Tuesday, October 08, 2013

Review: Skating to where the puck was

Skating to Where the Puck Was is part of William Bernstein's series called "Investing for Adults". I did not consider the previous book I read in the series, Deep Risk, to be worth the trouble, but I have a different opinion of this book.

Bernstein points out that in many cases, by the time an asset class is widely accessible to the masses for investing, it has lost most of the attractive properties it used to have, therefore rendering the asset class much less interesting. The first example he uses is from David Swensen's Pioneering Portfolio Management: the Yale Model, with its reliance of alternative assets, including hedge funds and other such, returned outsized success until it became widely known and copies, at which point it stopped yielding those outsized returns.

Similarly, he points out that recently, an individual investor could make outsized gains in the housing market by buying up houses and renting them for profit, but doing so would have required that you make a full time job (or serious side job) out of it, not by merely investing in an REIT. Similarly, the Japanese stock market returned incredibly high yields when John Templeton bought into it very early. So early, in fact, that when he first bought shares in the market, they could not even be taken out of the country! By the time generalized Japanese stock funds became available, the return on those funds going forward was dismal. The result, Bernstein says, is that:
if your portfolio looks like the Yale Endowment's, then you're likely to find yourself chairless when the music stops. Diversifying is easy; doing so early is difficult.
The solution? Boring old asset allocation and staying in the market for the long haul. There a really is no Santa Claus, and no tooth fairy, unless you're the next John Templeton and have the courage to get in ahead of the crowd. (And even then, there's no guarantee that you're not the next Bill Miller instead)

The book repeats stuff you probably already know as an investing adult, but the stories inside are worth a quick read and the book is cheap. Recommended.
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