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Why Smart People Lose a Fortune Hardcover – May 1, 2004
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The analogies don't always hold water, especially after the great recession that took place several years after Frankle wrote his book. Example: he cites GM as being a great stock which one could really count on. Yikes.
As well, Frankle's drumbeat against buy & hold, against buying when the market is weak & selling when the market rises could easily lead neophyte investors into a pattern similar to day-trading, or, just as bad, trying to time the market: selling near the lows & buying near the highs.
Certain aspects are points well taken. Watch out for the 'helpers' as Uncle Warren termed all the financial rags & personnel who want a piece of your financial pie. Frankle really seems to want to assist folks in earning more & retaining more of their hard-earned money.
This book has a few nuggets in it. I always try to take away something of value from every book, every class, every seminar, every lesson. I wouldn't call this book the be-all & end-all, just one little tool in the financial toolbox.
"Why Smart People Lose a Fortune" is one of the best investment guide books I've ever read. The author spends the first part of the book talking what we want and how we make decisions in the market. In other words, most of us have made decisions either based on the advice of our financial advisers, or based on emotional reactions. Emotions and money don't mix. I love how he points out that we feel worse when we take action and lose money than when we do nothing and lose money. His point is that emotions are strange and are not good indicators of what's really happening (i.e., that we lost money both ways).
He also talks about how the media is a poor source of information about the market because they want to sell advertising and newspapers, not help us. He also talks about how we do better by ignoring headlines because the American economy can and does recover from all manner of disastrous world events.
The author also reviews the more common mistakes that people make (buying and holding or buying bonds thinking they are the magic bullet), and tells you what a financial adviser should do (and how to pick a good one). He tells you how to choose the right investments for your goals, and finally, the 5 steps to market sensitive investing. That's the best part of this book:
- Take the market's temperature: Is the market strong enough that you want to be in it?
- Determine which quadrant of the market is strongest - that's where you'll invest.
- ID the specific mutual or index fund: How do you pick the right fund or funds for your needs?
- Move Forward: Apply the same steps to the rest of your capital (it's invested in quarter increments)
- Sell: When to sell. This is the hardest part and the part that the author says is where people lose money. Very important.
The author combines humor, word puns, inspiration quotes with rock-solid advice that you can actually use. What I love about this book is that I feel empowered. I don't have to know the whole financial universe, just the parts that affect my investing (He gives great resources to look at). It narrows that universe into a tight focus that I can use. It really is a straightforward formula that any investor can use to be an empowered financial person.
Frankle is not swayed by the incessant flow of useless information from the financial media or the conventional wisdom on investing in espousing his investment principles. For example, he believes that "asset allocation as a way to improve performance is a myth." Furthermore, he states that buy-and-hold may be a terrific strategy for your broker and mutual funds, but not for individual investors. He points out that asset allocation and buy-and-hold can lead to catastrophic losses. Investors must be educated to understand that being fully invested all the time is neither a riskless nor an intelligent strategy. On the contrary, buy and hold can result in your investing portfolio being decimated as it may been in the crash of 2000-2002.
Instead of hanging on every word of financial gurus and media stars, Frankel believes that investors should listen to what the market is actually doing and not what prognosticators are saying.
Frankel puts forth a simple five-step plan for investors looking for an alternative less risky investment approach. Since mid-2001 he has personally used this approach to invest in ETFs and mutual funds. One of his key points is to protect your assets in market downturns. In brief, Frankel's 5-step process is as follows:
1. Determine the overall market's health. He provides criteria for determining this in a separate chapter. In essence, if the market is strong, then begin investing 25% of your capital in specific ETFs or mutual funds, depending upon your risk tolerance.
2. Invest in the strongest of the four market segments (large and small cap growth and value).
3. Select and invest in specific mutual funds, index funds and ETFs. He suggests subscribing to the NoLoad Fund*X service which ranks all no-load funds on performance.
4. Invest in the market over a six-week period, if it is a strong market. Invest 25% the first week, and every 2 weeks thereafter until 100% of the funds are invested.
5. Sell when your funds lag in a strong market or when the market itself loses strength.
Overall, Frankle provides a penetrating look at the stock market from the eyes of a professional investment manager. His goal of pointing out the important factors in achieving stock market success is accomplished. This book should be in every investor's reading list, especially those just starting out or those who have no idea as to what the stock market is all about but continue to invest with poor results.