Monday, 8 October 2007

Book Review: Juggling Dynamite by Danielle Park

Let us begin with a quote from the Preface: ''This book is not a financial planning book or a finance text.'' It is rather a polemic, a book that puts forth controversial opinions, much of which I agree with and one of which is dangerous to investors. To use the analogy in the title of Ms. Park's book, if investments are dynamite, then she advocates becoming good at knowing when to hold onto the dynamite and when to run and hide, i.e. she is an ardent advocate of market timing.

As an industry insider with experience working for an investment dealer and now running her own company managing the portfolios of private investors, she is in a good position to warn about mistakes often made by the investing public and dangers of the investing industry, things like:
  • ''the key to lasting financial success is constant, conservative, diligent discipline and self-restraint''
  • a primary objective must be not to lose one's capital
  • be wary of media hype on hot companies and stocks
  • avoid debt and be very cautious about leverage
  • avoid putting much, most of your money into one investment - diversify
  • avoid mutual funds that charge high fees and use low cost index ETFs instead
Park puts forth the assertion in the book that the reality of economic cycles and of market bubbles and of purported long- term economic cycles and of secular trends means that an investor should vary the amount invested in equities and cash accordingly to preserve capital and make higher returns. This is contrary to mainstream financial theory, which maintains that markets are generally efficient and reflect available information, including public data on economic activity and cycles. Park herself admits the controversy of her assertion:
''There seems to be vehemence on the part of many mainstream financial commentators to refute the notion that anyone can use market timing to the investor's great benefit. I have tried to understand why this might be the and confess I have no clear explanation.''

Unfortunately, the bulk of finance research indicates no benefit to market timing from the various systems and trading rules proposed. Park does not back up her assertion with evidence, nor does she reveal the rules she would propose to use so that the possibility she does have a system capable of beating the market could be examined. Failure to do so voids the promise on the back cover, namely that: ''This book will equip you with the tools to make your portfolio grow using active investing and market timing.''

To be more than fair (why didn't she quote this kind of stuff?), there is some research that indicates some people or some systems can successfully time the market. One is called trend following, which exploits the documented tendency of market returns to persist or to have momentum for several years. The paper by Mebane T Faber titled A Quantitative Approach to Tactical Asset Allocation, available here at the Social Science Research Network describes the ability of the rule to buy/sell equities using the 10-month simple moving average to reduce portfolio risk (aka volatility) while maintaining the same returns as buy and hold. Or, the paper The Market Timing Ability of UK Equity Mutual Funds by Cuthbertson, Nitzsche and O'Sullivan also available at SSRN, describes how a small number of fund managers demonstrate market timing ability. I didn't find any papers that use economic cycle indicators as Park proposes but maybe there is some system that can apply them successfully. The point is that the burden of proof lies on Park in addressing the reader.

Two critical problems arise, however, for the individual investor in trying to apply market timing. First, is the constant effort to track the market for the buy/sell signal and then carry out the trading required. Second is the difficulty revealed by the Cuthbertson study - a much larger number of the professional equity fund managers (10-20% vs the 1.5% who did well) did worse and subtracted value by their market timing efforts. In short, the average individual investor is almost surely best off with the passive index investing of a balanced portfolio that is occasionally re-balanced.

For what it's worth, on page 41 Park makes the bold prediction that 2000 marked the start of a 20 year bear market for equities. She recommends on page 46 holding various forms of cash, plus commodities, gold, metals and minerals but to do this with ''a timing strategy employed with discipline.''

The writing itself is uneven, sometimes ungrammatical, often inadequately labelled, documented and footnoted. The book suffers from awkward diction and phrasing that makes it seem like a first or second draft, not a polished final product. This undermines the credibility of her message.

Once again, thank you to Mike at the publisher Insomniac Press, for providing me with a complimentary copy of the book to review.

You can buy the book at

Overall, there is a fair bit to like in this book, but the impractical advice to use market timing mars its usefulness for the DIY-investor. My rating: 3 out of 5 stars.

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