Book Review Archives - Page 4 of 8

August 15, 2014December 22, 2014

Book Review: How To Avoid Financial Tangles

If you ever read any novels by Jane Austen, Anthony Trollope, or Charles Dickens you quickly realize that the most important goal of 19^th Century English life was securing – through a fortunate birth or a strategic marriage – a steady income based on the rents of private property.

The plots of all their novels hinge on this uncertain quest. All of their protagonists seek to navigate the twists and turns of what may euphemistically be termed ‘financial tangles.’

Popular culture – at least in the US – no longer focuses quite so much on this singular struggle, as our movies tend to teach either one of two lessons. It’s either ‘true love overcomes all obstacles’ or ‘underdogs can overcome powerful antagonists through pluck and an intriguing bromance.’[1]

Despite the shift in popular culture, however, I would argue that avoiding financial tangles remains the central struggle of real life in the 21 Century.

I mention this because I wandered into a used bookstore recently, found myself at the finance section, and a book named How To Avoid Financial Tanglesby The American Institute For Economic Research fell into my hands. [2]

Financial tangles? That sounded interesting, as did the fact that the AIER is in Great Barrington Massachusetts. Massachusetts! My people! This should be good, I thought.

I noticed the first edition of the book was published in 1938 (a good year for financial tangles) and has been updated periodically since then. I also noticed 1938 represents a sort of halfway point in time between the Dickens & Trollope era and our own day, although my copy from the bookstore was published in 1995.

I’ve been reading through it slowly since.

What many of us need to know about financial tangles goes beyond what can be gleaned for free from a finance blog. On the other hand, we do not want to start incurring lawyers’ and accountants’ fees whenever we might step into a tangle.

We often need something relatively sophisticated, but at the same time not overly technical.

This book offers a kind of half-way technical approach. You will not find clever Clint Eastwood references to explain insurance concepts, or clever Sci-Fi analogies for quantitative trading, but you will get a starter briefing on important issues of real estate, trusts, wills and estates, insurance and contracts – basically all of the stuff of 19^th Century English novels.

Do you know the difference between joint tenancy and tenancy by the entirety? You better believe Lizzy Bennet knew. Are you familiar with Trusts for Minors? The lawyers in Jarndyce & Jarndyce were. Do you know the most important principles for designing a Will? The residents of Barsetshire did.

Do you have a will? Do you know why you should have one? Do you know why people – even relatively non-wealthy people – create trusts?

How To Avoid Financial Tangles can help you self-educate, most likely in advance of speaking with an attorney or some other specialist.

I’m not saying you will love reading this as much as you do reading Trollope, Dickens and Austen, but this is a solid place to start the modern process of avoiding financial tangles.

Please see post: All Bankers Anonymous reviews in one place!

[1] I defy you to come up with a major Hollywood movie that doesn’t follow one of these two patterns. See? You can’t do it.

[2] For those of you under age 40, “books” used to come in a paper, glue, ink, and cardboard format that could be physically held. This brought tremendous obvious disadvantages to people who read “books” this way. You couldn’t create an infinite number of copies at the press of a button. You could not Google search for key words, or check your precise % already read. You could not even cut and paste favorite passages to your Twitter account, without doing irreversible damage to the original book with scissors. Anyway, for this old style of book, believe it or not but there are still actual buildings where “physical book” fetishists still lurk, touching and handling the old-style paper and ink things. Used bookstores – and physical bookstores for that matter – now exist only outside of the “real economy” and may be safely ignored by all of you under age 40.

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July 24, 2014December 22, 2014

Book Review: The Automatic Millionaire by David Bach

A few weeks back I sent out a proposal to a few prospective agents, expecting at least one would recognize the genius – and their own self-interested business opportunity – in my personal finance book proposal.

One prospective agent asked a reasonable question in reply: “What’s the one thing you would like to get across to readers of your book?”

At the time I got his email I was in the process of sitting down to watch a summer blockbuster movie in the theater[1], so I fired off what came into the top of my head, to which he replied:

“Not good enough. You need to give readers something more concrete and memorable, like ‘Bach’s Latte Effect.”

I puzzled over that one throughout the movie, as I did not recall anything about delicious lactose-based caffeinated beverages in my limited knowledge of the Brandenburg Concertos.

Fortunately, when the movie let out I had recourse to The Google.

I learned that one of the most popular personal finance book of the last decade – The Automatic Millionaire: A Powerful One-Step Plan To Live And Finish Rich, by David Bach – makes use of Bach’s Latte Effect as a central, simple concept for getting rich.

David Bach, not Johannes Sebastian, composed the ‘Latte Effect.’

The next day I ordered the book, fully hoping to hate it, all the better to discard the agent’s comment in an ego-protective way.

I’m sorry to say: This book is quite good.

I mean, mine’s better, obviously, but David Bach has the distinct advantage over me of actually having written and published his book. And, it’s got a couple of extraordinarily simple, memorable, easy steps that could help most people get wealthy by the end of their lifetime.

