Customer Reviews

Reading Minds and Markets: Minimizing Risk and Maximizing Returns in a Volatile Global Marketplace

5 star:		(9)
4 star:		(14)
3 star:		(12)
2 star:		(5)
1 star:		(4)

 

 

Before you go any further, ask yourself two key questions. First, how much time are you willing to devote to managing an investment portfolio? Second, how much money are you capable of managing yourself?

These two questions are important because Jack Ablin's "global macro" strategy is not for beginning investors nor is it for people who are not able to make running their portfolio one of their core activities. Implementing Ablin's strategy will require a substantial amount of planning and setup activity and, depending on how complex your models become, probably a significant time commitment once things are up and running.

In addition, you must be able to commit enough capital to the strategy to make all the work worthwhile. The global macro strategy would be an insane amount of effort for portfolios that are smaller than the minimum initial investment (typically somewhere between $250k and $500k) for a customized account run by a professional manager.

OK--if all that didn't make you too discouraged--let's say you're game to check out the strategy. You'll find Reading Minds and Markets to be a good primer on how many big money managers, such as private bankers and high-net worth advisors, make asset allocation decisions. Ablin describes, in fairly broad terms, the five macro factors he uses to select asset classes, countries, and economic sectors. There is some useful discussion about edge and why it's important to invest globally, but the main focus is on explaining the key data that drive his strategy and tactics. It is left to readers to move themselves beyond these first theoretical building blocks and actually build a robust and useful model. Ablin doesn't provide much guidance on choosing benchmarks, portfolio diversification, or risk management either.

Bottom line: Reading Minds and Markets describes, at a 30,000-foot level, an investing strategy that is used by professional money managers. As such, the book will be most useful for readers who have some experience managing their own portfolios and are ready to move beyond indexing by rote, choosing individual equities on gut feel, or relying on mutual funds. Also, keep in mind that this book is just a starting point and doesn't contain the sort of granular detail a full how-to guide would have as a matter of course. 3.5 stars, rounded up to 4 for to a data-centric, hype-free approach to investing.

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Additional books to read if the global macro strategy appeals to you:
The Only Three Questions That Count (Fisher)-another top-down strategy
Unconventional Success (Swensen)-all about asset allocation from the manager of Yale's endowment
Trend Following (Covel)-why bother forecasting and building models?
Beyond Greed and Fear (Shefrin)-influential book about behavioral finance
Fooled by Randomness(Taleb)-were you good or were you just lucky?

This was a good read. Sometimes when I pick up books by veterans of Wall Street they can become so mired in "Streetspeak" that the thing ends up reading like a textbook. That was not the case here. Ablin's book reads more like an interesting newspaper or novel. If you are intelligent and comfortable with the markets but you do not work on Wall Street, this book is going to work for you.

Ablin accurately identifies the major misconception among small investors that the way to invest is by stock picking. He spends a good deal of time showing the futility of the exercise for any little guy because he is up against highly sophisticated investors in NY and elsewhere. Instead he teaches why focusing on the big picture is best and how that is the path best taken by prudent do-it-yourself investors. One of the things I really liked was the author's intense effort to remind the reader that this is not a get rich quick book. He lays out how his strategy of identifying what he calls "metrics" is for finding long term trends for various asset classes in an attempt to ride multi-year type moves. If you want to know if you should buy IBM or McDonald's you have the wrong book but if you want to decide between the US market and foreign markets this is the guy. I think both weekend warriors and the pros would be well served to crack open this book.

The best thing I can say about this book is that it is a quick read. It is tough to write a good investment book nowadays; the average retail investor is fairly well-informed. But this book adds nothing to an introduction to investing, and as an introduction it is a half baked mix of ancient cliches. They either (i) dialed it in, or (ii) they do invest this way, in which case, this is *exactly* why you shouldn't let some professionals manage your money (specifically, when they bring almost no discernible originality or insight to the table): they don't mean you harm, they haven't had an original idea in a long long time.

