Book Bits For Saturday: 2.26.2011

ANTs: Using Alternative and Non-Traditional Investments to Allocate Your Assets in an Uncertain World
By Dr. Bob Froehlich
Excerpt via publisher, John Wiley
There is clearly overwhelming evidence that a large percentage of a portfolio’s performance is determined by the percentage of money that an investor places in stocks, bonds, and alternative and non-traditional assets. Then to a much lesser extent, the performance of a portfolio is affected by the individual’s investment selection within those asset classes. The purpose of this book is to help you decide how much of that important 90 percent portion of your portfolio should be allocated to alternative and nontraditional asset classes.
When most individual investors thought of asset allocation, they simply thought of the big three: stocks, bonds, and cash. The reason was that most individual investors really only had these choices available to them. Not so anymore. Individual investors now have the opportunity to invest just like the big institutional investors by having exposure to alternative and non-traditional asset classes as well.

Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence
By James Glassman
Review via Reuters
Glassman’s safe harbor strategy is designed to “protect you against the Category 5 hurricanes of the financial kind.” Forget about living long enough to bounce back from stock market losses. “The older you get, the less long term is left for recovery.”
In practice, Glassman advises cutting back on U.S. stocks, investing in “aspiring” markets (Brazil, China and India) and investing in bonds. Even more cautious these days, Glassman also recommends something a little exotic for most mainstream investors: a genuine hedging strategy. Here’s the skinny on that:
* Buy derivatives to protect against stock losses. You can do this through put options on stock you own or hedge the entire market. These vehicles rise in value if the market drops. There are also inverse exchange-traded funds “bear market” exchange-traded funds that do the same thing, only less precisely.
* Protect against inflation. That means boring Treasury Inflation-Protected Securities. Staples in my portfolio, unlike conventional bonds, TIPS climb in value when the Consumer Price Index rises.
* Find a safe level of stocks, bonds, currencies and hedges for your age and lifestyle and re-balance every year. Sound advice, but nothing new.
Beyond Mechanical Markets: Asset Price Swings, Risk, and the Role of the State
By Roman Frydman and Michael Goldberg
Review via The Economist
In the past 20 to 30 years, the behavioural-finance school has been chipping away at the efficient-market hypothesis. Far from being hyper-rational actors, expertly analysing all available information and discounting future cashflows at the optimal rate, individual investors show psychological biases, such as being more willing to take profits than cut their losses. In short, they are more like Captain Kirk than Mr Spock…
A new book by Roman Frydman of New York University and Michael Goldberg of the University of New Hampshire tries to steer a third way between the efficient and behavioural schools. They build on an insight of John Maynard Keynes: the factors governing the success of any future investment are too complex to be calculable. Investors face a world marked by “known and unknown unknowns”, in the words of Donald Rumsfeld, a former American defence secretary…
The problem is not just that investors do not know how the fundamentals—profits, interest rates and so on—will develop. They also do not know which things other investors will choose to focus on at different times. For example, a study of Bloomberg news stories showed that only 5% mentioned inflation, which was then unusually low, as a factor driving asset prices between 2001 and 2003. By 2005, when inflation had gone back up again, this proportion had risen to 45%. The authors argue that investors develop strategies to deal with this uncertainty. As the fundamentals change they adjust their forecasts slowly.
Financial Contagion: The Viral Threat to the Wealth of Nations
Robert W. Kolb, Editor
Excerpt via publisher, John Wiley
Contagion is a fairly new concept in the economics literature—before 1990, it was scarcely mentioned. Early interest in the concept stemmed from international finance, particularly the finance of emerging economies, and concern about contagion was exacerbated by the Asian financial crisis of 1997–1998. Because concern originated in the international arena, the idea of transmission of financial difficulties across national borders has always had a prominence in discussions of contagion. But the financial crisis of 2007–2009, which inaugurated the subsequent Great Recession, provided powerful evidence that contagion was not a phenomenon limited to emerging markets or the arena of international finance.
Although there is little agreement about the meaning of contagion, much has been written about the channels of contagion, or the mechanisms by which financial distress originating in one source spreads to other victims. The problem here is to identify the channels of contagion or themeans by which financial distress spreads from one arena to others…
The Globalization Paradox: Democracy and the Future of the World Economy
By Dani Rodrik
Summary via publisher, W.W. Norton
Surveying three centuries of economic history, a Harvard professor argues for a leaner global system that puts national democracies front and center. From the mercantile monopolies of seventeenth-century empires to the modern-day authority of the WTO, IMF, and World Bank, the nations of the world have struggled to effectively harness globalization’s promise. The economic narratives that underpinned these eras—the gold standard, the Bretton Woods regime, the “Washington Consensus”—brought great success and great failure. In this eloquent challenge to the reigning wisdom on globalization, Dani Rodrik offers a new narrative, one that embraces an ineluctable tension: we cannot simultaneously pursue democracy, national self-determination, and economic globalization. When the social arrangements of democracies inevitably clash with the international demands of globalization, national priorities should take precedence. Combining history with insight, humor with good-natured critique, Rodrik’s case for a customizable globalization supported by a light frame of international rules shows the way to a balanced prosperity as we confront today’s global challenges in trade, finance, and labor markets.
Why America Must Not Follow Europe
By Daniel Hannan
Review via Andrew Klavan
I have recommended the Encounter Books’ Broadside series before, but allow me to recommend it again. There’s a new one coming out in about a week that’s just terrific: Why America Must Not Follow Europe by Member of the European Parliament Daniel Hannan. It’s 49 pages, reads smoothly and elegantly, makes its argument soundly and backs it up with facts. The next time some leftist says to you, “But socialism works in Europe,” in that, you know, sneery-whiny voice leftists have (all right, I’m joking), you can take out this book and make them eat it page by page. (Still joking. Sort of.)