The Gnome's 10 Most Valuable Financial Reads: Honorable Mentions

Before I start on the top 10 Most Valuable Financial Reads, here are the honorable mentions, divided by category:

Fundamental Investing:

  • Philip Fisher, Common Stocks and Uncommon Profits: why sell a quality business? This book is the most cogent defense of buying great companies and hanging on as long as they stay that way.
  • Joel Greenblatt, You Can Be a Stock Market Genius: A silly title, but the content is sound. Don't believe that there could be a book explaining bankruptcy investing to a middle-schooler? Well, here you go.
  • Robert Hagstrom, The Warren Buffett Way: The best place to start learning about Buffett. New readers should be aware, though, that the Buffett bag of tricks is quite a bit deeper than this book lets on.
  • John Neff, Neff on Investing: A very humble and matter-of-fact introduction to what Neff calls his "low P/E shooter" investing style. It blends biography and investing strategy seamlessly, showing the stomach it took to stick to his guns, particularly in the rough-and-tumble 1970s.


  • Nicholas Darvas, How I Made $2,000,000 in the Stock Market: The title is ridiculous, Darvas's risk management leaves much to be desired, and some have questioned if any of this ever really happened. But this is still probably the best introduction to how stock prices work. Plus, you can read it on a Saturday afternoon.
  • Edwards and Magee, Technical Analysis of Stock Trends: The Bible of technical analysis. The sections explaining the logic behind support and resistance work are unmatched, anticipating by more than half a century much of what modern behavioral finance is only starting to discover about how people think about and act toward their stocks.
  • William O'Neil, How To Make Money in Stocks: Great investment book or cross-promotion machine for Investor's Business Daily? Well, a little of both. Clearly O'Neil hit on something with his CANSLIM strategy. The problem for the serious investor is that it's difficult to integrate the CANSLIM method with other approaches (let me know if you've done this successfully). The problem for the serious reader is the incessant IBD trolling.
  • John Train, The Money Masters: A group biography of highly successful investors, this is one of the best ways to gain quick exposure to a variety of fundamentally based investing styles. The chapter on Robert Wilson's harrowing Resorts International short is classic.


  • Jim Rogers, Investment Biker: Primarily a travelogue, the parts of this book on macro investing are among the most useful material any investor can read, and aren't really duplicated anywhere else. Really understanding Rogers's approach to global investing is one of the most valuable investments you can make with your time. Now if he would just write a book that focused purely on his investment style. Are you listening, Jim?
  • Victor Sperandeo, Trader Vic: Methods of a Wall Street Master: This eclectic read provides a great introduction to Austrian economics suitable for investors, very helpful definitions of a trend and a trend break, and deals with the emotional side of trading to boot.
  • Nassim Taleb, Fooled By Randomness: An excellent discussion on how randomness, by definition, cannot be controlled for, and how we frequently ascribe to skill much that is in fact produced by variance.

Next installment: Most Valuable Financial Read #10.


Links of Fury


Napoleon on Investing

A quote that applies well to finance, courtesy of Napoleon Bonaparte, of all people:

"The whole art of war consists in a well-reasoned and extremely circumspect defensive, followed by rapid and audacious attack."

Replace "war" with "investing" or "trading" and you have a pretty succinct blueprint for doing well.

The point, of course, is to obsess over covering your tail. . . but to strike quickly and decisively when the situation warrants it. I could think of worse advice to follow.


How Deep Is Your Value?

Here's a deep value screen I run from time to time. It's been lighting up recently, for whatever reason--many more results than normal.

It uses the following criteria:

Current P/E less than 10, Forward P/E less than current P/E, Debt/Equity Ratio less than 1, Quick (Acid Test) ratio greater than 1.

This is not a screen for quality by any stretch (although I'll run some of those later on). The idea is to find very inexpensive companies that are not crushed by debt and are liquid enough to stay afloat long enough for that value to be recognized.

If you're interested in getting quality as well, you'll want to screen for return on equity or invested capital. But you're going to have to make some substantial concessions on price.

These are not exactly Ben Graham's net-nets (which would sell at a 33% discount to net current assets), but it's roughly the same idea. These are "cigar butts," as Buffett would put it, generally good for one puff.

(Scroll way down) . . .

Deep Value Screen
SymbolCompany NameCurrent P/EForward P/EQuick Ratio
IMMRImmersion Corp3.603.509.50
ASPVAspreva Pharmaceuticals Corp5.704.8010.10
HSOAHome Solutions Of America Inc6.005.002.70
AVCIAvici Systems Inc6.203.003.80
MTEXMannatech, Inc6.805.101.10
VLOValero Energy Ord Shs7.207.201.00
TXTernium SA7.307.001.10
GNAGerdau AmeriSteel Corp7.807.101.80
CPXComplete Production Services Inc8.508.002.50
BRLCSyntax-Brillian Corp8.706.102.00
SIMGrupo Simec ADR8.906.802.80
ZINCHorsehead Holding Ord Shs8.907.901.50
ESVENSCO International Inc9.208.102.60
MTLMechel ADR Rep 3 Ord Shs9.207.901.40
VIRCVirco Manufacturing Corp9.208.601.20
KGKing Pharmaceuticals Inc9.406.503.20
LMCLundin Mining Ord Shs9.408.302.90
ZEUSOlympic Steel Inc9.809.701.30

Bear with me on the screwy formatting. If any of you are HTML-inclined and have some thoughts on good ways to present tables, drop me a line at gnomeofzurich1@gmail.com.

