Blessed by the Potato

Sometimes being mean can be fun. No, that’s not right. Sometimes when I’m having fun I can come off as mean. I don’t aim to be mean, so this is a tough blog post to approach because that is just about all I have to offer. Let us pretend that I have been possessed by Greg McFarlane and this is a guest post FRotM: Book Edition.

A little while ago I got a piece of email that I ignored as being basically spam: a request to review and blurb a new book (actually titled: “A Free Investment Book for You”). Pitched as “a “How to” guide to obtaining compound returns of 20 percent, 30 percent, or more annually from investing in stocks and to do so in a manner that’s worry-free for the investor.” and “The Sane Approach to Investing in Stocks for Insane Profits.” I decided to be nice and junk it. That kind of pitch turned me right off: it looked like it was either not refined enough to know it’s contradictory, or a scam.

Then he followed-up. Clearly this was a real person and not a robot emailing me, so I wanted to put him out of his misery. This is what I sent back:

“I don’t think I would be a good choice for you as a reviewer/blurber. I don’t think 20-30%+ returns and “worry-free” can be put together like that, so seeing it as the central part of your message is troubling. I work as an editor so my reviews tend to be critical in the first place, and starting off on a bad foot already might not lead to a review you would like.”

He still wanted to send me a book, calling me “an excellent candidate for reviewing my book… my desiring your participation at this stage is a testimonial to the respect that I have for you and your work.” Ok kid, flattery will get you everywhere. I got the book. I read the book. I was open to having my mind changed: maybe it was a good investing book and he just needed to work on his email marketing. Alas, it was about as bad as I feared, shy of not advocating that readers borrow money from friends or remortgage their houses to invest.

Rather than tearing into it wholly, I just want to pick on one specific part: those worry-free 20-30% returns. In the book he lays out the 10-stock portfolio that brought him a 128% return in under 5 years. He compares that to just 45% on the S&P500. But that is a mistake. This is basically a giant case of getting a little bit lucky with stock picking, and a lot lucky with timing. He bought in 10 chunks through the end of 2008 and the beginning of 2009 — yes, he just happened to start investing at a generational low in the market that was followed by a massive, unrelenting bull market. No wonder he thinks 20% returns are worry-free. Anyway, it looks like he’s comparing his portfolio purchased across several time-points that span the market lows to a single time-point for the S&P500 from before the Lehman Bros event. It was easy enough to look up the S&P500 total returns and compare an index portfolio that made purchases on the same dates as he did, and the actual comparison would then be 104%. Yes, his picks out-performed, but it’s not nearly as impressive. Oh, and most of those same picks were hit way harder in 2008/2009 than the index was, so if there’s a repeat then so much for the “worry-free” part.

Then he lays out a second 16-stock portfolio that only has a bit over a year of tenure. He boasts a 29.6% return versus the S&P500 at 26.3% [figures not audited]. Yet that portfolio includes one position that just so happened to return 243% in a year. Exclude just that one outlier, and the portfolio underperformed. By a lot. Sure, sometimes that’s how investing works, but that’s not the kind of track record you base a book around (and again, hoping for a single lottery-ticket-stock to pay off while almost half your portfolio declines in an amazing bull market year is not my definition of “worry-free”).

I cannot in any way recommend this book — I haven’t even mentioned the title because I feel bad for the kid, and I don’t want this to be the only review that comes up in Google. But I warned him, and he asked for the review anyway.

Now he did start off by thanking his editors (amongst others), and on a micro level it’s a fairly tight text. With my own self-interest in mind paying for a few editing passes can help make a book more digestible (especially a self-published one). Unfortunately, the over-arching shortcomings cannot be saved by layout and grammar. It really needed a peer review — and some robust back-testing — before being sent off for a copy edit as the basic premise appears to be flawed, based on a mistaken return comparison and a great deal of luck. Though mentioned often in how the book was presented, the issue of worrying and freedom thereof was not covered.

Page distribution:
Completely blank, not even page numbers (colouring fodder for your young daughter!), 10%.
Small investing nuggets not even fleshed out enough for a blog post (e.g. 431 words on coattail investing does not blow me away with content), 30%.
Specific information* on companies found in a stock screener that will be instantly out-of-date in book format, 25%.
Index (the kind to look stuff up, not the S&P500), 4%.
Drivel, 7%.**
The purported approach/method/secret, 2%.***

* – Includes estimated future EPS growth rates to two decimal places, though all the percentages round precisely to X.00% so I don’t know why the digits were necessary in the first place.
** – Harsh but accurate summary.
*** – Totals may not add to 100% because math is hard and fact-checking is for losers who don’t have insane profits to chase. Also, yes, depending on how liberal you want to be on what counts as part of the approach versus general rehashing of Warren Buffett quotes, just ~2% on that topic. Spoilers: use PEG, buy when below 0.75-1.