Specific deficiences include:

* He promises a new world of "global macro" then spends exactly two pages on international markets. There is no insight here into global or macro. (you'll want to admire the shiny globe on the cover because that's the last global thing you'll find here)
* The asset allocation offered is absolutely ancient: decision 1 is "stocks or bonds," decision 2 is "which kind of stocks (foreign is listed but no insights), decision 3 is which sector or style (style + sector), decision 4 is which funds. That's fine, but brings nothing new to this framework and nothing on alternatives (commodities) or options or ETF (okay a half page, not helpful). In other words, the asset allocation strategy here is both ancient and not really actionable. I dare you to actually construct a portfolio with this recipe.
* Here is the worst problem, in all seriousness: because this is offered as advice and because the advice is absolutely routine, this is a recipe for following the crowd. I wouldn't mind that if it were fundamental, value-based strategy that truly does minimize risk but the metrics include P/E. His promotion of P/E metric as-it-appears is so lazy (bordering on malpractice) that your average finance undergrad can surely write you something more informative about the modern use of P/E ratio. To promote P/E ratio investing (buy low PE) without some meaningful color or detail (his incessant equivocation doesn't count!) on the associated challenges (e.g., which flavor? earnings-based distortions? benchmarking challenges?) is not good.

* The first factor (momentum) is probably important, but as it equivocates without meaningful guidance, it is absolutely not actionable.

* Also, as the author works in private banking, the total omission of suitability (i.e., recognizing the portfolio needs to adjust to your individual needs and risk appetite) and tax perspectives is just unforgivable.

... I am not criticizing the strategy per se, but rather the lazy presentation of a half-backed strategy. If liquidity, momentum, and P/E ratio are seriously your metrics, you should take them seriously.

...and don't get me started with the Fed model...I understand there can be a debate and some will use it to allocate, but lordly lord, you've got to situate these ancient metrics against their devil's advocate.

The book is filled with equivocations (follow the trend but be careful; buy low P/E but be careful it's not always right). Equivocation per se adds no value; investors already know that no rule is iron clad. You gotta be specific.

In short: a breezy brochure of an aging sort of asset allocation, sans global, sans alternative perspectives; promotes P/E, momentum, Fed model; not a single fresh insight; not informed of modern practices; if it were a formula (and thankfully, it isn't specific enough to be actionable), it would be a formula for following the herd, or the herd running thirty years ago.

I originally reviewed this book on 10/16/2009, but have to change it somewhat.

I love this book. I've been returning to it for over a month now to look up this or that. It is a seriously good book. In the past I was a trader, a momentum player, and eventually settled on a dividends w/ fundamentals type investment analysis. This particular book has opened whole new vistas of economic data for my consideration. I don't know how many times I've invested in good solid companies that suddenly took off under some crazy momentum. I rode the roller coaster up, not willing to exit, and then down, not knowing to exit. I think I'm getting a clue as to handle these and other situations.

My copy of this book is getting pretty dog eared. It doesn't supply the answers but it sure does point to where the answers might be. Thank goodness for all the data I can dig up for free on the net too.

OK, enough gushing, what follows is my original review ...

I'm a somewhat experienced investor and I found this book enjoyable and somewhat invigorating. What I didn't like was the lack of mathematical analysis. When a book repeatedly mentions calculating risk and metrics, I want to see at least an example of those calculations.

The book really get good a few chapters in. Particularly in the discussion of various useful metrics and what they mean. It really started tying together what, for me, had been disparate information that I hadn't previously been useful to me. Things like the availability of credit, money supply, and the overall economy. I've watched more than a few bubbles now and either rode them until they popped or got out way to early. Now I've got a little more clue to understanding why that bubble is happening.

I also liked that Ablin, from his own viewpoint and in his own words, rehashed some fairly familiar concepts such as comparing investments, timing, trading versus investing, etc. Every time I cover those topics from yet another perspective, I learn a little more of the nuance.

Another thing I liked was the discussion regarding market sectors, time management, the value of each decision, and minimizing risk. For example, if you have good reason to believe that the tech sector (or commodities or whatever) is about the expand then you can make a high level decision to get into tech. Afterwards, if you're like me, you try to pick individual tech stocks. Ablin points out that the extra work of stock picking increases your risk and that investing in the sector is wiser. That approach saves time and minimizes risk. I like that.

I found the book invigorating because it made me question many of my current strategies and inspired me to re-examine and implement or discard some strategies I'd been thinking about recently. If nothing else, any decent readable book causes me to reevaluate. This is a decent readable book.

The explanations in the book are for absolute novices (details below), that is, people with no previous interest in investing. But I just don't see such a person having the time and money to implement the advocated strategy: The description of the number of metrics you need to understand, gather data for and monitor seems to be a full-time job, if not more. And having to invest in a range of stocks within industries, within market categories (large cap, small cap) and within markets themselves (domestic, OECD, developing, emerging) would seem to involve a portfolio of well over a million dollars. Aside: Another reviewer here--Korava (July 27, 2009)--makes similar observations, but estimates the minimum portfolio at $250-500K.

