or other mode of information. They key is to identify and research a market, produce a useful product, and market it. Allen provides some good questions to ask and methods to develop your opportunities. I think this is also a very useful chapter.
  4. Licensing: This is a step beyond Inforpreneuring and Network Marketing. The concept is to license your ideas to others, and let them do the hard work of brining them to market and generating income. You will simply take a cut of the hard work. You can also license others idea and do the work to profit from them, while paying them a portion of the income. Either way can work to generate another income stream for you.
  5. Internet marketing: Obviously, with the book written in 2000, this was a “new thing” and a new way to generate an income stream. Allen goes through a wide variety of ideas, most of which have become common place in our modern world. Still, its good to see Allen’s marketing mind go through all the potential uses of the internet.

 

Allen finishes his book with ideas on how to shield your income streams from others, including legal tax strategies, ways to protect your intellectual property, and methods to continue the streams past your lifetime, so your heirs can enjoy them as well.

 

All in all, and excellent book, and well worth a read.

 

So what have you read lately that you find interesting?

 

Mr. 39 Months

 

Book Review – Yes, You can Supercharge your Portfolio by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the Fifth and final book in the author’s five part series on finances. In the previous four they showed how to use long-term trends to “time the market” in the long term (10 – 15 years +), how to set up an income producing portfolio in these low-yield times, how baby-boomers can still retire even after the dotcom crashes through using the right steps, and finally, how millennial and Gen Xers should be saving, investing and living their lives responsibly throughout their lives (their 20s, 30s, 40s….). This final book goes through a series of steps that anyone should take when designing their savings and investing strategy, so that it meets their short and long-term goals and they can move towards the life they desire.

Most of these steps are not unfamiliar to folks in the FIRE community. As laid out in the book, the six steps are:

  1. Evaluating your needs before deciding on your investments (what are you trying to accomplish, what are your current assets & liabilities, what are your short term and long term goals, etc.). You shouldn’t just invest in something, you should figure out what you want to accomplish first.
  2. Your whole portfolio matters. Often folks develop their investments over a period of time (bonds from grandparents, start an IRA at graduation, 401K at 3% match from work, buy some stocks from a friend who is a broker, etc.). An individual needs to consider all of their investments in one “pool” and make decisions based on that (some items are preferable in a tax-advantaged account, some not, etc.)
  3. Take on risk intelligently. Your stock may have gone up 15% last year, but based on the high risk you took on, it really should have gone up 30%, to compensate (maybe the much safer investment which made 14.5%). Its here they start getting into the use of Monte Carlo simulation to help with investment decisions.
  4. Diversify. Don’t put “all your eggs in one basket” or you faith in 1 or 2 stocks. There is a wide variety of investment options (stocks, bonds, ETFs, mutual funds, precious metals, real estate, etc.). They go up & down at different rates, and carry different rates of risk. By diversifying, you can reduce risk while keeping investment returns strong. It also makes it easier to sleep at night. Stein and DeMuth are big fans of modern portfolio theory, and demonstrate how a series of investments can earn good returns with reduced risk.
  5. Use the Monte Carlo Simulator to test drive your portfolio. The book covers the use of the Monte Carlo simulators at www.quantext.com or www.financialengines.com to test out the portfolio. Many of us are familiar with Monte Carlo simulators (see my sidebar for links). The simulators help you see your chances of reaching certain goals with the portfolio you selected. This really is the meat of the book, as it shows in detail how to analyze your portfolio strategy in order to optimize it.
  6. Do a Portfolio Reality Check. Look at the portfolio in terms of your current life situation (do you have debts you should pay off first, etc.), does the portfolio make sense, will you be able to sleep easily with the results. Take this opportunity to revisit goals and then act.

Other Topics Covered

  • Farewell to Bonds? Here the authors cover the use of low volatility stocks with low correlation (i.e. stocks that don’t move much, and don’t move with the market as much) in the place of bonds. They show it across time periods when stocks didn’t do well (2000-2002) and did well (2003-2006). In both, when compared against a 60% bond and 40% stock portfolio, they did well.
  • Hedge funds? Use of specific hedge funds to “hedge” against losses and obtain higher returns
  • Investing for Income: Most of these topics were covered in their previous book, but the general idea is to use dividend stocks, bonds, and REITs to generate respectable income (instead of having to cash in growth stocks).

Overall, I think it’s a good book, and could be useful for those interested in doing the research to “bump up” their returns.

I would rate in 25 stars out of 5, primarily because most of the topics were covered in the previous 4 books.