Bach has two, and only two, major points to make, both of which are absolutely correct.

Bach’s first point – The Latte Effect

You do have money to invest.

Nobody thinks they do. Most days I don’t think I do. I mean, the money always runs out first, right? How would I even scrape together an extra $100 a month? It’s just not happening, right? Wrong.

samuel_jackson_motherfucker — Yes, my barista actually made this Samuel Jackson latte and gave it to me. That’s how good a coffee customer I am. Which is scary.

The Latte Effect, coined by Bach, refers to the correct idea that all of us – ALL OF US[2] – are paying for things on a daily and weekly basis that we don’t have to. Each one of us – were we to track every little, literal, expenditure – buys small things that we do not have to buy.

Me, as an embarrassing example of the Latte Effect

Personally I have gotten in the habit of feeding my Starbucks addiction to an embarrassing level. Let’s say I spend $2.50 on a Grande per day,[3] for a total of $17.50 per week. And let’s say three times a week I grab a ‘classic sandwich’ for breakfast from that smug little green mermaid because I’m in a rush to drop off the girls at school or camp or whatever for a total of $12 more dollars per week. So I spend $29.50 per week at Starbucks.

So, sue me, what’s the big deal?

The big deal is that this tiny little forgettable expenditure, after 52 weeks, comes to $1,534 per year.

And the next big deal is what I’m not building in long-term wealth by spending that $1,534 annually.

How big is the Latte Effect?

Let’s say I saved and invested an additional $1,534 per year in the stock market, and let’s further say I did that for the next thirty years, until I turned 72. How much richer would I be?

Plug this into your compound interest calculators everybody:

At a plausible 6% return from the markets I’d be more than $128 thousand richer by age 72.

At a backward-looking, historically-realized 10% return I’d be more than $277 thousand richer.

What if instead of getting wise at age 42, I had cut out my destructive Starbucks habit and began my caffeine-free living at age 22? Now this gets really interesting.

At the plausible rate of 6% return from the market, I would end up at the age of 72 $472 thousand richer. And if markets returned as much as 10% every year I would be over $1.9 million richer.

So what is my Latte Effect?

Over my working lifetime (age 22 to 72) somewhere between $472 thousand and $1.9 million. Actually I am certain the range of the effect is much higher, as I’ve underestimated both my weekly Starbucks consumption and other unnecessary consumption items, but you get the idea. I should be, and could be, much wealthier.

And so could you. So what’s your Latte Effect?

Your Latte Effect

Now, you may be feeling quite smug because you’re Mormon and you never touch the Starbucks poison. Good for you. You still have a Latte Effect. I guarantee it.

You buy lottery tickets. Or gum. Or tic-tacs. Or Spotify/Pandora. Or Netflix/Hulu/AppleTV. Or internet porn. Or extra leveling-up manna on the Freemium games for the iPhone. I know you have a weakness, you’re just not telling me.

Which is fine. But you should be honest with yourself about your own Latte Effect, if you aren’t coming up with money at the end of the month to invest for your long-term financial security.

automate_your_investments — Automate Investments For The People

Bach’s second point: Automate the Investing

Not only do we not think we have any money at the end of any month, but very few of us – even if we had the money at the end of the month – have the willpower to turn it over to our long-term investment accounts.

The only surefire way to invest – and here I have to give Bach credit for totally nailing it, although also of course I independently urged people to do this last year[4] – is to set up automatic deductions from your checking account (or better yet, directly from your paycheck) into your investment accounts.

[Why does this work? I don’t know. It has something to do with the idea that money that either doesn’t stay in our checking account – or doesn’t even hit it – is money that we will not be tempted to spend. Humans are weird psychological puzzles when it comes to money. Incidentally, here’s a good book I reviewed that explores all the different irrational things we do with money. Ok, back to our regularly scheduled program.]

The following statement – a paraphrase of Bach’s book – deserves the bold, italic, underlined all-caps designation I’m giving it.

THE MOST IMPORTANT STEP YOU CAN TAKE TO BECOMING RICH IN THE LONG RUN IS TO AUTOMATE YOUR MONTHLY INVESTMENT CONTRIBUTIONS

I’ll stop shouting now, and offer a few additional calm thoughts.

The first best place to automate investment contributions is to your 401K and IRA, both of which are tax-advantaged, awesome investment vehicles.
If you already contribute to your company’s 401K (or 403b for non-profit folks), then check to make sure you are maximizing your annual contributions.
Your friendly bank or brokerage company will happily set up a monthly or bimonthly automatic transfer from your checking account into the investment account you open there.
If you’re just starting out and don’t think you qualify for the investment to open an account, you can sometimes convince them to waive the minimums, if you set up an automatic investment program.
If you’ve never invested before, try dedicating just 1% of your income to your investment accounts through automatic investing. Over time, once you’ve automated contributions, you will see that moving to 5%, and then 10%, of your income is no big deal.

