The 12% Solution : Book Review

 

Book Review #18

I just finished reading a very short and interesting book called "The 12% Solution" that promises to help individual investors with a long-term systematic investment strategy that can consistently beat market and prevent big losses during market correction.

The author, David Alan Carter says this book is for you if
- You are afraid of a major market correction because you have already seen at least one major market correction
- You purchased one too many “hot” stocks touted by influencers/TV gurus only to blow up your hard-earned money
- You tried mutual fund investing but your returns always lag the S&P 500

So, let me quickly summarize the essence of this investing approach for you.

1) Momentum investing and rotation are at the core of this rules-based investing approach. Decades of data confirms that momentum investing holds that trends can persist for some time, and it’s possible to profit by staying with a trend until its conclusion

2) The best way to make money is to not lose it. In other words, the ultimate success of any investment plan depends on one simple element: minimizing losses

3) Every month, few trades will be done at the end of the month (last trading day). For this your investment corpus will be allocated in a 60:40 ratio across a mix of equity and bond funds. A 3-month lookback period is defined as the optimal history for determining which ETFs to rotate the money across, and only monthly trades are advised to screen out market noise

4) The 60% on Equity is the "risk-on" part of the investment. At the end of every month, the ETFs for our risk-on trade are - SPY (S&P 500 ETF), MDY (Mid-cap 400 ETF), QQQ (Nasdaq-100 Index™ and features Apple, Google, Microsoft etc.), and IWM (US Equity small cap). At the end of every month, you review the 3-month trend of these four and move your equity component to the one that is showing the best trend in the last 3 months. And if all of them are showing negative returns then you move the equity component to cash or the cash-equivalent ETF (1-3 Year Treasury Bonds). This is called the cash trigger

5) The 40% on Bonds is the "hedge" part of the investment. At the end of every month, the ETFs for our hedge trade are - JNK (SPDR High Yield Bond ETF) and TLT (20 Plus Year Treasury Bond ETF). As with the equity part you reallocate your hedge component to either JNK or TLT.

6) The only other trade that remains is to do the trade that will rebalance and ensure that you maintain the 60/40 mix of risk-on and hedge investments. After this do not let the daily market noise lure you to do anything

The author has put up his results on the website https://lnkd.in/g_sXW8ZH and the results are for us to see (see pic 2 attached). Definitely the approach beats the S&P 500 and for most investors who cannot actively trade and time the market it seems to be a very effective method.

Thanks Stephen Christopher, MD for the book recommendation.

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The Crux: How Leaders Become Strategists - Book Review

Book Review #17

“Everyone has a plan until they get punched in the mouth” - Richard Rumelt quotes Mike Tyson's legendary words in this excellent book titled - "The Crux: How Leaders Become Strategists".

Richard busts the myth that a concoction of vision, mission and goals is strategy. He uses a mountaineering analogy to explain how overcoming the most difficult section/precipice is 'The Crux' of conquering a climb. Likewise, identifying the one most important 'gnarly challenge' in a business is indeed 'The Crux' of developing strategy.

Here are my key takeaways from the book.

1) The problem for most businesses is that strategic-planning exercises do not produce strategies. They rather attempt to predict and control financial outcomes (they are just a form of budgeting). After glancing at broader issues, it quickly centers on financial goals followed by budget allocations

2) Don’t start with goals — When a leader sets a goal, it is actually a decision on what is important and where resources and energy will go. Instead, start by understanding the challenge and finding its crux. Strategic challenges arise in three forms: choice, engineering design, but most often gnarly

3) Faced with a gnarly challenge, the strategist recognizes/forges an embedded solvable problem — not the whole gnarly challenge, but one with kinship to its key elements. And it is a problem that is possible to address

4) Mastery over a gnarly challenge arises only after the crux has been exposed when you see or recognize the locus of tension in the web of conflicting desires, needs, and resources

5) The concept of a crux narrows attention to a critical issue. The art of strategy is in defining a crux that can be mastered and in seeing or designing a way through it

6) The first part is judgment about which issues are truly important and which are secondary. The second part is judgment about the difficulties of dealing with these issues. And the third part is the ability to focus, to avoid spreading resources too thin, not trying to do everything at once. The combination of these three parts lead to a focus on the crux—the most important part of a set of challenges that is addressable, having a good chance of being solved by coherent action

7) The distinction between strategy and tactics arises in the military and denotes the difference between the general’s action plan and the top sergeant’s action plan. It is not about long-term vs short-term

8) Don’t Confuse Strategy with Management & Don’t Confuse Current Financial Results with Strategy

9) Strategy Foundry is a methodology to help a leadership team breakaway from treating strategy as goal setting. It helps identify key challenges, diagnose their structures, identify the crux, and work out how to address it. It is different from strategic planning or strategy workshops, where the outcome is essentially a long-term budget

Thanks for the recommendation Shiv Shivakumar

#bookreview #strategy #leadership Richard Rumelt

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