Craig Martin is a financial advisor/money manager. In this book written for the individual investor, Mr. Martin shares his investment philosophy and methodology, called asset-class investing.
The foundation of asset-class investing is the Nobel Prize winning research of Harry Markowitz and William Sharpe, called Modern Portfolio Theory. Using statistical analysis, Markowitz and Sharpe demonstrated that the majority (about 94%) of the returns from investments depend on asset class selection, not stock selection and market timing. If this is true, passive investors can get at least as good results as active investors. "Asset-class investing principles show us no one can consistently hope to beat the market." Passive investors buy and hold asset classes.
According to Markowitz and Sharpe, the investment markets tend to be efficient. The market compensates for the expected return of an individual stock by adjusting the stock price so the stock will tend to have a similar return as other stocks in its asset class.
Instead of selecting individual stocks, investors may get a similar return with less risk by buying an asset class investment, such as an Standard and Poors 500 index mutual fund. Some of the asset classes that Mr. Martin identifies are short, long and intermediated fixed-income (bonds) using index bond funds, small-cap stocks (Russell 2000 index), large-cap stocks (Standard and Poors 500 index), and international funds.
In addition to managing the return side of the equation, the investor should focus on managing risk. Risk can be managed by diversifying asset classes. Some asset classes tend to fluctuate in the opposite direction from others -- for example, when stock prices rise, bond prices tend to decline. By constructing a blended portfolio of different asset classes, the risk or volatility can be statistically estimated. There is a trade off between risk and return, but through this diversification strategy, risk can be significantly reduced while earning improved returns.
Mr. Martin also points out that studies have shown that investors significantly improve their returns by working with an investment advisor. The process Mr. Martin uses in working with clients consists of these steps: 1) Identify financial goals; 2) Determine risk tolerance and reward objectives; 3) Identify blend of asset classes to achieve goals; 4) Invest funds and monitor performance; 5) Optimize and re-balance as warranted.
Asset-class investing is a disciplined, consistent, long-term approach that is more suitable for planning and reaching financial goals than the speculative "picking and timing" approach. A speculator could alternatively go to a race track and bet on a horse instead of betting on a company's stock in the stock market.
If you are serious about investing, you really should study this book. It is very educational and readable. This book is no longer in print, but you can still get a copy from Craig Martin at firstname.lastname@example.org.
For our new reviews of business and self-improvement books, subscribe to our newsletter, Michael Gray, CPA's Tax & Business Insight!