Next, I'll give these a closer look and we can see if anything decent turns up.



This week's rate cut does make me wonder what's going to keep the dollar from continuing its decline.

Maybe I'm inadvertently calling a bottom here, but I wonder how much longer it is logical to keep hanging on to the dollar. Is it time to say "uncle"?

My answer has been to hedge pretty thoroughly. I've generally diversified my currency positions out of the dollar, although I retain significant exposure to the dollar through stocks.

The dollar could certainly bounce from here, but a rally would be pretty easy to catch.

I'm all about capital preservation right now until we prove that we can hold above 1500.

The good news for people who like to think about nominal returns is that if the current currency declines against hard and financial assets accelerate, we will definitely see new equity highs. The bad news, of course, is that this will be a paper gain, without meaning in purchasing power terms.


Another Massive Trading Range?

The current S&P 1-year chart doesn't look terrific, and the ugly July decline appears to have come out of almost nowhere to test the March lows.


Backing up chronologically gives us a little more perspective, though. Look at how significant the 1500 level is: the selling kicked off as soon as we crossed it.


Clearly we're at a major pivot point. Holding above 1500 would be very bullish. Failing and dropping down again would be equally bearish.

A final chart to provide some historical background:

This is the Dow Jones Industrials in the great bear market of the 1970s (then the most watched index). The Dow had an extremely rough relationship with 1000. It first tested it before this chart begins in the late 60s, then retested it several times before eventually breaking it decisively in 1982.

(Dow Jones)

If the current rally breaks down, does it suggest that we may have just made the second peak of a massive long-term trading range?


Surveying the cut's dollar damage

Because the dollar has been declining against a basket of currencies and of assets recently, whenever there's a rally I like to check the returns of dollar-competitive assets and currencies. I use this to see if the gains are just reflections of a dollar slide, or whether they are outpacing the dollar's decline.

Here's a chart of the nearly 3% S&P return for today (The Nasdaq & DJIA were slightly lower), compared to the return in USD terms of the Swiss
Franc (FXF), the Euro (FXE), and the Gold ETF. Since these are ETFs, the returns are not precisely the same as the underlying assets, but you get the idea.

As you can see, these dollar-competitive currencies and currency alternatives (gold) benefited in dollar terms today, though not nearly enough to compensate for the blowout day in the major averages.

My very unscientific conclusion if that if you were long today, you made money even controlling for the accompanying dollar sell-off.

Whether the returns will continue to be positive in currency-adjusted terms is anybody guess.


Fire or Ice?

Fire and Ice
by Robert Frost

Some say the world will end in fire
Some say in ice.
From what I've tasted of desire
I hold with those who favor fire.
But if I had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.

I doubt Robert Frost was thinking of the inflation/deflation debate when he wrote this, but he might as well have been.

Will the out-of-control money supply expansion of the last six years result in a credit contraction and ultimately something as bad as a deflationary depression, as Robert Prechter argues? (Ice) That seems to be the fear shared by the world's central bankers, who have collectively shoveled more than $300 billion of liquidity into the system in the wake of the subprime collapse.

Or will Ben Bernanke get into his helicopter to stave this deflation off, madly throwing out bushels of dollars and hyperinflating us all back to Weimar Germany? (Fire)

Neither, of course, would be great. And to paraphrase Frost, for destruction, either would suffice.

I am no permabear, and I am not a gold bug (although I am holding gold currently). But it strikes me as somewhat far-fetched that a US Federal Reserve that has said that the problem with Japan in the 1990s was lack of monetary stimulus can somehow be expected to sit idly by while the US money supply contracts.

Fire, or out-of control inflation, gets my vote as the more likely outcome.

Additionally, I am convinced by the Austrian permabear argument that the bull markets in virtually every asset in the world over the last five years does not indicate a miraculous period of everything getting more valuable, but rather suggests that all global assets are appreciating against all currencies, but especially the US dollar.

Further, global money supply has been increasing at double-digit annualized rates. The US is a relatively mild offender by world standards, rising at "only" 12%.

Still, even though the dollar might be better than other currencies, I frankly don't think it's safe to hold dollars any longer. I've moved into gold on the recent breakout, but if this gold rally fails, I will probably have my hands full of Swiss Francs (FXF).

Every dog gets his day, and the Gold Is Money gang's day is probably going to continue for the foreseeable future. Might as well be along for the ride . . .


There's plenty to talk about, so let's dive on in . . .

Money's Jason Zweig finds some new investment insights in recent advances in behavioral finance. Among other things, he describes how, for us homo sapiens sapiens, the anticipation of a reward is much greater than the satisfaction of actually getting the reward.

So we run stocks up to ridiculous levels when something good is over the horizon, and we sell them off when that good thing actually happens.

Apparently, this whole mechanism works in reverse, too, as fears of something bad or dangerous excite more anxiety than the actual arrival of the dreaded event.

Could this be why war scares tend to be such a great time to buy?