OVERRIDE

Money Wise

How to Create, Grow, and Preserve Your Wealth

A. Michael Lipper, CFA, developer of the Lipper Mutual Fund Indices, with Douglas R. Sease

St. Martin's Press

Financial advisers, newspapers, television, and radio reports often qualify information about mutual funds and other investments as “according to Lipper.” They all mean the various Lipper Fund Indices developed by Mike Lipper. Now you can learn, as he has learned, the lessons of creating, managing, and preserving wealth. These lessons are vital for the newly wealthy, the would-be wealthy, the second and third generations of wealth, investment advisers and other wealth managers, and charities and other nonprofits. They come straight from Mike’s own fifty years of experience as an investor and as a member of a family that has spent four generations on Wall Street.

Mike’s ideas have direct application to you:
- How to measure your wealth.
- You as a balance sheet.
- You as the single biggest contributor to your satisfaction as an investor.
- What kind or kinds of investor personalities describe you.
- When and how to use unconventional thinking.
- When you should use multiple portfolios.
- How to share your wealth with others.

There are millions of millionaires in the United States. If you've gotten there, or want to get there, this book will help you answer the question: What now?

From the New York Society of Security Analysts
Michael Lipper's book is very timely, especially considering the current turbulence in the financial markets. So often these days, many of us get questions about money management from family, friends, and customers. Often these questions come from people who need an analytical structure to respond to what is hitting them with shocking speed.

Two of Michael Lipper's statements really hit home. First, is the dangerous failure to think about the “consequences of being wrong.” Second, is “if you do not understand the game, do not play.” This comes from his experience of avoiding Enron after reading its annual report, and being unable to figure out how they got such big earnings out of their balance sheet.” These and other lessons come from a long career in the financial business.

Money Wise is filled with explanations and lessons on essential topics such as risk, your personal balance sheet, picking money managers, the dangers in trading, investor psychology, hedge funds, private equity, and investing in new trends. Read this book and give it to those asking questions on how to create and keep wealth.
William A. Hayes


BOOK EXCERPTS

Read an Excerpt

Introduction

Many people who do not have wealth believe that it bestows upon its holder a sense of well-being and satisfaction. Alas, they are often wrong and, were they to become wealthy, would soon discover why. Wealth brings with it tremendous responsibilities, not only to one’s self and family, but to the general welfare of society. How wealth is generated, invested, and spent has a tremendous ripple effect through the economy and society. Some people handle the responsibilities of wealth well, and some handle them poorly. But the mere weight of the responsibility is often enough
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REVIEWS

Praise for Money Wise

From the New York Times
THE appeal of “Money Wise” (St. Martin’s Press, $27.95), by A. Michael Lipper, doesn’t come from his investment picks. He doesn’t offer any.

It certainly is not provided by Mr. Lipper’s counsel on which asset classes to buy. His position is this: It all depends.

And after reading the book, you may not come away with new insights about how to select someone to help you manage your money, or about how to invest in general.

When it comes to advisers, Mr. Lipper says, “I look for managers who can carefully rotate their portfolio weightings and selections over multiple periods.” As for where to put your money: “Never invest in something because it is fashionable.”

You have probably heard views like that for years. So what makes this book by the founder of Lipper Analytical Services — now Lipper, a division of Reuters, which provides information on mutual fund performance — so worthwhile?

It’s the unusual path he has chosen to follow. These days, most investment books are trying to make the not-so-rich rich, with titles like “The Automatic Guide to Making Money in the Coming Crash” (my concoction). But Mr. Lipper has taken a different approach, by not aiming at people who are trying to become wealthy. He has written this book, with the help of Douglas R. Sease, a former editor at The Wall Street Journal, for those who are already well off and want to stay that way.

Such people are likely to find his straightforward and often unconventional advice extremely appealing. And so, too, might the rest of us, who can take advantage of at least some of the strategies that Mr. Lipper offers.

Consider the approach he suggests for one of the most fundamental components of financial planning: figuring out your net worth.

Typically, as part of this exercise, you are told to make a conservative guess of what your house would sell for today, deduct the mortgages against it, and add the difference to the asset side of your personal ledger.

The problem with that, Mr. Lipper argues, is twofold: Few people can count on converting their house into cash quickly, so whatever equity they have is far from a liquid asset, especially these days. More to the point, if you sell your house you still need a place to live (unless, of course, it is a second home). That expense — a liability on the balance sheet — is usually not included in the statement of net worth.

