Review: Patrick O’Shaughnessy’s Millennial Money

Note to Baby Boomers with adult children: This book review is for you.  Buy a copy for your Millennial children and encourage them to read it.  Getting started early will make an incredible difference over the course of their lives.

Most readers of financial books and news today are Baby Boomers or early Gen Xers, as it isn’t until early middle age that most Americans begin to think seriously about saving and investing for retirement.  The Millennials, at this stage of their lives, are more focused on starting their careers and paying down student loans; retirement planning is not high on the list of priorities.

Patrick O’Shaughnessy—himself a Millennial—seeks to change this generational attitude in Millennial Money: How Young Investors Can Build a Fortune.  It is an impassioned plea to start saving early and aggressively, as the Millennials will face a very different reality in their golden years than that enjoyed by their parents and grandparents.  Written by a Millennial in a voice that other Millennials will understand, O’Shaughnessy writes about “financial karma” and notes that, when it comes to money, we reap what we sow: “Building good individual financial karma is straightforward: spend less than your earn and invest a chunk of your income in the stock market every year.”

Unfortunately, as a collective, we’re looking at some very bad karma. Social Security—if it still exists in anything resembling its current form—will be far less generous, as America’s high and growing debt load makes the status quo unsustainable.  It may not be fair, but—as O’Shaughnessy notes—with the federal government’s total obligations including Social Security and Medicare approaching $222 trillion by one estimate, Uncle Sam simply won’t have the means to continue funding at current levels.  Whether they intended to or not, the Baby Boomers and their elected politicians of both parties have effectively looted the country and will bequeath an unpayable pile of debt to their children.

After driving home the need for Millennials to take retirement planning seriously, O’Shaughnessy emphasizes why it is so beneficial to start early, noting that “young money…has tremendous potential” but that “money’s potential fades with time.”

As O’Shaughnessy continues, “One dollar invested today can easily be worth $15 in forty years; but if you wait ten more years to get started, the same dollar might only grow to $7.50. Imagine how different your lifestyle would be in your later years with twice the amount of money in the bank.”

Simply investing in an index fund would get most Millennials off to a fantastic start.  But O’Shaughnessy is his father’s son, and he has a few strategies that he suggests are likely to generate far better returns.

Patrick O’Shaughnessy’s father—James P. O’Shaughnessy—is the author of What Works on Wall Street, a veritable encyclopedia of back-tested quantitative investment strategies and, in my opinion, a reference book every investor should keep at their desk.  The younger O’Shaunghnessy is continuing a family tradition when he offers his “Millennial Money Checklist” of investment criteria.  When building a portfolio of stocks, he suggest buying stocks that:

  1. Have shareholder friendly practices (i.e. pay dividends, buy back shares, pay down debt, etc.)
  2. Earn strong returns on their investments
  3. Have high-quality earnings
  4. Are attractively priced
  5. Have “improving market expectations” (i.e. stock is in an uptrend or showing momentum)

Though O’Shaughnessy takes a hybrid investing approach that includes momentum strategies, I would classify him primarily as a value investor.   A lot of Millennials will find following a value strategy to be psychologically difficult because, as O’Shaughnessy writes, “Value investing is all about buying in the face of fear, pessimism and negativity…[and] the reason it’s so difficult to be a contrarian value investor is that cheap prices result from trouble.”

The Millennials are a generation that, in their childhood, witnessed one of the biggest bubbles and busts in market history in the 1990s tech mania.  And if that didn’t sear risk aversion into their personalities, then witnessing the 2008 meltdown as young adults certainly did.  Because they’ve witnessed nothing but trouble from the financial markets, Millennials are more reluctant than past generations to invest in stocks.  O’Shaughnessy’s goal in Millennial Money is to break down this risk aversion with solid facts written in language that the average Millennial reader can understand.

If you are a Millennial—or if you are a Boomer with a Millennial child or a Gen Xer with a younger Millennial sibling—pick up a copy of Millennial Money and put its advice into practice while time is on your side.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

 

The 10 Investing Books You Should Be Reading This Summer

In honor of National Book Lovers Day this coming Saturday, Covestor put together a “top ten” list of books on investing, business and finance — as shared by portfolio managers on Covestor and members of the Covestor senior management team.

My recommendation–which is more appropriate now than ever given the recent market volatility–was The Art of Asset Allocation by David Darst:

The Art of Asset Allocation by David Darst: Selected by Charles Sizemore – CFA, RIA, and manager of the Strategic Growth Allocation portfolio on Covestor

“This is distinctly not a ‘how-to-trade-stocks’ book. As its name implies, it is a guide to building a comprehensive portfolio from the top-down. It is important to remember that, while a savvy stock pick can make you wealthy, studies have shown that more than 90% of your portfolio returns are explained by asset allocation.”

