Rory Gillen's new book: 3 Steps to Investment Success
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LDFerguson
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I'm told I'm very difficult to buy Christmas and birthday presents for, so I've helpfully put Rory's book on my Christmas list. 
Marmalade,
I understand your point, but I urge you to keep an open mind, as I think you will find the book very interesting anyway as it does agree with you in relation to the overvaluing of shares in the late 20th century. Prices certainly got out of hand and the burst of the bubble has brought things down to a far more reasonable level. Whether that level represents real value yet is certainly open to debate. The last section of the book directly deals with P/E levels and how they should be viewed to decide if a share actually represents a value prospect.
I found the book to be insighful because it has been written after the collapse. Whereas alll the other books were from before. It therefore emphasises being far more wary of taking on too much risk, as we can see where that got the world in the last decade, and to look for value in your investments.
I understand your point, but I urge you to keep an open mind, as I think you will find the book very interesting anyway as it does agree with you in relation to the overvaluing of shares in the late 20th century. Prices certainly got out of hand and the burst of the bubble has brought things down to a far more reasonable level. Whether that level represents real value yet is certainly open to debate. The last section of the book directly deals with P/E levels and how they should be viewed to decide if a share actually represents a value prospect.
I found the book to be insighful because it has been written after the collapse. Whereas alll the other books were from before. It therefore emphasises being far more wary of taking on too much risk, as we can see where that got the world in the last decade, and to look for value in your investments.
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Duke of Marmalade
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I've read the book.
I promised you negatives and these I do indeed deliver below. However, to be fair, anyone reading the book should be able to garner an accurate flavour of just what are the limitations and possibilities of stockmarket investment. Lots of historical data to show that there are no certainties here. A reasonable indication is given of what constitutes the "long term" view. Chapter 9 is the most informative and Table 9.2 in particular is eye opening. At least two surprises here - bank deposits have over a long period beaten inflation by 1.8% - that seems good to me. Gold on the other hand has only beaten inflation by 1.3%. Gold worse over the long term than bank deposits!! Can't disagree with his endorsement of on-line investing in ETFs and his dismissal of on-line trading as a below zero sum game. His dismissal of commission based selling is also hard to argue with.
However, I do have many criticisms:
Dollar cost averaging is hailed for its "power". That has been covered on AAM before but let me restate that this is a mere arithmetic truism. It has no economic substance whatsoever. He illustrates this power with two historic examples covering the first two 5 year periods of this century. That is not proof and it brings me to my second criticism.
Far too much reliance on "backtesting". The oodles of historical data is informative and maybe even useful but the next two criticisms are also related to an overreliance on backtesting.
He has a system for beating the FTSE index. Essentially keep rolling over into the cheapest stocks. Apparently it backtests well. But the inclusion of this "system" IMHO goes against his otherwise healthy and oft stated scepticism that there is "no silver bullet".
The chapter on technical indicators I found particularly unconvincing in this regard. Some of these "systems" are so contorted that they can only have possibly been derived because they backtest well.
Disappointed that there appears to be no reference to tax. To me tax is perhaps the most important factor - except of course for pension investors. (I accept that he probably did not wish to parochialise his message for to cover the many tax regimes would have been unwieldy.) Take his "buy the FTSE cheapest stocks" system, this is also presumably the least tax efficient as it should be correlated to high dividend yields and high dividends are a disaster from a tax point of view.
Finally, I think his attack on Tracker Bonds is biased. He actually gets the metrics right. He says that these structures cost about 2% to 3% per annum. But Table 9.2 reveals that historically the cost of guarantees has been 3.3% (equities less deposits) so this looks like competitive charging for the guarantee. The bias pokes through rather nakedly when he states that his conclusion is that these products suit the seller not the investor! (sic) In fact the actual costs made by the seller are typically only 1% p.a. and your average broker shuns these products as they simply do not pay enough commission.
Overall summary: the correct messages and descriptions of what stockmarket investment really entails and the appropriate level of scepticism of the various conventional myths and the endorsement of online trading in ETFs should have earned an A+ but the criticisms above, including what seems like contradictions to this down to earth and straightforward message, are fairly serious shortcomings IMHO.
