Andrew Allentuck

Monday, May 19, 2003

Make Yourself a Millionaire: How to Sleep Well and Stay Sane on the Road to Wealth
by Charles C. Zhang and Lynn L. Chen-Zhang
McGraw-Hill, 2003
352 pages
ISBN 0-07-140982-3

The dustjacket of this US-centric guide to financial planning says that author Charles C. Zhang "was the #1 rated financial advisor in 2002 out of American Express Financial Advisors' more than 9,000 financial advisors nationwide." Pity Amex clients, for if Mr. Zhang is the best they can do, they are in trouble.

Much of the advice is not just cursory, but evasive. For example, Mr. Zhang says, "don't be afraid to sell a mutual fund, stock, or other investment that is not performing very well. Sometimes investments don't come back from their poor performance, and sometimes they will. However, there are occasions when you need to evaluate your portfolio and cut your losses." Mr. Zhang has thus told the reader that financial assets go up and down in price, a keen insight to be sure.

He neglects to say that large pools of equity assets tend to have performance that reverts to the mean. If a fund is awful for one five year period, it has a pretty good chance of doing better than the median the next five year period. And vice versa. The bigger the stock's market cap, the more likely it is to revert to the average performance of the group. For diversified stock funds, it is almost a law. However, portfolios of government bonds with no credit risk, driven by ever-changing monetary policy, do not regress to the mean but have valuations that oscillate in a non-convergent pattern over time.

Whether there is regression to the mean or not, there are nevertheless issues of continuity of trends. Market moves of periods of days or hours are random and have no implications for future variations, those of months have a better than even chance of producing short term continuity in the next period, and moves over periods of years put the equity investor back at the level of looking to reversion to the mean for future performance. That's what Mr. Zhang should have put into his advice on selling one's losers.

On bonds, Mr. Zhang says, "the longer the duration of the bond, the higher the interest rate, because you are loaning your money for a longer time." Mr. Zhang confuses the term of a bond, which is how long one must wait until it matures, with its duration, which is the time-weighted interest stream and, as such, a measure of interest rate sensitivity rather like the role of beta for stocks. Mr. Zhang is right to say that for a normal yield curve, one must be paid a higher rate of return for extending time risk. But if a yield curve exhibits inversion, that is, if it shows that investors have a higher expectation of short term inflation or other mayhem than they have of long run disaster, then it is not true that time and yield are positively correlated. He covers his assertion of positive correlation of interest rates with increasing time with the word, "usually." The reader deserves more.

The investor who wants the most elementary of investment books in a U.S. context may find value in this book. But even if one can excuse the quite serious errors in it, there are better choices. This is one book the investor can safely leave on the bookstore shelf.