Gilder, George – Gaming AI

Discovery Institute Press, 2020 [Business] Grade 4

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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

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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

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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

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

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

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

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

Stone, Brad - The Everything Store

Corgi Books, 2013 [Business] Grade 4

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When Brad Stone asked Jeff Bezos about the idea of writing a book on Amazon, Bezos found it premature as a lot of history was still to be created. Observing the events after the publication in 2013 one can understand why. The company and its founder are one of the biggest success stories of the 21st century and many books are yet to be written about them. The title says a lot about the ambition of Amazon and Bezos, to become The Store for everyday purchases. They are certainly on the way.

Brad Stone is a journalist and author who focuses his writing on the technology area and frequently the major technology companies. He has written three books of which The Everything Store was his second. Stone had followed Amazon and Bezos for a long time as a reporter before deciding to write the award-winning book.

As is common with biographies the book is structured chronologically, starting with the early life of Bezos, his first jobs and the decisions that ultimately led to the formation of Amazon. Bezos had a well-paid job at a hedge fund on Wall Street and he took a leap of faith by - opposite to the advice and wishes of most of his friends and relatives – leaving the comforts to start his own business called Cadaver (later changed to Amazon). The book is as much a biography of Amazon as of Bezos, which is not strange due to his influence.

The book conveys the story that many of you will be familiar with at this time. Starting with selling books online, Amazon has moved into many new areas over the years. Some of the chapters describe the most important innovations of the company as the notion of the Everything Store, Amazon Web Services and the Kindle e-book. It also explains many of the failures, mostly related to early acquisitions (which are minor compared to the successes). Bezos’ idea is to fixate on the customers and to use the savings that Amazon realizes with increased scale to lower prices. The declining prices entice customers to buy more leading to larger scale and even lower costs in a virtuous cycle. The company has been ill seen by the financial community during large parts of its history due to the lack of (apparent) profits. With a true long-term perspective Bezos has the idea that what’s best for its customers is best for Amazon. Other stakeholders are not treated as friendly. Vendors, employees and the Government have a hard time dealing with it. In my opinion, that may be one of the tougher challenges for Amazon in the future as the best business should be the one that treats all stakeholders well.

The author pictures Bezos as a genius who sets the highest standards on himself and his employees. If the standards are not met, the stay at Amazon will be short. Considering how many leaders that have come and gone as well as the success of the company, it’s hard to argue against those points. Bezos was afraid that the book would become another one of those biographies trapped in the narrative fallacy of too much simplification and storytelling. The road to success is always bumpy and even though it’s now clear that e-commerce is a success, that was far from evident early in Amazon’s history. One could think of an alternative scenario where the development of e-commerce would have taken much longer to the detriment of Amazon. I would have appreciated such a discussion. Stone makes a few points about what is certain to happen in the future which I think could profit from a more nuanced view.

As an investor it’s great to be able to study successes and failures of businesses without having to make a judgment if the stock is interesting or not. Amazon is such a case for me. I think it’s an act of grave omission not trying to understand one of the most important companies in the world and possibly more crucially its fascinating founder. This book is a joy to read due to the simplicity of the language and the timely subject. I surely understand why it became a best seller.

Niklas Sävås, January 28, 2019

Zenger, Todd – Beyond Competitive Advantage

Harvard Business Review Press, 2016 [Business] Grade 3

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In his corporate strategy book Beyond Competitive Advantage the University of Utah business professor Todd Zenger, specialized in so called organizational design, presents a framework for companies on how to create shareholder value. The thesis is that companies too often use faulty or outdated structures to guide them in this pursuit and they should instead formulate and follow something the author calls a Corporate Theory of Value Creation. Although I don’t fully agree with all the preconditions that Zenger sets up the solutions he proposes are still largely correct.

