by Ben Stein, Phil DeMuth
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Product Description
Most investors spend their time worrying about selecting individual stocks and mutual funds: big mistake! Modern Portfolio Theory—developed in 1952 by economics Nobel Prize winner Harry Markowitz—shows that it’s more important to focus on how our securities interact as a whole. Astonishingly, most investors—including many professionals—still run their investment accounts the same way people did back when “How Much Is That Doggie In the Window” played on the Hit Parade. It’s time to apply what we’ve learned in financial economics over the past 50 years to bring your portfolio into the rock-’n-roll era.
Armed with a computer, you, the investor, can use sophisticated tools to analyze your holdings—tools that would have been the envy of the biggest money managers only a decade ago. First among these is the Monte Carlo simulator: the better mousetrap that investors have been waiting for.
With their trademark wit, Ben Stein and Phil DeMuth show you how your current portfolio is radically underdiversified, costing you money. They offer step-by-step instructions to supercharge it across a variety of investment situations to get you the best risk-adjusted returns.
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Average Customer Review:
2 of 2 people found the following review helpful:
Great book., 2008-09-10
This is a quick read, but deserves a couple of readings, anyway. I liked how they start with a core portfolio, supercharge it with funds or stocks, then use fixed income instruments to reduce the volatility. They even go farther and show how to create a stock only portfolio.
I've read a lot of Geoff Considine's articles on Seeking Alpha, and he addresses the problem of single company risk in portfolios. Geoff also mentions that you can use leveraged mutual funds or ETFs instead of individual funds to increase your portfolio return. I wish the book had addressed leveraged funds and/or ETFs.
0 of 1 people found the following review helpful:
Easy read, yet factual., 2008-06-26
We liked this book. Humor and economics combined with excellent suggestions for enhancing our existing portfolio. Authors provide cohesive focus, and lots of know-how of subject matter.
12 of 12 people found the following review helpful:
 A Deceptively Important Book for Your Portfolios, 2008-04-19
I will not review ground related to the book that has already been so ably covered here. Instead I want to relate my own experiences as to the improvement of portfolio composition that can be achieved both with this book and especially with the Quantext software they use throughout. Most people will likely arrive at the Quantext software by reading this book. I came at it from the opposite direction. Full disclosure; I have been investing since 1999 an have been an avid student of the markets, different approaches to the markets (including many variations of fundamental and technical analysis), and market history ever since. I have no affiliation or interest in Quantext other than the value I find in its use.
The star of this exploration is the Quantext software but "Yes, You Can Supercharge Your Portfolio!" brings the sophisticated concepts of risk/reward balancing into an easily understandable format with excellent examples as a point of departure. The only other Stein/DeMuth book I've read is "Yes, You Can Time The Market!," which I bought a couple of years ago and reread recently after appreciating the content of this recent book. They are different books entirely but both really useful in taking sophisticated market studies and making them easily accessible.
Now to the meat. The basic concept of modern portfolio theory (MPT) is that there is a relationship between the risks you take on and the reward you should expect for taking that risk, but that there is a way to optimize that risk/reward balance. Reward is measured by returns and risk is measured by standard deviation. The engine behind the benefits of MPT is proper diversification, but this is a subject that many investors really don't understand. Dividing your assets between domestic large caps, mid caps and small caps offers almost no diversification at all as these asset classes are highly correlated to each other; meaning that when one class goes down they all tend to go down, and vice-versa. A properly allocated portfolio should have a handful or two of non-correlated asset classes so that when some things are going down others are going up or staying stable. Other asset classes might include real estate, commodities, developed and emerging foreign markets, or riding different sectors. With the broad array of ETFs available these days finding diverse vehicles to invest in has never been easier. The point is to make your overall portfolio as limited in volatility as possible without giving up the potential for good returns. Intuitively the advantages of this don't make much sense to some people but a simple example should illuminate the concept.
Suppose you had the following performances over a four year period. Which would you prefer?
A) 10% 10% 10% 10%
B) 5% 32% -15% 18%
C) 18% -15% 32% 5%
D) 8% 13% 11% 8%
They all average 10% a year but because of the volatility of returns they compound differently. If you invested $10,000 this is what your money would've grown to after the 4 years (no expenses or contributions are assumed for ease of demonstration).
A) $14,641
B) $13,902
C) $13,902
D) $14,630
The least volatile portfolio, the one that achieved 10% every year, compounded the best. Obviously that's an unachievable level of consistency but the point is clearly demonstrated that the less volatile the portfolio the better for the overall returns.
