Sun Zhang, Daniel – An Investment Thinking Toolbox

Ekerlids, 2021 [Equities] Grade 4

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Within fundamental equity investing there is a body of different best practices and a canon of literature with important insights – what this site has labeled financial wisdom. Ever so often a person who has assimilated this wisdom writes a book about how he or she uses this in their investment management. This is such a book and as many of these books it is interesting to follow the personal exploration journey of the person and to see how the practical results look. Daniel Sun Zhang has written an easy to read user’s guide to his toolbox of investment thinking – similar to what Charlie Munger would call mental models. According to the author who according to the sleeve is the CXO of Teqnion the book was his own attempt to structure his investment thinking and we are all invited to join to everybody’s benefit.

The structure of the book is simple. It contains a number of chapters each dedicated to one investment thinking tool, say Warren Buffett’s circle of competence, fist principle, Munger’s inversion practice, anchoring, survivorship bias, unknown unknowns etc. Each chapter follows roughly the same format with some kind of background story related to the topic, a definition, linked personal investment experiences and finally “practical advice to myself” in bullet form.

Then there are two appendices covering the types of companies he likes (he has over time moved from deep value to compounders that are worth more than they cost) and the investment process he uses. This includes a somewhat eclectic idea generation, a learning process aiming to understand what the key issues are, a research process that combines a will to learn about all factors that has bearing on future cash flows with an insight of the declining marginal utility of investigating too many things. Then the author constructs an investment narrative that is also made quantitative to make sure it makes sense. This is thrown into a DCF using Monte Carlo analysis to account for varying scenarios. He sells when a stock has become overvalued, when there are better alternatives, when he doesn’t feel that he understands the investment case anymore or when he needs money for other things. It might not fit everybody but I would call that quite a decent investment process.

The book is in a way somewhat lightweight and it is a quick read for its 200 pages. In one or two of the linked personal investment experiences the link feels a bit loose. On the other hand this is easy to forgive as the author has digested some very useful tools and I particularly like the practical nature of his advice and the amount of self-awareness that is shown. A person that has read some amount of the books, blogs etc. of the value community the last decade or two will not find anything new but for those who haven’t they get a good dose of financial wisdom presented in an accessible way. I especially liked the linking done between William Ockham’s razor and Buffett-Munger’s notion of focusing on what is both important and knowable – see, I did find something new.

The author displays a good combination of the art of reaching an investment story and the science of looking at investment using statistical tools. Not everybody can synchronize qualitative and quantitative thinking. I think this combination could be even more important as everybody and their mum are compound investors today and stringent price discipline will be crucial for long-term success.

Above all this is a book to be used. Anyone who learns the mental models Sun Zhang presents will be a better investor than before. 

Mats Larsson, January 31, 2022

Reinert, Erik S. – How Rich Countries Got Rich and Why Poor Countries Stay Poor

Constable, 2007 [Economics] Grade 2

Link to Amazon… Read as pdf…

The governments in developing countries should actively nurture and protect a number of value adding industries and only allow them to be subject to full international trade competition when they have grown to their full strength. This is a highly acclaimed book in development economics and it is partly written to help developing countries. The author, the Norwegian Eric Reinert, is Professor of Technology Governance and Development Strategies at the Tallinn University of Technology in Estonia and has been advising a number of developing countries through the years, mainly in Latin America. Although, the author has several useful insights this is a frustrating book to read.

Broadly two thirds of the content of the book relate to how the author view the world with regards to the efforts of helping poorer counrties to develop economically and then the rest describes how it should be according to Reinert. In the author’s view the actions of UN institutions like the World Bank and IMF matters hugely, since the end of the 1980’s these institutions employ the wrong economic tools and due to this the “poor countries stay poor”. Some of those tools are deregulations, legal property rights, functioning societal institutions etc. that Reinert doesn’t object to but often downplays. The most important culprit is instead instant free trade and the use of David Ricardo’s trade theories that forces countries to specialize where they have their comparative advantage. Through this poor countries often specialize in low value adding, commodity based industries with scale diseconomies while rich countries do the opposite and over time this expands the inequalities. On top of this the rich countries’ international aid is of a type that further passivizes the developing countries and hinders them from taking self-sustaining actions.

Instead of setting up a structure for free markets with perfect competition in the economist’s sense, Reinert advocates an industry politic that under temporary protectionism tries to copy developed world companies, by this creating synergetic clusters of value adding, knowledge and innovation based companies soon strong enough to face the world competition. This will allow for increasing real wages and a growing middle class. With the growing wealth the societal institutions will develop over time.

The first objection to the book is that the “poor didn’t stay poor”. The last few decades have seen the largest wealth increase in human history. The mindset of the book is grounded in the period of the 1970s to the 1990s. The first paragraph states that half of the world’s population lives on less than $2 a day and the situation is getting worse. This wasn’t true at publication in 2007 and it’s not true today. According to UN statistics 6,6 percent of the world population lived in so-called extreme poverty (below 1,9$ a day) in 2019 – after a massive and steady decline over time. This is not to say that the situation is not often awful for a lot of people in the world, but still. Much of the wealth increase in Asia has in fact partly utilized the industry politics that Reinert advocates in combination with the active institutional development of the mentioned UN institutions (who since at least 10 to 15 years mostly focus on sustainability instead of “neoliberalism”).

The second objection to the book is its structure and tone. The author is highly polemical and borderline conspiracy theoretical with regards to how the rich keep the poor impoverished - Reinert seams undetermined if this is driven by malicious intent or stupidity. The book is insanely repetitive and wordy with the same few obsessive main points stated throughout all chapters without any obvious progress in the narrative.

This book feels extremely dated. It’s stuck in-between the 1970s North-South debate and the anti-globalist movement of the 1990s. This is a shame since it contains some valuable thoughts.

Mats Larsson, January 25, 2022

Seides, Ted - Capital Allocators

I recently read Ted Seides, Capital Allocators, and consumed an unhealthy amount of podcasts, with Ted as host and Ted as a guest. First read his book, see this review, and then watch the zoom interview I did. (to be published shortly). Read as PDF…

Gilder, George – Gaming AI

Discovery Institute Press, 2020 [Business] Grade 4

Read as pdf… Link to Amazon…

The author and technology deep-thinker George Gilder has packed a huge topic into a small book. Gaming AI is a refutation of the idea that the artificial intelligence technology in the end will create a mind in a human sense, never alone an all-powerful transcendental mind. AI is one useful tool in a long line of such instruments, but not more than that. The topics covered are not easy to grasp for a layman but I sure hope Gilder is right.

According to the author AI is the defining technological, philosophical and even religious issue of our time. The Silicon Valley in-crowd with high priests like Ray Kurzweil view humans as a second rate data processor with poor physical durability. With big data, deep learning and with the huge parallel processing capabilities of quantum computers we are rapidly approaching the singularity where the machine mind will surpass the human mind in all aspects. This so-called Turning-machine will be the all-purpose problem solver, the general-purpose machine to end all issues, the transcendental intelligence.

We will then face the question if this superior mind is kindly disposed to his creators? If it is, creating the mind will be the last mankind will have to accomplish as we will be supported by our guardian and can spend our days in pleasant but inconsequential contentedness. If not, it will be the last mankind does – period. Whatever the outcome turns out to be, the deterministic road to this crossroad for the fate of man is set in stone - we cannot not develop AI. We live in the last of times.

Gilder sees the above as quasi-religious nonsense. The vision is technically not feasible and he lines up a number separate of reasons coming from different sources. One key reason builds on Kurt Gödel’s incompleteness theorem that shows that full knowledge is impossible and building on this Alan Turing showed that the axioms of a system couldn’t be provided within that same system. All systems need an external programmer that Turing called an oracle. Computer logic cannot escape the self-referring loops in its own code. Claude Shannon further showed that information comes from unexpected data bits - it consists of surprises. A deterministic machine lacks surprises. The only theoretical way to escape this would require infinite space-time, memory and processing power. In reality digital computing is instead hugely sub-standard to the human mind in terms of operations per watt.

