Tuesday, June 06, 2006

Upside Downside complete review

I've now finished a decent book relating to risk management, Upside Downside: Simple Rules of Risk Management for the Smart Investor. The three main ideas of the book are profiled here (a call for scenario thinking, instead of most-likely case forecasting) here, (know what you own) and here (anticipate "regret" in your investing).

While these three ideas are certainly worthy of consideration for any investor, it's a small book (nothing wrong with that), but it feels "stretched out" with some narrative stories in attempting to hit 200 pages (not quite done, if you exclude the index). So it seems relatively expensive at $29.95.

The book was co-authored by Dr. Ron S. Dembo whom the dustcover describes thusly ...
"... is the founder and former president of Algorithmics Incorporated, and grew it ... to the largest enterprise risk management software company in the world, with ... over half of the world's top banks as clients. He was a professor at Yale ... and holds a number of patents in computational finance. ... In 2003, he was among the first fifty people indducted into the Risk Hall of Fame."
One of the pieces of advice given several times in the book relates to portfolio insurance (and in fact is the concluding sidebar piece), suggesting a good way to achieve this is to invest in a zero (stripped) coupon bond for the face amount of your investable capital, and the balance in some type of stock market investment. In one of the later examples, of a 55 year old looking to the next ten years (i.e. retirement at age 65), takes the investable capital of $200,000, places $130,000 in the strip bond (which has a $200,000 face value at maturity in 10 years), and then uses the other $70,000 to invest in a broad market EFT, which the book suggests could double over the ten years, resulting in a total of $340,000 at retirement. It suggests that this is a well-protected investment.

While that may be the case, this doesn't seem like a particularly good way to invest, given the overall return rate is only 5.3% which isn't a lot better than could be achieved simply by investing the entire amount in a bond which hasn't been stripped. It also suggests that buying futures (puts/calls etc.) is another way to protect a portfolio. Again, while this is true it will generally reduce the rate of return for most portfolios. Insurance always costs money.

All in all, I'd give the book 3.5 stars out of five. Good ideas, but a feeling of having stretched out the book and some examples that don't show particularly strong risk-risk/reward management techniques, in my own opinion.


The Confused Capitalist

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