The book is structured in three parts and seven chapters. Part one spanning the first 100 pages introduces and describes the author’s Corporate Theory and why it is needed. The other parts and the remaining 80 pages are mainly concerned with how companies – with their Corporate Theory at hand – should through organizational design, strategic focus, asset allocation, investment choices, acquisitions and divestments etc. link together the assets of a company, in a broad sense, to create value. “The leader’s task in a dynamic design is to identify and select the proper sequence of programs, initiatives or structures.”

However, to take one step back, Zenger starts by claiming that companies are too stuck in an antiquated view of strategy as formulated by Michael Porter in his classic Competitive Advantage - hence, the name of this book. What we are moving beyond is not the need to have competitive advantages as such but an old formulation of what corporate strategy to use. Porter’s approach to strategy is that a company should position itself in a valuable market niche where it through some means can have a competitive advantage and then work to fortify its moats in this market segment.

Now, the purpose of a corporation is to create shareholder value and in Zenger’s view this positioning type of strategy framework is too static to be able to create the continuous growth in value that shareholders demand. Instead the company should take a more adaptive and fluid trial-and-error approach. But without a beacon to guide these trials they risk becoming a value destroying random walk. Enter the author’s Corporate Theory of Value Creation defined as “a logic that managers repeatedly use to identify from among a vast array of possible asset, activity, and resource combinations those complementary bundles that are likely to be value crating for the firm.”

The theory that must be unique for the specific company can for example relate to an advantage in solving a set of customer problems, in exploiting a set of assets, a privileged position in gaining synergies from M&A etc. The observant reader could object that this doesn’t sound much different from the means that Porter would list in gaining a competitive advantage and they would be correct in this. However, Zenger’s Corporate Theory must also give a view on future development, on synergies between corporate activities and an insight on which assets that fit the company and by all this function as a tool to take the company forward into the future. It is a type of fact-based belief on how the company can create value that over time will help the management prioritize.

I agree on the need of a beacon and the book is not bad but it is quite lightweight, a tad ivory tower academic and there is a lot I don’t agree with. First, I don’t think companies are at all as trapped in Porter’s models that Zenger portrays. Secondly, while I agree on the corporate purpose of creating shareholder value it is a fundamental mistake to equalize this with the current share price. Further, the author advocates a corporate design oscillating between centralization and decentralization to over time optimize the combination of efficiency and innovation. I think there is an obvious risk that a firm by this never gets the compounding momentum that is needed for large-scale success.

The author in my view gives the right prescription but I don’t fully agree with all of the analysis done beforehand.

Mats Larsson, November 4 2018

Porter, Michael E. - Competitive Strategy

Free Press, 1980 [Business] Grade 5

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A concept that Warren Buffett has popularized in the world of investing is circle of competence. It describes what industries and businesses the investor understands well enough to be able to make an informed investment decision. It may be easy to understand the notion but its realization surely is harder than it seems. An integral part is to grasp the inner workings of an industry and the competitive situation of the specific business. A book that has stood the test of time and that will give the reader some well-needed guidance on the subject is Competitive Strategy by Michael E. Porter.

Porter is a Professor of Harvard University and Head of the Institute of Strategy and Competitive Strategy. He has written several pioneering books and papers and is possibly most renowned for Competitive Strategy and Competitive Advantage written five years later. He is a thought-leader and his material is widely used in academia worldwide and by practitioners as managers, consultants and investors. Porter has throughout his career worked as a consultant to help businesses improve their skills in making strategic decisions. He has studied hundreds of businesses in his research while teaching at Harvard Business School and has used much of that experience to produce his groundbreaking writings.

Competitive Strategy is divided into three parts. In the first part covering chapters one to eight, Porter presents a framework for how to analyze an industry and its competitors. His famous five forces, the key concept of the book, act as a base for the analysis. Chapters one, two, seven and eight are essential reading for both the investor and the manager as they present a foundation for how to think about competitive advantages on various levels while chapters three to six are more tilted towards managers and management consultants by giving hands-on information on how to device strategies. The management’s task is to develop strategies to strengthen the competitive advantage while the investor’s job is to analyze if management is doing the right things. In other words, management builds the competitive advantage and investors measure it. The second part of the book covers strategies for different industry structures as for example fragmented industries with many competitors and no dominating leader as well as emerging industries lacking stable rules. In the last part, again more interesting for managers and consultants, Porter presents several important strategic decisions that firms need to take and applies the ideas and lessons earlier described. Appendix 2 is also useful as it presents a hands-on way on how to conduct an analysis.