Not only do people overestimate their assets, Mr. Lipper argues, but they also underestimate their liabilities.

“Do you intend to fund education expenses for your children, or grandchildren?” Mr. Lipper asks. “Is your health going to be perfect until you suddenly drop dead? Do you intend to travel, eat in fine restaurants, and engage in other lifestyle indulgences after you retire? They’re all liabilities on your personal balance sheet, and many of them are, like some of your assets, difficult to estimate. Yet it is important that you make the effort because your estimate of your liabilities drives the way in which you arrange your assets.”

Other conventional wisdom when it comes to wealth is also misleading, he says.

Yes, of course, you want to invest in good companies with strong fundamentals, but Mr. Lipper says that “one of the rules that I try to follow is not to make a serious investment if I cannot find someone who has been in the same room with the principals of the company under consideration and seen them under some pressure.”

Mr. Lipper spends a great deal of time urging investors to be truly honest with themselves as they think both about their financial futures and their abilities.

Three quick examples make the point:

•“I know most people talk about cutting back on expenses when they retire, but they seldom make significant reductions.” His advice is to figure that once you quit work, you will continue to spend as you do now, and to plan accordingly.

•“Most investors at one time or another in their lifetime try their hand at trading stocks or other financial instruments. If you pay attention to nothing else I have written, pay attention to this: Don’t trade with a lot of money.” You are not likely to be good at trading, he says, no matter how smart you think you are.

•“The biggest mistake that I see people of wealth making is having a single-minded focus on investment returns with no thought about their spending patterns. At the end of the day, expense control plays a larger role in the success of a financial program than the entire array of specific investments.” His point is that you can certainly offset lower returns in the market, by living on less.

HIS thoughts even extend to raising children.

“If your child really wants an advanced degree in poetry,” he says, “consider that you might want to use the assets that would pay for the degree to instead set up a trust to help pay the cost of living until the child is economically independent.”

One last point also makes the book stand out: his focus on constantly asking what kind of financial legacy you wish to leave.

Competent estate attorneys can create your will and establish the necessary trusts, but it is up to you to decide whom or what you want to benefit.

The result of all this is a book that may help you preserve whatever money you have and think carefully about what you want to do with it.
—Paul R. Brown

From The Seeker
After many years of discussion with family, friends and colleagues, A. Michael Lipper, CFA, has written a book, Money Wise: How to Create, Grow, and Preserve Your Wealth (September 2008, St. Martin's Press) with former Wall Street Journal Money and Markets Editor Douglas Sease. The book is a delight to read not only for what it tells you about investing per se but because it's a witty tome about life's lessons. By the way, these lessons apply to investing, too.

Many clients of wealth managers will know the Lipper name, attached as it is to many mutual fund indices and fund performance statistics, often with the phrase, “according to Lipper.” Reuters bought Lipper's data company, Lipper Analytical Services, Inc. in 1998, now known as Lipper, Inc. As president of Lipper Advisory Services, Inc., and Lipper Consulting Services, Inc., Mike Lipper continues to engage in his philanthropic endeavors, to manage money for a select group of wealthy individuals and institutional investors, and to consult with financial companies.

Lipper is a member of the Board of Trustees of the California Institute of Technology (Caltech), which manages the Jet Propulsion Laboratory. In the book, he talks about what he's learned in the course of getting to know the physicists and professors there, and the parallels between physics and investing.

He sat down with Wealth Manager's Editor in Chief, Kate McBride, at his home in New Jersey in early June. [Full disclosure: The writer has known Mike Lipper for the better part of two decades, and worked for him for many years.]

In the book, you talk about science and the uncertainty of life, about change, and this ties in with your work with Caltech and the physicists there. How do you draw some of the parallels between physics and investing?

It has to do with probability and certainty. In physics you hope to discover or use a law that is totally repeatable and that anyplace in the world, somebody else can repeat it and get the same result not only today but forever. We know now [that] some of the past scientific laws weren't forever, but you're looking for [the ability to reproduce results] 100 percent of the time.

In investing, a good investor wins, in terms of dollar impact, something more than 50 percent of the time. A professional should win 60 percent and a great investor 67 percent–two-thirds of the time. You can look at Buffett, Soros, Neff, Peter Lynch. When you talk with any of them privately, they talk about the fish that got away, so while searching for investment truths we have to learn to deal with investment odds. The odds on totally replicating the past [are not good]; it's the ability to absorb error that is the way to stay in the game long enough for when things come right. The big tragedy of declines is that people sell out and say, “Never again,” and they miss the upsides, and historically, in this country the upsides have been bigger than the downsides.

