In view of the soaring gas price (with the USA average nearing $4 a gallon) and its impact on the Memorial day travel, it is interesting that people are facing much harder times in Europe, where the fuel price in many countries has already exceeded $8 a gallon!

A major reason for this disparity is that many European countries put a much higher fuel tax burden on the motorists, including the so-called “value-added tax” (or VAT). For example, while federal and state taxes make up only about 11% of the gas price in USA, in France and UK this tax accounts for about 70%.

I decided to look up the current gas prices in some of the major countries around the world, and here is the list (data are taken from here).

After seeing some of the entries in this list, I feel lucky to be driving in America!

Warren Buffett said in an interview with Germany’s Der Spiegel, published last Saturday, that the US is “already in recession”, even though “perhaps not in the sense that economists would define it”, and “it will be deeper and last longer than many think”.

How does an economist define a recession? This is associated with a decline in the country’s GDP (gross domestic product) or negative real economic growth for two or more consecutive quarters.

Buffett says “people are already feeling the effect” of recession, and how true he is! If you do regular chores, like buying grocery or gas for your car, you know this is mighty tough time we are going through. But well, if there is one thing we learned from economic history, tough times never last.

I don’t know about the smartest, but at less than 180 pages this is certainly the smallest investing book I have ever read. The bargain price of $4.97 was worth it though. (The size falls below the minimum 200-page limit I follow when paying $5 for any book on investing, but that is okay, as long as quality compensates for the lack of quantity.)

What about the content? Is it any good for the $4.97 I paid, or, (if you are not lucky to get the bargain) the $19.95 jacket price? According to the author Daniel Solin, this is the smartest book you’ll ever read because “it is simple. It is understandable”. And simple is good.

Between Chapter 1 and 35, the author talks about the follies of active (or what he calls “hyperactive”) investing as opposed to passive investing, where you buy and hold a diversified mix of index funds that track the entire financial market. There are interesting nuggets of facts and wisdom here and there. For example, between 1985 and 2004, the average annual return of all actively managed funds was a mere 3.7%, whereas the S&P 500 Index returned a whopping 13.2%.

None of this is new to an experienced investor, who is already well versed in the differences between index investing and stock picking. But this is where the story-telling skill of the author becomes important, because no matter how obvious the bottom line is, sometimes we all need hammering the point home (particularly when violent market swings cause even the most seasoned investor to make stupid mistakes).

The book gets interesting from Chapter 36, where the author starts talking specifics, beginning with his 4-step advice: 1) decide on asset allocation (proportion of stock and bond funds in your portfolio) based on your risk tolerance, 2) open account with one or more prominent fund families (Vanguard, Fidelity, T. Rowe Price) to set the ball rolling, 3) choose specific stock and bond funds offered by these fund families to build your portfolio, and 4) rebalance twice a year to reset the proportion back to the original asset allocation.

In short, the author does the following:

1. First, he presents four different asset allocation types, with increasing degrees of risk (and return): low risk, medium-low risk, medium-high risk, and high risk. Your choice of asset allocation depends on your risk tolerance (that in turn depends on your age and other circumstances).
2. Next, he builds the portfolio for each asset type using three kinds of index funds - total US stock index fund (that tracks the broad US stock market), international stock index fund (tracks major international market indexes), and total US bond index fund (tracks broad US bond market) - drawn from each of the three fund families.
3. He wraps up by suggesting you rebalance your portfolio twice a year (opinions vary on this - I rebalance once a year), to reset your portfolio composition back to the original asset mix.

These specific advices will hand-hold a first-time investor through the process of setting up a well diversified portfolio that is guaranteed to achieve at least the market return. And, “over the long term, simply achieving market returns will beat 95% of all professionally managed investment portfolios”. To a newbie investor, this alone should be worth paying $19.95 for this book. If you are a pro, search the bargain shelves of your favorite book store - you may get lucky too.

I always enjoy reading a well-written book on investing, and not because I am learning something new each time. In fact, after you are done with a half-dozen or so really good books, you pretty much know all there is to know about investing, and rest is mere detail.

Rather, what I really like is the style of writing, which separates the winner from the also-ran. Investing is as complex a subject as any branch of modern science (probably more so, because investing also involves human psychology and behavior, a topic not well understood yet). But the author must still get the message across to the layperson as well as the intellectual, because money management knows no social hierarchy.

Striking this delicate balance between presenting hard concepts and facts, and explaining them in a way ordinary people can understand and follow, is what makes a good, even great, investing book. There are many ways to tell a story, but the one who does it best gets my vote (or in this case, my money).

The problem is, when you visit the “investing and personal finance” aisle in a book store, you are immediately swamped with books of all sizes and colors (a search for “investing” on Amazon throws up over 163,000 entries). It is hard to figure out if the book you just forked $29.95 for is really worth it.

What I do is reverse the order - I figure it out first, and then buy. I go visit the local public library (my favorite spot in town, next to my home and the chinese buffet nearby), which has pretty much every book on investing under the sun. If I like a book that I read from here, I buy a copy for myself.

The only time I break this read-first-buy-next rule is when I come across an investing book that sells for under $5 in the “bargain price” section of the book store. As long as it has all pages intact (and there are at least 200 of them, so I can be sure I am not paying $5 for a newsletter!) and does not look overused, the book is a good bet for me, even if I never heard of it before. I still flip through a few pages to make sure this is not a total dummy. So far, I haven’t regretted a single purchase I made this way.

In the recent annual meeting of the Berkshire Hathaway shareholders held last Saturday, CEO Warren Buffett was asked about the best investment idea he would recommend to an investor in his 30’s. In his own words:

I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform…and I could just go back and get on with my work.

Coming from the most famous “stock picker” in the world, such drumrolling for index investing may come as a surprise to some. But as I said in this post, he has been advising this for many years, because with index funds you “would feel confident that (you) would outperform” and “get on with (your) work”.

An estimated 30,000+ strong crowd assembled in this meeting to hear from the Sage of Omaha in these troubling financial times. His main message was that it is impractical to expect an earning of 7 to 10% with publicly traded stocks today. Contrast that with past returns: between 1985 and 2004 a simple portfolio of S&P 500 Index fund would have earned 13.2%!.

You can read the meeting excerpt here and here.