This is my new go to book recommendation when people ask me what the first book about investing they should read is. For one, it is only about 150 pages and it’s a light 150 pages at that so you can get through it in an afternoon. Second, it gets one very, very important thing right that nearly every investing book gets wrong: it tells you that you won’t get rich investing. This is not a popular thing for an investing book to do and so few of them do it, but I think it is from this misconception that many of the mistakes new investors make stem. Browne, correctly in my view, points out that: "Think about your own occupation, for example. Could someone without your training, your skills, your experience, and your talent outperform you at your job? Of course not.
And yet too-good-to-be-true advertisem*nts invite you— an amateur with no particular education, training, or experience in speculation—to compete, in your spare time, with professionals who have devoted their entire careers to investing, and who continue to eat, breathe, and sleep investing every day."
Most people that make money investing are either professional investors or they are investing in something that they deeply understand.
If someone told me that they had built and sold two skincare brands and were making an investment into a new skincare company, I would sure listen up. It’s totally believable to me that they have some “edge” based on your extensive experience.
If they told me that you were going to start trading options on tech stocks, I would not pay you the slightest bit of attention.
Reality has a surprising amount of detail and smart people get themselves in trouble thinking that being knowledgeable in one area necessarily means they are knowledgeable in everything else (*cough* doctors and lawyers *cough*).
So the first thing Browne gets very right is to focus on making money in your career, the thing which you have spent years working on and where you understand all the little details.
The second thing he gets right is that he starts from a macro framework instead of getting lost in the weeds.
Most investing books are, ultimately, stock-picking books. Now there is nothing wrong with stock picking books, but it’s a very limited toolkit. The U.S. stock market over the past century has been the best performing in the world and still there are three ten-year periods in the U.S. where stocks were flat or down as an asset class.
Browne instead starts by looking at all possible macro economic environments. They fit into four general categories:
"1. Prosperity: A period during which living standards are rising, the economy is growing, business is thriving, interest rates usually are falling, and unemployment is declining.
2. Inflation: A period when consumer prices generally are rising. They might be rising moderately (an inflation rate of 6% or so), rapidly (10% to 20% or so, as in the late 1970s), or at a runaway rate (25% or more).
3. Tight money or recession: A period during which the growth of the supply of money in circulation slows down. This leaves people with less cash than they expected to have, and usually leads to a recession—a period of poor economic conditions.
4. Deflation: The opposite of inflation. Consumer prices decline and the purchasing power value of money grows. In the past, deflation has sometimes triggered a depression—a prolonged period of very bad economic conditions, as in the 1930s"
Browne then identifies which asset classes perform well in each environment:
"Stocks take advantage of prosperity. They tend to do poorly during periods of inflation, deflation, and tight money, but over time those periods don't undo the gains that stocks achieve during periods of prosperity.
Bonds also take advantage of prosperity. In addition, they profit when interest rates collapse during a deflation. You should expect bonds to do poorly during times of inflation and tight money.
Gold not only does well during times of intense inflation, it does very well. In the 1970s, gold rose twenty times over as the inflation rate soared to its peak of 15% in 1980. Gold generally does poorly during times of prosperity, tight money, and deflation.
Cash is most profitable during a period of tight money. Not only is it a liquid asset that can give you purchasing power when your income and investments might be ailing, but the rise in interest rates increases the return on your dollars. Cash also becomes more valuable during a deflation as prices fall. Cash is essentially neutral during a time of prosperity, and it is a loser during times of inflation."
This came to be known as the Permanent Portfolio and is an approach that has produced stock like returns with bond-like risks since the early 1970s.
There are some quibbles I might have with a few of Browne’s details, but he gets the big things right.
