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Book Review - Investing at Level 3
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I recently finished the book Investing at Level 3 by James B. Cloonan. Mr. Cloonan is the founder of the American Association of Individual Investors (AAII). After starting the book he states he felt the need to start over as a result of the financial crisis of 2008. The subtitle of the book is a good statement of the goal of the book “Higher Returns with Minimal Risk for the Long-Term Individual Investor”.
In the Introduction he defines his 3 levels of investing and makes a case for why he believes individual investors have an advantage over professional money managers.
The remainder of the book is in divided into two parts. In Part I Mr. Cloonan devotes a chapter to a critique of Modern Portfolio Theory and why he believes it does not represent the real world of investing especially for individual investors. The next chapter discusses the shortcomings of both Fundamental and Technical Analysis in producing market beating returns for followers of these analytical tools. The final chapter of Part I discusses the Financial Services Industry. This chapter repeats a lot of the criticism of the industry – they charge too much for generally poor performance.
The first two chapters of Part II were very interesting to me. These chapters cover investment risk. For long-term investors he believes volatility, the standard measure of investment risk, is not a good measure of risk but is an opportunity for long-term investors. He gives examples and a new way to look at portfolio risk. He also gives examples of risk during the withdrawal phase for retirement with guidelines for reducing risk at this phase. The final two chapters of Part II deal with active and passive methods of obtaining higher than market returns and ways to maintain your discipline in your chosen method. A common theme to these methods is to skew your investments to small-cap value stocks.
The Appendix is a plug for AAII and the resources it provides. This includes the AAII Model Shadow Stock Portfolio which has beaten the market during the years from inception. Criteria for inclusion in this portfolio are included. If you are an AAII member as I am, this is a bit repetitive.
For subscribers to ICLUBcentral’s Investor Advisory Service there is a mention of the newsletter in a section about investment newsletters that have outperformed the market according to the Hulbert Digest. (You IAS subscribers made a good choice.) Nice to see some colleagues get some credit.
Much of the material will be familiar to experienced investors. I found the chapters on risk new, interesting and possibly very useful. The suggested price of nearly $50 seemed a bit high but if it increases your long-term returns just a little it would be worth it. AAII members get a discount ordering through the AAII website. I am glad I read the book.
Russell Malley
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Book Review - Investing at Level 3
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