Making the Most of Your Dollars and Sense
Issue   |   Tue, 04/09/2013 - 22:23
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Berman uses intuitive thinking to explain the world of investing with his guiding example of the ubiquitous lemonade stand.

Lemonville sounds like a shady place to learn the ropes of investing, doesn’t it? As an economics major, I was taught to run the other way for fear of learning anything about lemons. On the other hand, if your crash course in investing came via headlines during the financial crisis, then perhaps you’ve been in Lemonville for longer than you’d care to admit. Or worse, if you still don’t know much about investing, then you might be stuck up Lemonville creek without a paddle.

It might also help if I told you that the lessons in Lemonville are doled out by a man who’s earned Street Cred running his own New York investment advisory firm, after earning a J.D. from Harvard Law School. But James Berman is probably unhappy with my name-dropping, since his “Lessons from the Lemonade Stand: A Common Sense Primer on Investing” is a book that quickly does away with the aura of investing as “…some mystical numerology, unknown to any but the anointed few.”

This isn’t a book about how to get rich from your couch. Berman, who’s a faculty member at New York University’s Finance Department (full disclosure: my dad works nearby, and he and James are friends), published the e-book himself as a guide for the students in his Introduction to Corporate Finance class. It’s since replaced the textbook they used. And for less than $6 on Amazon, it’s a smart, well, you know.

Once upon a time, the residents of Lemonville lived in a quaint town, with a Main Street unblemished by a roiling stock exchange. Along came an enterprising Lucinda, who started her own lemonade business, and before long needed the tools to grow the grove. Once the concepts of stocks, bonds and risks are sorted out by the end of the first chapter, the lemon tree in town becomes a gathering place where “anyone interested in buying and selling shares in lemonade stands could while away a summer afternoon.” At each step along the way, Berman is keen to whittle away at the technical language, smoothly shifting gears between defining a concept and weaving it into his beginner’s framework.

On the dangers of shorting a stock, Berman is all too happy to lay bare the basics: “When you short a stock, you really stick your neck out because there’s no limit to how high the stock price can go. Remember, also, that when you short a stock, you are betting that things will go wrong. But owners of companies have an amazing incentive to see that things go right, and when you short a stock, you are betting against that resolve. Many people have lost their shirts betting against human progress.” That truth seems deceptively self-evident; there are plenty of face-palm moments in “Lessons,” but they’re there by meticulous design.

In fact, the last line of that passage is where Berman leaves his mark. In between the mentions of “Lemonghinis” and investors losing their shirts, Berman’s experience with investors who’ve gone boom, and especially with those who’ve gone bust, shines through. In outlining a framework for the investing world, Berman derides anything but simplicity and clarity. The unavoidable aftertaste in “Lessons” is to wonder how so many people — amateurs and professionals alike — manage to grow estranged from the basic tenets of their craft. Far from preaching in holier-than-thou commandments, however, Berman brings the point to bear with alacrity.

True to his word, Berman cements all of his insights into an actual list of lessons from the lemonade stand. Some seem intuitive, but the concepts steadily ramp up; the book covers everything from investing basics to tax laws and real world valuation. Lemonville quickly grows into a complex town, and even though you can make quick work of the reading, there’s a bit of headrush if you do it all in one sitting. Lemonville’s residents run the gamut of investing prowess and temperament: the enterprising (Lucinda, our entrepreneurial stand owner); the heady (look out for his Mark Twain quotes); and of course the overeager (for whom your pity is in short supply by the end of the book). As reader, ruminating on how all the dots line up pays handsome dividends.

Always engaging, Berman is as incisive as he is deeply skeptical of the labyrinthine complexity towering over modern-day investing. He’s determined to show you how much of a folly investing can be absent the proper mindset, and he does it by crashing through all the jargon that would otherwise obfuscate that reality. For instance, we’re told a margin call is politesse for a bet gone terribly wrong. And it spurs my favorite Lemon Law, a quote from (who else?) Warren Buffett: “If you’re smart, you don’t need leverage; if you’re dumb, it’ll ruin you.”

To read Berman’s investing primer is to take a step back from the rough and tumble cycle of stock markets; it’s to understand why, fundamentally, investing should be less of a roller coaster ride than a road trip. There will be bumps in the road either way. But under the former view, you’re going down no matter what; under the latter, foresight keeps you from losing your lunch.

Naturally Berman is at his best in giving us a final word on the difference between traders and investors. “By definition, only half of all traders will be successful (in practice, far fewer, due to the house’s take in the form of commissions, transaction fees and bid-ask spreads), whereas the majority of investors can be successful if they invest in a well-diversified portfolio of quality companies for the long term.”

It’s worth noting that Berman avoids the most troubling fate that could befall a primer of this sort: unlike yours truly, he resisted the temptation to put in lemon puns that go sour. Counterintuitive as it may seem, lemonade logic might spell sweet success for understanding what makes the investment world turn.