Book Review: “The Investment Answer”

Friday, January 21, 2011

With the passing of Gordon Murray, co-author of “The Investment Answer,” the former PDF book is coming in print form next Tuesday (January 25). 

The tantalizing title and the interviews with Gordon Murray have driven up interest. At Amazon, it is currently #1 among all books!

So, let’s cut to the chase. Are Wall Street’s hidden secrets revealed? More to the point, do we actually get THE answer?

No secrets, but Wall Street’s map is redrawn

The book’s main point is that Wall Street induces losing investor behavior by greedily recommending inappropriate investments that offer Wall Streeters the highest commissions and fees.

The authors’ Wall Street includes all financial advisers (and retail brokers) whose pay is based on product commissions/fees or are affiliated with financial institutions. However, they exclude Independent, Fee-Only Advisers (co-author Daniel Goldie’s job category).

Not THE, but AN Investment Answer

They offer a simple, five-step decision process, with their description of “how individuals should approach long-term investing.” This is where “THE” comes from – the belief that their conclusions are absolute, being based on “unshakable logic and compelling evidence.”

For any experienced investor, the five decisions are neither new nor ignored by Wall Street. More importantly, while each person can believe “AN” investment approach is best for them, only fuzzy logic and cherry-picked evidence allows a “THE” label.

The authors’ five decisions

Here is the heart of the book: The decisions they say investors need to make, and what those decisions should be.

  1. “Do-It-Yourself” – Don’t do it (too complex, odds against you, difficult, time-consuming and emotionally taxing). Use a professional, but only an Independent, Fee-Only Adviser.
  2. “Asset Allocation” – The usual cash, bonds and stocks.
  3. “Diversification” – No, not individual securities. Rather, the Morningstar-matrix type categories (Note: They say that small-cap and value stocks beat large-cap and growth, so lean towards those.)
  4. “Active versus Passive” – Active managers do not and cannot beat the indexes, so only use passive. (Plus, index funds have lower expenses)
  5. “Rebalancing” – It’s important to do

As a bonus, they cover alternatives (hedge funds, private equity/venture capital funds and commodities) by saying they should be avoided.

The book is silent on mutual funds (including the online investor services offered) and lifestyle funds

These popular investment approaches, typically with low or no fees, are both efficient and effective alternatives to finding and hiring a local adviser at a 1+% fee.

The book is too short

This was a conscious decision by the authors:

“There are numerous other books and papers that address the ideas you are about to read here…and in far more detail. However, therein lies part of the problem. For most of us, these publications are too long and too technical.” [highlighting is mine]

Oh, my. I can’t help but think a better title for those unwilling to read and study would be: Cliff Notes for Investing by Dummies – With Answer Key Included.

So, should you read the book?

Sorry. I don’t have the answer for you. But, I can suggest one additional read before you decide:

As a counterpoint, here is the most popular 5-star Amazon review: “Elegant summary of the core of personal investing” by an experienced college professor. Besides his positive review, I expect you will enjoy his description of people who write negative reviews about the book.

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January 2011