Welcome!

Cognitive Computing Authors: Liz McMillan, Yeshim Deniz, Shelly Palmer, Elizabeth White, Rajeev Kozhikkattuthodi

Related Topics: Cognitive Computing , Java IoT, Microsoft Cloud, Agile Computing, CRM, CMS

Cognitive Computing : Article

A Geek's Bookshelf: An Investment Strategy for the Long Term

Book Review - Value Averaging: The Safe and Easy Strategy for Higher Investment Returns

Any book that says it can teach you to beat the market is junk and the vast majority of these books seem to. Basically, if you don’t know anything about investing/financial stuff, or, come to think of it, even if you think you do, get a good primer like Andrew Tobias’s book that I mention at the end of the review. Tobias is a great writer and, in addition to his writing skills, has a pleasantly healthy amount of cynicism about the process. (There are other similar books – even the dummy’s book is pretty good.) Read one (and one only) of these books and then follow the standard advice they will give: invest for the long term and diversify. I’ll add: and don’t ever listen to the talking heads on financial porn channels like CNBC or what you will see/read in any other media. All of these folks claim to have some insights into what the market is doing or will be doing. Trust me, if they really knew, they wouldn’t be telling you. They’d keep their advice to themselves and be even richer then James Simon, who has made upwards of $1,000,000,000 a year for the last few years running a hedge fund that doesn’t claim to know what is going to happen or why what happened, happened but rather they work by harvesting small discrepancies between investments that should correlate – often these momentary discrepancies are actually caused by people who think they do know what is going to happen!

Yet here I am reviewing a book that purports to give a twist on investing that you can use (admittedly under very limited circumstances) in order to beat the results of simply buying and holding! To add insult to injury, the idea is actually more than 20 years old and the reprint edition I am reviewing is essentially an unchanged reprint of a book published in 1993 – 15 years ago. So what gives?

Basically the traditional mantra of investing over the long haul is to say: “dollar cost average.” This method is very common to retirement investing and simply means putting in the same amount of money regularly. Thus buying more shares when things are going down and less when they are going up. It’s disciplined, simple to follow and thus ideal for explaining to people. Trouble is it actually doesn’t work all that well in practice and Edleson was one of the first people to notice this and think about systematic ways to improve on it. (The definitive analysis showing dollar cost averaging doesn’t work well can be found here, by the way: http://www.studyfinance.com/jfsd/pdffiles/v13n1/marshall.pdf. This is a truly excellent and very readable paper that you should read right after you read Edleson’s book.)

What was Edleson's key insight? Basically he combined the need to rebalance a portfolio with dollar cost averaging and came up with a systematic strategy that, according to all the tests given it that I know of, delivers better results than dollar cost averaging with less risk, i.e., the holy grail of long-term investing.

Traditionally rebalancing worked like this: you had say 50% in stocks and 40% in bonds and 10% in money market funds. The stock market goes up, you now have 60% in stocks and only 32% in bonds and 8% in money market funds. You sell some stocks to bring the portfolio back into balance by adding to the bond and money market position. This is a good idea, and you should do it.

Roughly speaking what Edleson did was throw a form of automatic and dynamic rebalancing into the dollar cost averaging plan; roughly speaking he says the following: let’s imagine we want our investment portfolio to increase by 6% a year, always taking into account the added investments we are making. We build a little spreadsheet showing what we should have each quarter and enter what we actually had based on market performance. For example, something like Table 1 for a $1,000 a month investment where you can see that the needed monthly investment is increased quarterly in order to keep the portfolio growing at the correct rate. Contra wise, if the market went up more than 1.5% in a given period, you would shrink the amount you invest in the next period – if it really went up you may have to put no money in at all!

While Edelson gives some data showing the efficacy of this method over dollar cost averaging, it is actually Marshall who shows in the paper I just cited that there have been no 20 quarter periods in recorded stock market history or even in Monte Carlo simulations of hypothetical stock market performance based on historical norms where Edleson’s value averaging  strategy would not outperform dollar cost averaging in terms of risk/reward. He concludes that Edelson’s simple improvement to dollar cost averaging can work wonders on your risk/reward ratio over the long term.

Ah, but of course there “ain’t such a thing as a free lunch”: if you have a long-term downtrend in the market the amounts you have to put in to do value averaging can get really scary – and may not be possible for you – at which point the strategy would break down. The downside to value averaging is that while not quite as bad as “doubling down” at a casino, in a horrible bear market, it has some definite resemblance to it!

