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BOOK PROPOSAL

March 3, 2009

Subject/Market
Investing, individual and institutional

Description
Individual and institutional investors have been badly burned in the last decade. Many are
on the verge of ruin because of poor investment practices based on bad advice from Wall
Street and lax regulatory oversight. This book explains what went wrong and how to
invest in the future to ensure a reliable cash flow.

The book is finished; the Contents and Chapter Outline are included here; (161 pages in
Microsoft Word using 12pt Times New Roman font, single-spaced; 40,000 words, 50
images, 22 tables). Title: “Investing for Cash Flow”. SubTitle: “Individual and
institutional investors must change their investment style to survive financial crises”.

Author
Economist and Certified Financial Planner™ who has spent 30 years on Wall Street …
Managing Director at Morgan Stanley; EVP and CIO at Fidelity Investments; on the
Board of Prudential Securities responsible for their merger with Wachovia.

George R. Fisher
5 Pier 7
Charlestown, MA 02129-4225

Cell 917-514-8204
Fax 215-689-4880
email george@georgefisher.com

Similar books
Asset Allocation Roger C. Gibson
Common Sense on Mutual Funds John C. Bogle
The Four Pillars of Investing William Bernstein
The Intelligent Investor Benjamin Graham
Unconventional Success David F. Swensen
Winning Investment Strategy Larry E. Swedroe

Why is this book different?


Many books on investing are filled with the mathematics of Modern Portfolio Theory or
recount the history of the markets, and most give general advice; but none actually tell
investors what they should do in practice. This book provides a step by step process
investors can and should follow to produce a reliable cash flow; the book uses academic
analysis and detailed statistics/charts but it is accessible to all experienced investors.
Portions have been posted on the web and have received a very favorable response.
Contents

• Introduction
The purpose of investing is to produce a reliable cash flow.
• Modern Portfolio Theory (MPT)
A primer on the basics of portfolio construction.
• Process
The steps to take
1. Choose the asset classes
2. Active management or indexing?
3. Specific security, closed-end, mutual fund, ETF?
4. Pick the specific investments
5. Choose the asset allocation
6. Manage the investment portfolio using Portfolio Rebalancing
7. Produce a Reliable Cash Flow
8. Become a Lobbyist
• Appendixes

o Geometric vs. Simple Average


o The Cost of Costs
o What good are bond funds?
o Writing Options as an Alternative to Market Orders
o Protection of Assets: SIPC and Excess Coverage
o 1975: Landmark Year

o Notes For Individual Investors


 Choose the brokerage firm
 Set account options
 Taxable and retirement accounts
 How much can you withdraw from a portfolio?
 Why not buy an annuity?
 Effective Tax Rate
 Rollovers: Why Not & How To
 Estate Planning: a call to action
 Time Value of Money

Bibliography
Disclaimers
Index
Chapter Outline
• Introduction
The purpose of investing is to produce a reliable cash flow. Of the thousands of
books and conferences on investing not one reflects on this vital fact: every
investor needs to produce a reliable cash flow. This applies to charitable
foundations, university endowments and municipal pension funds just as much as
it does to individuals. While chasing yields during bull markets, most investors
forget that come the inevitable downturn they will still be required to cover their
expenses.

Starting in 2007, this lesson was brought brutally home (again) to the whole
world. Every single major financial institution failed its clients and the regulators
were entirely absent. Successful investing seems like a bad joke during such a
time but it always does when the market turns down.

Investors need to take an entirely new approach going forward to establish their
independence from the financial services industry and to focus on producing the
one thing that ultimately matters: reliable cash flow.

• Modern Portfolio Theory (MPT)


A primer on the basics of portfolio construction. MPT teaches us to diversify
widely, to hold uncorrelated assets and to keep our eyes on the long term rather
than the momentary gyrations of the markets. The theoretical work was done in
the 1950s and there is recent empirical evidence that it will work to every
investor’s benefit if sensibly and conservatively applied.

• Process
The steps to take: there is a logical sequence of steps every investor must take to
construct a portfolio that will produce a reliable cash flow year in and year out.
The basics are drawn from Modern Portfolio Theory and avoid any reliance on the
financial services industry. There is nothing revolutionary in all of this, except for
the fact that very few investors have actually followed these precepts. Much of
this process involves following the advice of Benjamin Graham in 1939, updated
for modern circumstances & products and with the benefit of 70 more years of
experience and academic study upon which to draw.

1. Choose the asset classes


You must decide what you will own, what you will invest in. Equity, debt,
real estate, commodities and cash cover most of the viable options pretty
comprehensively. We need to look at the pros and cons of each asset class,
both in the US and internationally.

2. Active management or indexing?


Will you try to beat the market or “settle” for just being average? It turns
out that just being average will consistently beat anything offered by the
financial services industry which always promises to do better but never
does.