 

Mr. 39 months

Book Review – Yes, You can Get a Financial Life by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the Fourth book in the author’s five part series on finances. In the previous three they showed how to use long-term trends to “time the market” in the long term (10 – 15 years +), how to set up an income producing portfolio in these low-yield times, and finally how baby-boomers can still retire even after the dotcom crashes, through using the right steps, savings and planning. This book is written more for millennials and Gen Xers, and discusses the steps and objectives individuals should be taking throughout their lives (their 20s, 30s, 40s….). The book is chock full of bits of knowledge and wisdom for specific points of your life, and is well worth reading for those just getting started.

The book starts off discussing the four parts of getting your financial life’s crises ironed out, which are no more than having a general idea of:

  1. How much predicable events will cost (marriage, house, car, etc.)
  2. How much you’re likely to earn at different stages of your life
  3. How much money to save and when
  4. Some grasp of when and how much to borrow

One of the key points of the book is the “life cycle” model of financial planning, where a person’s income starts out low, builds up, then plateaus, while their consumption level stays relatively flat. Thus, they’ll need to do some borrowing to start with (house, college, etc.) then pay it off as they peak, while saving for that period as they retire and their income drops. It is around this cycle that the book is based.

The book then goes into numerous chapters, focused around:

  • Your 20s (challenges, saving & investing in your 20s, housing for couples & singles, babies, etc.)
  • Your 30s (challenges, saving & investing in your 30s, insurance, career advice, etc.)
  • Your 40s (challenges, saving & investing in your 40s, being sinvle and 40)
  • Your 50s
  • Your 60s and beyond

Each of these chapters has detailed graphs/charts, tables for recommended savings rates, recommended portfolio allocations, and notes on personal purchases which are typical at that point of your lifeThe only critique I would make is that this is based around the standard “work till your 60” plan for life, which for many FIRE enthusiasts is too long. We prefer to accelerate our savings and become independent much earlier. Still, I think this book would be very valuable for folks just graduating (either High School or College), probably alongside Dave Ramsey’s book.

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

Book Review – Yes, You can Still Retire Comfortably by Ben Stein and Phil Demuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

 

This is the third book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In the second book, they discussed the steps to create an income producing portfolio, through the use of bonds, dividend stocks and REITs. This book, written in 2005, is mostly addressed to the baby-boom generation, who had recently seen their retirement money damaged in the dotcom meltdown. The book’s concept was that, with the right steps, savings and planning, and individual could still retire comfortably.

The book starts off with some of the basic rules for retirement (Maximize your abilities, start saving early, don’t spend more than you earn, etc.) and then flows into retirement planning by decade – what you should be doing in your teens, 20s, 30s, etc. It is all sound advice, and falls in line with other things the authors have written (like Ben Stein’s “how to screw up your life” book). It finishes its first part by discussing the coming baby-boomer retirement crisis. As many of you know, a lot of boomers have not saved anything like what they will need for retirement. They only really started to do it in the 00s and this decade. That is probably why the 2007-2008 meltdown go so much press – it hurt the boomers badly.

The second part of the book goes into topics like how much you will need, how to setup a savings plan, and at what rate you will need to get your retirement money income. The charts in chapters 3 & 4 are priceless, as they show, based on typical returns, what you’ll need to save at whatever point you are at (5, 10, 15 years from retirement) and what your overall nest egg should be, based on projected lifetimes. The second section then talks about Monte Carlo simulations (to test your plan), income investing, and how to draw down your funds over your retirement. This is the heart of the book, and its best section. The only issue I have (and it’s a personal one) is that he relies a lot on bonds (his portfolio is 50% bonds, 50% stocks). In the 80s and 90s, bonds had high rates, and there were corporate bonds at 6% and 7% in the late 90s. Based on his knowledge there, I think he believed the bonds would return to that – but in our current low interest rate environment, they are only coming in around 3% – 4%.

The third section of the book discusses what to do if you haven’t got enough. It’s a bad spot to be in, but there are some alternatives:

  • Immediate annuities (to guard against outliving your money)
  • Relocation to a less expensive area
  • Reverse mortgages

The book closes with “25 big truths of retirement planning” another list of pearls of wisdom from the authors.

This was a good one, and I refer back to it occasionally to see if I am “on track” based on his numbers.

 

I would rate in 3.5 stars out of 5.

