Customer Reviews

Bull's Eye Investing: Targeting Real Returns in a Smoke and Mirrors Market

5 star:		(32)
4 star:		(10)
3 star:		(7)
2 star:		(4)
1 star:		(4)

 

 

This book asks where the stock market will be in ten years' time, and how you should invest as a result of that. It's potentially important, because discussion of long-term investment strategy (as opposed to next quarter's earnings) is so rare - yet obviously critical for investors. For that reason, I'm going to write a more detailed review than most of the others you'll find here. I'll summarize Mauldin's key arguments, briefly discuss his recommendations, and finally give you an honest appraisal of whether you should buy the book.

SYNOPSIS. In the first half of the book, Mauldin sets out to prove that in ten years' time the US stock market will likely be no higher than it is now, and possibly significantly lower. The stock market's future level will be determined by (a) earnings growth and (b) the value the market places on those earnings (ie. P/E ratios), so Mauldin focuses on these two elements. First, he argues that earnings growth will be disappointing. Companies' earnings will be depressed by the adoption of stricter accounting standards, the expensing of options, and higher pension costs. Combine that with anemic economic growth due to the aging of the population, the current account deficit and the budget deficit, and earnings are unlikely to exceed their historical growth rate of under 6%. Next, Mauldin argues that P/E ratios are unlikely to rise over the coming decade, and may in fact fall dramatically. He assembles a battery of arguments to prove his case. Secular bull markets have never started from times when the market's P/E ratio was as high as it is today. The market is currently overvalued according to multiple measures, and will likely revert to its historical mean. The risk premium is currently low, and a recovery to more sensible levels would depress P/E ratios. Finally, P/E ratios fall as inflation rises or an economy slips into deflation; so given the US economy's current inflation rate (close to zero), there's nowhere to go that would result in a higher P/E ratio for the market. With mediocre earnings growth and falling P/E ratios, the market is therefore headed nowhere or a lot lower.

If the market will be flat or down over the next decade, how should you invest? That's the subject of the second half of the book. Mauldin recommends that you buy value stocks or a mutual fund run by a value-oriented manager, since value stocks have historically outperformed growth stocks. Stocks that pay dividends are particularly attractive, as a large part of the total return from the stock market has come from dividends. You should also assemble a laddered bond portfolio, buy real estate, and buy gold or gold stocks if you have the expertise. His key recommendation, however, is that you should put your money into hedge funds, since hedge fund results are not dependent on the market rising.

HOW CONVINCING IS HE? Mauldin supports his argument that the stock market will stagnate over the next decade with data, academic studies and a reasonable description and rebuttal of opposing viewpoints. He comes unstuck, however, with the practical recommendations in the second half of the book. Three quick examples: (1) The first half of the book suggests there's a reasonable likelihood of deflation. In that case, cash would be a better investment than most of Mauldin's recommendations. (2) If the stock market is really heading down, as Mauldin suggests with his assertion that the market's P/E ratio could go to 10 or below, the best strategy for most investors is simply to buy long-term index put options; but he doesn't mention this. (3) Hedge funds have lousy tax efficiency, so returns for taxable investors would be a lot worse than Mauldin seems to suggest. These points deserve more discussion than this space allows, so I'll address them in more detail (and provide practical alternatives) on the TechUncovered web site. Suffice it to say that despite his honesty, Mauldin's viewpoint is likely skewed by his profession: acting as an introducing broker to hedge funds.

SHOULD YOU BUY THE BOOK? Despite these criticisms, Mauldin asks important questions and assembles and summarizes a lot of material. But here's the problem. Much of the content has been reproduced from Mauldin's free emails, which are available on his web site, and some of the key arguments are available for free elsewhere, such as Grantham's letters and Bogle's speeches. (I've provided links to these sources on the Market Resource Page on the Seeking Alpha web site.) Worse, unlike the emails, the book has been poorly edited. A couple of the chapters are co-written with a colleague, and read like stand-alone hedge-fund marketing material, while others repeat points in earlier chapters. So the book misses the opportunity to integrate the content of the emails into a readable, methodical argument. Whether you decide on the email archive or the book, though, Mauldin is definitely worth reading.

I am not sure what this book is trying to enunciate or whom it is targeted to, as you will see from my discussion below:

The first 8 chapters of this book are excellent and I am sure I will refer to them time and again.

The next chapters 9-14 enunciate, in excruciating detail, why the present decade will not be such a balmy one for equity investing.

The next chapters, 15-17 deal with investment psychology.

The next chapters, 16-18 deal with investing in stocks and bonds.

