Friday, February 20, 2009

Featured Book Look: Dear Mr. Buffett by Janet Tavakoli

"Only when the tide goes out do you discover who's been swimming naked," Warren Buffett once observed. Janet Tavakoli's book Dear Mr. Buffett is less about the Oracle From Omaha than the various naked swimmers in the recent financial markets. The essence of her argument is that the recent financial turmoil is not the result of unpredictable black swan events; rather, it is the consequence of out and out malfeasance on the part of those who take risk and those who are charged with regulating it.

"At its core," Tavakoli observes, "the mortgage crisis is no more sophisticated than a schoolyard swindle, and the SEC is the principal." She effectively contrasts the imprudent use of leverage across investment banks, government sponsored enterprises, and hedge funds with the value investing philosophy of Warren Buffet, driving home the point that much of our recent economic activity has been destructive of wealth. "Price is what you pay," Buffett explained, "Value is what you get." Our recent financial system, Tavakoli asserts, has paid high prices for little value.

Her book is an excellent, readable overview and explanation of what's gone wrong and also a warning about what may be to come. She explains:

"As long as Wall Street enhances revenues with leverage to prop up kingly bonuses, as long as there are few personal consequences for CEOs (and board members and other top executives) for shoddy risk management, as long as CEOs are allowed to walk away with millions, nothing will change. The fact that shareholders are wiped out is no deterrent, and moral hazard will live on (p. 206)."

Indeed, Tavakoli maintains, we have compounded such moral hazard by putting billions of taxpayer dollars at risk in bailouts without clear, effective accountability.

To be sure, even value investing undergoes painful drawdowns during bear markets. It is only after those downdrafts that portfolios reveal the value purchased for the price. Buffett has advised that people only buy things that they'd be happy to own if markets closed down for ten years. That may well be good advice for those looking to be well positioned in the next decade; if so, the bear market will have fulfilled its function and returned wealth to its rightful owners.

I will be periodically reviewing interesting blog sites and trading-related books as part of a new feature to this blog. All reviews are initiated by me and uncompensated. If readers have suggestions of sites and books worthy of review, by all means email me at the address listed in the "About Me" section of the blog page.
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8 comments:

MACDOW said...

While on the subject of great books. I am currently reading THE SNOWBALL

"Its the much anticipated book recounting with intimate detail the life experience and life-wisdom of the man known as "The Oracle of Omaha": Warren Buffett."

Have a look at this link http://www.randomhouse.com/bantamdell/snowball/

Its one of the very best books I have read lately. Once you start you wont want to put it down.

Val said...

Brett,
Thank you for your efforts to make your blog insightful for variety of readers! Even though I am primarily interested in trading, posts such as this contibute to my overall education in investment and life. Greetings from Germany, Val

Jorge said...

Dr. Steenbarger,

Just as a suggestion, it would be great if you could put the book reviews together somewhere (or use the tags feature in blogger).

That I remember, I think you've already reviewed:
- Way of the Turtle (Curtis Faith)
- Complete Turtle Trader (Michael Covel)
- The Only Three Questions that count (Ken Fisher)
- The Nature of Trends (Ray Barros)
- Markets in Profile, Mind over Markets (James Dalton)
- Technical Analysis Using Multiple Timeframes (Brian Shannon)
- The Essentials of Trading (John Forman)
- Inside the House of Money (Steven Drobny)
- Psychology of Trading (not yours, the SFO one)

Thank you again for all the effort you put into your blog.

Best trading,

Jorge

Adam said...

Brett ~

I'd very much like to see a "TraderFeed Bookshelf."

Perhaps your readers could submit suggestions with concise comments that you would filter and list as a sort of curriculum or "essential reading for the informed trader."

Of course, you'd be able to develop a wonderful list without outside interference.

Adam.

GS751 said...

Sweet I look forward to it....

Get In Get Out said...

Here is a great link to some of the best books in the industry www.timothysykes.com/library

Brett Steenbarger, Ph.D. said...

Thanks, all, for the great suggestions and thanks, Jorge, for the recap of prior reviews and suggestion to archive/tag those--

Brett

GarC said...

I have just finished reading the Tavakoli book and she is an accomplished writer/analyst/commentator. However I find the milking of her "friendship" with Mr. Buffet to be a bit nauseating. She must have included every piece of advice he gave her and every compliment given is quoted verbatim. I think his opinion of her gives her validation which is actually her being unfair on herself as she is remarkable in her own right.