Still, Edleson’s value averaging strategy is one you should seriously consider if you have inherited a lump sum and want to deploy it over time, or if you were lucky enough to be say one of the first 1,000 employees at Google and have cashed in.

What Edelson’s book won’t tell you is which asset classes to invest in nor what percentages to use for them. (Check out Bernstein’s very nice book mentioned above for this or his great Web site http://www.efficientfrontier.com/.)

In sum I was convinced that once you have made the asset class decision, value averaging does give you a strategy to do the investing that seems to beat the conventional wisdom handily. Edelson’s book deserves to be a classic of the investing literature alongside books like Graham’s. Amusingly enough, the name of the series it has been reprinted in is the “Wiley Investment Classics!”

Mentioned:
The Only Investment Guide You'll Ever Need by Andrew Tobias, Harvest Books; (January 3, 2005) ISBN: 0156029634

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William Bernstein, McGraw-Hill (September 22, 2000), ISBN:0071362363

More Stories By Gary Cornell

Gary Cornell has a PHD in mathematics from Brown University. At various times and among other things he has been a professor, a program director at the National Science Foundation, and a visiting scientist at IBM's Watson Labs. He has written or co-written numerous best-selling and award-winning computer books. Most recently he co-founded Apress (www.apress.com), which under his leadership became one of the largest publishers of books for IT professionals in the world. And he did all this while simultaneously having a truly serious case of the 'gentle madness,' AKA bibliomania.

Comments (0)

Share your thoughts on this story.

Add your comment
You must be signed in to add a comment. Sign-in | Register

In accordance with our Comment Policy, we encourage comments that are on topic, relevant and to-the-point. We will remove comments that include profanity, personal attacks, racial slurs, threats of violence, or other inappropriate material that violates our Terms and Conditions, and will block users who make repeated violations. We ask all readers to expect diversity of opinion and to treat one another with dignity and respect.