The balance of the chapters 20-24 deal with investing in hedge funds, gold etc.

The author shows that blindly investing in stocks and assuming that the future is always going to be rosy is misleading and unhealthy. His analysis was indeed instructive and I gained a lot from it.

He then meanders all over the place to prove that the coming decade will not be a bullish one for stocks.

He then presents alternatives, primarily using hedge funds and states time and again that this is for an "Accredited Investor" having net worth of $1,000,000 or more.

I am not sure how an average investor can use his recommendations or whether an Accredited Investor would bother to read this book and follow his (sometimes completely unrealistic) advice!

Get the book for a library, read the fist 8 chapters and leave it at that.

John Mauldin writes as a cool "just the facts" analyst. If this book doesn't convince you that you need to tread carefully in the next decade, then nothing will.

"Bull's Eye Investing" is a full frontal assault on the perennial bullishness of Wall Street. Mr. Mauldin comes armed with a wide array of studies from other authors. No, Mr. Mauldin does not bring his own guns made by his own hands. What he has done is assembled a vast array of weapons and assembled them in a way that makes the whole greater than the sum of the parts. (Many of the chapters are co-written with other authors.)

The entire book can be boiled down to one conclusion: the next decade will see a predominately declining market. Most of the book is spent detailing why this must be. Nothing written is new or ground breaking. Many of the cited studies use old premises, updated with the newest data. Trailing price-to-earnings ratios, for example, have long been cited as an inverse predictor of future returns. If you are familiar with such studies and already accept their conclusions, then you do not need to read this book as you will find the book rather repetitive. But for those who are not familiar with such evidence, the depth of arguments that he piles on will be impossible to deny.

The title of the book suggests a discussion of methods to invest in uncertain markets. It is worth noting that Mr. Mauldin is neither a professor nor a money manager - he is an advisor who helps his clients select hedge funds and other investing vehicles. Thus, as before, his investing recommendations are an assemblage of various studies and newsletters by other authors as well as his own experience with the world of hedge funds. The practicability of these recommendations is debatable. On the one hand, some of the cited studies provide strong statistical evidence that a particular investing strategy will work and he argues convincingly why these strategies make sense. On the other hand, Mr. Mauldin does not address how well such strategies might work with the strong headwind that he takes such great pains to establish.

"Bull's Eye Investing" is reminiscent of "Irrational Exuberance", written by Professor Robert Shiller at the peak of the technology bubble. Dr. Shiller was ridiculed as someone who "doesn't get it." Those who still believe so can skip "Bull's Eye Investing", as these two books could be kissing cousins. Similarly, those who accepted the premise of "Irrational Exuberance" will simply find more evidence for the same thesis in this book. This book is for the undecided - read this book now before Mr. Mauldin, like Dr. Shiller before him, proclaims to the world "I told you so!"

I have mixed feelings about this book.
Let's start with what I think are its weaknesses.
It's too long. My paperback edition runs 400 pages. I believe the book would gain importance and usefulness with 100-150 less pages.
Of course you know the author sends a widely successful, free weekly newsletter. Well, this book is hugely built upon the newsletter material. How easy it had to be to do "copy and paste"! Just use a few keyboard strokes, and here you are with this 1.1 pounds work.
Strange things are also the two chapters devoted to hedge funds. Mr. John Mauldin is a manager of managers (so to speak). His turf are the hedge funds. He makes money out of clients he directs to hedge funds. Now I confess I read and then re-read those two chapters (20 and 21) and still I didn't understand much. Is it my weakness or else's?
I agree with other reviewers: In this book there are hardly any new topics and ideas in the field of investing money.

On the other hand, this book is very well researched and insightful. Of course the ideas aren't new; what's new is that those ideas are selected, gathered, prioritized and clearly presented. For me, it's been an eye-opener. I detail what I believe are among the book's strongest points:

1 - (from page 16) Research clearly demonstrates that "when broad market indexes go above P/E ratios of 23 or so, investors essentially get no return over the next 10 years".

2 - (p. 33) An important study "showed that an inverted yield curve (when short-term rates are higher than long-term rates) is the single most reliable predictor of recessions. Recessions appear roughly a year after an inverted yield curve."

3 - The Investment Matrix Revelations (p. 69):
"There are clear patterns of returns relating to the secular bull and secular bear cycles. (....) Once the new period starts, it tends to persist for long periods of time. Though the very long-term returns have been positive and near average, investment horizons of 10 years, 20 years, and even longer aren't long enough to ensure positive or acceptable returns. (...) the charts clearly show the most important thing you can do to positively affect your long-term returns is to begin investing in times of low P/E ratios" (below 10 to 12).