Might an individual investor try to implement a rough version of this strategy within a mutual fund family that allows no/low-cost transfers? Maybe. But the book assumes investments at the granularity of individual stocks and doesn't touch upon the issue of having multiple "baskets" of stocks whose compositions are controlled by someone else with different objectives. And there is still the significant knowledge and effort required of the investor. Similarly for ETFs.

Might this book be a good introduction for someone who has suddenly acquired a large portfolio, such as an inheritance, and needs to choose and then interact with a professional investment advisor? Probably not: There is no advice relevant to this aspect.

This book has the feel of an extended version of the sales presentation that the author would give to potential customers of his bank's investment services. It feels like it was dictated to McGee, who then had time to clean it up only the basics. One sign of this is that sections of the book come across as an infomercial. Another is that virtually all of the supposed "how-to" advice on implementing the strategy comes across as "This is so knowledge- and labor-intensive that it needs a team of professional analysts." The author repeatedly talks about how he and his team build a model and then assembled and analyzed data covering many years (typically about 20 years) to find a helpful signal. Note: This is about areas where the book says the investor needs to be working, not the areas where it (legitimately) points out that you cannot compete with professional analysts.

While the book makes an argument for this strategy ("You should"), it provides no help in even starting to pursue it ("How to"). The anecdotes mention various categories of data, but the book provides no advice on how an individual investor might get practical access to that data. For example, it talks about using the 200-day moving average. While it is trivial to check this for an individual stock, the strategy involves monitoring hundreds of stocks (owned and under consideration) as just a small part of what you need to do. Neither does the book mention, much less assess, any investing tools/services that are a good fit to this strategy.

How to use the data is almost always in the form of a basic definition and then a few anecdotes, as are the cautions about interactions ("Metrics A and B were giving me opposite signals about stock X so I realized C."), leaving the reader in the dangerous position of not knowing how much they don't know. In discussing using momentum, the author claims that the 200- and 50-day moving averages can be used to signal buys and sells. This is inexcusably simplistic advice, especially at a time like this: In a recovery, the momentum signaled can be that of the general stock market itself, not the individual stock. Even in normal times, these averages are unreliable signals and should be used only as a filter to alert you to stocks that warrant a closer look.

I normally read a book in one or two days, and I rarely stop within a chapter. This book took me two weeks to finish, and that was only because I pushed myself so I could write this review (to satisfy my obligation to the Vine program). I kept putting the book down because it wasn't telling me anything new or useful. Note: Books that cover old ground can be useful/entertaining if they cause you to think about things in a different way, for example, the interaction of two things you learned separately. I found none of that in this book.

---- Optional: examples on why I say it is written for an absolute novice ----

Half the book (6 chapters, 96 pages) is an introduction to investing based heavily on anecdotes (versus using anecdotes to make more memorable what has been presented). It will not help a novice get started, but by mentioning terms and concepts, it might reduce the memory load during subsequent presentations. However, I would recommend the novice simply skip this book and start with a better introduction.

This book repeatedly explains the events of 2007-2008 (housing crash, CDOs, credit freeze ...) as if it was new information to the reader. The sophistication of the explanations is at or below the level in the Main Stream Media (not including the serious financial press).

The chapter on "Metrics" starts by defining the term, then argues that metrics are important, and then providing a very few examples. I suspect that a reasonably intelligent novice would find this chapter obvious and worse.

Analogies that are mentioned but not developed, thus providing no explanatory or mnemonic value. Intent seems to be to simply reassure the (novice) reader. Examples: Building a portfolio and a house; the economy is like a ship; liquidity is like gasoline.

Even with my MBA, it's hard to get excited about and fully digest books on Finance.

Basically this one boils down to buzz words, and a recommendation to gain introspection into your own investment habits, weaknesses, and triggers.

In a nutshell the author discusses momentum investing and "befriending the trend", along with "The Economy".

Pepper in some fundamentals on valuation, and then the author tries to bring it all together.

At the start of the "pulling it all together" chapter, the author correctly observes. "at this point your head is probably spinning". He was correct, mainly from the sense that these are very broad topics summarized into brief chapters. It helps if investors show up with a certain level of experience to integrate with this information.

The author makes a comparison several times throughout the book, that investing optimally, requires a "big picture" view, from 30,000 feet.

With globalization, coupled with the abundance and accessibility of information, this philosophy seems to be slowly supplanting "slow and steady wins the race". The jury is still out, on whether or not that is an effective method for successful investing.