Any time spent using the Quantext software leads you to the typical case for an investment vehicle being that you can expect the standard deviation to be twice the expected return. (There are a range around these results, of course, which leads to opportunities as well). If the return is 15% then the standard deviation is likely around 30%. This means that the portfolio is expected to achieve a return of 15% +/- 30%, or -15% to 45% in any given year. With proper diversification the ideal can be brought down on a portfolio level to a one to one relationship; i.e. a 15% return with a +/- 15% deviation, or 0% to 30% expectation. Yes, the top end of the potential returns comes down but the low expectation comes up equally to make a tighter and less damaging expectation of returns. That's the essence of a less volatile portfolio.
This is all well and good but there are a number of portfolio analysis tools that can help you analyze these factors. The difference with Quantext is a very important one though. While most tools look at historic returns and deviations and project those same numbers forward, Quantext takes the historic ranges and projects future probabilities using a "reversion to the mean" methodology. In other words, what has been achieving a return recently far above what markets typically have given over the long term can be expected to underperform in the future, and vice-versa. Also, what has had low volatility recently compared to the long term can be expected to show increasing volatility in the future, again vice-versa. The creator of the software claims that this methodology is almost twice as accurate as using the historical data projections, as most analyzers (and analysts!) do. My own experience is that it is indeed a better approach, although all users are cautioned to do their own due diligence. Intuitively for many investors this approach would make sense. Stocks that have been hot are likely overvalued and due to correct. Stocks that have underperformed recently are more likely to be undervalued and due eventually to have that value recognized.
This review is getting long so I'll make one last point. Quantext has one version of the software that lets you project out retirement scenarios using these portfolio projections. It uses Monet Carlo simulations to project a broad array of possible outcomes of future returns, based on the portfolio return/volatility expectations. The lower the volatility the more predictable those outcomes are and the less downside you're likely to suffer; making worst case scenarios a meaningful study that encourages creating a low volatility portfolio. Proper diversification is what lessens the volatility and that's what the Quantext software helps you do. Yes, You Can Supercharge Your Portfolio! makes it easy to understand how to use the software for such purposes by giving an easy to follow run down of the process.
4 of 4 people found the following review helpful:
Superchage Book and Software Breakthrough for the Individual Investor, 2008-03-17
Yes, You Can Supercharge Your Portfolio and the accompanying software are a significant contribution to the individual investor. Following in the lineage of their popular investment book series, Ben Stein and Phil DeMuth have again charted new territory by demonstrating the principles and concepts of portfolio theory through portfolio examples and the use of a special software. Portfolio theory shows that it is more important to focus on how our securities interact as a whole. By way of examples they show how the ordinary investor embarks on the path of investing. Unknowingly this path is very risky and subject to possible failure. The book progresses from risky investment strategies to less risky with high yielding results and portrays the development of "typical" and "optimal" strategies spanning the ordinary investor's lifetime. By example the book shows what to avoid and what to emulate and the reader is given a choice as which path they may wish to follow. The center piece of the book is the concept of the Core Portfolio which is "supercharged" by the addition of hand picked securities. Over a lifetime of investing such supercharging could by way of compounding make for significantly greater yields, possibly cutting off years of having to work or having to work much longer than anticipated prior to retirement for not following this simple but effective piece of advice. Also, an all stock portfolio is demonstrated for the more sophisticated, mature investor.
The Supercharge book is a start point in one's effort at understanding and investing using the principles and concepts of portfolio theory investing. The software, Quantext Portfolio Planner (QPP) which was developed by Geoff Considine of Quantext, Inc. (www.quantext.com) really puts the investor in the driver's seat creating a viable portfolio by contrasting and comparing portfolio alternatives. Once one has devoured the Supercharge book the reader will certainly want to give QPP a test run (30 day free download) and access the multitude of white papers Considine has written on the subject of portfolio theory investing and Monte Carlo forecasting which is available at his web site. Geoff Considine deserves the highest level of praise for creating QPP for the individual investor. Here-to-for only large investment houses have had access to the computing power of this type of software.
Who is this book for? The book and accompanying software is for any individual investor or investment advisor wishing to test out a portfolio before investing any money in the market. Additionally, the book and software are ideally suited for investor education courses such as an introductory college course, adult education (high school and community college) or in a high school investment literacy course.
3 of 3 people found the following review helpful:
Great Introduction into Portfolio Theory!, 2008-03-17
Ben Stein and Phil DeMuth have a great way of explaining investing to the layman. I own and have enjoyed all their previous books. This book is a great primer on portfolio theory and diversification -- the only "free lunch" in investing. They tell you exactly how to diversify your portfolio to get the return you require for the least volatility and risk. Volitility in particular should be on everyone's minds after the the first 3 months of 2008 when the Dow Jones Industrial average moves more than 200 points in a day consistently. There is a saying on Wall Street that you can either "eat well" or "sleep soundly at night". By diversifying and reducing volitility, you can do both.
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