To see the full list of 10 investing books, see: The 10 investing and personal finance books you should be reading this summer.

What to Read: Best Books for the Beginner Investor

How do I educate myself as an investor?

This is one of the most common questions I get from readers, and it’s easily the most important.  I’ll share some of my favorite investing books in a moment.  But first things first.

There is no substitute for experience. As in absolutely none.  Having your own money at risk has a way of making you focus in a way that reading a book never can.

But the problem with learning purely by experience is that it can be an expensive education when real money is involved. The market is a stern schoolmistress and one that is not averse to proverbially rapping you on the knuckles with a yardstick when you err.

You’re going to make beginner’s mistakes. It’s inevitable.  But by educating yourself beforehand, you can hopefully keep the financial pain to a minimum.

As a start, I strongly recommend you read the Financial Times (“FT”) daily and Barron’s weekly.  I consider these the absolute bare minimum of reading material for any aspiring investor.  The FT gives coverage of the global financial markets that no other newspaper—not even the Wall Street Journal—can come close to matching.  If you want to know what is driving the any stock, bond, currency or commodity market anywhere in the world, the FT is your source.  I’m a little old school and still receive a paper copy at the office every morning, but the FT has a great website and excellent phone and iPad apps as well.

Barron’s is more centered on the American markets, but I consider the two hours I spend every Saturday morning reading it cover to cover to be some of the most productive hours of my week.  In an age in which it is easy to get paralyzed with too much information, Barron’s condenses a week’s worth of data into a tidy, digestible package.  There may be days when I have to skip my morning FT reading due to time constraints.  But I never fail to read my weekly Barron’s.

Moving on to books, this is where the real education begins. Here is a shortlist of books I would recommend to any newbie to investing.  And for that matter, I would recommend them to grizzled market veterans as well.


First on the list is David Darst’s The Art of Asset Allocation. This is distinctly not a “how to trade stocks” book.  As its name implies, it is a guide to building a comprehensive portfolio from the top down. It is important to remember that, while a savvy stock pick can make you wealthy, studies have shown that more than 90% of your portfolio returns are explained by asset allocation.

I recommend that most families hire a good financial planner to help them make sense of their financial lives and to build portfolios that are appropriate given their ages, risk tolerances and special situations.  But if you are the “do it yourself” sort, Darst’s book can effectively replace your financial planner if you use it correctly.

And by the way, if you do employ a financial planner, and they have not read The Art of Asset Allocation, you should fire them.  Immediately.

Next on the list is James P. O’Shaughnessy’s What Works on Wall Street, a veritable encyclopedia of back-tested investing strategies.

Frankly, I don’t know how O’Shaughnessy finds the time to do this kind of number crunching.  What Works is over 600 pages of well-researched quantitative strategies. There is no filler here; it’s all meat.  He has sliced and diced the market in every conceivable way it can be sliced and diced: value, growth, return on equity, dividend yield, buyback yield—and the list goes on.

What I like most about O’Shaughnessy is his absolute lack of bias or dogmatism.  He does not approach the investing process with any preconceived notions, but rather lets the data do the talking.  And talk it most certainly does.

How do you use this book? As you gradually develop your own style, whether it be value, growth, or something more exotic, I recommend you use some of O’Shaughnessy’s screens as “fishing ponds.” You don’t necessarily need to buy every stock in the screen, but you can use the screen as a great starting point for further research.


I am a value investor by temperament, so no list would be complete without Benjamim Graham’s classic The Intelligent Investor.  Think of this as a less dense, more digestible version of Graham and Dodd’s Security Analysis.  (Security Analysis is considered the “Bible of value investing,” but it can be a little dense for a beginning investor.)

Benjamin Graham is considered the father of value investing and was Warren Buffett’s mentor.  Without Graham, there would have never been a Buffett, or at least not the investing legend we know and love.

Many of Graham’s specific tricks of the trade (such as buying stocks selling for less than their net current assets) are no longer usable (or at least rarely usable) in this era of instant data.  Graham had a massive informational advantage over his competition in that, in the 1930s when he really began to make a name for himself, he was the only investor with the patience and skills to pick apart a balance sheet or to calculate ratios.  Now this can be done instantly via stock screeners, making it next to impossible to “discover” a value stock the same way  that Graham would have.

Still, if you want to learn how to think as a value investor, then there is immeasurable value in reading the original text of one of the truly great minds in market history.


For a modern take on value investing, I highly recommend Mohnish Pabrai’s The Dhandho Investor.  I’m a particular fan of this book because I consider it accessible and non-technical; it’s something that doesn’t require a Harvard MBA to read and understand.

