| Bull's Eye Investing by John Mauldin
Review by Robert Blumen
I didn't expect to like this book quite as much as I did because from time to time I read Mauldin's weekly column, and his macro views are utterly mainstream and conventional, while I am an adherent of the Austrian School of Economics . From an Austrian perspective, he suffers from the usual fallacies about inflation, deflation, the importance of demand rather than savings in driving production, and others.
The book, subtitled Targeting Real Returns in a Smoke and Mirrors Market is a guide to achieving absolute, rather than relative returns in what Mauldin forecasts will be a secular bear market. Relative returns, meaning beating a benchmark such as the S&P 500 Index, are fine for fund managers who manage other peoples' money, but most investors would not be happy with losing ONLY 20% when the benchmark index that their manager uses was down by 25%. Mauldin defines real returns as doing better than you would in cash.
Mauldin spends the first third of the book building a case that stocks are still expensive, they cannot remain expensive forever, the standards of what is expensive have not undergone a fundamental change, and therefore the bear market will run until stocks get to be cheap. By historical standards, this would mean the entire market selling for a P/E of less than 10, and maybe less than that. He comes at the problem from several different angles, combining finance theory and financial history.
The strength and rigor of his analysis is outstanding. Along the way he takes aim at a number of the bullish arguments that defy history and logic in suggesting that stocks can achieve average, or even above-average returns from this point on out.
The strongest part of the book is his ability to take a series of studies that have appeared in academic finance journals and quasi-academic practitioner journals such as the CFA journal and summarize them in clear and simple terms. Here he give the individual investor access to the lastest research about financial markets that would be unavailable to most and difficult to interpret and apply without his thoughtful analysis.
Then he reviews some of the other clouds on the horizon: under-funded pension plans, unrealistic expectations about retirement and the over-valued US$. To more pessimistic people like myself, this all leads to the conclusion that we are headed for an utter financial and economic collapse of devastating proportions. But wild optimist that he is, Mauldin believes that we are in the "muddle-through economy", a period much like the 1970s in which things will be bad relative to the glow of the bubble years, but somehow we will all manage to get by.
A couple of chapters on behavioral finance summarize the work of Montier in this area. The last third of the book, which I did not read in its entirey, deals with Mauldin's strategies for finding value and safety in today's markets.
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