Automatic investing this way is not simply a way to invest, or one way to invest. No. I say with confidence it’s the ONLY way to invest. If you haven’t tried this, but have always wondered how other people actually invest money over time, you may be amazed to learn that the vast majority of people did it, one way or another, based on automatic investing.

So, the TL;DR on David Bach’s book:

You could have money left over at the end of the month if you stop drinking lattes (or whatever), and you could become wealthy if you automatically made contributions to your investment accounts, starting with your tax advantaged retirement accounts.

Caveats

I have only two caveats about The Automatic Millionaire, and these caveats apply to every single personal finance book I’ve ever read so far.

Who buys this?

First, the type of person who picks up a personal finance book is already different from your average person who needs help with their finances. A personal finance book buyer has self-selected as someone oriented toward financial self-improvement, and asking for outside ideas. Will buyers and readers of The Automatic Millionaire follow Bach’s advice? I hope so. Will the people who need the book the most actually end up buying it, in order to take their first few simple steps toward financial security? I don’t know.

Compound interest

My second caveat is just my personal pet peeve. Bach makes good use of the concept of compound interest, urging his readers to invest early in their lives to get rich later. Multiple charts and tables in the book show how a few thousand dollars invested, for X years, earning Y% return, will result in Z riches. This is great.

BUT!

Bach, like every other personal finance author who has ever been published, declines to show exactly how the math is done. He decided, the same way every other publisher has previously decided, that book readers cannot be trusted to learn a simple algebraic formula.

With a little attention and a simple spreadsheet, readers should be taught compound interest. Am I the only person who thinks that personal financial advice starts with people understanding compound interest well enough to do the calculations themselves, rather than refer to somebody else’s table in a book?

Apparently, yes.

If I ever spoke with that agent again, I’d like to tell him that the one thing people should understand is the compound interest formula. That is my most firmly held belief.[5]

But I’m afraid it’s not something the publishing world is comfortable with. They don’t trust readers enough to walk them through the junior-high level math. So we get tables and charts instead.

Please see related post All Bankers Anonymous reviews in one place!

Please also see related posts on:

Compound Interest and Wealth

Compound Interest and Debt

The Humble IRA

Become a Money Saving Jedi

[1] 22 Jump Street, if you must know. What? Whaaaat? My wife tells me Channing Tatum is quite a good actor. But I still haven’t convinced her to start calling me “Magic Mike.” I don’t know why she refuses me this simple courtesy.

[2] Ok, obviously not all of us. Because there is real poverty everywhere. And I know there is food insecurity within a few blocks even of my own house, so I should not exaggerate. But many, many, many, more of us – pretty much anybody who is gainfully employed right now and not on complete federal assistance – has their own Latte Effect were they to examine their daily habits scrupulously.

[3] I happen to know my Starbucks habit is much, much worse than this, but I’m not about to confess this to just anyone on the Interwebs. I mean, I have some pride. Also, there are some crazies on the Interwebs, have you noticed? Sheesh.

[4] I’m just bragging here so that any book agents reading this know that I’m totally all over this topic.

[5] That, and also the firmly held belief that Rihanna would totally prefer me over both Drake and Chris Brown, if she was ever given the opportunity. Sorry, RiRi, I am happily married.

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June 23, 2014

Book Review: Diary Of A Very Bad Year

I’ll admit to two large biases before praising Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager.

First, I prefer a personal account by a financial practitioner, rather than a financial journalist’s perspective, nearly every time. This preference, after all, underpins my idea with the Bankers Anonymous site itself.

The acronymic jargon of an ordinary financial practitioner’s presentation, however, typically overshadows his story for the lay reader. Who, except the specialist, can unpack the Re-Remics from the Reverse Repos, the positive carry from the negative basis trades, or FX forwards from a commodity curve in backwardation? Only the rare financier knows his craft so well that he can explain complexity while using language we can all understand.

Second, the Anonymous Hedge Fund Manager (HFM) featured in the book was a client of mine for a short while when I sold bonds on the emerging markets desk for Goldman. His clear language and thinking made a strong impression at that time.

Which explains why, when I read a review of this book a few years ago, I immediately thought of my ex-client. Was he the unidentified HFM? An email query and reply a few hours later confirmed it, yes.

Through a series of interviews with a journalist, HFM gives a wide-ranging but personal perspective on his experience between September 2007 and August 2009, covering the periods of the deepest dive and steepest financial recovery. His interests, while inescapably specific and technical, frequently veer to the philosophical and big picture.

In the free-fall period of late 2008 – when even the most plugged-in hedge fund manager was overwhelmed with unexpectedly bad developments – we experience a real existential question for financial markets: If all private banks were at risk of implosion without the backing of the US Government, what happens when the US Government defaults? Who is insuring it and how do you hedge that risk? Martians were not offering credit default swaps to earthlings.

Diary of a Very Bad Year will not tell you everything you need to know about the Credit Crisis of 2008. It will tell you what a large hedge fund manager experienced, in real time, in a way no journalist on the outside could ever tell you.

