Book Review: The Effective Investor: The Definitive Guide for All South Africans

The Effective Investor: The Definitive Guide for All South Africans. 2009. Franco Busetti.

Franco Busetti, the author of The Effective Investor: The Definitive Guide for All South Africans, is a seasoned investment specialist. Trained as a chemical engineer, he also holds degrees in artificial intelligence and economics and is a CFA charterholder. In the 25 years that Busetti has worked in investment management, his “tours of duty” have included research director at Absa Securities and strategist and head of quantitative research at JPMorgan and Credit Suisse Standard Securities.

The Effective Investor serves as a handy compendium on stock selection, portfolio management, and modern portfolio theory, with an emphasis on their practical application. Written in a tongue-in-cheek style, Busetti’s book not only informs but also entertains.

The book’s readability is as much a function of its organization as its crisp writing style. Each chapter begins with a quote from an investment practitioner or thinker of some renown that illuminates the topic of discussion. Key points are summarized throughout the book in gray boxes, and each chapter concludes with a bulleted list of the main takeaway items concerning investment insights. This format makes for ease of reference.

For the experienced practitioner or individual investor, the chapters may be read in isolation rather than in sequence. For the neophyte, however, reading the book from start to finish would be advisable because the material is cumulative. The book focuses on the equity market, with a secondary treatment of fixed income, often as part of a discussion on asset allocation or optimization. There is no discussion of the hedge fund industry or derivatives. Aimed at rounding out topics covered in the core chapters, a benefit to readers is the interspersion of chapters written with verve and wit by experienced practitioners. Consider, for example, Rowan Williams-Short’s invective on the practice of technical analysis: “As a voracious reader of investment literature, I have yet to find academic vindication of this pseudo-scientific garbage.”

Organized into five sections (The Fundamentals, The Implementation, The Psychology, Styles and Techniques, and Looking after Yourself), The Effective Investor proceeds from theory to practice, with a fair amount of attention given to investor psychology as an important driver of market behavior. The section on psychology covers such topics as sentiment, seasonal anomalies, market excesses, and the questioning of some popular myths. Devoted to the individual investor, the final section imparts “street smarts” in discussing the process of manager selection and the use of institutional research. Williams-Short’s “Really Bad Research” offers a humorous yet highly engaging read on bollixed investment research with numerous examples. The chapter “Doing It Yourself” provides a universally practical discussion on how to be a savvy investor in matters ranging from broker selection to asset allocation, rand cost averaging, and investment expense management. Of particular interest is the two-page “The Future — A Quantum Leap? A Brief History of Investment,” which traces the quantitative and theoretical underpinnings of the profession from Louis Bachelier’s Théorie de la Spéculation to Black–Scholes and the musings of Andrew Lo and Dean LeBaron.

The evolution of finance is increasingly interdisciplinary and complex. The Effective Investor is, above all, about the challenges of putting ideas to work — concepts that are easy to understand but difficult to implement — a point that Busetti makes in the very last chapter, in which several noteworthy South African fund managers deliver pithy and insightful aphorisms on the art and science of asset management. The wisdom here will be familiar to seasoned practitioners and novices alike, yet it bears repeating because investment management is, in the final analysis, a dynamic and truly global process.

More book reviews are available on the CFA Institute website or in the Financial Analysts Journal.

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