By Victor Canto
Reviewed by Gary W. Silverman, CFP®
Active investing and passive investing: the debate between these two camps has been raging for a couple of decades. If you have passive investing convictions, I doubt anything in this book will change your mind. If you believe in a more active investment style, the insights are so simplistic that they would be of little value.
You can't really blame the book for this. After all, it is not aimed at portfolio managers or financial planners, but rather the public at large. As a press release advertised, Cocktail Economics "is for investors eager to far outperform the average by applying economic theory to everyday events that might be discussed over cocktails."
The author, Victor Canto, currently runs the economic consulting firm La Jolla Economics. He began his studies in engineering, earning a degree from MIT. However, his avocation shifted to economics. In the process, he earned a Ph.D. in the subject and later taught at the University of Southern California.
Canto doesn't argue against passive investing, but he does push for active investing. His point is that since there are times when active beats passive, staying constantly passive is a pathway to mediocrity. Canto wants you to invest passively when it is in favor, and actively the rest of the time.
How do you accomplish this? You'd need to grasp core macroeconomic investment fundamentals; understand how economic shocks affect stocks; keep track of political, global and financial news; study what economists forecast for the economy, and then keep learning.
What Canto provides is "a framework of filters that have proven over many years to accurately identify which asset classes will perform best (or worst, or neutral) in each economic environment." The filter requires investors to recognize new trends. Investors then have to deduce how governments, economies, markets, and sectors will react. The investor then adds the dimension of conviction. If you have a weak conviction that the prophesized events will occur, you do little if any changing to your portfolio. If you have strong convictions, then you act strongly.
Canto is very logical in his presentation of the kinds of things that make stocks and sectors move. He is also correct that if you can figure out the economic "shock" you can, to some degree of accuracy, predict which industries would be helped and which would be hurt. What is missing is any actionable method of predicting the "what" and "when" of the economic shock. While hindsight examples are compelling, I do not see how I would have recognized them in foresight. But then again, I haven't taught graduate economics, nor do I own an economic forecasting firm.
The author purports that "...this book sets forth an intuitive approach to investing that takes into account all the macroeconomic forces that act on the performance of every possible asset class." In other words, it allows you to predict the future movement of asset classes and then act on that prediction. I'm not convinced he pulled off that little feat.
While some might poke fun at the seeming simplicity of his methodology, my most prominent protest to his approach is human nature. Most investors I meet develop firm convictions of an upward trend after the markets have gone up. They develop firm convictions of a downward trend after they've gone down. Yet take investors that have the ability to go opposite the crowds, and this book has a chance to make them a better active investor.
Gary owns a fee-only financial planning firm in Wichita Falls, Texas. He is the editor of the financial newsletter Personal Money Planning, and writes the newspaper columns Your Money and Biz2Biz.
Financial Times Press (2007)