It’s the best book I’ve ever read on the Crisis.

I read this a few years ago but was reminded of it because my wife just read Diary of a Very Bad Year this past week. She found it somewhat technical for the non-finance expert – as terms like leverage, credit default swaps, FX crosses, and even ‘hedge fund,’ get thrown around without explanation or definition. But she also appreciated the brilliance and humor of HFM in describing those two awful years, in real time.

The final chapter reveals HFM’s plan to quit New York City and move to Austin, TX with his fiancé.

He’s burned out on the stress of the Crisis and the responsibility of managing a large team and complex portfolio at his New York hedge fund. He dreams of eliminating his management responsibilities, simplifying his life, and shifting his balance, away from working, and more toward living.

When I checked in with him for lunch in Austin a few years ago, he had followed his plan exactly.

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June 21, 2014December 15, 2014

Book Review: Flash Boys by Michael Lewis

The Rise of the Machines

Michael Lewis wrote Flash Boys to alert the non-finance world about the scourge of high frequency traders front-running investors and fracturing traditional capital markets.

Lewis does not distinguish between quantitative (or algorithmic) trading strategies and high frequency trading firms (HFTs), although it’s helpful to define these terms first.

Quantitative strategies – of which HFTs form a subset – are computer-driven trading models, in which the human input all occurs prior to a market’s opening bell. The human instructions come from computer programmers who tell the model to look for certain signals in the way securities trade to prompt a buy or sell order. HFTs are a type of quantitative strategy that rely on speed, in milliseconds, to successfully execute trades. A good primer generally on quant trading and HFTs from someone inside that world is Rishi Narang’s Inside The Black Box, which I reviewed recently.

Lewis points to at least four simultaneous innovations that have led to the profitable opportunity for high frequency trading firms over the past decade.

First, an investor-protection law from 2005 called Reg NMS demanded that investors receive the ‘best’ price visible on a stock exchange, even though sophisticated investors know that large investment purchases or sales may get a best overall price if done quietly ‘off-market’ without alerting the rest of the investment community. Following Reg NMS, HFTs can play games with the ‘visible’ market price by posting, say, 100 shares for purchase or sale, only to cancel that price as soon as a real order hits the market. In Lewis’ telling, the 100 share order from the HFTs becomes an electronic trip-wire to signal certain types of large investors are making a move, and allowing the HFTs to front-run that investor through superior trading speed.

Second, the fracturing of the equity markets into more than a dozen major electronic exchanges and 40 (or so) broker-dealer created ‘dark pools’ for anonymous electronic trading has created multiple opportunities for risk-less arbitrage between exchanges, for those HFTs who execute trades in milliseconds.
Third, the privatization of US stock exchanges like the Nasdaq and New York Stock Exchange led the exchanges to seek their own profit through fee arrangements with HFTs at the expense of investor-oriented protections, which would have limited the access of HFTs.
Fourth, technology – between lightning-fast software and speed-of-light fiber optic cable – created a haves and haves-not unfair playing field between investors in many markets.

Lewis’ narrative follows the evolution of his protagonist Brad Katsuyama who figures out just enough of the HFT game to become inspired to shut it down – first because it interferes with his job trading equities for the Royal Bank of Canada, and later because he’s a self-appointed evangelist for protecting real investors from the HFTs.

Katsuyama and his plucky rag-tag group of Wall Street castoffs – and here Flash Boys most closely resembles the plot of every early Bill Murray movie like Meatballs and Stripes – set out to build a better exchange known as the Investors Exchange (IEX),[1] which through slow trading will box out the HFTs and their nasty algorithms.

The moralistic tone, and why it matters

Flash Boys differs from Lewis’ earlier finance books in the introduction of his moralistic tone – he seems genuinely outraged by the activities of high frequency trading firms. This moral outrage differs from the way that he was previously mostly amused by disgusting mortgage traders, stupid Icelandic Viking financiers, or Sub-prime CDO structurers.

In Liar’s Poker, Boomerang, and The Big Short Lewis distinguished himself from other financial journalists by adopting a knowing attitude toward Wall Street’s greedy ways. Whereas other financial journos portray a fairy tale world of virtuous small-time investors and evil greedy bullies, Lewis worked on Wall Street for a few years and knew better than to fall into that trap.

Lewis usually celebrates – at least up to a certain extent – those who outwit the competition to earn themselves a big payout.

Lewis’ bad guys in those earlier tales typically would receive a kind of satirical treatment for their excessive attitudes. Lewis found ways to laugh at his antagonists because he spent time enough with them to understand their strengths, weaknesses, and the right distinguishing characteristic to turn their unattractiveness into humor.

Lewis does not seem to have spent any time getting to know high frequency traders for Flash Boys, however, and here his moral tone – rather than knowing satire -exposes a weakness.