Pabrai draws inspiration from the Patels—a group of ethnic Indians who immigrated to the United States in the 1970s after being kicked out of Uganda by dictator Idi Amin—and despite starting with little capital or formal education, managed to quickly build a hotel empire in their new homeland using a simple “coin toss” rule of thumb in making investment decisions:

  1. Heads, I win.
  2. Tails, I don’t lose much.

Low risk and high potential returns: it’s the closest thing to nirvana an investor can hope to find.

Pabrai has no special metric or formula, though he does have a basic investment criteria that he shares.  If you style yourself as a value investor, like investing against the grain, and like the idea of rolling up your sleeves and doing some real research, then The Dhandho Investor is a book you should keep on your desk.


If you love market lore, then you will love The Reminiscences of a Stock Operator, a fictionalized biography of legendary speculator Jesse Livermore written by Edwin Lefevre. In addition to being wildly entertaining—it reads like a novel dictated in the first person—it’s full of “street smarts” that are as applicable today as when the book was first written in 1923.

I should be clear here: Reminiscences is not a “how to” book.  There are no formulas or screens to run.  But there is definitely a lot of trader wisdom, such as the counterintuitive maxim  of not averaging down by buying dips but rather “averaging up” into a rising market.  The best advice in the entire book—and something I recommend every investor of every stripe remember—is “Don’t argue with the tape… Quite while the quitting is good.”

But a close second concerns acting on “hot” stock tips: “Wall Street professional know that acting on ‘inside’ tips will break a man more quickly that famine, pestilence, crop failures, political readjustments or what might be called normal accidents.  There is no asphalt boulevard to success in Wall Streets or anywhere else. “


Finally, I want to leave you with a “big picture” book, Nassim Taleb’s Fooled By Randomness.  Taleb is more famous for The Black Swan, which became something of a an overused buzz word during the 2008 mortgage meltdown.  And his Antifragile, which was released in 2012, is also an insightful read.  But in my view, Fooled By Randomness is the only real “change your life” book of the three.

After reading Fooled, you will see the effects of randomness everywhere.  It can almost be a little disillusioning, as it can leave you wondering whether your own successes in life were the result of skill and hard work or simply being in the right place at the right time.

Fooled By Randomness, though it focuses primarily on the financial markets, will distinctly not teach you how to invest.  It will do much more than that.  It will teach you how to think.  I am not exaggerating when I say that you will see the world through a different lens after reading this book.

This article was first published on InvestorPlace.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

Review: Steve Forbes’ Money

If you want to understand how Steve Forbes feels about money, you need look no further than the dedication page of his new book by that name: Money: How the Destruction of the Dollar Threatens the Global Economy – and What We Can Do About It

“In remembrance of Alexander Hamilton, our first Secretary of the Treasury… Like few others before or since, he showed that money, properly understood, is the root of all good.”[Emphasis mine.]

Money as the root of all good; that would be a controversial statement even under more benign economic conditions.  Coming six years after one of the worst financial crises in U.S. history—and one that has been widely blamed on the greed of bankers—it would sound like near heresy.

Yet I would absolutely agree with Forbes that sound money is an important foundation on which to build an economy.  Money is not “wealth,” per se.  As Forbes paraphrases the futurist George Gilder, it is the ingenuity of the human mind that is the source of all wealth.  But money plays essential roles as a measure of value and a medium of exchange.  It allows for trust between counterparties—which is essential in a functioning economy—but its impact here goes further.  Sound money is a pillar of sound government and strong society, and periods of inflation and monetary instability are associated with higher crime and a breakdown of social cohesion.

Money is also a system of communication between debtors and creditors and between buyers and sellers, and manipulating the value of a currency can cause false signals that lead to bad decision making and misallocation.

In the opening chapters of Money, Forbes gives a brief history of the post-Bretton Woods world of floating exchange rates not backed by gold.  At times, Forbes seems to romanticize the ancien régime, comparing its relative order favorably with the seeming chaos of today.   On this count, I might have to disagree.  The fixed-exchange-rate system under Bretton Woods had its flaws as well, as a country could be locked into an artificially cheap or artificially expensive exchange rate, which in turn could distort its economy.  There is something to be said about a floating exchange rate’s ability to act as a pressure release value and move with market conditions.

Of course, theory is very different than practice, and Forbes is absolutely correct when he says that the abandonment of Bretton Woods ushered in an era of profligate government spending, enabled by acquiescent central banks, and runaway inflation.

Perhaps the most interesting section of Money is the chapter titled “Money and Morality: How Debasing Money Debases Society.”

Though perhaps a little esoteric—and definitely a little preachy—I agree with Forbes’ premise that sound money creates a better society:

By providing a common standard of value that facilitates  trade among total strangers, money promotes the cooperation and trust vital to commerce.  Unstable money that can’t be trusted undermines the market’s common perception of value, creating distortions and uncertainty that disrupt transactions, making trust harder to establish… People lose faith in the system—and in each other.

