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Reducing the Risk of Black Swans: Using the Science of Investing to Capture Returns with Less Volatility, 2018 Edition
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Product details
Paperback: 206 pages
Publisher: Buckingham; 2018 ed. edition (February 14, 2018)
Language: English
ISBN-10: 069206074X
ISBN-13: 978-0692060742
Product Dimensions:
5.5 x 0.4 x 8.5 inches
Shipping Weight: 8.6 ounces (View shipping rates and policies)
Average Customer Review:
4.3 out of 5 stars
15 customer reviews
Amazon Best Sellers Rank:
#155,982 in Books (See Top 100 in Books)
This book has once again been a game-changer for my journey as an evidence-based investor. I say "once again," because I first learned of a better way to invest back in 1998, when I picked up Larry's first book, "The Only Guide To a Winning Investment Strategy You'll Ever Need." It showed me how important it was to stop wasting time and money trying to beat the market, when decades of academic evidence suggested it was better to sit tight and wait for the market to deliver on several sources of expected long-term returns.And so I did ... and still do. My portfolio thanks me many times over. Still after 20 years, you can't help but wonder if anything has changed. This book answers that critical question. It introduces "the Larry Portfolio" for better managing market risks. It also introduces several additional sources of expected returns an evidence-based investor may wish to diversify into for the same purpose.If you’re new to evidence-based investing, you’ll probably find the book a challenging read. But even if you pick up just the main talking points, you'll be on your way to being a better investor for it. For those who are more familiar with the strategy, it will be a fascinating and fulfilling exploration of the latest academic insights and practical possibilities. Enjoy!
This is a very timely update to the already-essential first edition of this book. The authors do a very impressive job of explaining new categories of "alternative" (to pure fixed income and bond) asset classes that have become accessible to retail investors (instead of just hedge funds and the ultra-wealthy) over the past few years.As the excellent forward by Ross Stevens makes clear this revised edition couldn't be more timely given that we are in an environment where low equity returns going forward are likely given rich valuations while bonds are much less safe than usual due to the threat of interest rate spikes from a starting point of interest rates at or near all-time lows. The authors make a compelling case that we are entering a world where many of these alternative asset classes will become an essential part of defensive portfolio allocations.
Swedroe (and his various co-authors over the years) have been among the most tireless of investing educators. Even other "greats" like Jack Bogle or William Bernstein or Rick Ferri have seen their output tail off in the past decade as their interest wanes. That's understandable because a lot of it is repeating the same advice investors have been hearing for 20 years now. Watch costs, diversify, etc. Swedroe also strikes a good balance between sticking to "classic" advice while also keeping abreast of recent research. "When the facts change, I change my mind." Some other well-known authors seem strangely unwilling to adopt new information and change their mind, giving the impression that they feel that all financial research from the past 30 years has been a complete waste of time.This book takes what could have been a fascinating topic and turns in a dismal and underwhelming performance. It is already a brief book but a substantial chunk of it is a review of basic CAPM/factor/diversification theory. It felt too long for people who've read it before and too short for anyone who is coming across it their first time. Yet if you strip it out this "book" is only about 100 pages.What you really get is an overview of five "alternative" investing strategies -- alternative lending, reinsurance, selling volatility, managed futures, and "multiple risk premia". All of them get unsatisfying treatments. In most cases you can read articles that Swedroe has published elsewhere (alphaarchitect.com, ETF.com, AAII.com) on the same subjects totally free and just skip this book.With the first two -- alternative lending & reinsurance -- there isn't even any data or academic arguments presented. It is just "well, it is logical that insurance claims aren't tied to the stock market". If there's anything I've learned in my years of investing is that anytime someone claims something is "logical" or "just makes sense" you should look at the data and double check.What's the actual track record on alternative lending or reinsurance? The omission for reinsurance is especially galling since Swedroe admits it has been around for decades/centuries. No one was able to put together a dataset showing anything about it?If we look at the actual net returns of a reinsurance fund -- Stone Ridge High Yield Reinsurance Risk Premium Fund -- from July 2013 to November 2018 it returned a CUMULATIVE 29.9%. Equity returned 80%. Yet Swedroe tells us we should expect "equity-like returns" from this asset. 