Book Review: How to Smell a Rat by Ken Fisher

by: Chimin Sang

I enjoyed my reading of "How to Smell a Rat" written by Ken Fisher together with Lara Hoffmans, and I highly recommend it. Published by Wiley (NYSE:JW.A), this book is now a New York Times Bestseller.

The book is about financial fraud, triggered by a series of recent fraud cases, the most explosive being Bernard Madoff. I ran across this book when I was searching for a good book talking about accounting fraud. Though it was not the exact kind of book I was looking for, I found this book very well organized, crystal clear in its rendering of history, financial knowledge, hints and conclusions.

The book is most useful to people who has a need to trust their money with professional money managers, but it can benefit anyone because the book imparts some basic and useful financial knowledge in an easy and interesting way that it helps one set the right expectation for investment.

The book is about five signs of financial fraud.

1) Your advisors also have custody of your assets.
2) Returns are consistently great.
3) The investment strategy isn't understandable.
4) Your advisor promotes benefits like exclusivity.
5) You didn't do your own due diligence, but a trusted intermediary did.

Fisher expanded each sign into one chapter, and discussed them in details. I like the way those details are presented. Even though I knew exactly the reasons behind each sign before I read the book, I found myself fascinated reading through his text because it renders the logic in much more historic context, with humorous tones, and an interestingly new perspective.

One such example is when he elaborates on why consistent return is a red flag. One subtitle is "Average Returns Aren't Normal; Normal Returns are Extreme". Guess what it means? Well, we know that the stock market typically offers us 10 to 12% annual return, but really how often do we get those returns? It turns out that we have only an one third chance to have an annual return between 0 to 20%. Thus, an investor should set his/her expectation on volatility right. I have to apologize for my very brief explanation, which ignores completely the rich facts and humor in his original text.

The book is an easy read, 150 pages long. It is not expensive either, $16.47 at Amazon. Reading the book is an insurance for you to avoid future financial fraud crooks, who are destined to make headlines for generations to come.

Disclosure: No Positions