Customer Reviews

Blind Faith: Our Misplaced Trust in the Stock Market and Smarter, Safer Ways to Invest

5 star:		(10)
4 star:		(1)
3 star:		(1)
2 star:		(0)
1 star:		(4)

 

 

It seems that all the books on low risk investing emphasize picking good companies or funds and keeping them for a long period of time. Blind Faith is different.

I'd love to be stress or worry free but traditional Cd's and money markets pay so little and I certainly don't believe that corporate America has cleaned up its act. This book taught me another investment strategy and discussed in detail investments that I never heard of before like market-linked CDs.

I enjoyed the authors cynical approach and found the book to be entertaining as well as enlightening.

If you're a conservative investor searching for alternatives that don't involve gambling or sticking with the conventional wisdom of stock market investing you'll love this book. I've made some changes to my investments as a result of information I learned from reading this well researched book. It was actually entertaining as well! 5 Stars Loved It!

If you are a big company executive or a stockbroker you're going to hate this book. The author really rips into the big brokerage firms and corporations and how they take advantage of the little guy. If everyone practiced what was recommended in the book there would be a lot less left on the table for big business to glean from the small investor. 1 Star I'm sure they hate it!

Blind Faith is a behind-the-scenes critique of the information relied upon by most market analysts. Helpful are Winslow's recommended mechanisms to preserve (at least) the principal value of your investments. Wish I had this knowledge years ago. Buy the book and be ready to take off the blinders.

This book takes on Wall Street, and how. The author makes the erroneous assumption that "you can't beat the market"...fortunately, we have evidence that says otherwise. The gist of the book is that the only safe places to "invest" is in equity indexed annuities, life insurance, CDs, and corporate notes. It does a wonderful job of explaining the concept of equity indexing, which I think is a great way to conservatively save money...but it's not really an investment strategy.

The author assumes the efficient market hypothesis is true, even when it is not. In essence, you have the author starting from a false premise and trying to prove a point which is incorrect from the ground up.

Here is my counter argument to what the author is trying to convince you of...

The premise of the book is that of the Efficient Market Hypothesis or the theory that "you can't beat the stock market"...which seems valid on the surface being that 90+% of mutual fund managers fail to outperform their respective indices...but that "surface logic" just doesn't hold up under intense scrutiny:

The idea of efficient markets in this book is taken to mean that no matter what you do, there is no way to beat the stock market...and if you somehow do, it was a matter of chance or luck. It is an idea that is largely harbored in academic circles and it is based on one fundamental idea:

1. Stocks Reflect All Available Information

If stocks reflected all available information, there would be no way to beat the market. Stocks are information sensitive, and so they are priced largely by information. If all information is already available by the time you go to buy a stock, there is no way that you can profit by buying that stock at a specific time (also known as "timing the market") or by buying one stock over another stock because information is what would give you an "edge" in the market. With all information available, there is no edge. Thus, the only "rational" way to invest is simply to invest in index mutual funds or a collection of stocks that will passively mirror the returns of the stock market as a whole.

The idea rests on a theory that stock prices have one "true" value. There is only one "correct" price and that that price is determined instantaneously by the market. If and as new information becomes available, the price of the stock changes instantly and you can never make any money from it. The stock market is always right. That's why you can't beat it (consistently earn higher than average returns or higher than indexed returns).

Debunking The Intrinsic Efficient Market Theory

Firstly, there is no such thing as "instant repricing". Whether you are building a bridge or a company, or building an investment portfolio, it takes at least SOME time to reprice those assets.

This intrinsic method is also arbitrary in the pricing of stocks. The reason for the automatically correct and instantaneously self-correcting stock market is unknown and unknowable. It apparently "just happens".

The fundamental theory of the efficient market hypothesis crumbles when we realize that stocks do not in fact reflect all available information. Why? This is partially due to the illegality of insider trading, and various Government regulations. For example: Bill Gates cannot trade on his information about Microsoft because he would be considered an "insider", and would be "guilty" of insider trading if he did. This information does not get reflected in the price of a stock immediately.

The stock market does not reflect the most informed traders.

However, even if we were to discount insider trading eliminating information from the market, the efficient market hypothesis ignores the fact that there must be someone there to make the market efficient. Again, there must be a cause and effect relationship. Markets do not exist in a vacuum and are not arbitrary. Prices cannot be "automatically" correct without someone to make them correct. There must be someone buying and someone selling on information somewhere that causes the price to be what it is.

These are the traders. This is Wall Street. It is the people exploiting the small developing patterns, the individuals acting on new information as it comes to the market, it is the savvy investors who are willing and able to buy and sell stock based on that information that creates the efficient market. In short, the reason the market is efficient is because there is money to be made.