The philosopher Charles Sanders has shown that mental activity consists of three factors where objects are connected to symbols through an interpreter. The symbols cannot by themselves form a reliable representation of their objects. The digital map is not the territory. Hence, AI cannot form a reliable representation of the mind. The AI priesthood equals the map with the territory. While man is also fallible we live in this knowledge and in the managing of an incomplete map. Our mind is the source to our creativity and free will. The deterministic copycat has a hard time handling a world where the same inputs often give different outputs, where people act irrationally and where reflexivity is a key feature of the complex adaptive system that is our society.

In order to further develop a technology a creative outside force will have to transcend the logic that sustains the existing technology. Creativity cannot be deterministic in itself as it then lacks the surprises that constitute new data. Silicon Valley will have to alter its prevailing theory of philosophy of mind and instead engage with the task of putting AI to its many worthwhile uses.

This less than 50 pages short book that builds on Gilders previous Live After Google is an important contribution to the debate on our future on this planet. Some will see the rejection of the creative machine mind as backward looking while others will let out a sigh of relief. The main question is rather whether the author is right or not.

Mats Larsson, 13 July, 2021

Moazed, Alex & Johnson, Nick - Modern Monopolies

Read as PDF… Link to Amazon…

St. Martin's Publishing Group, 2016 [Business] Grade 5

Companies loved by their customers, with exponential growth, low capital needs and strong barriers to entry. A mouth-watering combo for investors. Enter the world of the modern monopolies! Apple, Amazon, Alphabet, Microsoft and Facebook have been crushing it. All of them have created and bought platforms where they take a cut of the proceeds when producers and consumers interact and exchange value. A few examples: The Apple Appstore where 3rd party developers create apps to users, Amazon’s 3rd party Marketplace where businesses sell goods to customers within the network. In Modern Monopolies Alex Moazed and Nicholas Johnson bring light to this special business model.

Moazed (CEO) and Johnson (Head of Platforms) co-founded the company Applico in 2009. Their business initially focused on building apps at Blackberry, AppStore and Android but they are now adapting companies to the platform model. There is time for incumbents to evolve but they are running out of it according to the authors. Applico has licensed its data model “Platform Insights” to WisdomTree who have launched an ETF “PLAT” based on it.

The book is structured in two main parts. Chapters 1-4 describe the evolution of the linear business model, where a company creates a service or product and sell it to customers - to platform businesses. These chapters bring a historical and theoretical background to how businesses have evolved and how they have been measured. The “Modern Monopolies” are not as the traditional monopolies who squeezed out as much profits as they could, instead these natural monopolies are loved by the customers as they offer a lot of value. At scale, every new customer adds value to others in the network which creates a virtuous cycle. In chapters 5-8, and the conclusion, the authors go more into depth into how to create and measure the viability of platform businesses. These are essential chapters for entrepreneurs as they describe how to use the insights. The authors have even created their own framework called “The Network Effects Ladder” to guide entrepreneurs through their platform journeys.

The key theme of the book is that platform businesses who enable producers and consumers to connect are the best businesses today. Scale economics and value chain analysis backed by Henderson and Porter were the holy grail during the 20th century, but it has been dethroned by “the strongest moat of all” (according to Bill Gurley) - network effects. Why are not all launching platform businesses then? It’s very difficult to reach critical mass, measured by when the value to onboard the platform is greater than the cost, and there is only place for one or two in a niche. This explains why these types of companies raise huge amounts of cash in the early days as it normally takes up to 10 years to reach that stage. They disrupt whole industries and the incumbents lobby the regulators to stop them. It’s what you can expect when you try to take a bone from a dog’s mouth (spoiler alert: you will get bitten). So far the incumbents have failed because of the strong communities in companies such as Uber and Airbnb who rally behind the businesses cause.

If you as an investor haven’t grasped why Shopify, Airbnb and Uber etc. have become such successful businesses, you lack a mental model for how to judge platform businesses. After reading this book it will be clearer. Maybe you will still think many of these businesses are too expensive now (and possibly they are), but platform businesses are here to stay and if you don’t learn about them now you will wake up one day having missed a lot of opportunities.

Niklas Sävås, April 17, 2021

Gilder, George – Life After Google

Regnery Gateway, 2018 [Business] Grade 4

Read as pdf… Link to Amazon…

The reader of Life After Google gets two stories for the price of one. The first is the tale of David vs. Goliath, or rather Cryptocosm vs. Google. The other covers the mistaken views of the AI-priesthood, at least as the author sees it. The stories are connected as AI and the inevitability of the coming singularity is a cornerstone of Google’s worldview. The second topic has also been broken out into a separate book by the author called Gaming AI, published in 2020, which I will review later on. This text will focus on the first theme. The polymath author George Gilder who published his first book in 1966 is also an investor, economist and technology visionary. Several of his about 20 books have over the years had profound influence on the leading persons of Silicon Valley. Gilder is also very much an advocate for the book’s underdog David who works in the form of peer-to-peer technologies such as blockchain.

There has always existed several worldviews among the people in Silicon Valley. Up until the last 15 years one dominating view was libertarian, sprawling, sometimes idealistic but more often capitalistic and often both anti-state and anti-big business. When Silicon Valley got their own corporate giants and industry tycoons, views gravitated towards a more orderly and centralized system well suited for Big Tech. Gilder even claims that Google is the first corporation with a full philosophical belief system. Apart from the deterministic and materialistic theory of mind focusing on AI there are several important parts.

Google views the world as a large database. There are always more data to collect and to analyze. The focus is on big data and cloud computing where a central ‘logic machine’ combines algorithms with data to know what people wants better than they know themselves. The normatively good is to search the one truth as the logic machine defines it and this can only happen if the machine can collect all data. Data privacy becomes immoral or “information wants to be free” as the saying goes. To maximize its reach the services are free for the users. The cost for search is instead paid through the add-on of advertising costs to other companies’ products. As indicated by Tim Cook’s quote “If the service is ‘free’, you are not the customer but the product” the users give up their user data. Gilder points to something even more serious; for advertising models it is vital to maximize the time that people are exposed to the chance to see adds, i.e. that users pay with their time, parts of their life.

Enters the savior Cryptocosm that will bring the centralized model to its knees, solve our security problems and revitalize the other decentralized and libertarian Internet. In some sense Gilder portrays a Hegelian dialectic view of historic development where focus on core and edge respectively replace each other. Through blockchain technology communication, commercial transactions and money itself will be decentralized and encrypted - even democratized - which will then make data unreadable for the logic machine. User generated personal data will only be available to the persons who hold the keys to it and it will neither be the state, nor Google. Top down control will give way to human uniqueness and creativity.

From chapter 10 onwards the book is with some exceptions a long parade of heroes. One genius after the other from the Cryptocosm-team is presented and I must admit that my attention starts to wane somewhat. Unfortunately this section is really loooong, more than half the book. This and the fact that the author’s two topics get too intermingled hurt the overall impression of the book. The depth, width and originality of thought are what save it. Few would be able to discuss Silicon Valley-epistemology, the functionality of money and the details of various blockchain solutions and get away with it. Gilder pulls it off.

Time will tell if he is proven correct in his views but as so often before Gilder looks far ahead into the technology future, making us all wiser.