I’m not saying Lewis shouldn’t be upset about high frequency trading. He makes a compelling case that we should all take a much harder look at whether all of their activity acts like a massive, hidden, tax on capital markets. What I am saying is that the moral tone – which resembles the style of weaker financial journalists – exposes the fact that he hasn’t spent enough time getting to know actual high frequency traders.

If he had spent time with some, we would have gotten some funny anecdotes and satirical send-ups – That Russian programmer with the bad breath and an unhealthy obsession with Miley Cyrus! Ha! The South African technologist who keeps twenty cats in his office and eats only vegetables that start with the letter T! You can’t believe how funny these guys are! That kind of thing.

The humor is amusing in its own right of course, but the humor also tells us that Lewis was there, and got to know these people. Unique among journalists he has a track record of actually going out and finding the stories rather than create fairy tales based on preconceived moral views. The Good Guys = Brad Katsuyama & Team versus Bad Guys = Faceless & Nameless HFTs formula makes me suspect we only got a portion of the full story.

I’m thinking about Lewis’ apparent failure to talk to HFT folks because a friend of mine from the HFT industry thinks Lewis totally blew it when describing his world.

I do not know HFTs myself well enough to judge, but I know my friend has a moral compass and wants the HFT story portrayed accurately.

(And you should see his 20 cats! Just kidding.)

I’m hoping in coming weeks to learn enough to judge better the accuracy of Flash Boys. More importantly than judging the book, I’d like to know to what extend HFTs really threaten the system, as Lewis argues.

More questions than answers

For my own future reference, but also perhaps other readers, here’s my beginning list of further questions to explore and answer after reading Flash Boys.

rise_of_the_machines — We have got to stop SkyNet

Lewis leaves practically unanswered what I think is the much greater problem of quantitative and high frequency trading: As computer algorithms constitutes 50-80% of all trading volume on US exchanges, what are we doing to shore up the system against massive technical fails like the Flash Crash of 2010, or like the Crash of ’87, for that matter? We haven’t seen The Big One yet but I’m pretty worried about it, and I hope regulators have a plan in place to prevent it. In other words, WE MUST PREVENT SKYNET! WHERE IS OUR JOHN CONNOR?
If Katsuyama’s IEX is a better mousetrap and a solid protection against HFT front-running, as Lewis believes, how has it fared in the subsequent months since opening in October 2013? I’ll be curious to know if it has begun to siphon off volume from other exchanges and the broker-created dark pools. If investors are self-interested, they should want to participate in the IEX far more than the shark-infested dark pools.
Lewis mentions only two HFT strategies that I can see, in simplest form: Strategy #1: Set up 100 share trip-wires inside these exchanges. When those get tripped, quickly front-run the direction of the market ahead of a big order. Strategy #2: Gain arbitrage opportunities by seeing an order in one exchange and then quickly executing in another exchange based on that order. Strategy #1 is borderline illegal so it strikes me as something that regulators could address. Strategy #2 is theoretically (marginally) ‘creating efficiencies,’ although not if the HFTs are, as they seem to be doing, seeing order flow to some exchanges faster than everyone else. IEX could put that strategy #2 out of business. But something tells me there are many dozens to hundreds more HFT strategies not described in this book. What are they?
Whatever happened to the high-speed line built by Spread Networks from New Jersey to Chicago mentioned in the early chapters? And was it made obsolete by the microwave towers mentioned in the Epilogue, or is that part of the same network?
My friend from the HFT firm mentioned this one to me: Lewis relays a very fishy anecdote about a hedge fund trader typing a buy order into his computer, only to watch the market suddenly shift away from him before he hits enter to execute the trade. This is, basically, impossible – unless the HFTs have hacked into the hedge fund guy’s computer – to see his trades before he even sends them to the exchange. Even I’m not that paranoid about Skynet yet. So, Lewis, what’s up with that anecdote?
Can we, and should we, distinguish between quantitative trading – relying on computer algorithms rather than human input to execute trades – and HFTs in a meaningful way when it comes to regulation and treatment in a market exchange?

That’s my short list of questions. More to come later.

Please see related posts:

Book Review of Pete Kovac’s Flash Boys: Not So Fast

Book Review of Rishi Narang’s Inside The Black Box

Book Reviews of Michael Lewis’ previous books on finance:

Liar’s Poker

Boomerang

The Big Short

Crashes happen when quants take over the markets, in Rise of The Machines

[1] Fun fact: They didn’t use the full URL of the exchange name because, you know, investorsexchange.com could be interpreted a variety of ways.

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June 18, 2014March 9, 2015

Book Review: All The Math You Need To Get Rich

I learned from my wife the concept of the “feedback sandwich,” by which she means if you want to give someone an important piece of critical advice, it’s often most strategic to cushion the blow with a compliment to start, and a compliment to finish, with the criticism nestled in between.

Michael Scott in Scranton, PA might have given feedback this way.

“Hey, I love your ability to file those papers alphabetically!”

“Everyone here in the office has just one word for you: halitosis.”

