The idea behind the book Just One Thing is that 12 of the supposedly "World's Best Investors" proffer the one piece of investment wisdom they have found most useful in their investing careers. The advice offered ranges from the profound to the irrelevant, and was usually more than one thing.
Andy Kessler's lesson was one of the most interesting. Kessler sites two principles around which he has constructed his investment success - 1.) lower cost creates its own huge networks when demand is highly price elastic, and 2.) intelligence migrates the edge of the network.
Dennis Gartman explains his 13 trading rules, which, if you aren't paying attention, is 12 more than the title suggests. That's fine, since Gartman is one of my favourite investment commentators, and writes the fabulous Gartman Letter. The most important rule? Never, ever, under any circumstance, should one add to a losing position ... not EVER! Actually, Gartman repeats that rule again, so he really only had 12 trading rules.
Mark Finn, formerly Chairman of the Virginia Retirement System and Chairman of the Vantage Consulting Group, and his son Jonathan admonish investors not to rely mainly on historical performance to assess investment skill, since strong returns are often followed by poor returns. The recent performance of the legendary Bill Miller is strong evidence of this truism.
Gary Shilling explains the wonders of trading in boring old Treasury bonds. T-bonds boring? Nonsense, says Shilling, and proves it by demonstrating that investing in zero coupon Treasury bonds can generate higher returns than investing in stocks. Shilling called the top of the interest rate cycle in the early 1980s, and became financially secure by buying long-dated zero coupon bonds, which can be purchased on 5% margin. By rolling over 25-year strips each year - buying a 25-year zero, selling it a year later and using the proceeds to buy another 25-year strip - one outperformed stocks throughout the 1980s and 1990s. A book is worth its cover price many times over if it reveals one unknown and surprising fact to the reader. This was such a revelation to me.
Ed Easterling argues that risk is not a knob that can be dialed up and down at will to generate higher or lower returns (amen. - ed.). Easterling discusses how volatility can dramatically skew returns over time, and how the measurement of returns can distort results. For example, the average annual capital gain from the stock market since 1900 has been 7.3%. However, the compounded return has been 5.0%, an enormous difference. Compounded, not average return is what matters. Returns are driven by valuations, particularly the price/earnings ratio of stocks. The lower the valuation, the higher the prospective return of the market and vice-versa.
James Montier discusses the nascent field of neuroeconomics and how the brain is hardwired to separate ourselves from our money in the market. This is a fascinating field, and the subject of Montier's chapter is too broad to summarize here, other than to say that we all have cognitive biases and irrationalities that impede our investment success. Identifying and understanding these biases and irrationalities is crucial if one is to become a great investor.
Bill Bonner wrote a polemic rant better suited for a book on the philosophies of Ayn Rand or Ludwig von Mises. Whether or not one agree's with Bonner, the dogma was irrelevant to the subject at hand. Skip this chapter.
Rob Arnot postulates that capitalization weighted indices such as the S&P 500 or the Russell 1000 are inefficient. Market cap indices are top-weighted with the biggest companies based on equity values. Since probabilistically the largest cap stocks will underperform all other stocks, indices based on other factors will do better. From 1975 to 1999, indices that were constructed using book value, cash flow, revenues, dividends and employment levels outperformed the S&P 500 by 2% per year.
George Gilder has a chapter in this book. Gilder is definitely NOT someone whom I would identify as one of the "world's greatest investors" since he was a True Believer during the Technology Bubble, and led his followers off the cliff when the Tech Bubble imploded. I do not consider anyone who is unable to identify an investment bubble as a good investor, let alone a great one. One would think that the ability to identify a crazy mania would be one of the first prerequisites of being a competent investor. Having said that, I have to give Gilder his due. He makes a very cogent argument that Regulation FD - where corporations must release all material public information at the same time and not advantage one group of investors over another - has had the perverse effect of allowing insiders to capture wealth at the expense of the public. Before Reg FD, a company might disseminate information selectively, allowing the lucky few on the receiving end to invest in the company's stock before the information became widely known. The effect of this selective information disclosure on the price of the stock was that it would rise in smoother fashion. With Red FD, the market is deprived of this outlet. Now, when information is released, the change in the price of the stock is more violent. This allows insiders to benefit more since they capture the delta between the price change of the stock before and after the information is released. I do not know if Gilder is correct, but I had never thought of this before.
Michael Masterson talks about building a successful business. His advice is to be nice to people. Do not screw someone over the last penny in business, which he says is the dominant ethos of many businessmen and women today. Instead, make sure everybody wins from the transaction. Over time, you will become much wealthier as people will want to do business with you.
The legendary Richard Russell offers what he considers four axioms of the market. First, compounding works. You will get rich, or at least wealthier than you are, if you let your money compound. Second, don't lose money. Third, wealthy people don't need markets. If you feel pressured to make money in the market, you are less likely to do so. Since the wealthy do not need to make money in the market, they tend to take a longer view and do better. Finally, look for values.
The editor of Just One Thing, John Mauldin, finishes up the book. His central message is to not underestimate the power of innovation. New innovations you could never imagine are on the horizon. Being able to identify the effects of the innovations will make you very wealthy.
Out of five, I rate Just One Thing
and place it on my investment book log.