 

Mr. 39 months

Book Review – Yes, You can be a Successful Income Investor by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a master’s & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

This is the second book in the author’s five part series on finances. In their first, they wrote about using certain metrics to be able to “time the market” in the long term (10 – 15 years +). In this book, they talk about how to set up an income portfolio that will pay you dividends – something often used by folks for their retirement. There is also a school of investing that says that the only real stocks you can count on are ones generating dividends – all the other “growth” stocks are just hot stocks that can easily come crashing down.

Written in 2005, the book discusses how, in reaction to the dot.com stock meltdown, the fed dramatically dropped rates in the US. The risk-free T-bill of 2000 was 6.2 percent, while in 2005, it was at 1.7 percent. This affected a lot of folks looking for income generating investments, like dividend stocks, bonds, annuities, etc. The book starts out explaining how the chase for growth can lead to major stock drops (like 2000) – which can be very painful depending on the timing. Their alternative is income investing, where you put money in the market when it is too expensive. Their idea is not to buy into growth, but to buy into investments that produce a regular yield.

The key measurement for them is yield – both yield from stocks, and yield from bonds. The caution that you should get your yield information from the same source for all your investments (since some calculate yield a little differently) so that you are always comparing apples-to-apples. They also caution that some of the info in the book is time sensitive (like from 2005?) so do the analysis yourself to get up-to-date information.

The book spends several chapters discussing Bonds (a topic that many FIRE folks don’t spend a lot of time on).It discusses the risks and rewards, how to measure yield, essential bonds for fixed-income investors, and then higher yielding bonds. These chapters alone are a real benefit for folks, because most people are poorly educated on the bond market.

The book then moves into income producing stocks, including preferred stocks. Much of the info here has been covered before, but the emphasis on yield and dividends, over growth, is the key concept.

The book then covers Real Estate Investment Trusts (REITs) which are another key source of income. REITs are a special class of companies, dedicated to real estate investments. Because they have to distribute 90% of their earnings as dividends each year, they benefit from certain tax codes write offs. Since they distribute so much of their earnings via dividends, they are income producing machines, and a key part of anyone’s income portfolio.

The book closes by working up some sample income portfolios:

  1. A very simple one, consisting of four index funds (20% Vanguard REITs, 20% IShares Stock select dividend, 30% Vanguard Inflation protected securities and 30% Vanguard short-term bonds). Four funds, low expenses, no fuss. In 2005, this generated a 3.8% annual yield. In 2016, it was around 2.6%.
  2. A slightly more aggressive allocation (20 different REITs, 10 dividend stock, 10% in IShares, 30% in Vanguard inflation protected securities, and 30% in Vanguard total bond market). This increased the yield in 2005 to 4.3%
  3. A very aggressive allocation (20% in leveraged REIT fund, 20% in leveraged dividend funds, 30% in Inflation-protected securities and 30% in PIMCO corporate income fund – to get some emerging markets yield). This gets the yield in 2005 up to 6.9%, even with the bump up in expenses.

The last thing they note is tax strategies. Specifically, tax sheltered accounts (401Ks, IRAs, etc.) is where you want to stock your Treasury Inflation-Protected securities. It helps avoid having to pay taxes on income that is one of the major hassles of TIPs bonds. Also consider putting REITs in your tax advantage accounts, for the same reason.

Overall, I found the book to be interesting, and I’ve used my father’s remainder IRA to setup something similar. It has produced some good yield for me (around 3.42%).

I would rate in 3.5 stars out of 5.

Mr. 39 months

Book Review – Yes you can time the market! by Ben Stein and Phil DeMuth

Most people remember Ben Stein as the teacher in “Ferris Bueller’s Day Off” or from his show “Win Ben Stein’s Money.” However, he is also an accomplished economist, with a degree from Columbia and the valedictorian of Yale Law School. He worked in the White House in the 70s, and has written articles on finance for Barron’s and the Wall Street Journal.

Phil DeMuth was valedictorian of his class at the University of California, and has a masters & doctorate degrees. He is a registered investment advisor and president of Conservative Wealth Management in Los Angeles. He has also written extensively for the Wall Street Journal and Barron’s.

The book was written in 2003, after the dot-com crash. It came out of a series of lunches and bike rides in Santa Monica from 1997 to 2000, where the two argued/discussed how the market appeared to be overpriced. However, since conventional wisdom was that you couldn’t “time the market” what were you to do? Market timing “had been the province of short-term fortune-telling cranks” and has had a justified bad reputation in investing circles. What the two authors wondered (and set out to research) was that, in the long-term (10+ years) were their valuation metrics that could be used to determine when to buy, and when not to buy, stock funds. Note that they were using stock mutual funds (S&P 500 Index) for your purchasing decision here, because individual stock analysis is something completely different.