I promised you negatives and these I do indeed deliver below. However, to be fair, anyone reading the book should be able to garner an accurate flavour of just what are the limitations and possibilities of stockmarket investment. Lots of historical data to show that there are no certainties here. A reasonable indication is given of what constitutes the "long term" view. Chapter 9 is the most informative and Table 9.2 in particular is eye opening. At least two surprises here - bank deposits have over a long period beaten inflation by 1.8% - that seems good to me. Gold on the other hand has only beaten inflation by 1.3%. Gold worse over the long term than bank deposits!! Can't disagree with his endorsement of on-line investing in ETFs and his dismissal of on-line trading as a below zero sum game. His dismissal of commission based selling is also hard to argue with.
However, I do have many criticisms:
Dollar cost averaging is hailed for its "power". That has been covered on AAM before but let me restate that this is a mere arithmetic truism. It has no economic substance whatsoever. He illustrates this power with two historic examples covering the first two 5 year periods of this century. That is not proof and it brings me to my second criticism.
Far too much reliance on "backtesting". The oodles of historical data is informative and maybe even useful but the next two criticisms are also related to an overreliance on backtesting.
He has a system for beating the FTSE index. Essentially keep rolling over into the cheapest stocks. Apparently it backtests well. But the inclusion of this "system" IMHO goes against his otherwise healthy and oft stated scepticism that there is "no silver bullet".
The chapter on technical indicators I found particularly unconvincing in this regard. Some of these "systems" are so contorted that they can only have possibly been derived because they backtest well.
Disappointed that there appears to be no reference to tax. To me tax is perhaps the most important factor - except of course for pension investors. (I accept that he probably did not wish to parochialise his message for to cover the many tax regimes would have been unwieldy.) Take his "buy the FTSE cheapest stocks" system, this is also presumably the least tax efficient as it should be correlated to high dividend yields and high dividends are a disaster from a tax point of view.
Finally, I think his attack on Tracker Bonds is biased. He actually gets the metrics right. He says that these structures cost about 2% to 3% per annum. But Table 9.2 reveals that historically the cost of guarantees has been 3.3% (equities less deposits) so this looks like competitive charging for the guarantee. The bias pokes through rather nakedly when he states that his conclusion is that these products suit the seller not the investor! (sic) In fact the actual costs made by the seller are typically only 1% p.a. and your average broker shuns these products as they simply do not pay enough commission.
Overall summary: the correct messages and descriptions of what stockmarket investment really entails and the appropriate level of scepticism of the various conventional myths and the endorsement of online trading in ETFs should have earned an A+ but the criticisms above, including what seems like contradictions to this down to earth and straightforward message, are fairly serious shortcomings IMHO.
This is an excellent book, both for the novice and the more experienced investor. Mr Gillen’s three steps are to (a) let compounding work over time; (b) adopt a value based approach to investing; and (c) not to let market volatility interrupt your investment plan.
Mr Gillen then deals with investment theory; provides an analysis of different asset classes; and concludes with developing an investment strategy.
The only place I would disagree with Mr Gillen is on his treatment of commodities. While Mr Gillen correctly points out that commodity prices have failed to keep up with inflation over the past 50 years, this is not true of commodity futures. The authors of Yale working paper “Facts and Fantasies on Commodity Futures” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=560042 point out that commodity futures have historically the same return and Sharpe ratio as equities, but are negatively correlated with equity and bond returns. This diversification effect is one reason for investing in commodity futures. The second is that part of your return is from the roll-yield (i.e the gains and losses on rolling over contracts), which is is theoretically uncorrelated with stock market returns, and so is a source of alpha return. Also, there is no practical difficulty in investing in commodity futures; you can do it easily by ETFs, e.g. the Lyxor etfs that replicate the Jefferies CRB Total Return index.
For €19.95 (the price of 4 pints) this book is excellent value, well written, and I can recommend it thoroughly.
Mr Gillen then deals with investment theory; provides an analysis of different asset classes; and concludes with developing an investment strategy.