2.96% a year nominal returns doesn't look "equity-like" to me.Alternative lending has a shorter track record, which should make us even less confident in its future returns. And see, for instance, the Bank of England's article "Should peer to peer lenders exist in theory?", the collapse of the Chinese P2P market, or the many finance bloggers who show their public numbers from P2P lending and have largely abandoned the investment. Do we have 50 years of data showing us correlations? Showing us how it behaves in a black swan? We don't get any of that in this chapter.What we do get is a recommendation to invest in Stone Ridge's Alternative Lending Risk Premium Fund. A fund that has 2% expenses and a minimum investment of $15 million. Swedroe also doesn't give a good explanation of the risks of investing in an interval fund. As Stone Ridge says, "There is no assurance that you will be able to tender your Shares when or in the amount that you desire." What's the "black swan" risk of Stone Risk halting redemptions for a few weeks or months? How does that affect risk & rebalancing in a portfolio?Throughout the book I kept feeling like Swedroe was jumping to solutions rather than walking readers through fundamentals. This was especially the case in the reinsurance & volatility premium chapters. Swedroe notes in passing that you can get exposure to reinsurance simply by buying stocks from insurance company. But, instead of a pure reinsurance play, you get about 15% reinsurance + 85% market beta if you do that. But you can hedge out the market beta. Why isn't that discussed? Elsewhere I've seen Swedroe say (without any data) that doing so exposes you to basis risk. But how much basis risk? Is that basis risk more than the fees you'd need to pay Stone Ridge and and advisor to get access to this fund?Likewise, after a long explanation of how selling volatility is a great strategy -- even though it INCREASES your exposure to black swan events, a contradiction that is never adequately addressed other than "oh, just be patient, it'll come back fast!" -- the answer is "buy into a fund that does this for you". Why is there no explanation of doing it yourself, the costs & benefits & tradeoffs? Maybe it doesn't make sense. But I have a feeling that most readers are more likely to try a DIY volatility premium strategy than to sign up for Stone Ridge.The final two chapters on AQR are equally poor. The chapter on the AQR style premia alternative fund -- whose sole benefit seems to be it can go short and capture more of the factor premium you've already got in your portfolio -- tells you little more than AQR's web page on the fund does. Of course, AQR is famous right now for having all of their funds lose money in 2018. The fund that Swedroe recommends lost -12% in 2018 (so much for diversifying away from equity returns...) and over the past 5 years has annual returns of 3.42% (so much for "equity-like" returns).At the end of the day my biggest disappointment is that all of the strategies are essentially presented as black boxes. The reader isn't even given enough information to evaluate alternative funds. What if another reinsurance fund launches in 2019. How do I judge whether that one is better or worse than the one Swedroe recommends? Are we relying on manager skill to run these kinds of funds?If, at the end of the day, the answer is, "well, these new investments are just super complicated and you really need a financial advisor to sort through them and help you pick one"....that's not a very satisfying answer because I feel like I could have skipped this book and just hired a financial advisor.
In my opinion, Larry has been at the forefront of Evidence Based Investing for over a decade. I was lucky enough to pick up his 2003 book, "14 Simple Truths..." back in 2005, and it was the catalyst to start my second career as a financial planner. Since then, I have read Larry early and often, and he has never disappointed. "Black Swans" is another beauty. It stays true to who Larry is, in that it provides evidence, not conjecture. Empirical Data, not Anecdotal opinions.Further, Larry is unafraid to come up with new ideas for investors. Investment ideas that I believe he may have scoffed at 15 years ago for "regular" investors. Though most have a hard time with this, recommendations and opinions should change as new information and data become available. Larry has strong believes but seems to me to open minded enough to continue to challenge not only conventional wisdom, but his prior beliefs as well.All in all, Black Swans is an investing book that every investor should read, from the stringent passive buy and holder to the active, market timing stock picker.
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