Mats Larsson, March 26, 2021

Schwager, Jack - Unknown Market Wizards

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As most of you know Jack is world-famous for his best-selling series of interviews with the greatest traders and hedge fund managers of the last three decades: Market Wizards (1989), The New Market Wizards (1992), Stock Market Wizards (2001), Hedge Fund Market Wizards (2012).  My personal favorite has until now been The New Market Wizards, which made me a much better investor/trader when I first read it in the early 90s. Last year Jack added the Unknown Market Wizards (2020) to this Hall of Fame of interviews. He has written several other books, among which I would like to highlight The Little Book of Market Wizards (2014) and A Complete Guide to The Futures Market (2017). The Little Book, with selected lessons from the greatest traders, is probably most valuable of all, considering the ratio of lessons learned to time to read.

On a sunny February morning Jack kindly took some time off for an interview before his XC skiing in the fantastic Winter Park Resort, Colorado. Below, we will get to learn more about Jack and his thoughts after meeting all these great traders. We will also get some input on how the market wizards performed after being interviewed by Jack, that there is a wizard for any type of trader/investor to learn from and who the greatest trader that Jack has ever met is. (Spoiler: He is in the Unknown Market Wizards). Finally, Jack shares his top 10 trading/investing books with us.

Investingbythebooks: Let us start with your take on fundamental analysis (FA)?

Jack D. Schwager: I started out as a fundamental analyst, as an economic graduate, but what me made change my mind and focus more on technical analysis was that risk management and fundamental analysis are not compatible. Quite the opposite, it fights proper risk management.  If fundamental analysis suggests you should buy a stock at 100, and if facts do not change, the implication is that you should buy more and more, as it declines. I also have concluded that fundamental analysis does not work as a timing tool. The only way fundamentals are useful for timing is: i) if there is totally new information (M&A, new medicine approved etc.) that can start a new positive trend. ii) otherwise, it is best used as a contrarian indicator. Fundamental analysis is useful for suggesting the probable direction of broader trends, not for timing trades. If you have a more technical approach then risk management and the analysis are compatible with each other, since you can define ahead of time at what price the analysis would be wrong, which you cannot do with fundamental analysis.

IBTB: But you have interviewed some very good fundamental investors/traders?

JS: Yes, but they are willing to absorb a significant interim drawdown if they are sufficiently confident in a trade. Jim Rogers from my first book is one example. Another example from the equity market is Martin Taylor (from an interview in Hedge Fund Wizards in 2012). He started an emerging market focused fund in 2002 with USD 20mn in seed money and had an excellent track record. When I did the interview with him in 2012, he was closing his funds, which had USD 7bn in assets, because he didn’t want investors pressuring him to keep monthly losses below some specific percentage. He subsequently started a new fund with his own money and some selected investors.

At the time of the interview, Taylor was in a drawdown in the high teens—a drawdown that was almost totally due to his largest holding: Apple. However, he emphasized that Apple was his highest conviction trade. He explained that the financial markets were just extrapolating recent quarterly results and were totally missing the potential of its huge expansion into China. He was totally convinced that his thesis was going to be proven right. In the six months after our interview, the stock doubled. Of course, fundamental traders, such as Rogers and Taylor, achieve some risk management through diversification, but they generally, do not have rules to liquidate a position if it has a certain percentage loss. In contrast, many technical traders, such as Peter Brandt, have a very different perspective. For them, the most important thing is not to lose much on any trade.

IBTB: Ok, I hear you, but please give us an example who is the best wizard combining the best of both TA & FA? 

JS: One good example is Bruce Kovner from the first book, Market Wizards. His forte was to look at the world economy and form a view of macro and its implications for various markets. But he would also use charts to pick his entry points as well as for risk management. He was the first one I interviewed that told me that he always decided where he would exit a position before he got in. He blended fundamental analysis with risk management, using technical analysis for the latter.

IBTB: When I told some friends that I was going to interview you everyone wanted to know, how did the market wizards do post the interview?

 JS I have not kept track in detail, some just because they were private. I think most have done ok. Some were already old when I did the interview and retired only a few years later (like Michael Steinhard). Others went on gathering more assets, which meant a degradation of performance. For example, Bruce Kovner had a decade of near 90% CAGR before I interviewed him. He then went on and started Caxton, raising tens of billions of dollars. He still did very well, but not 90% p.a. Performance will degrade when assets under management increases. In fact, the ability to manage huge sums of money while still delivering superior performance is itself a Market Wizard achievement. The best example of this attribute is Ray Dalio (interviewed in Hedge Fund Market Wizards) who had the distinction of successfully managing the world’s largest hedge fund. 

 IBTB: Please elaborate on the discretionary vs the systematic trader?

 JS: Of the all the wizards in my book, roughly speaking 90% were discretionary traders and 10% were systematic traders. The former intrinsically adapt, while the latter also need to do it, and if not, they could have problem. Ed Thorpe (from Hedge Fund Market Wizards) was a systematic trader who adapted and continually found inefficiencies in the market.

 One great example of a discretionary trader that had to adapt is Amrit Sall who is featured in the Unknown Market Wizards. He is a trader that trades on events, but as technology progressed, programs were developed that recognized words before he could trade. So, he needed to adapt his approach to this changed reality.

 It’s difficult for the same systems to continue to work over a long period of time. Therefore, systematic traders also need to adapt. A great example from the new book is Marsten Parker, a systematic trader. As a systematic trader you want to keep the same system, but at some point, it could blow up, Marsten would have gone broke if he didn’t change the systems he was trading multiple times. He now has a 20+ years track record.

 IBTB: I am sure there is a market wizard for everyone, Jack, so please give us some help.

-       What book/interviews to read if you are a fundamental/long only/value investor/trader?

o   JS: Hedge Fund Market Wizards, 2012 with Joel Greenblatt, Martin Taylor, and Kevin Daly.

o   Just briefly on Kevin Daly, he was very open, and very specific, and has continued to do well. He was always mostly long only, with a very modest short exposure. Despite launching his fund in Q499, just before the bear market, he was up 900% when I interviewed him in 2012 versus the general market being flat.

-       What book/interviews to read if you are a Technical analyst?

o   JS: Unknown Market Wizards: Peter Brandt. Very detailed on the use of charts, and he has a great book that I recommend. 

o   For trend following traders, I would recommend the interviews with William Eckhardt (New Market Wizards) and Richard Dennis (Market Wizards). Dennis and Eckhardt incidentally trained the famous “turtle traders,” who are featured in a chapter in New Market Wizards. Readers interested in a more detailed narrative on this subject should read Michael Covel’s excellent The Complete Turtle Trader.

-       What book/interviews to read if you want to learn about long/short?

o   JS: Most of the interviews are in this category, and they tend to be more global macro-oriented, less equity. The latter tends to be longer biased. For example, Stanley Druckenmiller (featured in New Market Wizards) is long/short, but his shorts are mostly futures and FX.

o   Market Wizards– I have two good examples, Bruce Kovner, and Michael Marcus.

-       What book/interviews to read if you are a Quant/systematic investor?

o   JS: HFMW Ed Thorp. Very instructive to see how he adapts to the market.

o   Unknown Market Wizards: Marsten Parker who has a very solid 20+ years track record, with many lessons on the critical importance of adapting.

o   William Eckhardt in New Market Wizards offers lots of sound advice about system trading.

-       What book/interviews to read if you want to improve your risk management?

o   JS: Every Market Wizards book is relevant here. Probably 80% of all the chapters in each of the books will have some significant comments about risk management, which is key for every trader.

o   The one exception being Jimmy Balodimas, from HFMW, who did not employ any specific risk management that I could discern. He breaks all the rules. For example, he trades against strong trends without stop loss orders. The key takeaway for me was that he found a trading edge that worked with his personality. He is the kind of person who always wants to be contrarian, which works for him since he is a good scalper (taking small profits all the time).

-       What book/interviews to read if you want to better handle your emotions?

o   JS: Of all the books, in the new book, Unknown Market Wizards, the topic of emotions and trading and achieving the proper mindset for successful investing comes up multiple times in very major ways.

