Book Review: Active Investing

In Peter Sander's Active Investing: Take Charge of Your Portfolio in Today's Unpredictable Markets (Adams Media Corporation, June 2005, 262 pp), the author espouses a mixture of various trading and investing strategies serving as a compromise between buy and hold and frequent day trading. Sander posits an investing strategy in an increasingly dynamic market that is not as simple as "set it and forget it" (i.e. buy and hold), but certainly doesn't require daily monitoring of the market. He argues that this "active investing" protects against the downside and leads to a modest outperformance of the S&P 500 during bull markets. The book is a valuable resource for those who want a broad-based investment strategy for their portfolio and are willing to take the time and effort required to partake in such strategies.

For investing neophytes and those with a more advanced background, Sander also provides a very nice overview of key topics - such as the history of the market, broad economic indicators, financial statements, options, resources to utilize (he finds Yahoo! Finance and Value Line among others especially useful), the process of determining price during buy and sell orders in the NYSE and NASDAQ, technical indicators, market versus limit orders, and much more. The book consists of many short sections that give brief introductions to these concepts. This broad coverage leads to a greater understand of the market forces at play and the history of financial markets more generally; but may not be entirely necessary to read in order to grasp the main thesis he elaborates throughout the other chapters (that is, the active investing strategy). Although he speaks generally about how to leverage such a strategy to your benefit and the various techniques at one's disposal, he talks very broadly about the strategies and doesn't outline detailed examples and procedures. Thus, if you wanted an in-depth analysis of a particular investment strategy, this is probably not the book for you.

At times, I found myself somewhat disappointed at the lack of detailed analyses that arise from the two sections per page organization of the book. In reality, the meat of the book (the active investing strategy) could easily be consolidated to a 20-page article. However, the other pages certainly aren't worthless as Sander provides helpful information (assuming you aren't a well-seasoned veteran of the market) about a wide array of investing areas and commentary of general market conditions. The topics are relatively eclectic and broad-based such that Sander is limited to giving brief overviews and doesn't dedicate too much space to one particular topic. The negative aspect of this structure is that the reader tends to crave more details and perhaps feels jolted when going from topic to topic. The book can also be a fairly densely packed full of terms if you're new to the game. Overall, though, Sander makes the text flow relatively well considering the varied topics he seeks to cover and is easy to read. A couple of the charts have the wrong time range (the chart is different than what is referred to in the text), which I personally find ridiculous and makes me question the editors, but doesn't really cause any detriment to the understanding of the concepts. Sander definitely knows his stuff.

The main purpose of the book is to provide a basic framework by which the "active investor" can seek to "modestly outperform the S&P 500." An underlying purpose, as I previously stated, is to give a fair overview of many aspects of the market; these are helpful for general understanding, but won't be particularly helpful in giving you an investment edge.

The active investing strategy can be summarized as follows. Sander encourages dividing your portfolio into various segments based on their investing strategies and your goals for the segment. The "foundation" portfolio is long-term in nature and requires little to no active management. This segment is typically invested in stock index funds, bonds, commodities, real estate, etc. and includes retirement accounts. This portion is mostly left alone as it's meant to grow over the long-term. The "rotational" portfolio is managed fairly actively and seeks to adapt based on current market conditions and business cycles. It invests in stock and funds as well, but rotates based current conditions as a vehicle of practicing "intelligent market timing." Sander encourages the use of easily traded ETFs for this portion. Finally, the "opportunistic" portion is the most active part of the entirety of the portfolio and is for stocks and options held a few days to a few weeks. This is definitely a "swing trading" technique and seeks to find undervalued assets at a particular point in time generate income and cash reliably. The investor then sells these assets to profit generously. This is the portion that is supposed to be doing the heavy lifting. Sander gives the following segmentation of allocating funds to the foundation, rotational, and opportunistic portions, respectively:

Classic: 50-80%, 10-30%, 10-20%
Conservative: 80-90%, 5-20%, 0-5%
Aggressive: 30-70%, 10-30%, 20-40%

Thus, for the vast majority of investors, the foundation portfolio should be the largest and most significant portion; something I certainly agree with. Although the author claims that the "rotational" and "opportunistic" segments of one's portfolio only need to be monitored once a week, based on the methods described in the book, these segments would realistically take a great deal of research and dedication on the order of at least one hour per day, in my opinion. If an investor rids him or herself of the opportunistic segment of the portfolio (which I would encourage the large majority of investors to do), I suppose a once-a-week monitoring schedule is doable for the rotational portfolio, although still less than ideal.

Sander also encourages the use of options for certain individuals and spends quite a few pages detailing them. I don't think options are appropriate for the average investor and instead should be used exclusively by experienced traders. The author does pose a caveat that these techniques are sophisticated and typically are not used by the average investor; rather, he posits that the active investor ought to be well-prepared and practiced before using these tools. But I still don't think he emphasizes it enough as I tend to err more on the side of caution and believe that nobody except truly seasoned trading veterans should use options.

The book's philosophy of using several short-term strategies - although not day-trading - to optimize results is somewhat counter to the strategy I espouse, but I don't think these techniques are without any merit. Although these strategies are not for an "average" person, with the right amount of research, commitment and knowledge, they can be done right. The investor just has to be able to come to grips with and accept the added risks involved in such techniques. But since only a small portion of one's total assets are even in the rotational and opportunistic segments, the risk is somewhat abated and there is a potential for increased returns.

Overall, this book does a very good job of giving an overview of many topics that can be helpful to investors. It encourages one to not only be diversified in assets, but also in investment strategies, which is the main point of the book, and certainly a valid point. It might be too dense and full-of-terms at times for the beginner (although it's certainly manageable) and too basic for the advanced, but strikes a particularly good balance for those mildly familiar with indicators, etc., but want a bit more. In the end, I enjoyed the book and utilize many of the same strategies (although mine are more in line with the foundation and rotation portions and not the opportunistic segment). I'd encourage investors to read the book if for nothing else than the nice recap of market history and resources to use; the investing strategies themselves are also noteworthy, but certainly not earth-shattering, and I think that two of the three segments are actually inappropriate for the majority of investors.

Rating: 3.5 out of 5 stars

2 comments:

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