One of my favorite perks to being a moderately successful personal finance blogger is that occasionally, I get the opportunity to review books or other products (alright, mainly books) related to personal finance and share my opinion on them with you, my readers. It’s always a pleasure to be able to read something, particularly something I might not otherwise have even considered reading.
Such is the case with Conquering the Divide. It’s a book on using financial indicators to help you time the stock market. Being pretty much a dyed in the wool buy and hold investor (both because that strategy comes highly recommended by sources I trust, and because, well, I don’t have that much time to read about companies’ finances), I was a bit skeptical about the premise. Would my skepticism be borne out, or would I find gems of wisdom in the words contained within? Let’s find out!
Conquering the Divide is broken up into four parts. The first of these parts, covering the first three chapters, attempts to explain the authors’ purpose for the book. Chapter one looks at the importance of developing a plan before you begin investing, comparing the process to the political campaigns of Bill Clinton and George W. Bush, and how their respective advisers approached the process of getting them elected. Chapter two briefly discusses the concept of risk, explaining how it is constantly changing and must be considered while investing. The third chapter, aptly named ‘Economics Can be Confusing’, provides a brief history of the field of economics and some of the major thinkers therein (Smith, Keynes, Mises, Minsky, etc.)
The second part of the book attempts to review economic theory. Chapter four looks at the relationship between the economy and the stock market, noting some of the work done by past writers (particularly Benjamin Graham) in figuring out the exact connection between the two. Chapter five notes that in the long run, the stock market should grow at about the same rate as the economy, although in the shorter term, many market participants react to other news. Chapter six focuses on determining market risk and finding investment opportunities as a result of that risk, ideally while avoiding the latest ‘big thing’.
The third part of the book looks at applying economic theories to analyzing the stock market. The seventh chapter is a particularly dense one, as it attempts to point out some of the many economic factors that can have an impact on stock market performance. Chapter eight attempts to make economics understandable, noting some ways that economists have applied economic theories to help predict the direction of stock market movements.
Chapter nine points out that bull and bear markets are different, that the indicators of bull markets are not the same indicators (or at least, do not always provide the same clarity of indication) for bear markets. The tenth chapter covers some of the ways you can attempt to find reliable leading economic indicators (with the warning that some math is required to do so), while the eleventh chapter finishes out this part of the book by listing some indicators that have been shown to reliably indicate where the stock market was going.
The fourth part of the book shows how to use these indicators and apply them to the stock market. Chapters twelve through fourteen look at three different indicators that the authors have found to predict the movement of the stock market (which I shan’t share out of respect for the effort they put into identifying these factors, as well as the fact that any one of them could fill a blog entry or two if I tried to explain it), while chapter fifteen provides a composite model combining all three of the indicators. Chapter sixteen rounds out the book by explaining how to use the Economic Market Indicator the authors publish to predict where the market is headed.
The book finishes with a few appendices. Appendix A provides several indicators that are touched on in the book, defining them and explaining where they can be found. Appendix B provides all the raw regression data used in preparing the book and comparing the indicators. Appendix C provides a worksheet to be used with the composite forecasting model described in chapter fifteen.
The book is rather stringent mathematically, with plenty of proof provided for the indicators and models discussed. The authors cite plenty of sources to back up their claims and their models. They also go out of their way to stress that though the models and indicators they are sharing have worked in the past, there is no guarantee that they will work in the future.
The depth of the math and concepts in the book will likely be a turn off to some people, as is the rather dry tone of the book. In spite of the aforementioned warnings that the future may not be like the past, the whole book is oriented around the idea that economic indicators can (and should) be used to predict stock market movements to improve investment performance.
Conquering the Divide is an interesting book. If you are the sort who would like a better idea of how broader economic trends could influence your investment performance, it makes a decent read. Just try to take the authors’ advice and stay away from trading stocks over too short a time period, okay?