4 - Technical analysis doesn't work (p. 209):
"Mark Finn of Vantage Consulting has spent years analyzing trading systems. (...) He has a team of certifiable mathematical geniuses working for him. They have access to the best pattern recognition software available. They have run price data through every conceivable program and come away with this conclusion: Past performance is not indicative of future results."

5 - Investors behaving badly (p. 217):
Gavin McQuill of the Financial Research Corporation (...) focused on six emotions that cause investors to make mistakes. 1. Fear of regret - an inability to accept you've made a wrong decision, which leads to holding onto losers too long or selling winners too soon. 2. Myopic loss aversion - a fear of losing money and the subsequent inability to withstand short-term events and maintain a long-term perspective. 3. Cognitive dissonance - the inability to change your opinion after new evidence contradicts your baseline assumption. 4. Overconfidence - people's tendency to overestimate their abilities relative to individuals possessing greater expertise. 5. Anchoring - people's tendency to give too much credence to their most recent experience and to show reluctance to adjust their current beliefs. 6. Representativeness - the tendency of people to see patterns within random events.

6 - Value Value Value (p. 262)
"Throughout this book, I show how value wins time and again. We have also seen numerous studies that show that buying deep value for the long term is a strategy that works in all types of markets. It is the only thing that works for stocks in a secular bear market cycle.
The essence of Bull's Eye Investing is quite simple. Target your investments to where the market is going, not to where it has been. Steady, stable, sure. Buying something that is undervalued, perhaps grossly undervalued, and waiting for the value to be seen by others is the way to real returns. Buying what everyone else is buying, after it has already risen in value, is why most investors simply do poorly."

The part devoted to investors' behavior coupled with the demonstration that a value strategy constantly outperforms market indices, should let readers correct their mistakes (if it's the case) and obtain significant performances out of their money.

The author writes in a clear, compelling style. Although I'm no speed-reader - and although the book is quite long - it didn't take me much to finish it off.

Every investor should read this book and keep it handy as a reference and a reminder.

I'm in the process of getting serious about investing as returns from existing investments are now a sizable part of my annual income.

This book's main argument, that the stock market is going to be flat, at best, over the next decade seems pretty persuasive. The most persuasive reasons for this are:
- The market, when starting from a high P/E and low interest rates, historically is flat at best.
- The market historically overreacts to a bubble (like the Internet bubble) and we have not yet completed that overreaction.

Mauldin recommends:
- Small-cap value oriented stock picking. This is the direction I was already intending to pursue. I think I'm going to need some help with this find the right kind of stock screening data.
- Hedge funds. This is counter to my strategy (and the whole value approach to investing) of really, deeply understanding your investments.
- Betting on a falling dollar. Mauldin provides no specific ways of doing this.

I'm interesting in joining a club of serious investors who want to pool what they are learning in the areas of small-cap and value investing. Please email ddillon@direcway.com if you know of such a club, online or local.

Here's a few more notes on the book:
o The style is very readable, but repetitive. The book would be considerably better if it had been polished and edited down to about half its length.
o Topics on other trends, such as demographics, pensions, the dollar being overvalued are also very valuable.

If a person constantly predicts a bear market over a period of years, eventually he will prove right, since, as we all know, bull markets do not last forever, and bear markets are regular features of the stock market landscape. However, it is not enough simply to predict a bear market, one must predict a bear market at the right time. A prediction of a bear market during the early and mid 1990s (and there were many) would not be particularly helpful, since the bull continued to 2000. The same applies here to Mauldin. Mauldin predicted a bear market in 2004. He was wrong. A consistent bull market has lasted from early 2003 until mid 2007 so far. If you listened to John Mauldin's advice, you would have missed the bull market of 2004, 2005, 2006, and 2007, especially in small-mid caps and foreign markets.

According to John Mauldin, bull and bear markets always last approximately 7-15 years. The facts do not support this conclusion. A bear market lasts for as long as it continues, and no longer. The bear market of 2000-2003 lasted only 3 years. Now according to Mauldin, the bull market of 2003-2006 is simply a "bear rally." But three plus years of positive returns cannot be so easily dismissed. In practical terms, for investors, you simply cannot afford to sit out a market rally like the 2003-2006 one.

Study after study has shown that the best way to minimize your risk and maximize your returns is to diversify, invest for the long run, and choose your mutual funds and stocks with great care after substantial research. One should not "buy and hold" blindly, but it's been proved that if your investment horizon is 9 years or more, a diversified portfolio of stocks will consistently outperform bonds. Furthermore, it's impossible to time the market successfully on any kind of consistent basis.

