This review is from: Investing From the Top Down: A Macro Approach to Capital Markets (Hardcover)

After the credit crisis it became obvious that one cannot base their investment decisions only on the domestic or company specific factors. What does an investor in India have to do with the subprime mortgages in the USA? nothing? Well he lost about 70 percent value of his investments due to the crisis.

This book came right at the time when I was thinking a top-down perspective was in order for making investment decisions as bottom-up approach failed and the markets became more integrated than ever before.

Here the book goes: First few chapters explain why top-down investing is a must today, the changing world, advantages of top-down, so on. After that one of my favorite chapters come. Chapter 4- Thematic Trading and Investing, where the author shows how themes (major ideas, trends) may be used in top-down investing, gives a few examples and guidance. Another big chapter is Chapter 6- Central Banking Is a Top-Down Affair, where the author explains the transmission effects of Fed policies on the financial markets, (stock prices, credit spreads, dollar, so on), Fed’s impact on stock sectors, and commodity prices.

Here is an excerpt : Keep in mind that, when credit spreads widen, it is important to determine whether the widening is because of a liquidly shock, as was case in 1998 and 2007-2008 when investors. or because of credit-quality shock, as was the case in 2001. The distinction is important because.

I also like chapter 7- Filling the Gaps on Value Investing (for those who want to stick with bottom-up) and Chapter 9- Do the Math, where the author gives some examples of how to do calculations to see if market has valued something wrong or if an investing opportunity exists.

At the end of every chapter, the author summarizes key points and lists the key indicators (the golden compasses) mentioned in the chapter.

Finally, the 60-page chapter, chapter 14- The Top 40 Top-Down Indicators goes through the 40 indicators selected by the author. For each indicator its power, where to find it, the view from the top down and how to nail it is briefly explained.

Here is a few things I didn’t like: 1- The author consistently refers to financial statements (whether its balance sheet, income statement or statement of cash flows) as balance sheets, which is a little annoying. 2- Occasionally after giving some information about the subject, the author doesn’t mention anything as to its application and leaves some question marks. One example to this is on page 205, in a chapter about the market sentiment. The author mentions surveys of aggregate duration levels as a way to track sentiment in the treasury market. Aggregate duration surveys. capture the average duration level among the portfolio managers surveyed. look for the degree to which fixed income managers are long or short relative to the benchmark index. For example a reading of 98 percent would indicate that on average portfolios had duration levels that were 98 percent of the benchmark indexes.. And? How do we make use of this information? Since the portfolio managers created a lower duration they expect interest rates going up? If so should we expect the same? How should we interpret this and act? These questions are not addressed. But again, in general explanations suffice.

To wrap it up, the book is full of useful information and some sections are well worth reading twice. The book is similar to Ken Fisher’s the Only 3 Questions. But the author does not try to push his opinions into your head like Ken and gives more macroeconomic information that would be useful in investing. Highly recommended to those who are interested in the title.

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