The only place I would disagree with Mr Gillen is on his treatment of commodities. While Mr Gillen correctly points out that commodity prices have failed to keep up with inflation over the past 50 years, this is not true of commodity futures. The authors of Yale working paper “Facts and Fantasies on Commodity Futures” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=560042 point out that commodity futures have historically the same return and Sharpe ratio as equities, but are negatively correlated with equity and bond returns. This diversification effect is one reason for investing in commodity futures. The second is that part of your return is from the roll-yield (i.e the gains and losses on rolling over contracts), which is is theoretically uncorrelated with stock market returns, and so is a source of alpha return. Also, there is no practical difficulty in investing in commodity futures; you can do it easily by ETFs, e.g. the Lyxor etfs that replicate the Jefferies CRB Total Return index.
For €19.95 (the price of 4 pints) this book is excellent value, well written, and I can recommend it thoroughly.
Monksfield
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The paper PMU refers to is well worth reading. Theoretically there should be a return embedded in the commodity futures contract - and for long periods there has been (positive roll yield). In recent years this has not been the case for many commodities. Some very large disparities have arisen between returns delivered via futures and movement in the spot price(s).
Still, the case for using commodities as part of a portfolio is strong.
I have not read Rory's book but I am generally in agreement with his investment approach.
Still, the case for using commodities as part of a portfolio is strong.
I have not read Rory's book but I am generally in agreement with his investment approach.
Agreed the Gorton and Rouwenhorst paper is about the best on the subject but it doesn't actually make many of the claims that some people infer from it.
Firstly, if I add up all the futures contracts in the world I get nothing. For every long there is a short. So, in just the same way that the market doesnt include bets on the all-Ireland it doesnt include commodities futures. You can think of these as bets. For you to win, I have to lose. Assets in zero net supply with costs is not investing - its speculating.
I'm also currently reading Rory's book and would echo Duke's criticism on the lack of tax coverage. It's actually not that difficult to deal with uk and Ireland taxation issues (I would have thought these are the main markets for the text) and their omission means that a novice reader of this book in either jurisdiction could easily lose their way very quickly or worse be hit with additional taxes to pay if they fail to file correctly.
Firstly, if I add up all the futures contracts in the world I get nothing. For every long there is a short. So, in just the same way that the market doesnt include bets on the all-Ireland it doesnt include commodities futures. You can think of these as bets. For you to win, I have to lose. Assets in zero net supply with costs is not investing - its speculating.
I'm also currently reading Rory's book and would echo Duke's criticism on the lack of tax coverage. It's actually not that difficult to deal with uk and Ireland taxation issues (I would have thought these are the main markets for the text) and their omission means that a novice reader of this book in either jurisdiction could easily lose their way very quickly or worse be hit with additional taxes to pay if they fail to file correctly.
M
mercman
Guest
I find this perception extraordinary especially when Investment professionals allude to it. A profit is a profit end of story. How one arrives at an eventual bottom line remains one's business. i.e. if a person decides not to declare their profit does it mean they made more money than somebody else that did declare it ?
In this country successive Governments carried on the Section 23/27 route to save peoples Tax, so much so that the sector used for regeneration has driven the country into a brick wall.
And as for the Tax amnesties ?? Sure this was the greatest game of charades ever. Pure madness. If an investor buys an investment at 1, then chooses to sell it at 1+. There's a profit. Now pay the taxes on the profit and move on to the next transaction. IMO.
M
mercman
Guest
Marc,
And the point I was trying to make is Rory Gillen is an accomplished equities adviser who has written a book on the topic. He seems to be blamed on the book lacking on Tax coverage. Tax is a separate matter that is handled in other different books and in reality by other professionals. The title of the book is 3 steps to Investment Success. It is not meant to cover Tax issues.
And the point I was trying to make is Rory Gillen is an accomplished equities adviser who has written a book on the topic. He seems to be blamed on the book lacking on Tax coverage. Tax is a separate matter that is handled in other different books and in reality by other professionals. The title of the book is 3 steps to Investment Success. It is not meant to cover Tax issues.