Investors, arguing that it’s too difficult to use his material in practice, sometimes criticize Porter. Conducting the strategic analysis is an assignment that ranges from weeks to months depending on the investor’s prior knowledge and network and it includes a lot of footwork and reading. On the other hand, investing is a full-time job and who is to say that it should be easy? Furthermore, investors who apply the five forces get criticism from Porter for being too superficial when using the model. Reading the book is tough and applying the lessons from it is even tougher which drives investors to take shortcuts. Porter also stresses that change is vital while many use the five forces in a static way. One could argue that it's understanding whether the future of the business will be better or worse than the consensus view has it, that is the key question for investors as the rest should be built into the current share price.

My recommendation to the reader is to compile a couple of case studies of businesses while reading the book as this will lead to a better understanding of the framework. Before I read the book, I had heard that it was challenging - which was confirmed. I had also heard that it would be worth the effort, which I agree on as well. Fully grasping the ideas will potentially make the investor recognize the challenges of a business before the information is public which will lead to an important analytical edge.

Niklas Sävås, October 13, 2018

Lowe, Janet - Damn Right!

Wiley, 2000 [Business] Grade 4

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There are multiple books and papers written about the vice Chairman of Berkshire Hathaway, Charles T. Munger. When Damn Right! was published however there wasn’t much. And whereas a lot is written about Munger as an investor, in this biography we get to know him on a more personal level from his birth to his 70s around the year 2000. Munger and his family always wanted to remain out of the public eye, causing very little information to be available about Munger before Damn Right!. Thus, Munger’s family was not overly excited about this book from the start. Still, the author Janet Lowe told Munger that she was going to write about him with or without his consent and after a while he agreed to be cooperative. Lowe is an investment writer and author. She specializes in books about business leaders and has among others portrayed Benjamin Graham, Warren Buffett and Bill Gates.

Damn Right! describes how Munger was born in 1924 and grew up in Omaha. His family taught him the sound morals of Thomas Jefferson and Benjamin Franklin from an early age. His father was an Omaha judge and Munger followed in his father's footsteps by pursuing law. Early in his career he suffered from both distractive events as being forced into military service, as well as sad ones with a divorce and the tragic death of his son. It took him until his thirties to start accumulating his fortune which he built out of savings from his legal practice, invested into real estate projects. Having realized that debt is a vital ingredient to be successful in real estate investing together with it being a full-time job, he soon moved on to other interests. This involved starting an investment partnership and resigning from being a lawyer after having co-founded the law firm Munger, Tolles and Olsen - which is used by Berkshire to this day.

Munger ran a concentrated investment portfolio with huge success but also wild fluctuations. He frequently discussed his investment ideas with Warren Buffett who he later famously went into business with, taking the subordinate position as vice Chairman of Berkshire Hathaway. Munger is famously known for teaching Buffett that it pays off to pay up for quality. What is not so known but explained in the book is that he himself also learnt that lesson fairly late. The company that in this regard made the strongest impression on him and Buffett was See’s Candies, a high quality, premium chocolate company located in San Francisco which has been a home run for Berkshire.

Aside from getting to know some of his and Berkshire's investments in See’s Candies, The Buffalo Evening News and Salomon Brothers the reader is introduced to Munger’s moral compass, which is strongly influenced by Franklin - his biggest hero. Munger is of the view that honesty and hard work will take a person a long way. Morals aside, a trait he is famous for which isn’t as positive though, is his manners. People who don’t know him well may think he is arrogant and rude. One thing that defines Munger is that he didn’t set out to become superrich but rather financially independent enough to pursue interests within education, medicine and philanthropy and also his hobbies of architecture, travelling and fishing.

