Book Reviews, Value Investing

Win By Not Losing: Book Review

Just follow my methods and you will make money. Yes, it is another one of *those* books.  Most of them are not worth your money.  This one might be worth it, but let me give you my misgivings.

The book warms up slowly, because it spends most of its early time destroying other ideas, without introducing their main ideas.  For example, it spends time destroying:

  • Gains in the market come slowly and steadily.  Correct, that’s wrong.  As my readers should know, market returns are lumpy. [Note to readers at Amazon, there are links at my blog that explain these concepts in greater detail.]
  • Modern Portfolio Theory.  Again, no argument here, it is not a good explanation as to how the market works.
  • Volatility isn’t risk; risk is the potential to lose.  Again right.
  • Diversification among risky assets does not provide much risk reduction.  Again right.
  • Most mutual funds miss out on the ability to limit risk, because they forbid market timing.  Here I differ.  Aside from funds that aim to time the markets, the asset allocation decision is not in the hands of the managers, but the shareholders, who must them selves decide how much stocks to hold.

This leads to their main hypothesis, that people have been duped into buy & hold investing, when they could make a lot more money if they only invested when conditions are favorable.

There are two problems with this: 1) how can you tell when times are favorable or not?  I use the credit cycle, and estimates of what various asset classes are likely to return if they were private businesses, but not everyone can follow that.  They give their simplified version, which is a moving average crossover method.  Buy when stocks are above the moving average.  Sell when they are below.  Simple, huh?

Yes, simple, and that brings up problem 2.  If a lot of people began managing money in a way like this, the market would become more volatile.  At moving average crossovers, people would rush to buy and sell as groups.  Some would shorten their moving average formula to get a jump on others.  Any risk control method, if used by many will cease to work well.

Other Difficulties

  • Though it is not a major aspect of their book, and it comes toward the end, part of the goal of the book is to interest people in purchasing their newsletter and/or money management services.
  • At times, buy and hold investing is the optimal way to go for an era.  Also, not holding assets for a long time limits the ability to limit taxes, and compound really large gains.  My mother and my father-in-law, amateur investors both, limited their taxes on their investing largely through buying and holding quality stocks over decades.  (The authors do advise that their strategy is best done in a tax-deferred account.)
  • At one point the book insists that the Capital Asset Pricing Model [CAPM] implies that the equity risk premium is constant.  Sorry, but that’s not true.  Many financial planners act as if it is true.  What is true is that it is challenging to estimate the varying equity risk premium.  Value investors have their own way of doing it, but it boils down to: “I’m not seeing many attractive opportunities to deploy capital.”
  • On page 116, they make too much out of how households have too much money in cash as a fraction of their assets near market bottoms.  The amount of cash may vary some — in general at market bottoms, institutions hold relatively more stock, but the main reason for the increased percentage invested in cash is simply the fall in prices for risky assets.  Aside from IPOs, mergers for cash, acquisitions for cash, money doesn’t enter & exit the market.  Market prices reflect the willing of marginal buyers and sellers to trade cash for stock, and vice-versa.  In aggregate, nothing changes except the price.
  • They criticize the Facebook IPO as one where sellers knew things would get worse, and so they sold, delivering losses to buyers.  But Facebook stock is considerably higher now than the IPO price.  Those that took the losses from the IPO didn’t wait long enough.
  • Page 150 — it took a longer time after 1980 before 401(k)s began replacing Defined Benefit pensions plans in any major way.  Congress passed several pieces of legislation in the late 80s which made sponsoring a DB plan less attractive; that’s when the changes started in earnest.
  • Page 171 — there were many in the insurance industry that remembered being burned on Collateralized Debt Obligations [CDOs] 1998-2002.  It was a common insight that CDOs were weak assets, and underpriced among insurers.  A new class of buyers got skinned in 2008, particularly banks and hedge funds.
  • Page 180 — there were many firms that anticipated the fall in subprime lending.  I worked for one of them.  I wrote an article about it for in late 2006.  It took a lot of courage to take action on the “Big Short,” and not many did.
  • The book dabbles on many topics, showing a superficial understanding of many ideas/events in order to show they one should not buy & hold.  The book plods for 80%+ of its pages developing what fails, and spends less than 20% of its time giving what one ought to do.  Their strategy takes up ~40 pages of a ~240 page book.

All that said, is the strategy a reasonable one?  Probably yes, but not if a lot of people adopt it.  Advanced amateur investors could implement the ideas of the book easily, those with less experience would need help to do it, and the authors offer that help, much of it free, and more for a fee.


Already expressed.  I’ll stick with value investing; I’d rather have a lumpy 15% than a smooth 12%.  This book could have been better if it focused on its positive strategy, fleshed it out more, so that average amateurs would have had a clearer direction on what to do.

Who would benefit from this book: If you don’t have an investing strategy and you want one, this book may benefit you.  I have read far worse strategies in many books.  If you want to, you can buy it here: Win By Not Losing: A Disciplined Approach to Building and Protecting Your Wealth in the Stock Market by Managing Your Risk.

Full disclosure: The publisher sent me the book after asking me if I wanted it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

By David Merkel, CFA of Aleph Blog