Duke of Marmalade
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Mercman,
I have three easy steps to investment success tax, tax and tax. Gillen recommends a strategy of investing in FTSE low P/E shares. That will mean high dividend yield. Dividends are taxed at over 50%. Post Office savings are tax free. Anyone holding high dividend shares is plain silly unless of course they do so through their pension fund.
I have three easy steps to investment success tax, tax and tax. Gillen recommends a strategy of investing in FTSE low P/E shares. That will mean high dividend yield. Dividends are taxed at over 50%. Post Office savings are tax free. Anyone holding high dividend shares is plain silly unless of course they do so through their pension fund.
If I could ignore practical investment realities such as taxes it would be easy to write a three step investment book.
1) Go to local shop
2) Purchase lottery ticket with the following numbers 1,5,14,18,26,41,42
3) Collect winnings and retire
In the shops in time for Christmas price €5.
1) Go to local shop
2) Purchase lottery ticket with the following numbers 1,5,14,18,26,41,42
3) Collect winnings and retire
In the shops in time for Christmas price €5.
Rory Gillen
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Why No Coverage of Tax Issues
I consciously left out tax implications for a number of reasons;
(i) I did not want the book to be seen as Irish-centric. Equally, I referred to the Irish Stock market on only one occasion for the same reason.
(ii) I was also addressing an institutional audience (fund managers etc) and tax issues are irrelevant to them.
I wish the book to be reviewed in the UK and maybe even in the US and by private and professional investors alike. As we all understands, there is a small catchment area in Ireland for such a book, especially at this depressed time. I have no idea how to get the book outside Ireland so any contributions or suggestions in that regard will be gratefully received.
In relation to the FTSE 100 value-based approaches I might make two points;
Rory Gillen
Founder, GillenMarkets
I consciously left out tax implications for a number of reasons;
(i) I did not want the book to be seen as Irish-centric. Equally, I referred to the Irish Stock market on only one occasion for the same reason.
(ii) I was also addressing an institutional audience (fund managers etc) and tax issues are irrelevant to them.
I wish the book to be reviewed in the UK and maybe even in the US and by private and professional investors alike. As we all understands, there is a small catchment area in Ireland for such a book, especially at this depressed time. I have no idea how to get the book outside Ireland so any contributions or suggestions in that regard will be gratefully received.
In relation to the FTSE 100 value-based approaches I might make two points;
- They can be followed in a pension account without tax eroding returns, and my recollection is that I mentioned the limitation due to taxes outside a pension account in the book.
- The returns highlighted in these approaches are not back-tested returns. They were tracked in real time using data that existed at the time i.e. I selected the stocks myself at the time, not in hindsight. And yes, I started that in 1995. There are plenty of articles in previous Irish newspapers from 1999 onwards where I outlined the approach.
Rory Gillen
Founder, GillenMarkets
Mizen Head
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I am a subscriber to Rory's site and have been since he started. I am very happy with my investing results.
However, I will try Marc's 3 step formula this weekend. I will send on the €5 to him on Monday.
Could I please ask other Askaboutmoney members not to do these numbers this weekend as I want to be a single winner. You can use the numbers next week, in turn.
Marc hasn't said but I guess they will work on Wed as well as Sat draw?
However, I will try Marc's 3 step formula this weekend. I will send on the €5 to him on Monday.
Could I please ask other Askaboutmoney members not to do these numbers this weekend as I want to be a single winner. You can use the numbers next week, in turn.
Marc hasn't said but I guess they will work on Wed as well as Sat draw?
RichInSpirit
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2 Words "Spread betting " no tax.
Duke of Marmalade
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I was unaware of that background and I accept that you didn't seek out the strategy with the benefit of hindsight.
Nonetheless, as a subscriber to the "you can't buck the market" thesis, I find it hard to believe in any systematic method for outperforming. The fact that it has worked for you in the past even if with foresight does not prove the system for the future, in short you were lucky (for example you would defo miss the dot com with this strategy). That's unless you can give some economic or behavioural justification as to why the strategy did work and should work in future.
As a side point, and I didn't check this out, if one picks the 15 lowest P/Es will there not be a tendency to be concentrated in low rated sectors and therefore lack considerable diversification.
Finally, not sure of the book's potential in the US market. Those guys like to get rich quick.