3. Specific security, closed-end, mutual fund, ETF?


What “vehicle” should you choose to invest in? Index Viper and iShare
ETFs will provide the best results for your investment portfolio; for your
cash portfolio, you need to look somewhat further afield.

4. Pick the specific investments


You’ve decided on the asset classes and you’ve decided on the investment
vehicles, which specific securities are best suited, and how many positions
should you hold?

5. Choose the asset allocation


Beebower, Brinson and Hood’s famous 1986 study convinced most of the
world that fine-tuning the exact asset allocation of a portfolio would have
a significant effect on returns. It turns out that not only does it not do this,
but the study wasn’t even about returns in the first place. Asset allocation
is about risk, not return.

A variety of current portfolios are presented to provide perspective.

6. Manage the investment portfolio using Portfolio


Rebalancing
Portfolio Rebalancing is one of the most vital and the most misunderstood
techniques in all of investing. Done correctly, portfolio rebalancing holds
the key to capturing investment gains as well as providing the most tax-
efficient way to produce cash, which is (after all) the purpose of all this
effort.

7. Produce a Reliable Cash Flow


The purpose of any investment is to produce a reliable cash flow. That
cash flow may not be needed until sometime in the future; or the operating
needs of an organization may depend upon it for daily functioning. In any
event, a portfolio must consist of two parts: investment and cash; and the
establishment and maintenance of the cash portfolio is the key to long-
term investment success.

8. Become a Lobbyist
Capitalism may not be dead but it has become anesthetized recently. For
over a decade the risk-free US Treasury has produced a better total return
than any equity market. The risk/return tradeoff of MPT has not been
working.

This is upside down and it is the result of the twin failures of the financial
services industry and Governmental oversight. If equity investing does not
start producing a better return than Treasuries, what rational person would
invest? Investors must insist that certain basic principles be enforced going
forward or investing will wither.

• Appendixes
o Geometric vs. Simple Average
How are investment returns measured?

o The Cost of Costs


The financial services industry’s primary purpose is to generate fees; an
investor’s primary focus must be to eliminate them. Costs eat up an
average of 50% of an investor's returns ... for absolutely nothing.

o What good are bond funds?


Why hold a bond fund instead of a bond portfolio? The answer has to do
with the inner workings of the yield-to-maturity calculation.

o Writing Options as an Alternative to Market Orders


Portfolio Rebalancing offers investors the opportunity to increase their
returns slightly by writing options instead of executing market (or limit)
orders. Not for everyone, but a viable alternative for some investors once
their portfolios are established correctly.

o Protection of Assets: SIPC and Excess Coverage


The collapse of several titans has focused attention on various forms of
asset insurance. The Government’s guarantee is probably pretty good (if
you’re not in a hurry) but private, “excess” insurance coverage is not.
Diversify among institutions as well as among securities.

o 1975: Landmark Year


Most investors don’t know it but May 1, 1975 marked their Independence
Day … if only they would take advantage of their freedom.

o Notes For Individual Investors


Most of the advice of this book applies equally to institutional as well as
individual investors. Individuals do have some special requirements,
however.

 Choose the brokerage firm


Never put your money in a “full service” brokerage account. Never
put your money in a mutual fund or insurance account. Never turn
your money over to someone else to manage. It may seem déclassé
or unsophisticated to use a “discount broker” but such pride is
badly misplaced. Which ones are best?

 Set account options


There are several options that should be set for your
brokerage account for the best results. Set them upon
establishment if possible.

 Taxable and retirement accounts


“Asset location” refers to the problem of deciding what to put into
a taxable account or a retirement account. The answer has to do
primarily with taxes (which change from time to time) and cash-
withdrawal needs.

 How much can you withdraw from a portfolio?


It is vitally important that you not run out of money once you are
living off your investments. Based on 30-years’ history, studies
have concluded that 4% adjusted for inflation is the maximum
prudent withdrawal rate for a portfolio diversified among equity
and debt.

 Why not buy an annuity?


An annuity can provide a level of peace of mind and as such a
well-chosen immediate annuity can be a valuable component of a
retiree’s portfolio. But understand the tradeoffs before you run out
and buy one.

 Effective Tax Rate


The IRS wants everything it’s owed but the rules require of you no
more than the minimum. Don’t be unintentionally generous.

 Rollovers: Why Not & How To


The financial services industry is desperate to get you to roll over
your retirement plan into an IRA. This is not always in your best
interest.

 Estate Planning: a call to action


Little mentioned except in political campaigns, estate taxes are the
most onerous in the whole tax code. If you think a simple will can
protect you, think again.

 Time Value of Money


If you don’t understand the basics of compound interest, present
value and so on, you should take the trouble to learn.