Although the book is filled with timeless quotes from both Munger and Buffett I still feel that some quotes are a bit misplaced where one subject is discussed and then followed by a quote or writing which is not really connected with the prior text disrupting the flow of the reading. However, this is more of a minor observation than a large negative. For me, a book about Munger could never be boring. I like Poor Charlie’s Almanack more, which is a book I often go back to, but I still rate Damn Right! highly and it’s a must for all Buffett & Munger fans. The part I enjoyed the most was to get more insight into Charlie Munger the person and not only his sharp quotes and wisdom, even if the book gives the reader plenty of that too.

The only thing I would ask for now is for someone to fill in the gaps of the last 20 years of the fascinating life of Charlie Munger.

Niklas Sävås, September 23, 2018

Ford, Henry - My Life and Work

Garden City, N.Y., Doubleday, Page & Co., 1922 [Business] Grade 4

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When considering the most successful and influential businessmen of the 20th century, Henry Ford certainly comes to mind. Many entrepreneurs and businessmen of later times have arguably been influenced by how Ford ran his business and how he created the world's most prosperous automobile company. In Ford's autobiography "My Life and Work" the reader gets thrown into the early beginnings of the Ford Motor Company and its evolution. Asked the question if it was tough to build his company Ford answered: “I cannot say it was hard work. No work with interest is ever hard.”

In chapters one to three Ford describes how he at an early age became interested in machines and how he started to work as a mechanic. During that time, he managed to build his first car and resigned from his job to start his first company and later on his legacy, the Ford Motor Company. Already from the outset he aimed to take the automobile from a luxury good to a public good. In chapters four and five Ford presents his efforts to produce the perfect car, called the T-model, which could be made so cheap that practically everyone with a decent salary could afford it. In chapter six until the end of the book the author drifts away from the Ford Motor Company to discuss his more general and ideological views on business and things in general. He presents his views on the rise of the machines, wages, profits, money, banking, charity, education among else. Always with passion and a very firm view on what is right and wrong.

It wouldn't be wrong to characterize Henry Ford as a "moat-creator". He believed in the low-cost model which is often described as the strongest type of moat or competitive advantage. By always increasing efficiency and constantly improving it's possible to keep competitors at bay. He had a similar view to Jeff Bezos’ in that all the time spent watching competitors is time lost on improving the own operations - and thereby opening up to competition. Many of the factors modern businesses pinpoint today as decentralization and constant improvement were methods employed by Ford. He tried to reduce the costs as much as possible in order to sell more cars and reduced prices constantly to increase the market for his cars. One example is how he paid back 50 dollars per car to the consumers one year as he thought the profit was too high. Talk about goodwill!

Some other characteristics of how Henry Ford ran his business give signs of a great corporate culture. Instead of using the word profit he says service. He believed that the function of the producer is to deliver as much value as possible to the consumer. He also used the word partners instead of employees. “It is not usual to speak of an employee as a partner, and yet what else is he?” On incentivizing his employees, he thought that high wages were key. Ford describes that it pays to create a situation where the employees are strapped from financial worries.

During the evolution of Ford Motor Company Henry Ford often got seething criticism publically for the choices he made as they were often against the general view of the market. As a true contrarian Ford had the view that everyone with a decent salary should be able to afford a car and worked tirelessly with this objective in mind. When the public opinion thought Ford was crazy with regards to the number of cars he was to produce he simply didn’t care. Another side of Ford was his ideological views. Some chapters, as for example one about money, are more a discussion about what Ford thinks is right without really getting to the point on how he wants things to be. Even if the book at parts is filled with too much ideology for my taste it's also packed with essential wisdom on business.

This is an important book for the investor who wants to understand the power of having a low-cost advantage built by a fanatic CEO. Hopefully the investor can benefit from improved pattern recognition by learning about the success story of Ford to find tomorrows Ford Motor Company, Wal-Mart or Amazon.