@ThingsExpo Stories
SYS-CON Events announced today that N3N will exhibit at SYS-CON's @ThingsExpo, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. N3N’s solutions increase the effectiveness of operations and control centers, increase the value of IoT investments, and facilitate real-time operational decision making. N3N enables operations teams with a four dimensional digital “big board” that consolidates real-time live video feeds alongside IoT sensor data a...
In a recent survey, Sumo Logic surveyed 1,500 customers who employ cloud services such as Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP). According to the survey, a quarter of the respondents have already deployed Docker containers and nearly as many (23 percent) are employing the AWS Lambda serverless computing framework. It’s clear: serverless is here to stay. The adoption does come with some needed changes, within both application development and operations. Tha...
SYS-CON Events announced today that Avere Systems, a leading provider of enterprise storage for the hybrid cloud, will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 - Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Avere delivers a more modern architectural approach to storage that doesn't require the overprovisioning of storage capacity to achieve performance, overspending on expensive storage media for inactive data or the overbui...
With major technology companies and startups seriously embracing Cloud strategies, now is the perfect time to attend 21st Cloud Expo October 31 - November 2, 2017, at the Santa Clara Convention Center, CA, and June 12-14, 2018, at the Javits Center in New York City, NY, and learn what is going on, contribute to the discussions, and ensure that your enterprise is on the right path to Digital Transformation.
SYS-CON Events announced today that mruby Forum will exhibit at the Japan External Trade Organization (JETRO) Pavilion at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. mruby is the lightweight implementation of the Ruby language. We introduce mruby and the mruby IoT framework that enhances development productivity. For more information, visit http://forum.mruby.org/.
Digital transformation is changing the face of business. The IDC predicts that enterprises will commit to a massive new scale of digital transformation, to stake out leadership positions in the "digital transformation economy." Accordingly, attendees at the upcoming Cloud Expo | @ThingsExpo at the Santa Clara Convention Center in Santa Clara, CA, Oct 31-Nov 2, will find fresh new content in a new track called Enterprise Cloud & Digital Transformation.
SYS-CON Events announced today that NetApp has been named “Bronze Sponsor” of SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. NetApp is the data authority for hybrid cloud. NetApp provides a full range of hybrid cloud data services that simplify management of applications and data across cloud and on-premises environments to accelerate digital transformation. Together with their partners, NetApp emp...
Smart cities have the potential to change our lives at so many levels for citizens: less pollution, reduced parking obstacles, better health, education and more energy savings. Real-time data streaming and the Internet of Things (IoT) possess the power to turn this vision into a reality. However, most organizations today are building their data infrastructure to focus solely on addressing immediate business needs vs. a platform capable of quickly adapting emerging technologies to address future ...
Amazon is pursuing new markets and disrupting industries at an incredible pace. Almost every industry seems to be in its crosshairs. Companies and industries that once thought they were safe are now worried about being “Amazoned.”. The new watch word should be “Be afraid. Be very afraid.” In his session 21st Cloud Expo, Chris Kocher, a co-founder of Grey Heron, will address questions such as: What new areas is Amazon disrupting? How are they doing this? Where are they likely to go? What are th...
Most technology leaders, contemporary and from the hardware era, are reshaping their businesses to do software. They hope to capture value from emerging technologies such as IoT, SDN, and AI. Ultimately, irrespective of the vertical, it is about deriving value from independent software applications participating in an ecosystem as one comprehensive solution. In his session at @ThingsExpo, Kausik Sridhar, founder and CTO of Pulzze Systems, will discuss how given the magnitude of today's applicati...
Join IBM November 1 at 21st Cloud Expo at the Santa Clara Convention Center in Santa Clara, CA, and learn how IBM Watson can bring cognitive services and AI to intelligent, unmanned systems. Cognitive analysis impacts today’s systems with unparalleled ability that were previously available only to manned, back-end operations. Thanks to cloud processing, IBM Watson can bring cognitive services and AI to intelligent, unmanned systems. Imagine a robot vacuum that becomes your personal assistant th...
SYS-CON Events announced today that SkyScale will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. SkyScale is a world-class provider of cloud-based, ultra-fast multi-GPU hardware platforms for lease to customers desiring the fastest performance available as a service anywhere in the world. SkyScale builds, configures, and manages dedicated systems strategically located in maximum-security...
SYS-CON Events announced today that Avere Systems, a leading provider of hybrid cloud enablement solutions, will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Avere Systems was created by file systems experts determined to reinvent storage by changing the way enterprises thought about and bought storage resources. With decades of experience behind the company’s founders, Avere got its ...
SYS-CON Events announced today that Taica will exhibit at the Japan External Trade Organization (JETRO) Pavilion at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. ANSeeN are the measurement electronics maker for X-ray and Gamma-ray and Neutron measurement equipment such as spectrometers, pulse shape analyzer, and CdTe-FPD. For more information, visit http://anseen.com/.
High-velocity engineering teams are applying not only continuous delivery processes, but also lessons in experimentation from established leaders like Amazon, Netflix, and Facebook. These companies have made experimentation a foundation for their release processes, allowing them to try out major feature releases and redesigns within smaller groups before making them broadly available. In his session at 21st Cloud Expo, Brian Lucas, Senior Staff Engineer at Optimizely, will discuss how by using...
In this strange new world where more and more power is drawn from business technology, companies are effectively straddling two paths on the road to innovation and transformation into digital enterprises. The first path is the heritage trail – with “legacy” technology forming the background. Here, extant technologies are transformed by core IT teams to provide more API-driven approaches. Legacy systems can restrict companies that are transitioning into digital enterprises. To truly become a lead...
SYS-CON Events announced today that Yuasa System will exhibit at the Japan External Trade Organization (JETRO) Pavilion at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Yuasa System is introducing a multi-purpose endurance testing system for flexible displays, OLED devices, flexible substrates, flat cables, and films in smartphones, wearables, automobiles, and healthcare.
SYS-CON Events announced today that CAST Software will exhibit at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 - Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. CAST was founded more than 25 years ago to make the invisible visible. Built around the idea that even the best analytics on the market still leave blind spots for technical teams looking to deliver better software and prevent outages, CAST provides the software intelligence that matter ...
SYS-CON Events announced today that Daiya Industry will exhibit at the Japanese Pavilion at SYS-CON's 21st International Cloud Expo®, which will take place on Oct 31 – Nov 2, 2017, at the Santa Clara Convention Center in Santa Clara, CA. Ruby Development Inc. builds new services in short period of time and provides a continuous support of those services based on Ruby on Rails. For more information, please visit https://github.com/RubyDevInc.
As businesses evolve, they need technology that is simple to help them succeed today and flexible enough to help them build for tomorrow. Chrome is fit for the workplace of the future — providing a secure, consistent user experience across a range of devices that can be used anywhere. In her session at 21st Cloud Expo, Vidya Nagarajan, a Senior Product Manager at Google, will take a look at various options as to how ChromeOS can be leveraged to interact with people on the devices, and formats th...