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02/24/2005
Investments, A Review by Russell Sears

I hesitate to give a review of a book I am still in the middle of reading, and probably always will be. Due to its depth, I found that I never really finished reading the 3rd edition of Investments, by the time I progressed to the latter chapters, I had already found myself constantly referring to the book earlier chapters.

Often the world of investments are full of jargon and complex subjects. Investment professionals throw out not just a language but usually a philosophy intended to beat your thoughts into subjection. I consider it a great benefit that my intro into Investment was through this early book. It explained these complex concepts in simple enough language that I could understand. Simple, but comprehensive, I have yet to pick up an investment book that has come close to explaining the range of concept of this one. Further, it presents the philosophical concepts with at least an effort to present both sides. Yet, I detect the authors inclination to index, at least for the masses, rather than actively manage a portfolio. But the 6th edition presented active management in a better light than before.

A caveat to the numerically challenged, this book probably is very difficult reading for those without a basic statistical knowledge. While the texts does review the concepts of standard deviation, covariance, regression etc. it is probably not the easiest way to learn these concepts. As the text assumes you have mastered these ideas fairly quickly. Yet personally, coming from a math background with only basic stats knowledge, I found this book to be an excellent way to solidify a better understanding of stats. Learning stats for a grade lacks motivation incorporate it to long term memory, and the meaningfulness of practical numbers. And what could be more motivating than the hope of increasing your wealth. I would recommend this book for concurrent reading for a beginning stat student.

The sixth edition is definitely worth the purchase if you have not updated your edition for a while. This edition makes extensive use of the Internet. With purchase you obtain access to a web site with power point presentation of each chapter, a glossary of term and quizzes. There also are Excel application on the website for students that want more complete look at a concept than a normal text question.

Both the book and website contain links to relevant websites for each chapter. Like the book itself many of these sites are well known by most connected investors. The website also contains news feeds, by chapter. While often I did not see the direct relevance to the chapter. This I suspect rather is a reflection on web news. Also the site has "power web articles" which appears to retain the most relevant and often the current think on the topics in each chapter. I found this site valuable for the few chapters I have referenced it for. This living updates makes this edition a step ahead of most textbooks, not just investment textbooks. Finally a trial subscription to market data is available for free. But I must confess I did not bother with activating, since I have access to Bloomberg at work.

The sixth edition has done an excellent job of updating topics that have become more relevant recently and keeping up with the best ideas on the current thinking of academic research on the markets. A good summary of recent scandals is given in chapter one for example. And the regulation environment that has grown to meet them. Another example, that caught my imagination, is research by Jaganathon and Wang. This research uses a 3 beta factor model of value weighted market, spread of high grade to low grade bonds as proxy for the business cycle and the cost of human capital. They find "that the significance of the book-to-market and size factors disappears once we account for human capital and cyclical variation of the single-index betas" (Chapter 13 page 425.) Small caps are dominating large and China India and outsourcing are large influences on the cost of human capital. Spreads on junk bonds are tighter than I can have ever experienced. Such concepts invariably divert my attention from the book. This version I again will never complete, and that is a good thing.