I think (as the author similarly observed) investors often look for a quick score, or a get rich quick scheme. In the final chapter the author observes: "If what you are looking for is a simple, clear-cut recipe for investment success. I'm afraid you're about to be disappointed.' This book will help investors with the serious investment of time and understanding that is involved in picking winners.

Albin does an excellent job of guiding you through how to analyze market trends. No one is ever able to pick a winning stock all of the time, but with careful studya and analysis, he does show that the odds are much more in our favor. He makes a great point of not allowing our feelings about a stock guide our choices and buy and sell times. He admits he has made this mistake as well. Very well written and it shows how much his experience has taught him over the last several years.

Early in the second chapter, the author reveals a profound question he was asked early in his career after he had presented an opinion with supporting evidence- "whether the data I had just presented as a reason for my bullish outlook was data that I had selected because it supported my theory, or was it data that I consistently tracked, hoping to detect signs of change?"

At that point, he had to answer that it was more of the former than the latter. But going forward he began developing dashboards of indicators that he would watch consistently, forming the basis of this book.

Because metrics on everything would be overwhelming, and because the author believes that higher level decisions, such as how much is invested in stocks versus bonds, has a greater impact than lower level decisions (such as what specific stocks or bonds, or stock or bond funds, one buys), his approach and examples are focused on the big picture.

While this book offers no silver bullets, the author describes his five categories (momentum, the economy, liquidity, psychology, and fundamentals) as well as examples of key metrics in each. The importance of each category and how the example metrics work is well explained.

Although the author's focus is clearly in managing large lower-risk funds, I was disappointed not to see any information on how to use this system more aggressively, or why such an approach wouldn't work, if it couldn't.

I understand that the author gets his data from proprietary systems (e.g. Bloomberg), but it would have been helpful if he could have listed some good (free) sources for the metrics described, especially since he notes how readily available the data is "over the Internet."

Aside from these minor shortcomings, the book is excellent, especially in the way that it makes the reader think about what he or she should be monitoring.

If you want to change from a buy and hold investor to the smart money, this book is an excellent place to start. I have been timing the market successfully for seven years and can say with out a doubt that you do not have to just blindly buy and hold and take losses like so many did in 2008 and 2009. I have recently been searching for some simple metrics to explain to my friends and family to help them increase their returns in the market and avoid the huge losses that take place every few years. This book has done that for me.
The authors five metrics are market valuations, the economy, liquidity, investor psychology, and momentum. The author devotes chapters on each measurement and how they give buy and sell signals. Great times to buy are when at least four of the metrics are screaming buy or sell. (One will usually be off.)

1. You want to buy when the market has attractive valuations, which are measured by the price to earnings ratio and dividend yield (P/E of 10 to 15). You want to get a good margin of safety with limited down side. You want to sell when the market price to earnings ratio has become ridiculous. (P/E of 20-25)
2. You want to buy when the economy is improving, it will still be in recession but you want to see the GDP starting to improve and unemployment stop declining at the same rate. You want to sell when the economy peaks and starts a decline, not being able to grow GDP or jobs at previous rates.
3. You want the market to be trading at high volumes versus historical averages so there are plenty of buyers moving into the stock market or your sector group with you. Also the market declining on increasing volume is a sign to sell.
4. Ironically selling when the majority are bullish and buying when the market is bearish is profitable. It is time to sell and go to cash when a major magazine has a bull on its cover and time to buy when a bear makes it to the cover. This shows that the sentiment has gone so mainstream that the selling and buying has already occurred by the majority and it is time for a reversal. The author shows many ways to measure this.
5. Always go with the trend, do not fight it. Only change your investment direction when there is a confirmed trend reversal. The best indicator of this is watching the moving averages of prices for an index on a chart. If you would have bought when the Dow Jones industrial average crossed above its 200 day moving average by 1%, then sold when it fell below the 200 day moving average by 1% you would have almost doubled your portfolio return over the past 27 years versus a buy and hold approach. If you take nothing but this away from the book you will do very well and outperform most mutual funds using this approach in an index fund or ETF.

Do yourself a favor and buy this book to educate yourself on smart investing in your 401K. Stop giving away all your profits in each bear market. If you would have known about selling when the market fell below its 200 day moving average you would have been with me in cash in January of 2008 and avoided all that pain. The author really does an excellent job explaining how to read the collective mind of the market, using the five most powerful indicators there are.

On a high level, this book started out good but ended up to be average. The good points about the book is that there is a lot of information from the author's experience regarding market history over the past few decades. There is a lot of data and examples that could be interesting to the novice reader. However, for someone in the field or for an experienced investor, this book may be a little disappointing. Below is a more detailed discussion of what I think about this book.

