“If all the money that’s ever been invested in hedge funds had been put in Treasury bills instead, the results would have been twice as good.”

I have often suspected the same thing. I think hedge funds are really only good for the hedge fund managers. If a hedge fund manager is making outsized returns, he’s probably taking lots of risk.

*Affiliate Link

For those of you not familiar with what’s going on, e-book prices have been going up over the last year or so. In some cases, e-book prices are higher than the price for a paper version of the same book.

The reason?

Agency pricing. Basically, what that means is that publishers set the prices for e-books and do not allow discounting. There’s no such restrictions on paper books.

Why the change?

This is the interesting part. This all happened due to Steve Jobs. From the article:

It was Mr. Jobs himself who wanted to level the playing field for e-book pricing. Early last year, as Mr. Jobs, then CEO of Apple Inc., planned for the launch of the iPad, the company wanted to start an e-book store so that iPad owners didn’t have to rely on Amazon’s Kindle store to buy e-books.

But Apple didn’t want to have to compete with Amazon’s discounted prices. Under Mr. Jobs’s direction, Apple persuaded five of the biggest publishers to abandon the wholesale model, by which retailers were free to discount the recommended retail price. Under the new pricing arrangement, publishers set the price of e-books.

In March, Random House Inc., a unit of Bertelsmann AG and the country’s largest consumer book publisher, joined its five large rivals in adopting the no-discounting digital pricing model.

Thanks, Steve.

Seriously, it really irks me to have to pay so much for something I know is cheaper to produce than the paper edition. So, I have decided that I’m not buying any more e-books until the prices come down.

Related: The Wall Street Journal Takes a Look at E-Book Pricing

The randomly-selected winner of the latest AFM giveaway winner was commenter #1, Laurie Smith. This is the first time in my 7 years of blogging that the first commenter was randomly selected for any giveaway. Congrats to Laurie.

For those of you who didn’t win, I still highly recommend Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves*. It’s a very interesting and easy read.

The next giveway will be posted in a bit.

I received a copy of Mike Mayo’s Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves* a week and a half ago. As the title suggests, the book is about his experience as a securities analyst covering banks.

First things first. Who is Mike Mayo? According to the inside flap of the book, he’s “…one of the top-ranked banking and finance analysts of the past twenty years. Mayo was the only analyst to testify during the Senate Banking Committee hearings in 2002 on conflicts of interest on Wall Street, and in 2010, he testified again, this time as the first analyst to speak on the causes of the crisis.”

My thoughts on the book

Overall, I liked the book very much. It was an easy read and gave a nice overview of what happened in the years leading up to and following the housing crisis. Along the way, the author discussed the problems he had trying to be an honest analyst. When he was critical of banks, they shut him out and wouldn’t give him access to their management. He was even fired for his honesty. I applaud his efforts to put investors first.

Reading the book, it’s very clear that Wall Street is a racket. It’s heavily loaded in favor of the bankers and investors are only important because they provide money. Something needs to be changed.

I enjoyed the personal aspects of the book like when he shared about his struggles to land his first banking job. He ended up working at the Fed in the merger-approval area after working briefly at IBM. He spent five years at the Fed and eventually landed a job at UBS. Mayo’s honesty in his reports didn’t do him any favors with his employers. At one point he was fired from his job a Credit Suisse and spent six months unemployed.

When it came to his discussion of the causes of the housing debacle, I felt he was too easy on the politicians and their role in helping create the crisis. The lack of detail here could be because he was writing about the crisis from his perspective. Whatever the case, he left the impression that politicians (both Democrats and Republicans) played a minor role in the creation of the crisis.

The best part of the book was his discussion on fixing capitalism. From the book:

To fix the banking sector, should we rely more on government regulation and oversight or let the market figure it out? Tougher rules or more capitalism? Right now, we have the worst of both worlds. We have a purportedly capitalistic system with a lot of rules that are not strictly enforced, and when things go wrong, the government steps in to protect banks from the market consequences of their own worst decisions. To me, that’s not capitalism.

I can understand the appeal of certain regulation. If we’d had the right oversight in place, we would have limited the degree of the financial crisis, which included bailouts measured in hundreds of billions of dollars, and millions of people losing their homes due to foreclosures. But we also would have sacrificed innovations in credit and a vibrant financial sector. Over the past century, our economy probably would not have grown as fast or been anywhere near as dynamic. Moreover, the real problem with regulation is that it often doesn’t work very well, in part because it’s always considering problems in the rearview mirror. The financial system today is almost dizzyingly complex and moving at light speed, and new rules tend to address fairly precise things. They ban specific types of securities or deals or trades instead of addressing larger principles.

He goes on…

A related issue is that regulation can sometimes trigger unintended consequences. Another section of Dodd-Frank cut the fees that a bank can charge a store for debit card transactions. As you can imagine, banks are not about to simply shrug that off. It adds up to billions each year. Instead, they’ll make it up somewhere else—most likely by charging consumers for other services, as in no more free checking. The bottom line? Consumers will now pay more for the convenience of using a debit card, and will likely never see the benefits from the lower costs to merchants. This is—let’s face it—price-fixing by the government, and it shows why measures like this don’t really help things in the long run. If the government were to set a cap on how much McDonald’s could charge for Big Macs, it wouldn’t take long before the price of fries went up to cover the difference.

