How to beat the street

May 4, 2012: 6:57 AM ET

Can ordinary investors really make money through good times and bad? A review of The Indomitable Investor, by Steven Sears.

By Scott Cendrowski, writer-reporter

FORTUNE -- Let's say you've never read a book on investing. You avoided Peter Lynch's advice on how to get one up on Wall Street, dodged all the Internet get-rich-quick schemes, brushed off your in-laws' efforts to get you to read Suze Orman, and finally steered clear of the various "crisis investing" titles that have appeared in the past few years.

If you've held off all these years, why buy an investing book today? For starters, stock markets obliterated billions of dollars of your money. Then they skyrocketed while many people -- probably including you -- sat on the sidelines. But there's also the inconvenient fact that most Americans are now on the hook for managing their own retirement assets in some form or another -- either in a 401(k) or IRA. You may have even already admitted it to yourself: It's time for you become a better investor.

Steven Sears' The Indomitable Investor offers an enticing premise. The author, a Barron's editor, promises to explain how investors can avoid Wall Street's countless pitfalls and build wealth in good times and bad. Sears begins with an awesome truth that would make every investor 10 times richer if they only knew it. "Bad investors think of ways to make money," Sears writes. "Good investors think of ways to not lose money."

Think of it in practice. Warren Buffett, the most successful investor of the last 100 years, didn't get rich executing trades each day from behind a Bloomberg terminal in Omaha. Instead, he became one of the world's richest men by buying low-priced stocks that gave him a margin of error if things went wrong. Buffett didn't blow up during disappointing years, either, which means his wealth compounded year after year after year. Buffett often jokes about the importance of compounding. His first rule of investing? Don't lose money. The second rule? Don't forget rule No. 1.

Unfortunately, Sears squanders this brilliant starting point. After the first chapter, The Indomitable Investor grows a tangle of conflicting advice and dubious tips that emphasize typical Wall Street ideas for stock trading, which are exactly what civilian investors should avoid. He offers advice from former Bear Stearns Chairman Ace Greenberg, who always sells losing stocks -- no excuses.

Should you always get rid of fallen stocks? Of course not. Stocks of good companies dip for all sorts of reasons on their way to long-term gains. Plus, Main Street investors can't afford the trading costs of churning through stocks like Wall Street traders.

Sears then argues that successful investors must follow economic cycles and indices such as the VIX fear index to understand when to hop in and out of market sectors and individual stocks. It's worth noting, however, that the VIX and ISM economic reports are some of the most widely followed reports in the investing world. Yet tracking them didn't save anyone in 2008.

Sears often sounds like a day trader in this book. That makes sense given that his day job is covering the options market for Barron's. It's not that he can't provide wise insights, but his advice seems distorted from covering market gyrations on a second-by-second basis.

The truth is that successful investing is among life's harder pursuits. Great investors often possess traits unlike yours and mine, and they act in ways that often contradict basic human behavior. Take Buffet again. There was a time in the early 1990s when he publicly supported Wells Fargo (WFC) stock because the bank's shares were cheap enough to protect against further losses and offered enormous upside. But everyone else was focused on the bank's terrible real estate loans.

A trio of well-regarded short selling brothers went around wearing "Buffett Busters" T-shirts and shouting that Wells Fargo was going down. (We know who came out on top.) What's the takeaway? Many of the best investors don't worry about trying to time economic cycles like everyone else. Instead they chart their own course.

It may seem hopeless, but people with day jobs can invest successfully. And it doesn't require playing the game by Wall Street rules. You only need to know a few "secrets." First, cost is the only aspect of the investing process that you'll ever be able to control. Nowadays, many Wall Street analysts tell us that U.S. corporate earnings will continue to flourish, that U.S. stocks can be expected to rise by 9% a year on average, and on and on. These predictions may pan out over the next decade, and then again they may not. Who knows? But if your mutual fund charges 1.50% in expenses, the one thing you can bank on every year is losing 1.50% of your money.

Second, you shouldn't buy stocks when they're expensive, nor sell when they're cheap. How do you know which condition applies today? The most reliable indicator is Yale professor Robert Shiller's long-term gauge of stock levels that he tracks on an Excel file and publishes on a Yale website for all the world to see. According to Shiller's spreadsheet, the average historical cyclically-adjusted P/E multiple for U.S. stocks is 16. Today they trade at 22. Wall Street will always tell you to buy. Shiller espouses a better method.

Third, invest in the broad stock market or find someone who will do it for you, preferably someone who favors value stocks instead of high-flying but unpredictable growth companies. Simply, the only time you should gamble on individual stocks is to have fun. Tens of thousands of very smart, very ambitious stock pickers crowd into the market every day. Do you really know more than they do?

That's about all the investing secrets there are. One book that incorporates most of this wisdom but has so far received little press is Daniel Peris' The Strategic Dividend Investor. Written for the lay investor, the preface begins, "If you like to trade stocks, read no further." (This should be music to your ears.) Peris espouses an easy-to-understand dividend philosophy -- he demands to be paid cash to hold onto stocks -- that preaches patience, low costs, and strong long-term returns. If you're only going to read one book about investing, try this one.

Compared to Peris, Sears often seems myopic. He says timing is everything in stocks, and he's right. (You should never buy stocks regardless of valuations -- remember 2000?) But Sears prescribes a difficult-to-follow -- and potentially dangerous -- method to deal with that truth: a Goldman Sachs-endorsed approach to play market cycles. The strategy favors cyclical stocks like energy and materials when the economy is growing and retreats to defensive sectors like healthcare and utilities when the economy is shrinking.

If you think you can time market cycles better than Wall Street, well ... maybe you should get a job on Wall Street. It's telling that Goldman Sachs (GS) provides the research that supports these prescriptions, given that Goldman runs a very successful brokerage business selling stocks.

If you want to become a better investor, you can't possibly try to play the same game as Wall Street. Start with the easy stuff -- picking low-cost funds, buying stocks when Shiller's long-term P/E line is low, not betting on too many individual stocks. And remember what Buffett often says: Successful investing is simple, but not easy to do. The same might be said for writing a book on the topic.

Our Weekly Read column features Fortune staffers' and contributors' takes on recently published books about the business world and beyond. We've invited the entire Fortune family -- from our writers and editors to our photo editors and designers -- to weigh in on books of their choosing based on their individual tastes or curiosities.

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