Niklas Sävås, September 8, 2018

Doerr, John - Measure What Matters

Portfolio Penguin, 2018 [Business] Grade 3

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What is the secret tool that has created Google’s success? It turns out to come from Intel. In Measure What Matters John Doerr, venture capitalist extraordinaire, presents the Objectives and Key Results model (OKR), where objectives define what an organization or sub-unit tries to achieve and key results detail how these objectives will be met. Hence, it is a type of execution tool that drives an organization and its employees to work in the same direction towards a joint goal. The aim of the book is simply for Doerr to present the model to a larger audience than the companies that he invests in and by this help an even larger crowd to become more industrious.

The book is partly self-biographical as Doerr looks back on the many companies he has funded. Approximately a third of the text describes the OKR-tool and the rest contains a large number of case studies and success stories from various (mostly) technology companies that with Doerr’s help have used the tool with great positive effect. It is certainly an impressing list of contributors to the book as for example Larry Page, Bill Gates, Sundar Pichai, Susan Wojcicki, Bono and loads of others contribute sections to the book. Further, Jim Collins, Sheryl Sandberg, Al Gore etc. add write-ups for the book’s cover so the author obviously has a vast network. The real hero of Doerr and of the book is however the late Andy Groove of Intel. Apart from being an early mentor to Doerr, Groove is also the intellectual father of the OKR-tool – event though much of the ideas were openly borrowed from Peter Drucker.

To work with OKRs means setting aggressive objectives - essentially goals - that are “significant, concrete, action oriented and (ideally) inspirational” and then deciding on 3 to 5 executable action items called key results that lead to the objective if fully met. These results should be specific, measurable, and verifiable and come with clear deadlines. Further, it should be crystal clear who the owner of each OKR is. The benefits of using the model, and also the structuring of the chapters in the book, are according to the author an organizational focus and commitment to the issues that really matter, a transparency and alignment to joint purposes that produces work satisfaction for employees plus a sense of community and team spirit, an accountability that brings power to the execution of initiatives (plus, by this, a flexibility to quickly change direction if so needed) and an ability to reach stretch targets by working towards them in smaller increments. The process is steered through a dynamic and continuous process of performance management the author calls CFR (Conversation, Feedback, Recognition). Doerr recommends a dual cycle with both annual and quarterly OKRs and further that the objectives are set both top-down and bottom-up. Also, one should work to connect teams through cross-functional OKRs. On the look of it, I think this is a great tool for organizational execution but also culture building.

When reading the many case studies I’m quite struck by how very similar the Silicon Valley establishment thinks and sounds. With all their “amazing”, “10x”, “fail fast” and “we are going to be the next xyz”, the attitude of the Silicon Valley contributors to the book is virtually missionizing – it’s a bit like listening to 10 Jehovah’s witnesses, one after another, although, the holy trinity of this cult is rather wealth, productivity and creative destruction – all through the power of technological change. The contributors that stand out as molded in a somewhat differentiated form are the thoughtful Bill Gates and Bono that obviously comes from a totally different environment. In my view the balance of the book could have been shifted somewhat from case studies to a more collected presentation of the OKR and CFR models. With the current structure it is important that the reader doesn’t miss the so-called resource sections of the appendix as they give more meat to the models.

In sum, I like the tool more than the book.

Mats Larsson, August 29 2018

Belobaba, Peter et. al. (ed.) - The Global Airline Industry

John Wiley & Sons, 2016, [Business] Grade 4

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This is a highly ambitious and voluminous textbook introduction to the airline industry and to airline operations written by a total of 17 authors, mostly academics at the MIT Department of Aeronautics and Astronautics but also from other universities and a few industry practitioners. Much of the content was apparently originally developed for an MIT course, quite naturally, called the Airline Industry.

The coverage of the book is impressive and at first looks at airlines from a top-down managerial point of view, then goes in to more practical and operational details when surrounding airlines and finally covers a number of related subjects. Among the first types of topics are the industry history, the regulation of both airlines and airports, the economics of the airline market, pricing options and revenue management plus costs and productivity.