I agree. Unfortunately, our politicians don’t seem to be listening.

Overall, Exile on Wall Street* is a great read. It’s easy to understand and not at all mundane. I highly recommend it to anyone who’s interested in learning more about the housing crisis and the interworkings of the banking industry.

Now you have a chance to win a copy of the book from AllFinancialMatters. If you’re interested, please leave a comment below. I’ll randomly select and announce a winner on Friday. Before you enter, please consider my two rules:

1. You must be a resident of North America (I will not ship internationally).

and…

2. You can only enter one time.

*Affiliate Link

Great read so far. I’ll review once I’m finished (hopefully Friday).

Ken Fisher’s latest. Looks interesting.

Again, another interesting-looking read.

I look forward to reading them all. Fortunately, all of them are fairly short. I like that Wiley is sending me these kinds of books. I enjoy reading and learning about financial crises.

“Although the benefits of permanent life insurance exist, the costs must also be weighed. I recently replaced one of my term life insurance policies with a new policy bearing a $1 million death benefit and an annual premium of $465 per year, so in preparation for this chapter I reached out to several life insurance agents to see what the cost would have been for permanent life insurance policies with the same death benefit. The answers? A comparable whole life policy was 20 times more costly—$10,380 per year! The universal or variable life policies would cost around 10 times the amount that I am paying for my term policy. I’d rather control the fate of that extra money than trust a life insurance company to manage it.”

I’m about halfway through The Ultimate Financial Plan: Balancing Your Money and Life* and I have to say, I’m impressed. The main author, Tim Maurer, clearly has the reader’s best interest at heart throughout the book. Good stuff for someone just starting out.

*Affiliate Link

If you own a Kindle or Nook, you have probably noticed that E-Books have gotten quite pricey. Here’s why:

…e-book prices on many new national best sellers are higher today than they were at the start of last year. That’s because the six major publishers have adopted a new pricing model, known as “agency pricing,” championed by Apple Inc. Publishers, worried about the deeply discounted $9.99 digital best-sellers promoted by Amazon.com Inc., agreed to set the consumer prices of their digital titles. Under this model, retailers act as the agent for each sale and take 30%, returning 70% to the publisher.

The major significance of agency pricing was that it made it impossible for a retailer to discount the price without the approval of the publisher. The impact was immediate. Amazon had built its market share in part on aggressive price discounting in which it actually lost money on the sale of many of the book industry’s most popular titles.

Based on WSJ’s estimates, an E-book that retails for $12.99 breaks down like this:

Pricing is being set by publishers instead of retailers. Of course, it’s in the publisher’s best interest to keep prices as high as possible. They probably won’t change this practice until more authors choose to self-publish.

I received a copy of Tim Maurer and Jim Stovall’s The Ultimate Financial Plan: Balancing Your Money and Life* a week or so ago. I’m about 25% of the way through the book but I like what I have read enough to go ahead and host a giveaway of a copy. I think AFM readers will enjoy it. I’ll post a review of the book as soon as I’m done reading it.

This book would be great for newbies but those who are “financially mature” will probably like it too.

So…

If you would like to entered in the giveway, simply leave a comment below. Be sure and remember my two rules:

1. You must be a resident of North America (I won’t ship internationally).

and…

2. You can only enter one time.

I’ll randomly select a winner Friday morning. Good luck.

*Affiliate Link

Larry uses the story to illustrate what lots of people do when it comes to investing:

…One of the most strongly held beliefs among the investing public is that smart people working hard can somehow identify:

A. which stocks are going to outperform the market (and buy them) and which will underperform the market (and avoid them), and

B. when the bull will start a stampede (buy stocks) and when the bear will emerge from its hibernation (sell stocks).

The first is called the art of stock selection. The second is called the art of market timing. Collectively they make up the art of active management. In order to identify these hardworking market gurus, investors rely on another strongly held belief—that the past performance of active managers is a reliable predictor of future performance.

Based on these two strongly held beliefs, investors adopt one of the following strategies: They either study the performance of actively managed mutual funds and identify the ones that have had the best performance, or they rely on others to perform that due diligence for them. For example, many investors rely on Morningstar’s rating system to identify future winners. Others rely on publications such as Money, Smart Money or Business Week. Still others hire financial advisers to perform that role. And some financial advisers hire other firms (e.g., Frank Ruessell, SEI) to help them identify the great managers. Having identified the manager with the best past performace, they hire them to manage their portfolios. While this strategy sounds logical, the historical evidence demonstrates that it is unliefly that investors will receive the results they expect.

He then goes on to state that only about one-third of actively managed funds outperform their benchmark in any given year (and 90% of actively managed funds underperform their benchmark (after taxes) over 10-year periods).

And yet…

When this underperformance occurs, investors regroup and look for the next manager who will outperform the benchmark (and consequently hit another wall).

I liked this analogy. Instead of doing the same thing over and over again, why not look for a different approach like indexing?

*Affiliate Link