-       What book/interviews to read if you have little/no experience but want to learn from some of the best, to find your edge?

o   JS: Unknown Market Wizards. One interview stands out, Jeffrey Neumann. He is the most amazing trader I have met. He had crazy expectations coming out from college with a goal of making 1 MUSD in his first year, and he started with 3000 USD in 2002. When I met him, he was up to 50 MUSD, but last I heard from him he was up to 250 MUSD.

 IBTB: There are eleven Unknown Market Wizards interviewed in the book, let us give our readers some short comments on my favorites in the book, Peter Brandt, Richard Bargh, Amritt Sall, John Netto, Jeffrey Neumann and Chris Camillo.

JS: Peter Brandt: Peter is the epitome of risk management, and his edge is just that, risk management. His view on charts is that they do not have any great predictive power in general, but at certain points in time, there is an asymmetric trade to be done. Each position always risks a fraction of 1% of the total equity. He has strong views, but weakly held, i.e., as soon as a trade does not work, he is out. Charts are just used to identify points for his risk system. His goal is never to lose much on any given trade and make a lot when he is right.

Richard Bargh. Richard is the most introspective trader I have ever met. He not only keeps a diary of his trades, the details of the reasoning with regards to the buying/selling etc, but also a lot of details about his feelings and how his mental state was at the time of the trade. Every day & weekend he follows up in a spreadsheet and makes a review of everything. During his evaluations of his past performance, he concluded that fundamental analysis works best for him together with the previous mentioned monitoring of emotions.

Amrit Sall, Amrit does exceptional preparations ahead of big trade events, setting out exactly what to do before the event happens.  Once the event happens, he can take a very large position when his analysis indicates such action. He is then in the moment for the trade totally; his world ends at the screen. Regardless of how the trade develops, he knows what he will do immediately. For example, if the market deviates from his expectations in a negative way, he will be out within a minute.

John Netto. John is unique since he uses his own emotions as a guideline. He evaluates them as a contrarian indicator. That is why he says emotions are useful and he has even built them into his trading method. He has built an elaborate software program and like Amrit prepares ahead of big events. Ahead of these he has established a fundamental bias, and then he uses technical analysis for timing, with that fundamental bias in mind and constant monitoring of his emotions.

Chris Camillo. Chris is the closest to a (very) modern Peter Lynch of the market wizards. He looks for unusual high levels of mentions of key words and word combinations to anticipate trends that will impact companies. He will hold a position until he believes the anticipated trend is recognized by the market (for example just before earnings or just after). He does not care about technical or fundamental analysis, nor risk management. He even does not care about the price level itself, as long as the change in social media is positive, he stays long. He has written a book with a very “Peter Lynch” kind of subtitle, “How I beat the pros at investing by reading tabloids and connecting at Facebook”.

Jeffrey Neuman: Jeffrey is another trader who tries to catch very nascent trends.  He is a person that very naturally picks up new things. He is always looking for new trends and doing a lot on the ground research to learn more about the product in every possible way. In that way he also is a modern Peter Lynch, but without the fundamental valuation part. He uses charts for timing with tight risk control and is willing to attempt a trade multiple times if he is stopped out and still believes in the trade. His track record is among the best of all market wizards I have ever interviewed, and in terms of cumulative percent return, he is probably the most impressive of them all.

IBTB: Jack, thanks for the interview. Much appreciated and happy skiing today!

On a final note, I must mention that the best chapter in the book is Jack’s conclusions, 46 Market Wizard Lessons, which is a summary of general lessons learned by the 11 wizards in Unknown Market Wizards. Read, and reread.

As a final treat, Jack shared his 10 favorite investing books. Enjoy.

Bo Börtemark, February 2021,
Twitter @Investbyhebook
www.investingbythebooks.com

THE TOP 10 INVESTING BOOKS, BY JACK D. SCHWAGER

Reminiscences of a Stock Operator

Edwin Lefevre

Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading

Peter L. Brandt 

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

Nassim Nicholas Taleb 

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos

William Poundstone 

The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It

Scott Patterson

More Money Than God: Hedge Funds and the Making of a New Elite

Sebastian Mallaby 

Option Volatility and Pricing: Advanced Trading Strategies and Techniques

Sheldon Natenberg

When Genius Failed: The Rise and Fall of Long-Term Capital Management 

Roger Lowenstein

What I Learned Losing a Million Dollars

Jim Paul  

The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution

Gregory Zuckerman

Smith, Terry – Investing for Growth

Harriman House 2020, [Equity Investing] Grade 5

Read as pdf… Link to Amazon…

“How to make money by only buying the best companies in the world”. The subtitle of Mr Terry Smith’s latest book neatly summarises his philosophy of owning great businesses for the long run. Mr Smith has had a long and successful City career. Since 2010 he has been running Fundsmith, the eponymous fund management group. This book is an anthology of newspaper columns he has written as well as annual letters from Fundsmith covering the last decade. His previous books are Accounting for Growth (1992) and Celebrating five years of investing in decades of success (2015), the latter of which largely forms the first half of Investing for Growth. The articles and letters give readers both a sense of the philosophy employed by Mr Smith as well as an introduction to various topics like shareholder activism, share buybacks etc. Consistently, his message is to own a small number of great businesses for the long run and your returns will reflect underlying business performance. I think this piece of advice makes a lot of sense.

Mr Smith’s focus is on owning companies that generate sustainably high returns on incremental capital (as opposed to ‘cheap stocks’) while keeping a keen eye on costs e.g. by keeping portfolio turnover very low. The major difference compared with the previous book, and the reason this one is even more enjoyable and rewarding to read, is that ‘Investing for Growth’ also enables the reader to go through Smith’s annual letters in sequence. These are interspersed with his musings on topics ranging anywhere from ETFs to boxing and cycling (clue - investment success is not about winning every stage). He is no shrinking violet; it’s fun to read.

Mr Smith really manages to get across his point about focusing on the quality of the businesses first and valuations and technicals second or even third. The real value of this book though is in reading through the annual letters in chronology. There are some interesting observations to be made.

One is this: investors expressed concerns about valuation levels in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019. In other words, many investors have spent the last decade worrying about great companies being overvalued while missing out on some very large gains. Another is this: there were concerns around more restrictive credit conditions (e.g. end of QE) already in 2013. We are still waiting.

Mr Smith is a pragmatist; while the philosophy hasn’t changed, the implementation has, with the portfolio having shifted emphasis from consumer goods to technology. He is also a highly independent thinker on matters such as retained earnings, risk vs reward etc. His list of things to avoid includes buying on valuation alone, market timing, sector rotation, making forecasts etc. He does advise to ‘look for the obvious’. It is all very ‘uncommon common sense’.

Of course one can argue that Mr Smith is talking his own book here and that the ‘evidence’ he refers to reflects a period in markets where high quality businesses of the kind he invests in have been in favour. However, the argument that in the long run returns will reflect underlying business performance is made very convincingly both by reference to Mr Smith’s own experience and to that of other great investors as well as using some very long data sets. Keeping in mind that this book will mainly appeal to long-term investors with a focus on high quality businesses, I would highly recommend the book which is a great addition to a library of annual letters from e.g. Berkshire Hathaway, Markel Corp etc.   It is fun, it is original, it is practical and Mr Smith’s ideas have made me a better investor.

Christian Billinger, January 14, 2021

Smith, Terry - Celebrating Five Years of Investing in Decades of Success

MCMLIII Publishing 2015, [Equity Investing] Grade 4

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“1. Invest in good companies; 2. Don’t overpay; 3. Do nothing”. This is the seemingly simple but not easy, recipe for success at Fundsmith, the fund management business founded by veteran financier Terry Smith in 2010. This launch followed a long and successful career in London as a sell-side analyst and CEO of Collins Stewart and Tullett Prebon. The book is a collection of newspaper columns written for the Financial Times and other newspapers in a style that suits both the interested amateur and the experienced professional. Smith lays out the principles behind Fundsmith’s investment philosophy as well as his views on some slightly more technical issues such as ETFs, fund management fees etc. It is my impression that Smith genuinely wants to educate readers and his message is this; own a small number of great businesses for the long term and your returns will reflect underlying business performance. This seems to me like very sound advice.