What got you interested in doing the work that you're doing with Caltech in the first place?

Like with almost everything in my life, it was accidental–I had heard of the school but really didn't know it. A neighbor and good friend is a graduate, bachelor's, master's and doctorate and invited [my wife] and I to attend what they call Caltech Associates Dinners where they bring in professors to talk about what they're doing, and we were fascinated–[it's] a whole different world than what I was used to–even though I was at one point an electronics analyst. This stuff was way above anything that I knew anything about, and I was impressed. I can go in there and learn something from very smart people–a lot of what I've learned is not immediately applicable. It's a different point of view; that they are the manager of the Jet Propulsion Lab opens up the concept of space and how a tiny error here on earth means that you miss a planet by zillions.

The stuff they're doing in neuroeconomics is fascinating. The theory is that they can identify the portions of the brain that make decisions–and quite probably economic decisions. Whether those are investment decisions, more work's got to be done. They have a game theory group–fascinating work. Bottom line, [they're] just a bunch of very bright people, and it happened at the right time in my life.

Are you applying anything that you've learned there to your own firm or investments?

Yes and no. Yes in the sense that a good investment program would have significant investments in the progress of science. No in the sense that I don't feel comfortable in finding managers that are heavy in technology [companies]. Most of them know more than I do, but it's temporal and current, and I'm looking for, not quite a law of physics, but I'm looking for people that are looking at the horizon and beyond, and how to invest for it. The problem is that there's a lot of work being done on this, but it's inside large companies and it won't have, near term, significant earnings-per-share impact.

So there's a lot of work being done on the forward horizon, going beyond, to what's next–so it's very long term?

It's very long term. Since we manage some money, and some of our own money that should be long-term oriented, I need to solve this one way or the other, but I haven't gotten to it.

How would you know when companies are doing that deep thinking [beyond the horizon] inside; is it evident–is there something that you look for?

Well I can't be categorical because I haven't solved it, but you talk to people who read the papers [that are] being produced. Only a small portion of the papers is truly future-oriented. To some degree I look for the equivalent to the Erie Canal–after the Revolution the government recognized that to develop the West you had to have a water route, so they helped fund the connection through the Great Lakes to the Hudson.

There's been an old investment principle–follow the government where it spends its money–they may not be right, they may not do it right, but they are a change element. Landing somebody on the moon–everybody says that's very nice, but how do you translate that?

The technology that has come out of that creates GPS, the cell phone, and a number of medical advances. The question comes: How do you tie it together? It's bit by bit. You have to be very patient, and any number of the [entities] will go broke, often not because of the science, which is pretty first rate, but because the business management skills are not there. Hopefully I can recognize reasonably good business management skills; I need somebody to make the scientific evaluations. This is why my preferred method of investing is through funds where the research and portfolio management people have the requisite technical knowledge, and questioning them, and doing some direct work, we can make a judgment as to their business skills.

Is there something in the book that wealth managers could take away, or maybe have a conversation with their clients about?

In many cases the first thing they have to do is devote more time and energy to listening, so that they can fashion an account that is specific rather than thinking of themselves as either manufacturer or distributor. They should be a custom tailor.

The other thing is to be suspicious of whatever the current trends are–it doesn't mean you have to spend your life fighting conventional wisdom, but you need to prove out, in the current phase, the conventional wisdom.

The earth was flat until you had some evidence that it wasn't. If you were an early adopter you found gold; if you were a late adopter, you were trapped in Europe.
—Kathleen M. McBride

Reviews from Goodreads

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ABOUT THE AUTHOR

  • A. Michael Lipper, CFA, developer of the Lipper Mutual Fund Indices, with Douglas R. Sease

  • A. Michael Lipper founded Lipper Analytical Services Inc., the preeminent provider of unbiased comparisons of fund performance and management in the United States. He is now the president of Lipper Advisory Services, Inc., and Lipper Consulting Services, Inc.

    Douglas R. Sease is the former “Money & Markets” editor for The Wall Street Journal and a veteran financial journalist.

  • A. Michael Lipper Photo: Fred Stucker Photography
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Available Formats and Book Details

Money Wise

How to Create, Grow, and Preserve Your Wealth

A. Michael Lipper, CFA, developer of the Lipper Mutual Fund Indices, with Douglas R. Sease

  • e-Book

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FROM THE PUBLISHER

St. Martin's Press

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