“Also, cool green shirt you have on today!”

In reviewing Robert L. Hershey’s All The Math You Need To Get Rich I have had recourse to the feedback sandwich. First, I will list some examples from the book that I quite liked. In the middle, a couple of important concerns. Finally, some kind words about how I would use this book if I taught math to high school kids

What works

Hershey presents basic, essential, practical, financial math and then follows it up with numerous word problems at the end of each chapter to help lock in the knowledge.

Two examples in particular stood out as excellent, and paraphrasing them from Hershey’s book illustrates the importance of Hershey’s project.

Example 1

Two twin brothers, each of whom wants to get rich in 45 years, pursues two different paths toward their goal.

The first brother (aptly named Lucky), in a hurry for wealth, decides to buy lottery tickets. He makes a plan to buy $10 of lottery tickets every day, six days a week, for the next 45 years.

The second brother (named Tim) decides to invest exactly half of the amount spent by brother Lucky in a balanced portfolio of market securities, such as stocks and mutual funds.

How much does Lucky bet and spend over course of 45 years, and what is the probable outcome? How much does Tim invest over the course of 45 years, and what is the probable outcome?

While results may vary, we can calculate the expected value of each of these brothers’ behaviors.

To calculate Lucky’s results, we need to know that lotteries return an expected value of $-0.50 per $1 bet. The point of a lottery, after all, is to raise money for the lottery organizer, and to return about half the money over time to the players.

Lucky bets $3,120 per year ($10 x 6 x 52)

And a total of $140,400 over the 45 years ($3,120 x 45)

Since he loses an expected amount of $0.50 per $1 bet, we can quickly see that Lucky loses $70,200 over the course of his 45 years of lottery playing. Lucky might win $10 here, $100 there, and occasionally $1,000, but the odds in the long run mean he’ll burn up an estimated $70,200 over the years, nearly guaranteed.

What about Tim’s results?

Tim invests $5/day, 6 days a week, 52 weeks per year. His annual investment is $1,560 ($5 x 6 x 52).

Hershey (the book’s author) assumes a 10% gain on investments[1] to calculate Tim’s results after 45 years. Aggregating the compounded returns of annual $1,560 investments at 10%, we can see Tim’s net worth climbs to $1,121,492 after 45 years.

Tim’s a millionaire using just half of the money Lucky ‘invested’ in lottery tickets, while Lucky has a zero net worth.

Now, that’s what I call a useful mathematical comparison.

$all the math you need book$

Example number two that I loved from the book

A recent college graduate named Patience is thinking of taking a trip to Europe, which will require her to max out her $5,000 credit card and pay the 18% annual interest charges on the card. Realistically she knows she will stay maxed out for 10 years, so she will have to pay that 18% interest all the while for the next ten years. How much is that?

Alternatively, Patience considers not making the trip to Europe, and instead may invest the amount of the unspent interest in an S&P500 index fund. Hershey assumes a 15% annual return[2] on that investment. How much money would she have then at the end of 10 years?

The annual finance charge, following the trip to Europe, would be $900 ($5,000 x 18%). Over ten years Patience would end up paying $9,000 in interest charges, and still owe $5,000 at the end of ten years.

If, instead, she invested $900 per year in the mutual fund that earns 15% per year, we can calculate – using the magic of compound interest – that she would have $18,274 in her fund.[3] Her positive net worth from investing beats the $5,000 deficit by a long shot. And just as importantly, the interest charge on the credit card ends up costing more than the original trip itself.

My critical thoughts – the bologna in the feedback sandwich

First concern – Who reads this?

One concern I maintain with a book like this – which I fretted about earlier in a review of another math-book-for-non-math-types Innumeracy – is who, honestly, will ever pick up this book? Will people who already feel uncertain about their math skills, however theoretically eager to learn the mysteries of numbers or tempted by the chance to “Get Rich,” actually dig past the first few paragraphs to learn what they do not know?

I don’t know. I doubt it. Math-oriented people enjoy confirming their own math aptitude with a book like this, and they may be able to expand their skills into useful finance applications with this book. I have a harder time picturing non-math folks picking up and actually working their way through the instructions and sample problems, however accessible this book may be. I think Hershey has made this as approachable as possible, but I still question the draw of those who are the intended audience.

Second concern – No way to teach compound interest (my pet peeve)

Every finance-math for non-experts book that I’ve ever read relies on a terrible crutch when it comes to teaching compound interest: The table in the Appendix with compound interest multiplication “factors.” I hate this.

What a proper book on compound interest should teach is the formula FV = PV * (1+Y/p)^N, with definitions of each variable and multiple examples to shows its application. That formula, once understand, can solve any compound interest problem flexibly, and precisely.

This book’s appendix features a y-axis listing the number of compounding terms from 1 to 100, for example (the N in the formula), while the x-axis shows ascending percentages of yield (the Y in the formula). At the end of every example in the book that references these tables, Hershey is forced to say: “That’s not exactly the answer, but it’s close enough.”