Smith focuses on a few key ideas as part of his overall approach; the importance of high returns on capital, independent thinking, running your winners and that valuations matter a lot less than commonly perceived to long-term investors. In addition, he discusses some of the factors impacting the net return to investors as for example the level of fees paid, the level of diversification and the futility of market timing. Smith uses anecdotal evidence from his own career as well as high-level data to validate these ideas. The book is organized chronologically which means there is sometimes a lack of flow if one reads from start to end. On the other hand, Smith uses plain language and his common sense approach really comes through in his style of writing; there is very little jargon. It is a fun book to read. It is also hard not to be won over by his arguments when it comes to buying great businesses for the long-term, especially given his long experience in different market environments and the success of Fundsmith. 

I think this is a useful addition to most investors’ libraries given the practical advice provided and the examples from Mr Smith’s own career; while most of the ideas will come across as mere common sense, it is the illustration of how to apply them from a successful practitioner that is the real value of the book. Terry Smith describes a philosophy and way of operating that has a lot in common with investors such as Nick Train and Tom Russo. They are all of course followers of Warren Buffett and Charlie Munger. However, while Buffett has described himself as 15 % Phil Fisher and 85 % Ben Graham in the past, Terry Smith would better be described as 15 % Graham and 85 % Fisher; he cares first and foremost about the quality of the businesses he invests in and only later about the valuations at which they trade. Important to keep in mind is that this is not, and does not pretend to be, an academic work. The amount of data provided is limited and given the format there is limited room to expand on some concepts and ideas. One could of course argue that Smith is simply arguing his own case here, however I think the ideas in the book have been sufficiently tested by the market over time to say that they probably have some merit. It is certainly a style of investing that resonates with me.

There are challenges to be made to Smith’s argument, one is the fact that he has enjoyed great success investing in ‘bond proxies’ during a period of declining long-term interest rates. This may of course be true. I see this book as a valuable insight into the practical application of a quality investing approach from someone who has been around for a long time; I hugely enjoyed reading, and re-reading, this book and would highly recommend it to anyone that is of a similar bent alongside other great books in the same vein such as “Quality Investing” by Lawrence Cunningham, et al. The book was released to highlight the 5th anniversary of the launch of Fundsmith. One can only hope that Mr Smith will highlight the 10th anniversary and beyond with further editions of this book.

Christian Billinger, October 18, 2020

Freiberg, Jackie & Freiberg, Kevin - Nuts!

Broadway Books, 1996 [Business] Grade 3

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Warren Buffett’s and Tom Gayner’s advice for investors is to avoid airlines. Buffett jokes about being an “airoholic” as he has invested in airlines with dismal results. Gayner says investors can beat the index simply by investing in all companies except the airlines. After a few recent good years, 2020 has proven to be one of the worst for the industry. Southwest Airlines is the exception to all this. The curious person wonders why. In “Nuts!”, the authors and management consultants Kevin and Jackie Freiberg (assigned at Southwest at the time) explain the success of the company.

Why the name “Nuts!”? One reason is that the company only serves nuts to passengers during short flights, but the deeper and more explanatory reason is that their employees breaks all kinds of norms in the industry. The pilots joke with passengers, the CEO travels in coach with the rest and flight attendants use funny costumes. More importantly, the staff do everything they can to satisfy their customers. Pilots offload luggage when needed, customer service representatives let customers stay over in their own homes having missed a flight and employees work extra time without getting paid. In short, they do everything to stand up for the strategy of Southwest Airlines: low costs and great customer service – and they do it out of free will. 

Herb Kelleher, the founder and long-time CEO, who is also depicted in the book Intelligent Fanatics for his outstanding management skills and value creation, has created a cult more than a traditional company.  Kelleher’s take on company culture: “Culture is not about magic formulas and secret plans; it is a combination of thousand things”. 

There are four parts to the book - the first tells the story about the beginnings of the airline when they struggled for years in court due to the bullying tactics of larger airlines. The second part covers six main pillars of the culture at Southwest and should be read by anyone interested in organizational aspects of businesses, especially those who want to learn about the agile way of working widely adapted across companies today. The third part deals with the all the unique quirks of Southwest such as having a relentless employee focus, unconventional advertising and celebration of milestones. The last part summarizes what the authors have learned from Southwest with specific focus on leadership.

24 years later, the main points are still relevant as the lessons from are widely adopted in companies today. It’s about building an organization which is lean and able to tackle new challenges as quickly as possible. Many large companies use the terms associated with agility but don’t put them into practice. Southwest does. Other airlines have used the Southwest way as a blueprint, but few have succeeded. Some have successfully adopted the low-cost strategy using less dense airports and manage to limit the airplanes’ time on the ground, but few have achieved a similar culture and results. Myself, I wonder if it’s possible for a bureaucratic company to become entrepreneurial or if it’s more like seasoning a meal, too much salt and you have to start from scratch? The key point made by the authors is that Southwest is an example of an employer who motivates the employees which are proud and feel a sense of meaning working there. I think that point is more important than ever today where many employees don’t identify themselves with the company they work for. 

The book had been better with less repetition and it lacks the genuine feeling of a biography as when written by the founder himself. It’s best read “textbook style” by those wanting to understand the agile project development method or by a founder who wants to get things right from the start. If you want a good story, books such as Phil Knight’s Shoe Dog or Brad Stone’s, The Everything Store are better but Nuts! is still worth the effort for some readers.

Niklas Sävås, October 4, 2020

Oppenheimer, Peter C. - The Long Good Buy

Published by John Wiley & Sons Ltd, [Equity Investing] Grade 5

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Peter C. Oppenheimer is the chief global equity strategist at Goldman Sachs. He has written a book that gives a great overview of past cycles, which he has experienced for the last 35 years.

His idea was to write a book to help us to better understand the relationships between the economic and financial cycles. The financial market tends to create its own narrative, what George Soros called reflexivity, which makes it difficult in the end of cycles when there is a disconnect between the economy and the financial cycle.

The book has three parts: Lessons from the past, The nature of bull and bear markets and finally Lessons for the future. They can easily be read separately.

One key message is that despite all the incredible changes that has taken place, some things remain the same, human behavior. In up and downturns, from Despair, to Hope, followed by Growth and Optimism. 

The author takes us on a journey where he develops practical tools and frameworks for assessing risk and rewards over the cycle.  This gives us a helpful process to tackle the moods swings we experience as investors. As a side note, one of the best quotes (*) to describe reality is the following: “Since the unexpected happens more often than the expected, and the unexpected can happen in an infinite number of ways, while the expected only can happen in one way, its unlikely that the expected happens”. 

In the spirit of the above, Peter categorizes bear markets in three forms: Cyclical, Event and Structural. He then looks for indicators to flag bear market risks. No single indicator is reliable on its own, but a combination of six factors provides a reasonable signal for future bear market risk. This indicator, maybe even more importantly, is a guide to the likely future 5-year returns.

The book ends with a major conclusion for the equity investor. If he/she can hold the investment for at least 5 years, and be able to accept periods of fluctuations, equities is the best choice. If the investor can recognize the signs of bubbles and changes of the cycle, the/she can enjoy a really “long good buy”.

Next week we will publish our long interview with Peter, which I hope will give you more color on some of the things in the book that interested me most. Happy reading!

Bo Börtemark, September 14, 2020

(*) In memory of the Swedish economist, Assar Lindbeck, who died August 28th, 90 years old.

