Book Reviews

Book Review on The Little Book of Bulletproof Investing

I have been meaning to read this book from quite some time ago, due to its very catchy title 🙂

This book is meant more for the general public, and not for seasoned investment professionals.

Some key points:

  1. Fear drives the market
    1. Greed springs from fear, fear that we lose out or that we will not have enough. The human brain at the heart (the limbic system) is full of emotions, and that is covered by the cerebral cortex which makes up reasons to justify them after the fact.
    2. Because of fear, people seek safety in numbers. There are 3 problems with crowds  which causes huge price swings (i.e. causes the manic-depressive moods of Mr Market):
      1. Groupthink – Everyone in a group tend to converge to a same way of thinking (any nails sticking out are hammered)
      2. Response polarization – Nuances or details are lost in favour of black-or-white, simplistic choices.
      3. Risky shift – Groups are more likely to adopt more extreme positions because they feel invincible.
    3. Investors overreact to good and bad news alike, and over-extrapolate from short-term trends into the future.
    4. People hate losing money about twice as much as they like making money.
  2. Don’t panic or be elated over short-term market events. Dimensional Fund Advisors have a chart showing how the market climbed throughout the century despite countless events that caused short-term market drops.
  3. Relationship between a person and the investment advisor
    1. Every person has 3 ego states: i) Parent ego state, ii) Adult ego state, iii) Child ego state. People tend to adopt their child ego state when it comes to investing, and look to “experts” that take on the parent/adult ego states.
    2. People’s “risk tolerance” changes according to the market. When the market is high, their “risk tolerance” is high, when the market crashes, their “risk tolerance” is low. When people say their “risk tolerance” is high, they are simply saying that they want to make lots of money.
  4. How to reap long-term returns despite inherent psychological influences
    1. Investors lack the psychological stamina to hold onto their portfolios for long enough to reap long-term returns. Hence we need to start with an acceptable predefined level of loss, then reverse-engineer a portfolio. This will determine the stock-bond proportion. The higher the proportion of stocks to bonds, the greater the historical average annual real returns but the larger the worst-case annual loss.
    2. Fama and French’s 2004 CAPM paper showed that low beta stocks, small stocks, and value stocks tend to produce positive abnormal returns. Consumer Staples (food, candy, soda, beer, liquor, tobacco), Healthcare (health services, medical equipment, drugs, pharmaceutical), Utilities, and Energy are historically low beta market sectors.
  5. Constructing the bulletproof portfolios
    1. Tangent 20 portfolio (historically the largest loss over any 12-month period from 1926 to 2009 after inflation was 20%, median annual return is 3.8%)
      1. 5-Year T-Notes: 80%
      2. Small value stocks: 8%
      3. Low beta stocks: 3% each in Consumer staples, Energy, Utilities, Healthcare
    2. Tangent 25 (median annual return is 5.6%)
      1. 5-Year T-Notes: 60%
      2. Small value stocks: 16%
      3. Low beta stocks: 6% each in Consumer staples, Energy, Utilities, Healthcare
    3. Tangent 33 (median annual return is 7.1%)
      1. 5-Year T-Notes: 45%
      2. Small value stocks: 22%
      3. Low beta stocks: 8% each in Consumer staples, Energy, Utilities, Healthcare
    4. [My note: The book had a table showing what $10,000 would become in 15 years by compounding the median annual return and showing the historical worst-case annual loss. I think that this is misleading. One cannot take the median historical annual return and then extrapolate because severe losses can cripple a portfolio. Imagine historical performance being -50%, -40%, 2%, 3%, 5%. You would not say that hmm, looks like if I invest in the stock market, I should assume I make the median return of 2% in future. Similarly an average annual return wouldn’t work, because a 50% gain does not cancel out a 50% loss.]
  6. Using ETFs
    1. Bond portion
      1. Use the iShares Barclays’ 3-7 Year Treasury Fund (IEI) with average duration of 4.4 years or the Barclays’ Intermediate Treasury Fund (ITE) with duration of 3.9 years.
      2. To guard against an inflationary environment, put half into iShares Barclays’ TIPS Bond fund (TIP)
      3. If you prefer munis, choose Market vectors Intermediate Muni Fund (ITM) or iShares S&P National Municipal Bond fund (MUB)
      4. If you prefer lower credit quality, choose Vanguard’s Total U.S. bond market fund (BND)
      5. For foreign bonds to hedge against the U.S. dollar depreciating, choose SPDR Barclays’ International Treasury Bond fund (BWX).
    2. Low beta stocks
      1. Energy: IXC (international), XLE (domestic)
      2. Consumer staples: KXI (international), XLP (domestic)
      3. Utilities: JXI (international), XLU (domestic)
      4. Healthcare: IXJ (international), XLV (domestic)
    3. Small value stocks
      1. Buy from Dimensional Funds (
      2. U.S. (VBR), Foreign (DLS or PDN), Emerging Markets (DGS or PXH)
  7. Tangent portfolio allocations
    1. Tangent 20
      1. Bonds: Treasury (IEI: 30%), Inflation (TIP: 30%), Foreign (BWX: 20%)
      2. Low beta stocks: Energy (IXC: 3%), Consumer Staples (KXI: 3%), Utilities (JXI: 3%), Health Care (IXJ: 3%)
      3. Small value stocks: U.S. (VBR: 4%), Developed Foreign Markets (DLS: 3%), Emerging Markets (DGS: 1%)
      4. Total expense ratio: 0.29%
      5. % non-dollar denominated assets: 30%
    2. Tangent 25
      1. Bonds: Treasury (IEI: 25%), Inflation (TIP: 25%), Foreign (BWX: 10%)