Destruction of money brings “social malaise” marked by “scapegoating, corruption, social unrest, and increasingly coercive government.”

I would add that, while inflation has not been a problem since the onset of the 2008 crisis here in the United States, the bailouts and unprecedented Fed stimulus that bankrolled them have contributed to a widespread perception of unfairness, that Wall Street runs Washington.  With this perception comes resentment—and none of this is healthy for the country.

Forbes proposes returning to the gold standard and spends the final chapters of the book making his case.  This might be a bridge too far for me and, in any event, it would be politically impossible any time in the foreseeable future.  I do, however, agree with Forbes that loosening restrictions on alternative free-market currencies should be a priority.  If the dollar—or any other currency—is managed prudently, then our government should have nothing to fear from a little competition.

I recommend you pick up a copy of Forbes’ Money.  Steve Forbes is no stranger to radical new ideas, and his thoughtful yet unapologetic defense of free markets is a refreshing contrast in this age of post-bubble statist solutions.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

Review: Clash of the Financial Pundits

There is no shortage of market opinion out there.  Between CNBC, Fox Business and Bloomberg, there are 72 hours per day of non-stop financial chatter on television, and we haven’t said anything about the market segments of general news stations like CNN or the cacophony of voices on the internet.

The challenge today is not finding information but rather filtering it.  And that is where Josh Brown and Jeff Macke step in, bringing us Clash of the Financial Pundits, the “first-ever book written to tackle this most daunting component of investing: our guide to help you become a more informed consumer of financial news and conjecture.”

A book about financial punditry written by financial pundits might at first sound a little self-serving.  But Brown and Macke do a fine job of explaining to readers how the sausage is made in the financial media, and Clash is an eye-opening collection of interviews with some of the leading personalities that have shaped the industry.  The interviews with Jim Rogers, Jim Cramer and Barry Ritholtz would alone make Clash a book worth reading.

A little background is necessary here.  To start, what exactly is a pundit?  A pundit is a subject-matter expert who frequently gives their opinions to the public—what you might pejoratively call a “talking head.”

“Expert” can be something of a subjective term, and a lot of the advice that is shared over the airwaves can do more harm than good.   So, how do you separate an insightful pundit from the noise?

Brown and Macke offer some suggestions for questions to ask:

  1. Who is the expert, and what firm or organization does he represent?
  2. What does her professional affiliation mean in terms of the opinions she’s sharing?
  3. Does he have the same time frame or investment objectives that I do?
  4. How many ideas is she generating each day or week? How much thought is going into each one?
  5. What are the consequences for him if he is wrong?  [Note: This is major bugbear of mine.  A person giving advice should have skin in the game.  If they recommend a stock, they should own it themselves.]
  6.  How does the opinion I’ve just heard relate to my own portfolio or investing goals?  Is there any real relevance?
  7. Why am I reading or listening to this in the first place?  Intellectual curiosity? Entertainment? Or do I have an actual need to employ this sort of information?
  8. Is there a publically available archive of this person’s pervious opinions and forecasts? Have they been mostly accurate or mostly wrong?  What were the driving factors behind the accuracies or the great calls? Luck? Skill? Good timing? Strong research? Some combination of these elements?

Perhaps the greatest insight from the book—and one you should always remember when watching a very convincing speaker—is that “The practiced pundit is making appearances and dropping quotes for the benefit of a firm or a career—not necessarily for your benefit.”

Never forget that point.  Financial punditry is not charity.  Every person you see expressing an opinion on TV, radio or in print has a motive, whether it be furthering a career, espousing a political ideology, or simply boosting their own ego.

I’ll leave you with two related points.  Brown and Macke suggest—and I agree with them wholeheartedly—that a market commentator’s most important trait is not experience, intelligence or even honesty.  It’s humility.  Given enough time, the market will prove us all wrong.  Be wary of anyone who seems excessively cocksure.  Their arrogance is either a mask for underlying insecurity or it is due to a lack of experience.

John Maynard Keynes—a man with no shortage of strong opinions—one said that “When the facts change, I change my mind.”  He was on to something.  You shouldn’t take advice from a pundit who refuses to acknowledge when they are wrong—or to acknowledge the possibility that they could be wrong.

Secondly, in getting a following, confidence is more important than being correct. In times of uncertainly, people crave black-or-white answers; shades of gray are unsettlingAs Brown and Macke write, “We want to be told exactly what’s going to happen and what to do about it.”

You’ll have to fight your basic human instincts here, but be careful not to be swayed by the pundit with the most enthusiasm in their voice.  Listen to their arguments, weigh them, and make your own decision.

Clash of the Financial Pundits is a must read for anyone who enjoys financial media.  My compliments for Brown and Macke on a book that needed to be written.

Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.