Newport, Cal – Digital Minimalism

Portfolio Penguin, 2019 [Surrounding Knowledge] Grade 4

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The average US person is checking his smart phone 85 times a day, he’s using social media two hours a day and the average teenager is consuming various types of media 9 of the 24 hours. After writing three books on how to succeed as a student Cal Newport had his break through with So Good They Can’t Ignore You, giving somewhat unusual career advice. This book was soon followed by the even larger best seller Deep Work that focused on how to be able to do high quality work in today’s hugely distracting work environment and by this keeping yourself relevant in a continually changing employment market. The common theme of all these books has been a rational focus on the really important and by this a disciplined usage of time. Time is a hugely precious asset in our short lives so we should try to treat it as such.

The topic of this book wasn’t something Newport had planned. Instead the idea came out of comments from his readers on how they apparently felt an even larger need to fend of distractions outside work than in it. People were telling him stories of exhaustion, of discontent with their life, even feelings of addiction, and linking all this to their use of digital media. At the same time as social media got its mobile break through the psychical illness statistics in the Western world shot through the roof. People interacting with Newport seamed to have lost control of their own lives and their usage of time and with this loss of autonomy also their sense of purpose.

True to his proven formula the author is in this book advising us to focus our usage of digital tools to the few chosen ones that best support what we truly value and then knowingly miss out on everything else. It has to be said that Newport hardly is a tech-misanthrope as he’s an associate professor of computer science at Georgetown. In a way he’s joining the long line of Silicon Valley luminaries that will not let their own families use the products their companies produce. The book is split in two parts where the first presents the author’s solution to the alarming situation, a “digital decluttering” and the second discusses various tools and methods that will help the reader to use digital media in a productive healthy way.

The digital declutter is a combination of a rather abrupt 30 day digital detox period combined with suggestions for a range of meaningful and creative substituting activities. To me this is perhaps the most important realization in the book; that you have to replace the value in the addictive activities with something else that brings satisfaction - or the chock therapy will fail. After the digital declutter-period is over one is allowed to reintroduce digital tools, starting from a blank slate and only adding the few that truly adds value and at the same time deciding on how to use them. Newport strikes you as a constantly rational and disciplined person that seams to like an optimized life. To his credit the method he proposes and advice he gives is flexible enough to fit more personality types than his own and to take account of the digital tools that a person cannot avoid to use if he wants to earn his living. The author understands the difficulties of what he is suggesting.

To me the first part of Digital Minimalism feels like the more important part of the book. The many pieces of advice in the later part are good and in many cases thought provoking but if the chock therapy from the first part works they really shouldn’t be needed as I see it.

This is a book and an author that don’t beat about the bush. If we want to be in command of our own lives we have to make some efforts to accomplish this. Here is some help.

Mats Larsson, May 5, 2020

Lencioni, Patrick – The Five Dysfunctions of a Team

Jossey-Bass, 2002 [Business] Grade 3

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According to the management consultant Patrick Lencioni successful teamwork, rather than strategy, technology and other factors, is the ultimate competitive advantage simply because it is both so powerful and so rare to achieve among businesses. Lencioni is the founder of The Table group, a lecturer and an author of a host of books of which for example the title Death by Meeting sounds like a quite tempting purchase. The Five Dysfunctions of a Team is his best seller as it explores how to turn around a failing executive management team to finally get the entire group to work together towards shared goals.

The first three quarters of the book is a fictional story of how Kathryn Petersen is appointed CEO of the somewhat waning former tech star company DecisionTech Inc and how she manages to restore its former strong business momentum by leading the management team from dysfunction and conflict to a tight knit and business focused unit. The last quarter is Lencioni’s theoretical repetition of the model that Petersen is using to pull this off plus some practical advice on how to implement group changes. In all this sums up to about 220 easy to read pages that is possible to conveniently finish in a relatively short space of time.

Hardly meant to be a high quality novel the plot is easy and the characters are flat (your first guess of which of the persons that will not stay in the group by the story’s end will probably be correct). However, the business fable still serves its purpose well as a tool to bring the methods to life for the reader and the team members exemplify personality types that we all face now and then. We mainly get to know the management team through a number of offsite sessions where Petersen - more or less like the consummate management consultant – with few hiccups works her magic and changes the group dynamics by using the model of five connected team dysfunctions. Relatively little attention in the fable is spent on how the team dynamics would be connected to and dependent on the overall culture of the organization.

The model consists of a pyramid of five dysfunctions or segments where each prior dysfunction has to be remedied to function as a base for the next segment. In combination they will lead to successful teamwork. The dysfunctions are: 1) an absence of trust characterized by team members’ unwillingness to show vulnerability in the group, 2) a fear of conflict that leads to an artificial harmony rather than important discussions, 3) a lack of commitment since the shortage of frank dialogue gives people the option to refrain from buying into the decisions taken, 4) an avoidance of accountability since team members themselves didn’t mentally commit to the decisions they are very reluctant to give feedback to other’s in the group on how to improve and 5) an inattention to the results of the team since those in the group, due to ego or career motives, put their individual needs first. Hence, in a successful team people trust each other, engage in constructive conflict around ideas, commit to plans of action, hold each other accountable for delivering against the plans and they focus on the collective results.

To get everybody in a team to work in the same direction is clearly the key aspect of succeeding with a team. Still there are other somewhat more technical success factors that could have been mentioned as well such as the competence of the team members, the cognitive diversity of the persons so that they bring different viewpoints to the table and the group’s size, incentives, working methods etc. Intuitively the advice Lencioni gives makes sense and the topics discussed remind me of the similar work Focus Consulting Group has done in the financial sector. However, the fact that the author was about 36 when he wrote the book makes me slightly hesitant on how much real life backup he’s got for the efficiency of the model.

This is an easy read that will give clear inputs on how to tackle many key success factors of teamwork – the “ultimate competitive advantage”.

Mats Larsson, February 23, 2020

Robichaux, Mark - Cable Cowboys

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John Malone, depicted in The Outsiders by William Thorndike, is renowned for shaping the cable industry and for the enormous wealth creation he amassed as CEO of Tele Communications Incorporated (TCI) and several spin-offs such as Liberty Media and Liberty Global. His early vision was that scale and possessing own content was hugely important in order to achieve bargaining power against content producers. Not only was his aim to build the largest cable company in the US but also to unite the cable industry leading to less competitiveness and more riches for TCI and himself. In some industries, like airlines, companies fight tooth and nail to the detriment of all, Malone was eager not to let that happen to cable.

The author of Cable Cowboys, Mark Robichaux, started to cover the cable industry as a reporter for the Wall Street Journal in 1991. Six years later it was evident that one man had had more impact on the industry than others. John Malone. Robichaux wrote the book with Malone’s consent but it’s not an authorized biography. He met Malone and many of his colleagues during the project. 

The book is structured in chronological order following Malone’s personal life and how he got in to the cable business in the first place. He started out in the telephone company Bell Labs but hated its bureaucracy. He moved on to McKinsey, where he learned that the key to a good management consultant was to be a good listener. Later, he joined TCI, despite having better offers elsewhere. He thought the potential long-term upside was better. TCI was owned and operated by Bob Magness (who wanted the “smartest sonofabitch he could find” to turn the company around) and the two struck up a lifelong friendship. When Malone came to TCI the business was flooded with debt and he had to fight from day one in order for the firm to survive. 

After five tough years which is best summarized by Malone himself “I’m the head of a little pip squeak company in debt up to its ass, a couple of million dollars in revenue, and not creditworthy to borrow from a bank – we’re barely making it”, he started to roll-up local cable businesses buying 500 companies over 10 years to build the largest cable operator in the US. During these years he never showed a profit as he wrote down cable assets aggressively. He thought it best for shareholders to minimize earnings, and by so taxes and instead focus on cash flows: “Tax-sheltered cash flow could be leveraged to land more loans to create more tax-sheltered cash flow”. Malone was unconventional and right and produced 900x returns for his shareholders over a 30-year period.