Mauldin is in the hedge fund business; hedge funds are designed to produce positive returns during bear markets. So it is in his personal interest to convince people that a bear market is coming. Hedge funds are limited to people with over a million dollars, so they are not exactly a viable solution for average investors. In addition, hedge funds are not the cure-all that Mauldin suggests. In fact, many hedge funds lose money and go out of business. They are, in fact, extremely risky investments, despite Mauldin's claims.

Mauldin believes in a deep value approach to stock picking, which I happen to agree with. Value stocks have lower volatility and tend to outperform the market in the long run. However, they don't do as well as growth stocks during bull markets, as several value fund managers learned during the late 1990s, some of whom even lost their jobs.

The argument Mauldin makes for a coming recession is pretty persuasive although not original. Trade deficits, budget deficits, an aging population, pension and medicare obligations; these all point to increased inflation (the least painful and only politically acceptable way to pay off our obligations) leading to recession and depressed stock prices. With the current market and economic conditions (Aug. 2006), it's time to think about some defensive investment choices: value and high-dividend stocks, and bonds. But we are not in a recession yet, and it's not inevitable. As Mauldin points out, quoting Greenspan, the market is so large and complex that it's essentially impossible to make accurate predictions. And the market is so efficient, that if it were possible to predict the future by any means, that information would be immediately and permanently discounted.

John Mauldin provides brilliant analyses of US and global economic dynamics to make a strong case for a flat to down market over the next ten years. The book also includes an excellent tutorial on hedge funds. If these subjects are your main interest, then the book a really worthwhile read (5 stars).

However, while his writing is often masterful, the book fails to provide a workable investment strategy (which is sort of promised by the book's title). His advice on how to find stock market winners is disappointing because it's wholly impractical for the average investor. Essentially, his advice is to read everything there is to read about a company (SEC filings, reports, industry journals, creditable websites, etc.), go to trade shows, meet the company's management, meet the employees, etc.. He does allow for the fact that this process is somewhat arduous, so he advises working in groups to analyze a sufficient number of companies to find the winners. This is just what a lot of professionals do in the investment industry... but these are full-time jobs!

Overall: a great case for making hedge funds generally available to the public; a strong case for a flat to down market over the next decade or so; but, ultimately, doesn't deliver the golden arrow... so regrettably 3 stars.

This book should be subtitled "Economics 101 for Investors". John lays out a historical perspective usually not found in personal investment tomes. Usually, most authors promote some magical formula for getting wealth based on a formula that works until we move from secular bull to secular bear or vice versa. This book teaches a lot about market cycles and cycles within cycles. I wish I would have has this book about 30 years ago. John also has an informative free weekly email newsletter that is a real education.

Having little knowledge of truly what Bulls Eye Investing was about, i trusted the recommendation from IBD and gave it a good read. The author did a great job of providing as much knowledge into this book that he possibly could; based on that, i completely recommend this book. The only downside to this book for me was that it was just booooooring... i didnt care about hedge funds either. But what basically boiled down to when it came to stock searching was this:

Stop-Loss
Dont Fall in love with stocks
Pick Value
Patience

Not only does he mention these towards the end of the book, they are just so bland/broad. The title is misleading and was used mainly as an eye catcher because it covers more about history, data and a bunch of unnecessary hog wash. Some chapters stood out more than others, but a feeling of repetiveness kicked in after the fourth or so. Hedge Funds, i skipped altogether. However this book covers the history of the market and everything you could possibly dream of knowing regarding the overall market direction. I still give "BULLS EYE INVESTING" a thumbs up for the amount of educational information on its behalf.

If you're a reader of the author's weekly commentary, you already know one of his strengths is the ability to offer good commentary -- sometimes opinionated and sometimes factual -- without the hype. Most books and commentaries are written more to market the author than inform the reader, and that leads to inflammatory posturing that simply incites (but doesn't inform) the readers. Mauldin consistently presents a reasonable case for his views, and doesn't mind offering opposing perspectives as potentially valid. His book follows the same format of being more interested in teaching his readers than marketing himself. Beyond that, you'll find his understanding of market mechanisms -- and his advice -- is superb. Don't worry if you don't understand the entire book. If you're an investor, read it at your current level of understanding and you'll find it worth the time and money. Then re-read it as you become more financially astute. If you're just interested in garnering a better understanding of what motivates investors and drives the financial markets, you'll also find this book quite illuminating.