The second type of subjects includes fleet and route planning, flight crew management during both regular operations and when things don’t work out as planned, labor relations and security handling. The last type of subjects includes airports, air traffic control, industry related environmental issues and how IT effects the management of airlines. This is all obviously very comprehensive. The only topic I can think of that’s missing and that might have warranted a comment is the authors view on whether the traditional long haul hub-and-spoke network model could be rivalled by smaller fuel efficient, long range planes deployed in “long and skinny” point-to-point networks.

The sector has obviously changed a lot over the years for example with the emergence of low-cost airlines and the growth of new airlines originating in developing countries – both topics covered extensively in the book. The largest change is however the transition from a fully nationalized sector to a commercial industry. It is today almost chocking to read about how tightly regulated the industry has been both between the 1950’s up until the deregulation in the 1980’s, but in reality also up until now. Apparently, in some aspects the European Union has been a global forerunner in the deregulation of the sector which only goes to show how bad it has been.

For me as an investor chapters three through six were obviously the most useful covering the economics of both the industry and if an airline corporation. Commendable enough these chapters start off with a section on airline terminology, definitions and also acronyms such as RPK (Revenue Passenger Kilometer, i.e. one paying passenger transported one kilometer) or ASK (Available Seat Kilometer, i.e. one available seat flown on kilometer). In the end I think one must conclude that air transport is a commodity and in any commodity business the low cost providers will usually turn out to be winners.

Initially my worry was that with the authors predominantly being academics the text would be too detached from practical life but this is not at all so. They clearly have a very deep domain knowledge. This doesn’t mean that it’s 500 pages to breeze through. Reading it is rather hard work as it is full of detail in anything from regulatory agencies to airline schedule development. Also, a book containing material from this many authors never really addresses the reader in a fully coherent language.

This book works well as a university textbook and it would be an excellent choice if you as an outsider have been recently recruited as an airline CEO and need a crash course on what you are getting into. However, it is probably too heavy and full of operational aspects to really suit an investor looking to understand the industry economics.

Mats Larsson, July 14, 2018

Galloway, Scott - The Four

Portfolio/Penguin, 2017, [Business] Grade 4

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The US FAANG-stocks and Chinese BAT-stocks have driven the current growth focused stock market cycle almost from the start in 2009 and their popularity among investors doesn’t look to be fading just yet. Not all are enthralled though. Scott Galloway, a business professor at New York University and serial entrepreneur, plainly thinks that Facebook, Amazon, Apple and Google has become too big and powerful for the good of the economy. This is the story of the Four; their business models, how they became this dominant and the problems that follows from this.

In the introductory chapter Galloway lays out his thesis where a technology-optimistic society naively views big tech companies as inherently good and as a result the US government regulate the Four much more lightly than the companies they compete with, tech companies are allowed to pay very low taxes and investors supply capital to them almost for free. Big tech companies, in contrast to almost any other big company in other sectors, are seen as the good guys and given a free card to do as they please. Unfortunately, this and the ruthlessness and relentlessness of the companies has not only lead to arrogance and hubris from the side of tech companies with regards to their behavior but also to a market power that has grown so big that no one can effectively compete with them.

Then follows four chapters, each with more detail on all of the Four, or the four horsemen, as Galloway also calls them (he is a professor in marketing). The final section is five slightly unsorted chapters that slice the thesis of the book in a different way and among others go into detail on some of the sins of the companies; try to answer why their business models and products and services have such a tight grip of us as consumers; list the characteristics the companies share that have lead to their success; ask if there are other companies that could join their ranks and also a rather misplaced chapter giving students advice on how to succeed in their future work life.

I was given the book after listening to Galloway at a conference. I had actually previously refrained from buying it as its thesis, at least to some extent, plays too much on my confirmation biases. Now, I’m glad I read it. It is an easy, sometimes almost a bit lightweight, read that quickly puts the reader in the center of a very important discussion that will gain in prominence over the coming decade. The topic has clearly gained momentum during 2018. Still, Galloway isn’t accusing the companies. They are profit-maximizing entities and do what they should do, albeit with a bit too much brutal zest, and a large part of their dominance is obviously down to great products.