Malone realized early on that he was a great capital allocator and deal-maker but he didn’t like the operating side of running a huge business. Therefore, he ended up selling TCI to AT&T for USD 48 billion. Unfortunately, the cultures of the firms didn’t match, and the merger became a disaster. As Malone had kept his shares in AT&T he lost USD 3.5 billion and one of his major regrets became that he didn’t sell his shares at the time of the merger. AT&T later decided to spin-off Liberty Media which was operated by Malone and he continued his buying spree and financial engineering with Liberty.

One thing which I think could have been stressed more in the story is how Malone thought about mergers. As an investor you are trained to believe that mergers destroy value, which is questionable judging by the recent century. It surely wasn’t the case when it came to Malone as his merger strategy realized very straightforward synergies. TCI was formed by buying smaller cable companies and used the larger size to its advantage by getting better deals from the programmers. The company also cut administrative costs to the minimum.

By reading this book you will not only learn about one of the most successful business leaders of the twentieth century but also how television and the internet has evolved. That is the main difference with the portrait in The Outsiders which is more condensed and focused on Malone.

Niklas Sävås, January 19, 2020

Schroeder, Alice - The Snowball

Bloomsbury, 2008 [Business] Grade 5

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Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn't … pays it”. The man behind this biography, Warren Buffett, grasped that at an early age and became the world’s greatest investor. The Snowball is a fitting title for the ultimate biography about Buffett. There are so many angles one could take to a review of this wide-covering book as it portrays the most intricate details of Buffett as an investor and businessman but also his personal life. A large part deals with his relations with family and friends. His main lessons for investors may be known for most:

1.      When you have figured out the qualitative aspects of a business the numbers should hit you in the head

2.      The importance of pricing power

3.      Bet big when the odds are in your favor

4.      Concentrate on the best ideas

5.      Clone others’ ideas

6.      Be patient

7.      Don’t use leverage

But there are also a lot of personal lessons:

1.      Remember that your body needs to last a lifetime

2.      Adopt an inner scorecard

3.      Always act with integrity

The author Alice Schroeder was a renowned security analyst who covered Berkshire Hathaway and whom Buffett took a liking to. In 2001, Buffett suggested that Schroeder should convert to writing full-time which eventually resulted in this book.

To summarize the main theme of the book; Buffett was born in 1930 and wanted to be rich from a young age. He was a successful entrepreneur who ran multiple businesses before turning eighteen. When he learned about investing and how one could make more money with less effort that was where he turned all of his focus. He went to Columbia since his hero Benjamin Graham was teaching there and Buffett embraced Graham’s deep value investing strategy. When he started his partnership as a 26-year old, described in chapters 22 and 24, this was his main method even though he also invested in a few quality businesses. During these years, surprisingly, he sporadically also used leverage and short-selling, reasoning: ”When investors changed their minds, stocks often dropped like thwacked full of bird shot in midflight”. Eventually, he changed his focus to a long-only strategy investing in quality businesses at the right price, which was partly due to some costly lessons, partly due to the influence of his partner Charlie Munger - but also as it worked better for his larger portfolio size. This transformation is integral to the enormous success. The preeminent businesses are those that are best adapted to change. That is certainly also true for investors of which the learning-machine Buffett is a telling example.

Another major theme of the biography deals with the challenges Buffett has met throughout his career. The near failure of Salomon Brothers, the TMT bubble when many thought Buffett’s prime had passed, his biggest acquisition General RE which was a major flop during the first years, Coca-Cola which was a fantastic investment that became mediocre, 9/11, the death of his dear friend Kay Graham who contributed to bringing Buffett to the top of the social ladder - and the most important loss of all, his wife Susie. Nothing managed to stop the snowball from growing and Buffett has always managed to get out stronger from the hardship. This may be the most important lesson from the book; everybody will be put to difficult tests during a long life, it’s the way you respond to hardship that decides if you will be successful or not.

For those that are not so interested in Buffett’s personal life, the annual letters are enough.  If you want to read about his actions on the Salomon debacle then I would recommend the Lowenstein biography. This is however the ultimate book of Buffett covering business, investments and his life. It’s long but all the 830 pages are a joy.

Niklas Sävås, November 17, 2019

Parames, Francisco Garcia – Investing For the Long Term

John Wiley, 2018, [Equity Investing] Grade 5

Link to Amazon… Read as pdf…

Francisco Garcia Parames, born in 1963, and already one of the very few successful investors that both have started a fund from scratch and written a book, and has done this in Europe - not even UK, but Spain. He kindly takes us through his story from the very beginning, which includes a heavy dose of inspiration from the usual US suspects. This book can be read with great benefit both by those with less knowledge and by experts. This is a perfect, easy to read book for the holiday or for a long flight.

The first part of the book is about Parames life before becoming an investor. I think this is very inspirational for beginners, so it’s not to be disregarded. The second part covers the author’s theory of investing and it starts with his use of Austrian economics. This clearly sets him apart from other value investors. Obviously this has increased my interest in the topic and the author graciously recommends key books on the subject. Then comes two chapters that discusses the merits of investing in stocks over the long term. I found these less interesting, but very well written and wells suited for the beginner.

Subsequently follow chapters 7-8, which I found the most interesting, since they are all about how to make money in stocks. Parames recommends 9 ways to find the winners, of which I will discuss 3. i) Opportunities in cyclical companies. Parames is by heart a value investor, and stresses the value of patience and long-term thinking. He thinks cyclical companies are the easiest and least risky way to find opportunities. Cycles always turn around. He stresses that the key here is not to try to predict the inflection points and to keep buying thru the fall. It is also vital that the company has little debt and a market leading position. ii) Long term projects. Investors in general lack patience, leading to incorrect prices and investment opportunities. Patience is an investor’s biggest asset, not intelligence. He writes “its surprising how schizophrenic investors are, disliking investments that hurt short term results, but increase value in 2-3 years.” iii) Free lunches. These appear when a stable business, which justifies its share price, comes into a possession of an asset, an overlooked early stage project that is not priced by the market.

Valuation is the author’s last step in the selection of stocks. The work here focuses on calculating a normalized earnings number and putting a relevant multiple on it - on average 15x. Once Parames has done that, he invests in those with the largest discount to current the market price. He then addresses the question when the market will realize that the stock is too cheap. It can take time, but he gives the example that even if it takes 10 years to get to his target price (which are 50% higher than current price) he will get a 4% return, which he thinks is the worst-case scenario. He works actively with portfolio rebalancing, selling winners and buying losers, keeping the weights unchanged. He doesn’t like catalysts but concludes that some factors can speed up the revaluation process, like new managers or economic cycle, currency rates etc. that change for the better. He stresses once again that patience is key for success and that you need a lot of it.

The final chapter of the book is about the irrational investor lurking within us all. It’s a great summary of behavioral finance. He addresses the problems of extrapolation, herd mentality and the risk of drifting away from a sound strategy. His recommendation is to be aware of the biases and implement a somewhat automatic investment process. He further highlights the problem with information overload and the negative slant on all information we receive, making it more difficult to hold on to one’s convictions as it distorts reality. The book ends with some true gems. Firstly, a list of 26 small ideas and a guiding principle. Secondly, one of the best readings lists I’ve seen in a book, with a lot of inspiration for everyone. This is a perfect finish for a book from an investor that is reading all the time, and still evolves his investment style like a true master.

