Books I Recommend

Investment

Stocks for the Long Run, by Jeremy Seigel.

This is a fascinating book that is basically a historical perspective on the market related to investing technique. It offers lots of statistical analysis of time series, together with insightful discussion of what the real mechanisms were behind the numbers. The book goes through several interesting discussions with mounds of supporting data:

· Invest in stocks, not fixed return assets like bonds, CD’s, and the like.

· Stocks are actually less risky over long enough time frames and they have higher returns.

· Returns versus market averages, earnings, sentiment, etc..

· Large cap versus small cap, Value versus growth.

· The Nifty 50 and what happened to them.

· Effects of taxation

· Global investing

· Economic environment and investing: Gold, Fed behavior, etc.

· Inflation, business cycle, effects of world events

· Volatility and the crash of ’87

· Technical analysis and trends

· Calendar anomalies

I highly recommend the book. It walks through a number of surprising results. I’ll just step through a few here.

· Siegler reports that the main reason bonds have under performed stocks was the move off the gold standard, which allows inflation to erode the bond’s return. In fact, from an asset allocation standpoint, he ranks the new inflation indexed Treasuries as stock-equivalents. A secondary effect was that bonds were artificially high in the years closer to the Great Depression because investors were leery of stocks.

· All of his conclusions are analyzed against foreign markets and they all hold up. I find this to be compelling.

· For the period from 1802-1997 the longest period you’d have to hold stocks to regain a positive return is 20 years. The longest period you have to hold them to beat bonds and T-Bills is 10 years. There is no period you can hold bonds or T-Bills to reach a positive return when inflation is factored in.

· Stocks outperform bonds in 82% of 10-year time spans from 1871-1997.

· The demise of the gold standard dramatically increased the correlation between stocks and bonds, making the value of bonds as a diversifying agent far less.

· He calculates optimal asset allocations (% you should keep in stocks) based on the holding period you are willing to allow to weather bad market conditions:

Risk Tolerance 1 yr 5 yrs 10 yrs 30 yrs
Ultra-Conservative 7% 25% 40.6% 71.3%

Conservative 25% 42.4% 61.3% 89.7%

Moderate 50% 62.7% 86% 112.9%

Risk-Taking 75% 77% 104.3% 131.5%

Interestingly, there are several cases where he would have you buying over 100% by borrowing on the margin.

· Today, 50% of funds flowing into mutual funds are from 401k plans. The money comes in no matter what the market is doing for the most part, and this helps keep it moving up. By 2015, age demographics will force a reversal of this trend as Baby Boomers retire and start spending their savings. Siegler feels that as the Third World comes up to U.S. standards they may be able to offset this outflow, but if the Asian crisis lasts indefinitely, the markets are headed for increasing pressure.

There is a lot more to this book than I can list here. These conclusions are reached in the early parts of the book. It isn't clear in the aftermath of the stock market bubble bursting whether folks will still subscribe to the book's conclusions, but I must say that I do.


The Roaring 2000’s, by Harry S. Dent

This book is definitely worth a read for all those readers who wonder if the market should be at 10,000 or not. Dent puts forth an interesting thesis. By tracking the birth rates, maturations, and peak spending years of various generations, he attempts to predict how demographic trends will affect the stock markets. His conclusions are uniformly rosy—he’s predicting the market will go to something like 40,000 by the year 2008!

The reason? Baby Boomers will reach their peak-spending year in 2008 which should provide plenty of potent fuel for the economy. In fact, their spending will be on a steady growth path from now until then.

Dent makes a lot of other projections as well, mostly along the New Economy paradigm, based on things like the Internet making everything permanently more wonderful. Ignore that stuff. He’s drawing conclusions by looking at only 2 recent datapoints—hardly scientific, although Dent is an Economist with an impressive set of credentials. His demographic projections are more interesting. While one should be cautious about projecting the stock market on just this one factor, there is little doubt it will add a lot of extra push to the Dow.

Fiction

The Witches of Karres, by James H. Schmitz. Out-of-print science fiction, and my all time favorite due to fond childhood memories of the book. I just bought a used edition on eBay, and there are rumors it will be reprinted again. It's too bad Schmitz wrote so little before passing on. I really like all of his work.