      2. Low beta stocks: Energy (IXC: 6%), Consumer Staples (KXI: 6%), Utilities (JXI: 6%), Health Care (IXJ: 6%)
      3. Small value stocks: U.S. (VBR: 8%), Developed Foreign Markets (DLS: 3%), Emerging Markets (DGS: 3%)
      4. Total expense ratio: 0.31%
      5. % non-dollar denominated assets: 30%
    3. Tangent 33
      1. Bonds: Treasury (IEI: 21%), Inflation (TIP: 21%), Foreign (BWX: 3%)
      2. Low beta stocks: Energy (IXC: 8%), Consumer Staples (KXI: 8%), Utilities (JXI: 8%), Health Care (IXJ: 8%)
      3. Small value stocks: U.S. (VBR: 12%), Developed Foreign Markets (DLS: 7%), Emerging Markets (DGS: 4%)
      4. Total expense ratio: 0.33%
      5. % non-dollar denominated assets: 30%
  8. The book had an interesting observation that from Nov 2007 to Nov 2008 when the S&P500 fell 43.5%, the recommended tangent portfolios performed badly. During the period, foreign stocks fell even more than U.S. stocks, the dollar appreciated (impacting non-dollar assets), and inflation was negative (impacting the TIPS). [My note: In a sense, this shows that the recommended portfolios would perform well in an environment where the dollar depreciates, foreign markets do well, and inflation is moderately high. The low beta portion and small value portion will sort of cancel each other out, in good times the small value will do well while the low beta does not do as well, in bad times the low beta does not do as badly as the small value. Since a greater portion is in the low beta stock, these stabilizes the portfolio compared to the small value stocks which can swing wildly.]
  9. If you only want to use index funds, do the following:
    1. For 20% downside risk, use 24% S&P500 and 76% bonds.
    2. For 25% downside risk, use 36% S&P500 and 64% bonds.
    3. For 33% downside risk, use 47% S&P500 and 53% bonds.
  10. Rebalance your portfolio every 3 years or so to reset the allocations back to what they should be.
  11. On life and career
    1. Find out what you want to do early and do it.
    2. Spend as much time as possible with people  you want to be like.
    3. Be known for your excellent work and work habits.
    4. Dress to please others, have good manners, be on time, have integrity.
    5. Make your boss look good. Give your boss the credit and take the blame.
    6. Don’t count on life being fair.
    7. Be grateful.
    8. In the real world, good looking people get ahead, sex counts, being old is a drawback, nepotism and favoritism exists (people like people who are like them, or like them), who you knows matters more than what you know.
    9. Most jobs that are going to make you successful do not leave time for you to do other stuff (e.g. watch movies, go yoga, play online games, etc.)
    10. Read the WSJ every morning (
    11. Marry a sensible person and your life will be right.
      1. There needs to be reciprocity in a relationship and it should be a monopoly. If you have to compete with others, sell out at a loss and find another better opportunity.
      2. What you put in by way of unselfishness, kindness, and patience should be repaid.
      3. You cannot “change” anyone.
      4. Do not marry someone who is high maintenance, either financially or emotionally, no matter what.
    12. Children are luxury goods.
    13. Save a lot, be well insured, get asset protection, have a reserve fund of 3 months to 1 year’s worth of living expenses.
    14. Don’t borrow money except to buy an appreciating asset (e.g. education)
    15. Don’t borrow from (or lend to) friends or family unless it is needed to pay for a life-saving operation. You will lose both the friend and the money. If you still need to, use Virgin Money (
    16. Don’t retire, keep working.
    17. Reverse mortgages should be a last resort (high fees, low payouts eroded by inflation, tied to the house, house seized if you go to a nursing home).
    18. Find deposit accounts with the highest rates ( If you are concerned with getting enough FDIC insurance, use
  12. Planning for the end
    1. Do up the following
      1. A will (
      2. A revocable trust to hold your assets and administered by a trustee that you appoint.
      3. A durable power of attorney for health care who makes medical decisions on your behalf in the event that you cannot communicate.
      4. A durable power of attorney for finances who looks after your money in your mental absence.
      5. A living will that directs what you want medical personnel to do to extend your life if you are unable to communicate.
    2. You can save on estate tax with illiquid assets that are hard to value so they can be claimed at the lower end of the value range.
    3. Prepare a document listing the following:
      1. Wishes for your funeral
      2. Contact information for your priest, minister, or rabbi
      3. Contact information for estate attorney, accountant, insurance agent, broker, and investment advisor
      4. Access information to online accounts (e.g. email, personal websites, social networking sites)
      5. Location of past 3 years’ income tax returns
      6. Information on every investment account you own (bank accounts, CDs, brokerage accounts, hedge funds, annuities, IRAs, etc.)
      7. Beneficiaries of your retirement accounts
      8. List of all property you own (including cars), title deeds, mortgages and loans against them
      9. List of debts owed
      10. Information on life insurance policies
      11. Wishes on the disposition of possessions.
    4. Write love letters to your close ones

Websites from the book:





No comments yet.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Copyright © 2005 – 2018 All Rights Reserved.

Enter your email address to follow this blog and receive notifications of new posts by email.


Blog Stats

  • 560,026 hits
%d bloggers like this: