by Charles Sizemore | June 28, 2013 11:17 am
Editor’s note: We’re pleased to be rolling out a summer series on investing books. Each week we’ll be reviewing two books — one classic, one a bit newer. Our editors and contributors will offer their perspective on some popular titles. We hope you find some inspiration.
In the forward to Intermarket Analysis and Investing, originally published in 1990 and republished in 2013, Michael E.S. Gayed writes:
“Recognizing that the stock market is a difficult game to play and admitting that investing in securities is an art, we can only preface this book by saying, ‘Good luck.’”
Outside of politics, few areas of life are in greater need of fresh thinking than the investment profession. Like students of political ideologies or religious cults, investors often fall into dogmatic camps.
There are chartists, who view stock patterns as if they are prophetic views of the future. There are value investors who view the utterances of Warren Buffett and Benjamin Graham like divine revelations. Then there are trend-followers … and contrarians who actively bet against the prevailing trend.
You get the point: There is a dedicated core of followers for virtually any investing style you can imagine (and plenty that you can’t). But the problem with rigid schools of thought is that what works in one market does not necessarily work in another.
This is the basis of Gayed’s book. Rather than lean too heavily on one particular method, with all of its inherent flaws, Gayed attempted to meld the various schools of thought into a unified process. He wasn’t the first analyst to do so, and he certainly wasn’t the last.
But his attempt is one of the most comprehensive I’ve seen — and it was made over 20 years ago.
Investment books tend to have a somewhat finite shelf life. Stories and anecdotes can look dated with the passing of time. But as with Graham and Dodd’s Security Analysis, first published during the pits of the Great Depression, there is value in studying historical anecdotes and in reading a contemporary account of the times.
History tends to get “scrubbed” with the passing of time, which makes learning its lessons more abstract and difficult. Gayed’s book fits a particular time period — the late 1980s and very early 1990s — and that makes it an effective time capsule of the era immediately preceding the Internet Revolution.
One of the aspects I most respect about Gayed’s work is that he is intellectually honest. Investing isn’t easy, and no “how-to” book is a guarantee of success. You will make mistakes along the way, but those mistakes make you a better investor if you make analyzing them part of your process.
And this is really the key word: process. All 484 pages of the book can essentially be boiled down to one critical point: you must have a rigorous investment process in place. The process can take different forms, but a regular assessment of the results should be a key part of it.
Process brings order from the chaos and prevents your investment decisions from being “a random walk of trial and error.” And if it is failing to deliver results, “perhaps the whole process should be examined to uncover where things went wrong.”
Well said, Mr. Gayed.
Gayed addresses the strengths and weaknesses of each of the major schools of investing thought. For example, of fundamental analysis he writes that it is “more reliable than any other approach … tangible and logical.” But also acknowledging its shortcomings, he notes that “fundamentals tend to lag behind the price action. The discounting mechanism of the market often senses evolving financial problems before the company actually discloses them.”
Similarly, Gayed writes that quantitative market timing approaches are “most helpful in allowing investors to buy or sell a security at the most opportune price.” But they can also let you “get carried away in a frenzy of speculation and overtrading, eventually becoming a gambler.”
And remember, Gayed wrote this in the days before discounted internet trading and algorithmic bots!
Gayed saves some of his best insights for last in the section on intermarket relationships. The capital markets are a complex organism. He writes, “Market links are interrelated, and they tend to feed on each other … The commodities market, for example, influences the trend of interest rates, which affect the bond market. This, in turn, impacts securities prices.”
In this era of central bank intervention, it’s important to remember not to view each segment of the market in isolation. Intermarket analysis is complicated — and messy — and you won’t always put the pieces together. But it should be part of the thought process that goes into your asset allocation.
I recommend you pick up a copy of Intermarket Analysis. Gayed’s magnum opus is an exhaustive collection of investment insights that he has done a remarkable job of funneling into a cohesive framework for analysis.
The sheer scope of material covered would put most MBA programs to shame.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.
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