Speculative

The Age of Spiritual Machines, by Ray Kurzweil.

Kurzweil is a bit of a self-professed visionary, but his accomplishments entitle him to it. He’s been a successful high-tech entrepreneur for years, with companies that developed cutting edge technology for speech recognition, OCR (used to read to the blind), and music synthesizers (actually samplers, but we’ll talk electronic music some other time). This is his second such book, the first having been called The Age of Intelligent Machines.

It was a fascinating book, and one that is currently in vogue, but I found Kurzweil to be a bit heavy on the golly gee whiz science fiction salesmanship and a little light on technology. Of course that balance is probably right for most folks, but I hungered for a bit more substance behind his conclusions.

The book basically attempts to project what happens if Moore’s Law continues in perpetuity. Interestingly, there’s a bit of discussion about just what the law even is. I’d always heard it as a projection that computing speed would double every 18 months. Kurzweil says his measurements (and to be fair those of others) show it is in fact doubling annually and the rate is increasing. He mentions that Moore says he was misquoted, and that he only ever claimed doubling every 2 years. The latter is more like what my experience with PC’s has been, but Kurzweil makes persuasive arguments about why its more like a year.

Moore’s Law, it seems, is based largely on photolithography and its potential to reduce the size of chips. Each reduction in size increases the switching speed of the devices, and hence the clock speed of our computers. As we all know, a 450 MHz machine is much faster than our old 200 MHz machines (apologies to those of you who are still not at the latest generation). But Kurzweil argues that there is more to it. We don’t just make the transistors on the chips smaller, we add more transistors as well. And these extra devices contribute to even more performance enhancement. It’s true, too. When the Pentiums came out they were faster then the 486’s at a given clock speed, which were faster than the 386’s, and so on. We must also give credit to those extra transistors doing things like making our video cards tremendously faster. It seems like 3D video benchmarks become obsolete every 6 months—clearly a much shorter cycle for this category than Moore’s law would have projected.

Anyway, he doesn’t spend the whole book on Moore’s Law. Rather, he extrapolates how computers will compare with the human brain in terms of processing power. He makes the argument (which I happen to agree with), that artificial intelligence has shown poor results because the human brain is so much faster than contemporary computers. In fact, he estimates it to be about 1 million times faster. From there, he projects that personal computers will be as powerful as the human brain by about 2020. Coincidentally, this is about the point most chip makers fear Moore’s Law may run out. He goes on to project that personal computers will have the computing power of all combined human minds by the year 2060.

Pretty wild stuff. There are sections on how we will upload our minds into computers, long discussions of religion and spirituality, and a lot else. Definitely worth a read if you like the deep end of the pool. It isn’t that the book is that technical—its written for the lay person. But the vision presented includes some pretty far out ideas.

Just so you know how much an optimist Kurzweil is, he feels machines have already achieved a level of intelligence, and lists lots of examples of things machines do just as well as people. While it is true that Deep Blue beat the human at chess, I’m not sure how helpful these examples are. One of the more dubious is that he basically claims speech recognition is a done deal. Anyone in the audience who has tried it would dispute him immediately on that one. BTW, he also admits to being forced to turn of the MS Word grammar checker because it disagreed with him too often on correct English. I have to second him on that one. I’d say it’s wrong about half the time or more.

If you like this book, The Pysics of Immortality by Frank Tipler goes along well with this train of thought.


The Physics of Immortality, by Frank Tipler.

Tipler's thesis is to provide an explanation for how the predictions of most of the world's religions can come true in a manner compatible with contemporary physics description of the universe. In his view, God is a computer, and Heaven is a virtual reality we'll all be uploaded into. What's interesting about the book is that it provides another one of those extrapolations of how powerful computers will eventually be and what that should mean to us. In this case, he gets to figuring out how powerful a computer must be to represent all possible states of the human mind. Doing so would mean the computer can simulate all possible realities that a human mind can conceive of. In this all-powerful computer, you would have every possible simultaneous consciousness, and could have all experiences at once, instantly. Now you see what his vision of Heaven may be. It's thought-provoking if nothing else.

 
All material 2001-2006, Robert W. Warfield.