Bull's Eye Investing
Targeting Real Returns in a Smoke & Mirrors Market
by John Mauldin

reviewed by Ian Bullock

As one of those loyal million fans of John Mauldin's weekly newsletter (Thoughts from the Frontline at www.2000wave.com), I looked forward to the long promised publication of this, his latest book. How he managed to do it while having an office overlooking The Ballpark in Arlington, home of the Texas Rangers - as well as produce the weekly newsletter, let alone all the other business and social things that he does - is a mystery. Clearly, John is a man of much varied talent as evidenced by his work, family- and life interests.

In his introduction, Mauldin metaphorically writes that the first half of the book is about how to fish, and in the second half he tells us where to fish. We are cautioned to avoid the temptation to skip to the last part and look for the 'quick investment fix' because "If you don't understand what is happening in the economy and world markets, you will not have confidence in your investment strategy and you'll end up chasing the latest hot investment, which is a prescription for pain in any type of market."

Quoting again from his introduction, "Good markets are followed by bad markets, which are again followed by good markets. They are as predictable as winter and summer. …You can prepare for winter just as you prepare for summer. As investors, you can be successful if you understand the economic and investment seasons we are in and plan your investments accordingly."

Mauldin takes a look at what history has to teach us about the potential for stock market returns over the rest of this decade. This time it is not different. We are helped to look at investments in the context of what the economy is doing, and therefore where it is likely to be going. His analyses, and the information he has gathered from a wide variety of sources, tell us we are in a secular bear market - and he shows us where the opportunities for successful stock market investing lie under these conditions. What is different this time is that the rules for investing have changed: what worked during the 1980s and 1990s won't work over the coming decade. An investment return relative to the market may have been satisfactory back then, but in today's market we have to focus on absolute returns, and that is the essence of Bull's Eye Investing.

After setting the stage by taking an overview look at history, several different ways of looking at the stock market are examined, then there is an intriguing look at controlling risk, before getting into the advantages and disadvantages of specific types of investments. Mauldin identifies what he sees as the opportunities open to the small investor in this current type of market and where to look for these opportunities.

Some chapters have been co-authored with other respected authorities with the added advantage of drawing on the knowledge and expertise these specialists have in their particular fields of investment management and financial analysis. As an example, the chapter on history's guide to realistic expectations that was co-authored with Ed Easterling of Crestmont Holdings contains a remarkable matrix blandly titled Individual Investor (Taxpayer) Nominal Returns that encapsulates a mind-boggling array of information about market and economic performance over the last century. This chart is an education all by itself.

John Mauldin describes the current economic environment as the Muddle Through Economy, and has said so for some considerable time now. In his words, "…I do not mean some continual below-trend state of growth. I mean that we must still do the difficult work of rebalancing the economic scales that were decidedly tilted in the last boom. I believe that until we have adjusted these imbalances, we will be fighting an uphill battle for growth. This difficult process will likely take the rest of this decade." During this period he foresees below average growth interspersed by intervals of high growth; however, a piece of the rebalancing consists of price/earnings ratios regressing to the mean - they will come down. Then (brave man!) he goes on to state how he thinks this economic scenario will play out and what the individual investor can do to survive and prosper.

The author is strong on developing an investment psychology and offers a number of rules to help guide us to better investment decisions. There are also real life examples of screens and criteria used by successful researchers that we can use to develop our own disciplines to avoid mistakes in the stock selection process. The chapter entitled The Value in Stocks, is really useful for the individual investor because it gets into stock selection criteria, as well as some basic rules that answer investors' questions, such as, "How do you find good dividend-paying stocks? The Bull's Eye Investing process is the same as for value stocks. You screen for the stocks with the basic characteristics that you want, and then you do your homework." And he cautions against using the stock market for trading and speculating, charitably commenting that some are quite good at it - but not many.

Mauldin is a recognized authority on hedge funds and last year testified at a congressional hearing on hedge funds. Hedge Funds 101 is yet another of the many outstanding chapters in the book, and gives the reader an excellent overview of the variety in hedge funds as well as the goal of each. He sees them as important investment vehicles for achieving absolute returns in the Muddle Through Economy, in contrast to the relative returns from the likes of mutual funds. Except that hedge fund investment is restricted to high-net-worth individuals, and institutions; a situation that the author finds unfair and discriminatory against the other 95% of the population that doesn't have a million dollars. This could all change if Mauldin's proposal to the congressional hearing finds its way into legislation. For the entire testimony go to www.accreditedinvestor.ws.

A book about investing would not be complete without covering topics such as commodities, gold, real estate, and even starting up your own business. These and more are covered by the author, frequently interspersed with his own down-to-earth insights - and cautions. Much emphasis is given to proper due diligence when confronted with any investment decision and he decribes in thorough detail what has to be done in the process of due diligence.

True to form, in the final chapters of the book John Mauldin cuts through the gloom and doom, sees the good and creative things that are happening, takes an optimistic look at the future - and shows readers how to position themselves to be winners in the present period of upheaval and change.

There follow four appendices that give suggested reading material; bond information; hedge fund industry resources; and, hedge fund net worth requirements.

No surprise that Bull's Eye Investing is moving up on the New York Times Business Best Sellers List.

I.B.
July 7, 2004

Bull's Eye Investing by John Mauldin Bull's Eye Investing
Targeting Real Returns in a Smoke & Mirrors Market

by John Mauldin
John Wiley & Sons, Inc., Hoboken, NJ
2004


Ian Bullock is an author, reviewer, co-editor of The CEO Refresher, investor & shareholder champion, former CFO and consultant, residing in Toronto, Canada. Contact Ian by e-mail at Refresher Publications.

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