He’s instead partly dissatisfied with consumers but mainly with the US competition authorities that he thinks play by a pre-Internet playbook and don’t see that the monopoly power of each of these companies is similar to that of for example AT&T or Standard Oil when they were broken up in pieces. With reference to the classic Apple 1984 commercial, picturing Microsoft as the intrusive dictator, Apple and the others have simply taken the previous ruler’s place and done a much better job of controlling all our lives. Competition is broken. One oft commented issue with the book is that Galloway observes and analyzes a problem but he doesn’t present any solutions. However, in later presentations he comes to the conclusion that the Four should be broken up into twelve separate companies and that this should rejuvenate competition.

If you don’t come away terrified after reading The Four you might already be a Borg in the empire of the four horsemen.

Mats Larsson, June 25, 2018

Stigter, Marc & Cooper, Sir Cary - Boards That Dare

Bloomsbury Business, 2018, [Business] Grade 2

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The premise of this book is that most if not all corporate boards are stodgy and complacent and due to this either don’t see - or outright reject - the requests from sustainability focused institutional owners and the purchasing demand from likeminded customers. Business leaders are said to only focus on short-term profitability and CSR has degenerated to a green washing, box-ticking exercise. Hence, the directors risk leading their companies to their demise. This creates a need for a new bread of directors that fills the governance void and also a new model go guide them.

The authors are business consultants in Australia and the UK and Sir Cary Cooper is one of the UK’s leading academics in management studies. I very much question if the above really is the status of the boards they consult to or the views held by the 61 directors interviewed for the book. To me the thesis is an overly spectacular and speculative one that misrepresents the situation. Yes, there are bad boards and some are overly stodgy. Yes, some directors are bad. Still, most boards are in my view fairly decent and there is rarely a lack of focus on sustainability issues.

This book offers one set of chapters, number 2, 3 and 4, that are well balanced and grounded in reality, flanked by chapters 1 and 5 that are sweeping, cynically un-balanced, bordering on flawed as they, in my view, label the exceptions - the bad eggs - as the majority. The middle chapters argue for more active boards and a mix change in the time spent, from compliance towards business strategy, by doubling the hours spent on the directorship. Diversity is a key requirement in composing the board and IT-competence and CSR-competence should according to the authors be added to the boards.

While much of this is good, it is also very much in vogue right now and doesn’t need much promotion as I see it. Also, of the same reason I don’t generally want to see lawyers and management consultants on boards, I don’t agree that CSR or IT-specialists should be there either. Narrow competences can be added on a consultancy basis. Although they might have specialties, directors in my view must be broad enough to have well grounded opinions on most issues. The authors’ objection to the above might be that sustainability encompasses everything in today’s world. However, if everything counts as sustainability issues then in reality nothing counts as sustainability issues.

The foundation of the authors’ view on sustainability is Michael Porter and Mark Kramer’s concept of Shared Value. Stigter and Coopter from this launch their own concept called Total Value and Care Governance. Boards that “can, know, want, are and dare” first cater to the employees, then to consumers and other stakeholders and finally to the society and the environment. By doing this they will be financially successful and consequently will also reward the shareholders. This “broadened fiduciary duty” is obviously a hugely popular notion today, implying that there are no tradeoffs in business. Optimize for all at the same time and paradise is waiting. There is no notion of how to manage compromises between conflicting goals.

Ironically, the model Stigter and Coopter present share many similarities with the shareholder value and balance scorecard models of the late 1990’s as it sees a sequential process from personnel and customers to financial results. The difference is that in the original models there was a method to allocate limited resources. Since the owners receive the present value of the future residuals after all other stakeholders have been satisfied, the owners have the incentive to balance and satisfy the interests of all stakeholders. By their pursuit to generate the highest return on capital over time societies’ resources are put to their most efficient use and this makes all of us better off.