Rory Gillen
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Imagine that God tells me that the strategy Rory is setting out has an expected premium of 4%pa above cash with absolute 100% certainty. However Rory thinks that it is 6%pa.
How long will it take Rory to find out with 95% confidence that it is more likely 4%pa rather than 6%.
The answer to this question is 400 years.
18 years of observations in market terms is really just " noise" and we can't really draw any reliable statistical inferences.
If I want to set out to show that I expect shares to beat cash I need about 60 years of data so maybe in 40 years time we might be able to show that there is something in this but we probably can't say it now.
How long will it take Rory to find out with 95% confidence that it is more likely 4%pa rather than 6%.
The answer to this question is 400 years.
18 years of observations in market terms is really just " noise" and we can't really draw any reliable statistical inferences.
If I want to set out to show that I expect shares to beat cash I need about 60 years of data so maybe in 40 years time we might be able to show that there is something in this but we probably can't say it now.
Rory Gillen
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David Dreman, the well-known US fund manager, has 27 years of additional data, and not overlapping. That's 45 years of data showing the same simple theme. That a concentration on value within the overall market, if well diversified, can, over time, improve returns.
45 years of data is not bad. Of course there are no certainities and 200 years would be better, and the book clearly outlines that there are no guaranties with the approach. Indeed, it is only one chapter in the book and the book provides other solutions for investing and controlling risk.
However, doggedly holding to your view of an efficient market hypothesis, which has been debunked so many times that any self-respecting disciple of EMH would have abandoned it long ago, serves for no useful debate.
You'll probably now throw your risk/reward bible at me now arguing that the higher returns just reflect having taken higher risk. But even using your own measure of risk (volatility), these approaches have much lower 'volatility' than the market. So not only do they deliver higher returns but they do so with lower volatility (risk).
Of course, volatility is not risk so this last line of reasoning is pointless anyhow.
This is my last comment on this issue. I'd say most readers are bored senseless by now!
45 years of data is not bad. Of course there are no certainities and 200 years would be better, and the book clearly outlines that there are no guaranties with the approach. Indeed, it is only one chapter in the book and the book provides other solutions for investing and controlling risk.
However, doggedly holding to your view of an efficient market hypothesis, which has been debunked so many times that any self-respecting disciple of EMH would have abandoned it long ago, serves for no useful debate.
You'll probably now throw your risk/reward bible at me now arguing that the higher returns just reflect having taken higher risk. But even using your own measure of risk (volatility), these approaches have much lower 'volatility' than the market. So not only do they deliver higher returns but they do so with lower volatility (risk).
Of course, volatility is not risk so this last line of reasoning is pointless anyhow.
This is my last comment on this issue. I'd say most readers are bored senseless by now!
Rory,
I happen to prefer French wine to Spanish but equally that has nothing at all to do with my point either.
I made the same point recently and you took the same tack. Perhaps we can stick to the issues....
This is a simple question of statistics. We want to know if there is true alpha in any strategy once we adjust for risk. By which I don't mean standard deviation from the mean incidently, as that would not pick up the value premium, but rather excess return as measured by growth stocks minus value stocks.
As I pointed out before ( http://www.askaboutmoney.com/showthread.php?p=1228515#post1228515) the UK value premium since 1955 has been about 3% above the FTSE. This is available to all investors essentially for free from following a diversifed value strategy. So, what i want to know is how much alpha does your strategy generate above this benchmark?
I happen to prefer French wine to Spanish but equally that has nothing at all to do with my point either.
I made the same point recently and you took the same tack. Perhaps we can stick to the issues....
This is a simple question of statistics. We want to know if there is true alpha in any strategy once we adjust for risk. By which I don't mean standard deviation from the mean incidently, as that would not pick up the value premium, but rather excess return as measured by growth stocks minus value stocks.
As I pointed out before ( http://www.askaboutmoney.com/showthread.php?p=1228515#post1228515) the UK value premium since 1955 has been about 3% above the FTSE. This is available to all investors essentially for free from following a diversifed value strategy. So, what i want to know is how much alpha does your strategy generate above this benchmark?