Bo Börtemark, October 19, 2019

Carreyou, John - Bad Blood

Alfred A. Knopf, 2018 [Business] Grade 4

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Bad Blood is a masterpiece in dissecting how bad the suffering can become when there is no room, either inside an organization or outside, for those with diverging views. This is a story of how a multi-billion company turned to nickels within a few years with devastating consequences to patients, employees and investors. By only acknowledging the supporting evidence for a specific view without questioning, one will both get a worse understanding of how the world works and risk being fooled by people understanding human psychology. This book will teach you many valuable lessons in that respect.

The author, John Carreyrou, is an experienced investigative journalist at the Wall Street Journal. Having worked for the firm since 1999 he has won multiple awards for his articles. His stories have typically, but not solely, been about company-scandals. Bad Blood got raving reviews and was awarded as business book of the year in 2018 by both McKinsey and Financial Times.

The story is covering Silicon Valley company Theranos and its founder Elizabeth Holmes. The company’s mission was to revolutionize the health care business by enabling blood tests at home. By drawing some drops of blood from the finger instead of a large dose from the arm in a typical venipuncture, the procedure promised to be both cheaper and simpler. Saving billions for the taxpayers, who did not want the company to succeed? The problem was a lot of great promises but not a lot of delivering. The technology the company built was not ready while CEO Elisabeth Holmes and the COO Sunny Balwany tried everything in their hands to hide the truth from the outer world. By using horrendous business ethics as well as lawyers with questionable tactics the company managed to keep the lies from destroying the company for an impressive stretch of time (well learned from any oppressive regime), especially considering the renowned investor base and a very experienced board. In the end, the investigative journalism of the author Carreyrou contributed to stop the madness from continuing - and with it saved investors from plunging even more funds into the company. Most importantly it saved patients from getting the wrong results on their blood tests, potentially saving lives.

As often regarding business and investing Buffett has already said it in the best possible way. The following quote is described as who to hire but is fitting for founders as well and especially for Holmes: “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”

This is a reminder for investors of the importance to understand that even though the management signals smartness and ambition - together with a great story to back it up - it may all be built on lies. Having the circle of competence through own knowledge or contacts in order to question what a company signals can’t be underestimated. By studying all the successful people who fell for the tricks of Theranos one can be sure of one thing though. We are all susceptible to be fooled. This is why it’s so important to read this book and other similar books focusing on business scandals - such as Enron. I can’t promise that it will make you avoid investing in the next fraud but hopefully the odds will be tweaked slightly in your favor. Possibly. Maybe…

If not, you still have a few hours of exhilarating reading in front of you. This business thriller will keep you wide-awake and I wouldn’t be surprised if you read it in one sitting.

Niklas Sävås, August 15, 2019

Baid Gautam – The Joys of Compounding: The Passionate Pursuit of Lifelong Learning

Published by Gautam Baid, [Equity Investing] Grade 5

Link to Amazon… Read as pdf

There have been many books written about Warren Buffett & value investing, and many read them and are impressed by the message, not least due to Warrens outstanding performance over time & his charming ways. But many read & listen to it and then forget it. One person has more than read it, he has also immersed himself into it and created his own version of investing.  That person is Gautam Baid. For Gautam it’s not just about investing, it’s a total experience which runs his daily life. Reading “The Joys of Compounding” was surprisingly inspirational to read.

This is a must read, both for the beginner and the professional. My only critique would be that sometimes it’s too many quotes, too much of a discussion around the same things. It could be done more efficiently, i.e. in less pages. But, that’s also part of the charm, that is how Gautam is. And to some extent that has now influenced me as well. Many times, I want to get to the point too fast. Here you must spend time, to immerse yourself into the art of investing.

Still, for the ones who have read more than a few books on Warren and disciples, I want to highlight a few chapters that I think stand out and will surely re-read many times. Those chapters are 18, 27 and 32.

Chapter 18 is about the idea that the market is efficient most of the time, but not all the time. Great discussion on the difference between risk & uncertainty. Chapter 27 is a real treat, since it’s about something not so common to discuss among value investors, how to invest in commodities & cyclicals.  He also manages to make an intriguing case for “Techno-Funda” investors, looking at both fundamentals and charts for investable trends. Finally, chapter 32, key chapter of the book. Easy to read & borrow ideas, but everyone needs to develop his or her own conviction. To do that, there is a shortcut, keep a journal and (chapter 26 and update your beliefs chapter 22) learn about yourself.

We are about to come to the end of this book review, but it’s not the end of the discussion of the book, it’s just the end of the beginning. Tomorrow we will publish our long interview with Gautam, which I hope will inspire you further since they are partly about the chapters above, which I think will clarify his ideas further.

Having read the book once, and multiple chapters over and over again, I can say it has been a true Joy. I now look forward to the compounding, of not just financial returns, but in overall life, and the pursuit of lifelong learning.

Bo Börtemark, July 30, 2019

Ries, Eric - The Lean Startup

Crown Publishing Group, 2011 [Business] Grade 4

Link to Amazon… Read as pdf…

Waste and inefficiency must be avoided in order to build a successful business. But how could it be achieved in practice? This is the problem that the author Eric Ries sets out to tackle with his book The Lean Startup. The Japanese businessmen Taiichi Ohno and Shigeo Shingo invented lean production in the 1980s. The aim was to avoid waste in Toyota’s manufacturing. The methods have been copied by many companies since. Another term frequently used in the book is “agile”, i.e. working with short production cycles using adequate tools to measure success and learn continuously.

Ries is a Silicon Valley entrepreneur. With ten years of practical experience from starting and running successful businesses he had seen what worked and what did not. Convinced that his success was due to his methods he started to blog about them in order to spread the word of his formula that he calls the lean startup methodology. That blog led to this book from 2011, with the subsequent follow up The Startup Way in 2017. Today he is an author, a venture capital adviser and deemed a thought-leader on innovation and strategy.

The Lean Startup is a practical guide mainly written for entrepreneurs and startup managers. It is structured in three parts: Vision, Steer and Accelerate. In the first part Ries presents the basics of lean and agile and his concept of validated learning. In the second part, Steer, he describes the cycle of build-measure-learn. “That didn’t work, next!” By focusing on small meaningful deliveries - minimum viable products - and working with short feedback loops, waste can be avoided. This is the main idea of Ries’ methodology, as long feedback cycles demand good forecasts and humans are terrible forecasters. If the time from start to end is too long it’s also hard to learn from mistakes and correct them in time. The last part, Accelerate, deals with how to avoid bureaucracy when growing and how a company can gain a competitive advantage and invest in order to improve it.

Chapter seven and eight are the most interesting ones for the investor. By using traditional valuation techniques based on figures from the financial statements, it’s very difficult to understand if a startup, or any company, is viable or not. The CFO of a startup needs to track metrics at a customer group, cohort, level in order to know if the incremental development creates value for the company. For the public investor - unlike the venture capitalist - these metrics are seldom available. The next best is arguably to look for developments across the customer base and to track KPIs such as the cost of acquiring a customer, customer retention and revenue per customer.

The things Ries writes about are not new. His main sources are experiences by him and other entrepreneurs as well as by thought-leaders in business, innovation and strategy such as Ohno, W. Edwards Deming, Clayton Christensen and Peter Drucker. The main feat of the author is that he has taken principles that have worked in manufacturing to the technology space and refined them to work efficiently there.

If one were to be critical, as one should always be, Ries doesn’t give the reader much proof of the success of his method. It all makes intuitive sense and having worked with both traditional and agile principles myself I agree with most of what the author says. But as no base rates for startup success is presented and compared with data for businesses employing these principles, there is room for improvement. I hope the author supplies hard facts in a later edition.

The biggest insight for me as an investor is the reminder that the most important corporate metrics to analyze are either unavailable or difficult to find for the outsider. Studying financial statements is a start but far from the end. Being an investor is like being a detective, the search for clues never ends.

This is an enjoyable read which should interest both the investor as well as anyone involved in business.

Niklas Sävås, April 22, 2019