Thursday, 8 November 2007

Money Money Money Ain't it Funny Book Review

Not So Funny – Personal Finance Books and Sheryl Sutherlands “Money, Money, Money...”

Business books are generally amongst the least convincing of literary assets. The genre seems bloated with "try hards", preachers and smart alecs who write as though they never falter in the commercial world. Worse, the two ultimate criticisms are generally bang on - if these people had found any serious secrets they wouldn't be telling the world and, if they were seriously useful performers they wouldn't be writing books.

Perhaps worst of breed are the DIY investment and personal finance books. Cost of production must be low - there are so many of them. At least 75% feature the words "millionaire", "easy", "simple", "quick", "in no time", or "for beginners" in the title.

The styles are as clichéd as the titles. The formula, especially as adapted to New Zealand goes something like this:
1. There is a panic and a crisis and very shortly you will not know what has hit you. You and millions like you. Essentially, your incurable profligacy has led to this, and, cumulatively as a nation we are all doomed for the same reason; and,
2. Furthermore because you will be old and incompetent (as you have demonstrated already) it will be tough. Certainly tougher for you than me your competent, rich author.
So that's good for several chapters, then we have a few standard solutions which are equally illuminating:
3. Here are a couple of dozen ways to be more of a miser involving the remains of toothpaste tubes, very short showers and holidays with your in laws; coupled with,
4. Here is a list of things you can stop doing right now, places you need never visit again plus a series of minor household assets you can sell immediately on Trademe.
Right - you are feeling better already? Absolutely.

Here then is the plan. And at this point it typically becomes genuinely pitiful as we learn that some people have made money out of their house (true but we knew that), car ports add value to residential property (ditto), compound interest on savings is "rilly, rilly powerful" (just like sulphuric acid is if you have some), how to be careful picking your advisor because some get commission on products they sell and may be biased (Get away), share prices for good companies often go up so make sure you pick the right ones (if only) but watch it because shares are dangerous especially for someone like you (so is electricity).
In short pretty much what the Americans refer to as a "hill of beans".

Amongst the shelves and shelves of this dross a genuine stand out is Christchurch based advisor and financial analyst Sheryl Sutherland's "Money. Money, Money: Ain't It Funny" (Longacre 2007). Do not be put off by the slightly cutesy title - this is a serious strong read and what's more you could learn a great deal that is helpful without being beaten up in the process or having to destroy your life and crucify your aspirations.

The book takes a different tack.

The reason is that the author has been reading, studying and trawling the best brains in economics, psychology and sociology, putting it together with her long work experience in the field and distilling the results into language and examples which we can recognise, learn from and do something about.

Sutherland takes on that toughest of tasks - translating theory into useful practice - and shows how the newly emerging discipline of behavioural economics explains a good deal that went unexplained before and how to apply that to our investing. This is far more than simple efficient market bashing (the majority of which is wrong or unsupported by evidence) by dispossessed security analysts and brokers. Much of it is close to home.

She has a great chapter on probability and chance with a table which shows us the actual chances of that $6.00 lucky dip winning over a life time of purchases, the odds on nailing Big Wednesday, the chances of being in a road accident and the like - so that we get some insight into the slippery territory of risk.

Why is this useful? Because human behaviour involves pervasive oddities like becoming attached to certain things (hoarding - the endowment effect) which makes us cash up winning investments and hang on to losers in the hope they will turn around, because whether we are presented with a glass half full or half empty (framing effect) distorts our judgment about good and bad risks and because worrying about spilt milk and what might have been (sunk costs) stops us moving on and accepting that making mistakes is the best way to learn.
Especially useful too, is Sutherland's approach to risk which stresses that being too risk averse (and say abandonning equities) is as calamitous a mistake as betting the entire ranch on commodity futures. Much of what she advocates boils down to taking a measured approach which draws on thinking rather than kneejerk reactions.

The lessons about portfolio theory should be taken to heart. The value here is the stress placed on how people actually behave - concealing from their advisors some of their assets for example, or trying to mentally pigeon hole some assets. I notice this tendency frequently and the all time New Zealand naive diversification has to be the idea of fussing and fiddling with equities and fixed interest investments while we sit with around 80% of our assets in residential real estate - leveraged real estate at that.

There is no promise of easy riches here. But neither is this a visit to the Head Mistresses Office. Instead there are sound explanations, a rational approach to making investment decisions, pointers about how to think, steps to take to be more measured in making decisions, ways to fight overwhelming tendencies and a sharp grip on reality.

My favourite is her letter from a client asking for an idea to earn a riskless 10% - if you don't mind - with the priceless epilogue "P.S. I don't like risk. P.P.S. I don't want to pay commissions." If the book helps reduce the number of such requests then my sometimes faltering but nonetheless genuine belief in the value of education would be somewhat vindicated.

Brent Wheeler

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