I can’t endorse this. I refuse.

All The Math You Need to Get Rich was first published in 1982, the same year in which my fifth grade teacher introduced us to the Timex Sinclair 2000.

[10: Print “Mike” ; 20: Goto 10 ; Run]

At that point in 1982, text appendices of compound interest tables made perfect sense.

Not in 2014, though.

Any reader of a book in 2014 also has use of an Excel spreadsheet program that sits on their desktop or laptop, and can be used to good effect with the formula above.

The text-based, imprecise, crutch of an Appendix table, which no person will carry with them, ever, gets in the way of anyone who ever wanted to actually learn how the compound interest formula really works, in real life.

Phew, got that off my chest.

Back to the complimentary thoughts

If I was assigned a high school math class as a substitute teacher and given 1 month to teach the kids something useful, I would pick a book like All The Math You Need To Get Rich as a textbook. Here are real-life skills for understanding interest rates, percentages, probabilities, and dealing with orders of magnitude – in short most of the things households, investors and citizens need to use on a daily basis to get by. Certainly these help most of us think much more, and much more often, about useful math applications, than the traditional courses – Geometry, Trigonometry, quadratic equations, and Calculus – that make up the majority of traditional high school math curricula.

Not only do these relatively accessible concepts come in handy more often, I would hope – as their substitute teacher – that I could impress upon the unruly high schoolers their own self-interest.

“Learn this about probabilities” I would exhort, “and save yourself thousands over your lifetime by not buying lottery tickets or gambling.”

“Deeply understand interest rates and percentages,” I would urge, “and use your powers for good (getting wealthy) instead of evil (making credit card companies richer).”

This is a fine book and I may use it for teaching my girls what they need to know in the future.

See related book reviews:

Innumeracy by John Allen Paulos

Master Math: Business and Personal Finance Math by Mary Hansen

[1] Astute readers will argue that 10% is too high an assumed return from a portfolio of stocks for 45 years, and I agree. Using a 6% return, Tim’s net worth at the end of 45 years climbs to $331,880. This doesn’t have quite the ring of ‘millionaire’ that the author Hershey probably wanted, but it still isn’t anything to sneeze at, for the cost of a daily Starbucks addiction.

[2] I know I know, too high, but still, work with me here a little bit.

[3] If we assume a more modest 6% return, she would have $11,863.

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April 7, 2014April 7, 2014

Book Review: Words and Money by Andre Schiffrin

Somewhere on my Top 5 thematic topics on Bankers Anonymous is a hard-core media critique – which I refer to in kinda-joking-kinda-not joking shorthand as the “Financial Infotainment Industrial Complex.”

When I read the Wall Street Journal or listen to financial news on the radio I find myself talking back – usually although not always silently – to the journalists, complaining about the coverage. The more I know about the financial topic, the more I complain.

My complaints tend toward several common themes:

The coverage relies on a specific anecdote, or a journalist reporting that ‘some people feel that’, without any big-picture or data-rich context around that anecdote or that ‘some people feel’ story.
The expert opinions come from people with a vested (financial) interest. On Wall Street this is known as ‘talking your book,’ in which a trader consistently offers a view of the world to others that most supports his trading position. I am never surprised to learn that someone in the insurance industry, for example, can speak eloquently about the benefits of an insurance product.
Negative stories about financial and economic news dominate positive stories 10 to 1, leaving the unsophisticated individual investor constantly battered by (mostly) unwarranted fears that in a purely rational sense should have zero affect on their personal financial attitudes and actions.
The topic du jour usually has absolutely zero relevance to a rational individual investor as well as to the vast majority of institutional investors. Gold! Bitcoin! Twitter IPO! Herbalife!
Simplistic, moralistic, cartoonish coverage by journalists of different roles in the economy. (Banker = Greedy. Home loan borrower = victim and moral paragon. Small Business = Plucky. Big Business = Soulless.)

Typically I complain silently to myself, shake a metaphorical fist at the newspaper or radio, and then I occasionally vent my frustrations by typing out a Bankers Anonymous post blasting the Financial Infotainment Industrial Complex. That can sometimes calm my nerves.

I have not tended to dwell on the profit-motive of media companies themselves and the swiftly-shifting economics of media companies.

I usually do not get upset about the profit-seeking of media companies because

a) I’m a red-blooded American capitalist (Amurica! Heck Yeah!) so I don’t want to begrudge any designated for-profit company’s attempt at wealth creation; and

b) I don’t know any better

I usually do not get upset about the swiftly shifting economics of media companies because

a) I don’t get a paycheck from any media companies, and

b) I have an optimistic (possibly simplistic) view that what we are in the process of losing in traditional print and analog forms we are more than gaining through the newly unleashed forces of digital media.

André Schiffrin, the author of Words and Money, has spent a lifetime firmly in the traditional print media camp as a publisher (Pantheon Books), founder of a publisher (New Press), and author. He is also a Frenchman in America. And he is deeply concerned about these latter problems that I haven’t considered much – the for-profit model that appears to be serving us badly, and the shifting economics of the media business. His book has given me food for thought.

