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Book synopsis: “The Little Book of Alternative Investments:"

Posted: May 11, 2011 1:55 a.m.
Updated: May 11, 2011 1:55 a.m.
 

Title:  “The Little Book of Alternative Investments:
Reaping Rewards by Daring to be Different”

Authors: Ben Stein and Phil DeMuth

Synopsis:  The book discusses the 60/40 stock/bond portfolio has evolved by natural selection to be the default preference for many investors. Since 1976 it has offered about 93 percent of the returns of the entire stock market with only about 65 percent of the risk. That’s a pretty good trade-off. On the other hand, the vast majority of the risk comes from the stock side.

If you scratch the surface, most investors are terrified. The authors state in the book that “luck is a terrible strategy.” Investors know the pain of losing money, yet they have to do something with their savings, so they are led by the financial services industry to throw it at whatever has done well lately and then cross their fingers.

On investing in gold, the authors said that most assets are supported by underlying earning power. Gold is supported by other people’s fascination with gold.

 This is a circular argument. Gold is extremely difficult to value rationally, which means that its price is wildly susceptible to fanaticism and gold metaphysics. By definition, most people will get most interested precisely when the price is highest and the expected future returns are lowest.

Hedge funds are deemed to be the ultimate alternative investment because they set out to “hedge” or bet against whatever is the prevailing wisdom or trend. Their whole purpose is to go against whatever the general market feeling. Some hedge funds are really just managed investment pools, but their goal is to be contrary.

Quote:  “A great little book for investors who are trying to improve their asset allocation. Lots of meat and fun to read.” — Brenda Jubin, Ph.D., Seeking Alpha

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