In the beginning of the book, the author attacks the efficient markets hypothesis (EMH). This was to be expected from a professional money manager, because even the weak form of the EMH states that you cannot make money off technical or fundamental analysis. There have been tons of empirical evidence showing support that US markets are at least weak form efficient, and plenty of research supporting that US markets are semi-strong form efficient (i.e., prices incorporate all publicly-available information). In addition, the author selectively cites evidence (including a quote from Warren Buffett) to show that EMH does not hold in practice and, like many anomalies that have been reported, selectively chooses certain events that would be contrary to market efficiency. However, as previously mentioned, the book does not discuss the magnitude of evidence that shows the US stock market is efficient.

The author once again name drops Warren Buffet and how Buffet describes the existence of "pockets of inefficiency" that canny investors can take advantage of. However, the author fails to realize that this argument IS consistent with market efficiency. In fact, the behavior of investors to trade on these inefficiencies eliminates such profit opportunities, and causes the market price to move to its correct value. Hence, such inefficiencies only last for short periods of time and then they vanish. Therefore, for all practical purposes, a non-professional investor cannot make money of these inefficiencies and professional money managers cannot consistently find these.

This book contains lots of figures and data and starts off with the difficulty that individual investors have in accessing such information. The author describes how expensive the data sources are (which is true), and how professional money managers have access to such information. This seems to imply that one should leave investing to the professional money manager. However, this argument fails to consider whether the individual's ability to choose investments is worse than the individual's ability to choose a money manager. To see why, if the individual does not know how to choose a money manager and chooses one that runs a Ponzi scheme, then he or she would have lost all her money. On the other hand, if the investor had invested by himself or herself it would probably be unlikely that his or her entire investment would be wiped out.

With all the discussion of data and how the data can be used, the author does not include what is the most important lesson from the recent financial crisis - correlation between assets increases substantially during stressful market conditions. What does this mean? In the past, data is used by backtesting over several years (e.g., 10 years or 20 years). However, analysis over such long periods do not show the substantial increase in the correlation during economic downturns. In particular, we have learned during the latest financial crisis that correlation between asets is substantially greater during downturns than they were during normal market conditions. In other words, as one asset falls substantially, other assets follow suit. For example, people thought that by purchasing securities backed by houses in California and Florida their investment would not have been that highly correlated. However, people failed to realize that the same underlying determinants of value affected both markets, which caused sharp simultaneous declines in California and Florida housing prices during stressful market conditions.

Now, let's go to the "meat" of the book - the so-called "Five Factors." The first factor is called momentum, and the author advocates the use of moving averages. Buy and sell decisiona are done based on the trend relative to the moving average. However, one has to be careful about using trends to predict how stocks are going to react. Stock prices have been shown to follow a random walk. A mountain of evidence has been published that show stock returns are not predictable from one period to the next.

The second factor is the economy, and I would have to genearlly agree with the author on this factor. Finance theory tells us that investors are compensated for taking on market risk, because market risk cannot be diversified away. Therefore, one has to pay attention to which stocks are more or less sensitive to the movements in the market, or what is known as beta.

The third factor is liquidity, which I would agree is important because if funding dries up then defaults occur. When defaults occur, many other problems arise. Also, if a big enough company defaults, then a systemic problem may ensue.

The fourth factor is psychology, which does plague many individual investors. The author devotes 28 pages to discuss this topic and then warns the reader "not to succumb to the temptation to use market sentiment indicators." I understand that this should not be the sole factor, but he goes on to say that this should not be the "primary factor in your decision-making process." There are only five of these factors among the hundreds of possibilities that the author chose to include in his book, if psychology should not be a primary factor then why even spend the time to include it.

Finally, we have fundamentals and valuation. The author advocates the use of relative valuation in determining which investments are attractive. I would agree that relative valuation is the tool to determine whether one asset is cheap or expensive relative to other similar assets. However, the author fails to explain how difficult it is to find perfect competitors to a company. Therefore, judgment needs to be used (preferably by someone with expertise) to determine which comparables are used and what adjustments, if any, need to be made to make the comparison of values between firms meaningful.

In summary, this book follows the following general style: We have been taught X. Oh, look at what recently happened which shows evidence that X is wrong. I did Y and it did better than what these people following X did. So, X must be wrong and you should use my Y. Then, they find reasons why Y is the right thing (Ironically, this last step is what the author calls as "deductive reasoning," which he finds flaws in (see pages 53-4).)