A few of his bigger ideas, which I’m still mulling over, deserve attention.

How much profit is appropriate for book publishers?

I learned from Schiffrin that up until the last decade or two, the publishing industry worldwide generally contented itself with a very modest profit margin, on the order of 2-3% profit per year. Picture here the independent gentleman publisher, concerned with the ideas as much as the business. With the recent consolidation of global media conglomerates, however, stodgy book publishing became the low-profit step-child of higher-growth, higher-profit media ventures like television, cable, and newspapers.

Media executives and media investors – seeking to maximize their own opportunities – shoe-horned low-profit book publishing into the demands of higher-profit companies. The result, according to Schiffrin, is a highly risk-averse publishing climate, in which independent publishers wither and die, and only blockbuster authors and titles get promoted.

In addition, as Schiffrin describes it, book-publishing houses got the Bain Capital treatment: buy the company, add a ton of debt financing, fire the expensive and experienced talent, extract maximum financial value – and then sell. In the widget-production business, we can (sort-of) objectively admire this move to greater efficiency, but in the book-publishing business, even a capitalist like me can see that the world of ideas is hollowed out and made poorer by this kind of profit-first approach.

At a Barnes and Noble big box store you can see that the offerings reflect the priorities of for-profit book publishing, rather than the priorities of a thoughtful reader. Schiffrin cites numerous statistics from the US and Europe about the increasingly endangered species known as the independent bookstore.

Is book publishing and book selling different from widget-making?

In the context of ideas and culture, I’d say yes.

I don’t have enough knowledge of that world to have any solutions, but Schiffrin makes a compelling case about the problem.

Schiffrin’s solutions come from Europe, in which a combination of governmental and non-governmental (University, or non-profit) institutions fill in the gaps and keep independent book publishing alive, essentially through non-market subsidies.

Movies as an important cultural media, deserving of protection

This seems strange to say, but I never consider the movie industry as a serious part of the cultural ecosystem of my country, but I realized from this book that my American bias has blinded me somewhat. I always think of Hollywood as a purely profit-driven mega-business, so I forget that movies meaningfully contribute to the culture.

I mean, Transformers and X-men, right? I never give it much thought.

Schiffrin, who hails from the European context, does give it a lot of thought. He cites the Norwegian film industry, French Cinema, or the Korean film industry as successful examples of government-subsidized media with a big contribution to make to the cultural milieu.

Why don’t I think of movies a serious cultural contributor? Schiffrin’s book has helped me see now that it’s because independent movies are nearly impossible to find in this country. Independent movie theaters are even rarer than independent bookstores, and movie chains simply will not leave money on the table to show limited-audience or challenging films.

Unless you’re a serious movie nerd living in Cambridge, MA you can’t find independent films in the US.

Did you know Norwegian theatres are 90% municipally owned, and that allows them to maintain a substantial outlet for Norwegian films?

I know some clever reader will point out that all sort of independent films from the US could probably be downloaded if I looked into it.

Two problems with that response:

I’m not a movie nerd, so I would not know where to start.
Watching a movie in a theater is not the same as streaming it on my laptop.
I would prefer a shared cultural experience, brought about by an independent theater owner with a vision, rather than me engaging in a deep-dive into a singular, unshared project.

I wonder what our world would be like if independent film production and screening actually happened in the US.

Changing economics and functions of digital media

I am less concerned about this than Schiffrin, again possibly because of my ignorance. He suggests a variety of non-market subsidies for journalism, such as foundation support or government support for the cost of producing news. Like most of Schiffrin’s ideas, I have a hard time imagining that catching on broadly, at least in the US context.

I am reminded of Warren Buffet’s prediction a few years ago that newspaper ownership would become appropriate only for philanthropists, seeking out a combination of prestige and good will, but certainly not profits. Even as newspapers have struggled to remain profitable, Buffett himself acquired many newspapers last year as investment propositions, not philanthropy.

Meanwhile, digital news aggregation sites such as Drudge Report, Gawker, Huffington Post and Business Insider offer a new model for news consumption, if not for producing original journalism, as previously understood.
I’ve enjoyed Henry Blodget’s periodic updates on The New York Times’ struggle –to adapt to the changes underway in the shift from print to digital. As a proxy for the business challenges, as well as the cultural shifts at stake, the Times both explains and illustrates the debate for me

Schiffrin’s Words and Money does not explain everything that’s wrong with book publishing, the soullessness of Hollywood, or the impending death of journalism. His outlook is possibly too distrusting of profit-seeking by media companies, and possibly too hopeful for the meliorating influence of government subsidies for my taste.

On the other hand, when we wonder why independent bookstores die, newspapers slash reporting budgets, and big-budget movies provide as much food for thought as a marshmallow – he’s got a point. The completely free market in these areas leads to some grim results. Follow the money.