If the intrinsic efficient market theory were valid, then there would be no incentive for anyone to buy any stock because there would be no opportunity for profit. Additionally, if there was no profit to be made by selling, there would be no incentive for an individual to sell their stock. There would be no reason to invest in the stock market, and quite possibly no way to do it - not even in an index mutual fund which would be holding stocks in a stock market where no one would be willing to sell because there would be no incentive to do so. There would be no functional stock market.

This book is an excellent example of why one needs to be very careful about the term "expert". A lot of fancy footwork does not make a theory correct, though the author attempts to justify his claims...he is unsuccessful.

Before making any comment on the book, I would like to draw your attention to some points from page 16-17 of it for your reference.

- In June 2001 Dalbar Inc., of Boston, released a study entitled "Quantitative Analysis of Investor Behaviour" which examined real investor returns from Jan 1984 through December 2000. It found that the individual equity mututal fund investor realized an annual return of 5.32% compared to 16.3% for S&P 500 index.
- Charles Trzcinka, a professor of Finance at Indiana University, published a report in June 2002. The average mutual fund (in a sample of 6900 US stock mutual funds) gained 5.7% during the four year period of the study between 1998-2001, while the average investor earned only 1.0 percent.
- Both studies reached the same conclusion. The Dalbar Research indicated that investors underperformed the market by approximately 67%. The Trzcinka Study, covering a different time period, indicated investors underperformed the funds they were invested in by about 82%.
- Charles Ellis (the ex chairman of AIMR, the mother body of CFA) reports, in Winning the Losers Game, over 75% of professionally managed funds underperformed the S&P 500 index for the twenty five year period ending in 1997.

Okay, you might already have a brief idea what the author, a CPA, CFP, CLU, ChFC boss of a financial planning company, wanted to preach. Yes, market/index based insurance products or equivalent through his service. No matter what, I am obliged to say this is quite an interesting and helpful book, in particular for investment novices who regularly underperform the market. However, I suggest those veterans who can beat the market, or "still" strive to do so to give it a pass.

p.s. Below please find some of my favorite passages for your reference.

Those who do not learn from history are doomed to repeat the mistakes of history. George Santayana pg 38

A person's economic status tends to determine the psychological and financial meaning of gambling for that person. Higher income people see gambling as entertainment and a way to socialize with other people. Conversely, the lower the income, the more gambling is seen as a form of investment. pg 40

There are two kinds of investors, be they large or small: those who dont knwo where the market is headed, and those who dont knwo that they dont know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesnt know, but whose livelihood depends upon appearing to know. pg 134

The best way to escape from a problem is to solve it. Alan Saporta pg 139

I read with zeal the opening chapters of the book expecting some insightful summaries about what we already should know are the bad aspect of equities. I eagerly expected hints of alternatives, to keep the reader interested. That was not to be. The writing became progressively more strident. I sensed a trap. Flipping way ahead, nearly two thirds of the way through the book..... equity indexed instruments. As you can verify by the briefest of Google searches for ELKS, EIA, MCD, these are themselves as suspect as anything on the investment market. My favorite quote was "The only people enthusiastic about these investments are trying to sell them." I concluded that the author is trying to sell them too, found evidence of that possibility on the jacket, and threw the book away.

This book is one of a kind! It is the first book I've read that speaks the truth about the perils of investing in the stock market. The suggestions are clear, sensible and a must for anyone who isn't buying into the old worn out advice that no longer works in todays environment.

Finally, a book that speaks to concerns that I've had about investing since I read my first investment book but that no one seems to talk about.

The author covers topics that are taboo in most investment texts, such as how the investment industry is rigged against the individual investor (corporate structure, taxes, investment banks, government regulation, etc.), and what you can do to protect yourself from market risk. Diversification doesn't help when the whole market collapses after a catastrophic event like 9-11 or in a deep recession.

If you want to take advantage of up markets and hold onto your gains in down markets, then read this book.

Finally someone willing to write an honest analysis of the self-serving behavior of the financial industry. Anyone invested in the market who reads this book will strongly reexamine their beliefs with regard to investing. Undoubtably many in the financial services industry will hope that this book does not get read. I for one, hope that it becomes a classic.

While the book is a few years out of date now, the basics are both telling and accurate. Anyone who invests in the stock market, either with their own portfolio or indirectly via qualified plans, i.e. 401ks etc., needs to understand the risks they take. And it is "they" who are taking the risk. The sales people, brokers, and their upper management take zero risk and make all the money. For the average investor it's a scam. Learn from this book, then go to Vegas, at least you'll have some fun losing!