Book Review: Be Principled and Grow Rich

Wow - a new post is WAY overdue! I just read a short book with some great information, so this is the perfect opportunity for a new post. And since stock investing can generate passive income if done right, the post is even on-subject.

Be Principled and Grow Rich by Kirk W. Tofte with Samuel Case

This book was a very quick read, which is perfect for me since I have a relatively short attention span (like start making a sandwich, get distracted by something - anything, really - then find the partially made sandwich an hour or more later - that kind of short).

Not knowing really what to expect, I was somewhat surprised to find that it was a study on improving stock performance using a really simple tool - what the authors call Principled Asset Rotation (PAR). You may have heard about it, but I hadn't, so it was completely new to me.

To boil it down to the bare takeaways:

1) Figure out if the S&P 500 or Russell 2000 performed better last year.
2) If the S&P 500 performed better, invest in large-company growth stocks (ticker symbol IVW if you are into ETFs) the following year.
3) If the Russell 2000 performed better, invest in small-company value stocks (ticker symbol IWN if you are into ETFs) the following year.

If you are interested in the principles behind it (like I am - I can take very few things at face value without understanding the underlying principles), definitely read the book. My brief explanation is thus:

The economy moves in cycles. The stock market is a forward indicator of the economy. Therfore, performance of stocks in certain sectors of the economy in one year predict where we will be in the economic cycle and therefore which stocks will do well.



There were a couple of things I found odd about the book:

1) The authors did not mention exchange-traded funds (ETFs) for using this investment strategy. I think they would be a perfect tool because they nearly perfectly mimick the indices the authors mention (less about a 0.2% expense ratio).

2) They propose several other strategies with historically worse returns (presumably because they get farther away from the underlying principles) because the transaction fees might be "too high" for some investors with small caps. With ETFs (or even the mutual funds they mention), this should not be an issue at all.

These things don't detract from the book, I just thought it interesting...

All of the data in the book ended in 2001. As a former engineer, I couldn't help but run the data from 2002 to 2007. The book's method outperformed the S&P 500 and Russell 2000 over that total time period (like 55% vs. 23% vs. 48%), but didn't do well at all in 2007 (based upon the 2006 indicator).

I suppose when you arbitrarily pick a calendar year, that is bound to happen, but I am certainly impressed with the overall results. (I will also mention that 2002 to 2007 was a little weird as the small-cap value was the choice every year over that timeframe.)

I plan to play with this using a small portion of my portfolio this year, then maybe move a larger portion (up to 25%) into this strategy.

If you have read the book or implemented the strategy, I (and other readers) would love to hear your feedback.

Good luck!