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Book Review: Market Sense and Nonsense by Jack D. Schwager

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Author and investment manager Jack D. Schwager shares his vast knowledge of investing in Market Sense and Nonsense: How the Markets Really Work [and How They Don’t]. Schwager has published at least eleven investment books, and he’s done investment research for over 22 years with major financial companies. His education pedigree includes a BA and MA in Economics. He knows investing.

This book appeals to multiple audiences. Professional investors will want to read Market Sense and Nonsense. Economics students will use it as a textbook. Amateur investors will struggle with it, but they’ll find it is worth the struggle. At the end of each chapter, Schwager includes gray boxes containing the chapter highlights to assist readers who may have become lost in the technical details.

Schwager makes his points by using recent real life examples. In “Chapter 2: The Deficient Market Hypothesis,” he uses the mortgage crisis of 2008 to explain why markets don’t always act efficiently. He tells the reader what really caused the housing bubble to self-destruct when banks repackaged mortgages to be sold as bonds, and the failure of rating agencies to correctly evaluate the risk.

Speaking of risk in “Chapter 4: The Mismeasurement of Risk,” he teaches the reader how to calculate the risk of an investment. The reader gets a better understanding of risk than the explanation provided by television analysts. It’s a difficult chapter to read so you’ll want to read it a couple of times to get every detail. Schwager explains volatility, Beta and risk. He demonstrates why using past performance is not a good basis for making an investment decision.

Keep in mind, Schwager is a hedge fund guru as well as a technical analyst. In part two of Market Sense and Nonsense he gives an in depth description of hedge funds and their risks. After reading chapters 10 through 16, the reader will have a new understanding and respect for hedge funds.

In “Part Three: Portfolio Matters,” Schwager explains diversification and building a portfolio. Earlier he wrote about risk for an individual investment. In this section he talks about calculating and lowering risk for a full portfolio. He shows that since a hedge fund invests in more than stocks and bonds, it has a greater opportunity to provide diversification than a mutual fund.

Schwager advocates making hedge fund investing more available to the public. The accepted dogma considers hedge funds an extremely high risk thus they are only available to extremely wealthy investors. Some funds require a minimum of one million dollars to join. Schwager states, in the 2008 downturn, mutual funds lost more of their value than hedge funds. Therefore, he argues, hedge funds are less risky than mutual funds, and provide a greater opportunity for growth.

In chapter 16 Schwager purposes the use of managed hedge funds, a supermarket of individual hedge funds. The investor gets to choose which investments to put in their shopping cart. This would make hedge funds more available to the small investor.

Some of these currently exist, but they are more expensive. The investor pays a hedge fund fee in addition to the management fee. It’s an interesting concept worth evaluating because as many people with retirement funds have found, mutual funds aren’t cheap or safe.

Market Sense and Nonsense ends with an epilogue and two appendices. The epilogue lists the 32 investment observations highlighted in the gray boxes throughout the book. Appendix A gives an introductory description of options trading, and Appendix B provides several formulas for risk-adjusted return measures.

Market Sense and Nonsense is a difficult read, but worth the effort to those who want to understand and improve their investing. If you get bogged down, skip ahead to the gray boxes, and then go back to the text as time allows. He challenges many of the norms that are heard on television. Schwager provides some thought provoking observations, and as stated earlier, he knows investing.

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About Bruce G. Smith

I'm a part time writer with a few articles published here and there. In addition to writing, I'm into nature and architectural photography.