Review: The Big Secret for the Small Investor

As I became more knowledgeable on the basics of investing, especially index fund investing, I thought I would pick up a book that had a different approach to broaden my perspective.  Although I tend to dismiss books that advertise having a “secret” that changes everything and will put you ahead of the game, the author if this one had written some well received books in the past, so I thought I would give it a shot.

The book begins by explaining the inferior performance of the major index funds (as expressed in my previous post) and then discusses how we can make changes in our strategy to gain better returns.  The author takes the approach that we should buy things that have greater intrinsic value than what we are paying for them, which occurs because of the emotions of investors.  This is actually the basis of value investing.  However, to do this we must be able to discern the value of a stock, and he makes it very clear that it is extremely difficult to do even for professionals.  The authors’ “big secret” is to invest in something called a value-weighted index, which takes advantage of the fact that emotions often over/under-estimate the value of a stock, and picks companies that are expected to under-perform in the future.  When the stock values bounce back to reflect their actual value, the index wins.

I almost feel like I should have a spoiler tag on this post, because this book reads much like fiction in that the whole book is leading you to the final “secret”, which is only talked about for maybe 20 pages.  Although it somewhat seemed like the rest of the book was filler, it provided good information about the difficulties in valuing stocks, the drawbacks of capitalization-weighted stocks, and the other index options out there.  The tone was very informal, which was good in a way because it was easy to read, but also a tad disappointing in terms of being a challenge; the book is filled with anecdotes that help relate the lessons the author learned in his life to investing, but again this feels like wasted space that could have been used for more rigorous material.

Pros:

• A good introduction to value-investing.  The information leading up to the final secret helps you understand why this approach is difficult, and some easier ways to go about it
• A short read.  At under 150 pages with big text, the lack of rigor can be excused by how fast you can learn the the main points of the book and move on
• The informal tone makes it very easy to read, which is refreshing after reading textbooks all day

Cons:

• It is only an introduction to value investing, there is a lot more to be learned from more definitive sources
• The informal tone gets annoying when I am ready to learn a lot of material but am presented with stories and something resembling a conversation instead

Conclusion:

All in all, every con for this book could be seen as a pro, depending on your perspective.  If you want an introductory book to value investing that isn’t intimidating, it is the book for you.  If you want a more thorough guide than you might want to skip it and look for something else.  For me, the quick read was definitely worth it if only just to broaden my horizons about what strategies are out there and the benefits they have over what I am doing.  Especially for my project, perspective is always a good thing.