Business and investing conditions change. So should your portfolio.
~ Charles Roblut
A shamefully large number of months ago an author contacted me through Seeking Alpha to ask if I would review his new book on investing. I happily agreed as I knew of – and had great respect for – his work. I never received the book, so I assumed he had changed his mind.
A few months later, I received another email through Seeking Alpha asking whether I had had a chance to read the book. I replied that I hadn’t received it and the author again asked his publisher to send out a copy. I received it within a few days and let the author know I would add it to my growing list of books to read and review.
Weeks turned into months and I never got around to reading the book. Then we decided to turn our life upside down with a move to another city. And now … well, let’s just say this isn’t the only book someone is waiting for me to review.
Better Late Than Never?
If you are the author or publisher of one of those books, let me apologize to you as I do now to Charles Rotblut, author of Better Good Than Lucky: How Savvy Investors Create Fortune with the Risk-Reward Ratio. On that note, I should probably call this review “Better Late Than Never.” I hope to clear my book review backlog by the end of the year.
If you’re not familiar with Charles Rotblut, he is a vice president with the American Association of Individual Investors, editor of the AAII Journal and author of the weekly AAII Investor Update newsletter. (Like many others, I follow the AAII bull/bear sentiment as an indicator of excessive optimism or pessimism in the market.) Charles is a Chartered Financial Analyst and his work is readily available throughout the mainstream media.
Better Good Than Lucky is divided into four parts, which I’ll outline briefly for you here:
Part I: The Investment Community and Your Portfolio
Part I starts with the premise that it’s important to be careful who you listen to when it comes to investing. It begins with a thorough vetting of the myriad of investment information sources available today, and moves onto a discussion of Modern Portfolio Theory and the Efficient Market Hypothesis, with an appropriate amount of caution on all of these issues.
The author also wades into the active vs. passive investing debate, offering a balanced view of the pros and cons of each, and suggesting in the end that a little of both is a pretty good approach for many investors.
Next comes a discussion of “Psychology, Social Investing, and Sentiment.” This was one of my favourite parts of the book as Mr. Rotblut offers a few specific strategies investors can use to shift the risk-reward balance in their favour:
- #1 Rule of Investing: only do what allows you to sleep at night.
- Keep an investing journal.
- Use price limits.
- The 10-20 Rule: what to do if your position falls by 10%, then 20%
- Sell half on a double.
- Use trailing stops.
- Monitor earnings estimates.
- Watch valuations.
- Watch for market-moving news.
Obviously, the list above is just a sampling. Charles explains how and why to use each of these in the book, as well as the role technical analysis can play in your portfolio.
Part II: Corporate Analysis
The second part of the book does an excellent job of explaining how the individual investor can analyze and evaluate corporate business models, balance sheets, income statements, and cash flow statements. If you’re new to investing and markets, this is a great primer. Personally, I only have a very basic understanding of these things at a conceptual level, so it’s nice to have these details at my fingertips for reference.
Part III: Valuation
What is the true value of a company or index at any given moment in time? This is the question that any valuation metric attempts to answer. Value is not always clear in the present, so we are left with various mathematical tools to help us with our estimates.
Part III of Better Good Than Lucky explains several of the most common valuation metrics from price to earning and price to book ratios to discounted cash flow methodologies, CAPM, and beta. Suffice it to say that there’s more than one way to value a stock.
Part IV: Creating Your Own Luck
Long time readers know I don’t put much stock in fate or luck. Like Charles, I think we can create our own luck. Part IV takes readers through a series of steps to get started on a good investment portfolio, leaving luck on the sidelines.
This part of the books reviews reasons you may or may not want to employ the help of a financial advisor and offers a Risk Reward Scorecard for investors to use. The back of the book also contains a handy glossary of investment terminology for your reference.
Better Good Than Lucky is a great resource for beginning investors and as well as those with a little more experience. With the amount of information tucked between its covers, it’s hard to believe this book comes in under 200 pages. If you’re looking for a multi-faceted approach to investing, you might want to take a look at this book.
Your thoughts are, as always, welcome!