The authors then set out to look at various metrics for determining the time to purchase, compared them, provided their strengths and weaknesses, and then judged them over various time periods (5, 10 and 15 years). They also provided methods for the reader to do similar analysis in the ongoing years, so you could continue to use the methods. The list of metrics they came up with were:

  • Price vs 15-year moving average of price
  • Price-to-earnings ratio (PE) vs 15-year moving average
  • Dividend yield vs 15-year moving average
  • Fundamental value (can’t use this now, their source no longer provides the data)
  • AAA bond yield vs stock “yield”
  • Price-to-Cash Flow and Price-to-Sales (can’t use this now, their source no longer provides the data)

Each of these metrics provide a point where the investor should start purchasing stocks, or should stop purchasing (but continue to let the stocks sit and reinvest the dividends). Again, this is long-term timing, so there is nothing in here to show when to exit the market completely and put it in bonds or your bank.

They end by showing that, by combining each of these metrics, rather than using just one, and using that to determine your time to purchase, you can enjoy even greater stock.

Price: This metric is just a comparison of the current S&P 500 (adjusted for inflation) versus the 15-year moving average. When the current price is above the 15-year average, you should stop purchasing and let your stocks ride. When it dips below, you can begin purchasing again. As you would expect, since it has been climbing steadily for many years, this one doesn’t provide a signal to purchase as much. In fact, using this metric, it suggests you shouldn’t have been purchasing from 1985 to 2008 (one of the great run ups of stocks). The only time it wanted you to buy recently was from 2009 – 2012.

 

Price chart

Price-to-Earnings: This one seems to be a little more accurate, in my opinion. Many folks have used the P/E ratio for their investing decisions. Here you are measuring the current S&P500 P/E ratio versus the 15-year moving average. Again, when its above the average, you shouldn’t buy, when it is below the average, you should buy.

PE chart

Again, if you look at the chart, it recommends not continuing to buy in 1985, and only starting back up again in 2004. The book provides documentation to show that, as of 2003, this method rewarded the investor better than continuing to purchase during the great stock run up. Perhaps if t went past 2003 (when the book was written) it wouldn’t be valid. Something for me to check out in the future.

Dividend Yield: Companies can elect to distribute some of their excess earnings to their shareholders, and these take the form of dividends. Nowadays, companies don’t like to give out dividends – their CEOs think they have a better use of the earnings to grow the business. In the book, they track the S&P500’s dividend yield versus the 15-year moving average. When the current yield is below the 15-year average, the assumption is the stocks are overpriced, and you should not be purchasing new stocks (but you should continue to reinvest the dividends). Again, based on this, the book shows how, over a long period (15-20 years) the investor beat out the others (in the case of 20 years, it was almost a 50% increase in overall returns). This is also the third metric in a row which says to stop buying new stocks n 1985 (?)

Dividend yield chart

Earnings Yield vs AAA Corporate Bond: In this fourth and final metric,  the book compares the yield of a AAA corporate bond to the S&P500 Earnings Yield (you get this by dividing 1 by the P/E ratio). The earning’s yield has always been a short-hand way to compare bonds to stocks. The idea here is that if someone can earn more “yield” from a bond than a stock, they should invest in bonds. Except for a dip between 2008-2010, this metric was also suggesting investing in stocks for the past several years.

Earnings vs bonds

The book concludes with an analysis of how to use all the metrics together to significantly increase your returns. It compares using 1, 2, 3 or 4 of the metrics together, and their returns over 5, 10, 15 and 20 years, as well as comparing them with other strategies (asset allocation, other investments like real estate, etc.) In the end, this long-range market timing was shown to be more successful.

However, the authors note that this strategy is not for the faint of heart. It is a true contrarian strategy, where people will be purchasing stocks when there is “blood in the streets” and refusing to buy, when the market is going up like a rocket. It is also, very much, a long-term strategy, where you are not looking to capitalize on the investments for 15-20 years.

 

By the way, as of August 1, 2017, three of the four metrics have turned to “don’t buy” additional stocks. Only the S&P500 earnings yield vs bond yield still is pointing towards buying more, and even that is pretty close (S&P500 yield was 4.05%, AAA bonds were 3.75%). Also remember that this metric does not say to sell your stocks, just don’t buy any new ones (and continue to reinvest your dividends).

Overall, I liked the book, and may keep the metrics in mind for my “fun money” accounts. For my 401K/IRAs I plan on sticking with my asset allocation strategy.

I give it 3.5 stars out of 5

 

Mr. 39 Months