Best of Book Bits 2013 (Part I)

Successful Investing Is a Process: Structuring Efficient Portfolios for Outperformance
By Jacques Lussier
Summary via publisher, Bloomberg/Wiley
What do you pay for when you hire a portfolio manager? Is it his or her unique experience and expertise, a set of specialized analytical skills possessed by only a few? The truth, according to industry insider Jacques Lussier, is that, despite their often grandiose claims, most successful investment managers, themselves, can’t properly explain their successes. In this book Lussier argues convincingly that most of the gains achieved by professional portfolio managers can be accounted for not by special knowledge or arcane analytical methodologies, but proper portfolio management processes whether they are aware of this or not. More importantly, Lussier lays out a formal process-oriented approach proven to consistently garner most of the excess gains generated by traditional analysis-intensive approaches, but at a fraction of the cost since it could be fully implemented internally.

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead
By Alan Blinder
Interview with author via The New York Times
Q: You write, “Our best hope is to minimize the consequences when bubbles go splat — and they inevitably will.” How much confidence do you have that when the next bubble goes splat, we will be ready, willing and able to contain the damage?
A: Less than I wish I had. But I’m at least hopeful that some of the lessons we’ve learned, and some of the actions we’ve taken, will make the next bubble less damaging than the last ones. For example, we now understand better the dangers that lurk in high leverage, overly complex financial instruments, and lax (or nonexistent) regulation.

Skating Where the Puck Was: The Correlation Game in a Flat World
By William Bernstein
Review via The Chicago Tribune
This time of year, many investors begin to reflect on the past 12 months in the market. Did stocks sail higher than bonds? Was it better to own Apple or Google? Did some mutual funds outperform others?
It’s certainly OK to do this type of review, but if it tempts you to make drastic changes in your portfolio, experts say to watch out. You may be doing more harm than good.
That was one of the conclusions that William Bernstein, a financial adviser and author, made in his new e-book, “Skating Where the Puck Was: The Correlation Game in a Flat World.”Bernstein found that even among institutional investors — the pros who manage university endowments and public pension funds — there is a tendency to chase after the next “big idea.”

Naked Statistics: Stripping the Dread from the Data
By Charles Wheelan
Review via The Economist
Data are everywhere these days; the problem is making sense of them. That is the role of statistics, the university course that so many people dodge or forget. Charles Wheelan, a professor at Dartmouth College (and a former Chicago correspondent for The Economist), does something unique here: he makes statistics interesting and fun. His book strips the subject of its complexity to expose the sexy stuff underneath.

Forecast: What Physics, Meteorology, and the Natural Sciences Can Teach Us About Economics
By Mark Buchanan
Column by author via Bloomberg
In the not-too-distant future, it’s easy to imagine a U.S. or European Center for Financial Forecasting. Thousands of researchers would oversee massive simulations probing the developing network of interactions among the world’s largest financial players, following the vast web of loans, ownership stakes and other legal claims that link banks, governments, hedge funds, insurance companies and ratings companies.
The computers would test scenarios and calculate hundreds of indicators of systemic leverage, the density of interconnections, or the concentration of risk at single institutions. Experts would probe models of the financial system, looking for weak points and testing resilience, much as engineers now do with models of the electrical grid or other complex systems.