Some passable corporate governance advice is mixed up with a light version of Porter and Kramer’s shared value concept. Adds very little.

Mats Larsson, May 27, 2018

Lev, Baruch & Gu, Feng - The End of Accounting

John Wiley & Sons, 2016, [Business] Grade 3

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There is something wrong with the accounting. It doesn’t appear to serve its purpose anymore. Baruch Lev and Feng Gu, two accounting professors at NY Stern and the University of Buffalo respectively, in a legible way explain why this is and what to do about it. This is not a book for those who want to understand the intricacies of today’s accounting, it’s a book that argues for a total overhaul of the way we practice accounting. The aim is to mobilize investors to lobby for a change towards a better accounting methodology.

In the main sections of the text the authors first try to convince the reader of their thesis that the usefulness of accounting numbers is in decline, then they give their main reasons for this and finally present a reform package in a section of the book that also contains a number of case studies from various industries.

So, what are the issues that Lev and Gu single out as indicators of a quality problem? They show how even having the gift of perfect foresight in forecasting quarterly EPS numbers has yielded gradually less outperformance since the 1990s. With a start in the late 1980s they show a declining correlation between historical sales, profits and book values and future ones rendering historic numbers less practical when making forecasts, with regards to what moves share prices new accounting data now contribute 5% of the movements compared to 10% two decades ago. This leads to higher estimate errors and increased estimate dispersion from analysts while the volatility of the underlying businesses has dropped. All this is, in the authors’ view, indications of the declining relevance of accounting numbers with regards to their key target group of analysts and investors. Although they present a convincing case this part of the book is a bit too agitating for my taste.

A large part of the explanation for the declining efficiency is that while the core principles of accounting haven’t changed for at least a century there has been a big shift in the structure of businesses. The center of gravity of the business world is gradually moving towards what’s called asset light companies. The thing is that even those companies have assets; they’re just not accounted for. In the 1970s the unaccounted intangible assets were estimated to equal half of the tangible ones on the balance sheet. Today, the ratio is the reverse. Thus, the number of non-accounting events that affect the value of a company has gone up. Further, the amount of subjective managerial decisions in deciding on values in the accounts has increased dramatically. Lev and Gu count estimate-related terms in financial reports (“expected”, “estimated” etc.) and show that they have increased 400% in just two decades and further that this change correlates well in time with the growing difficulty of using historic numbers to forecast future ones.

By decoding a vast amount of conference call Q&A transcripts from when companies report their quarterly earnings the authors try to reverse engineer what investors truly focus on. They conclude that companies should report 1) what the strategic resources of the company are that will help them get a sustainable competitive advantage, 2) how they invest in these resources, 3) what the risks are towards the resources value creating ability and what management is doing to mitigate them, 4) outline the strategies with regards to how the resources are deployed and 5) measuring and reporting the resulting value creation through a cash flow based economic profit measure that deducts the full cost of the capital used. This would create a relevant, industry- and company specific reporting. To not just add more things for companies to report they further suggest full semi-annual reports instead of quarterly and the abolishment of much of fair value accounting going back to cost based numbers to leave the valuation to investors.

After a, in my view, too sensationalist first half the authors actually present an unconventional and interesting solution on how to reform accounting.

Mats Larsson, April 22, 2018

BioTechPrimer/Burke, Emily - The Biotech Primer

BioTech Primer Inc., 2012, [Business] Grade 4

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If one takes a step back and looks at the evolution of biotechnology the last 3 - 4 decades, it has been a breathtaking journey of bringing impressive scientific discoveries to the areas of health care, agriculture and industry. This primer focuses mainly on biomedicine and the life science biotech industry. The BioTechPrimer Corporation offers training sessions in biotechnology, often to a non-scientist audience and is as such well suited to explain this perhaps somewhat unintelligible topic to a broader audience. The main author Emily Burke, Ph.D. who has a long career in the biotech industry, is the director of curriculum for the organization and teaches several of its courses. The text could have benefited from a more formal introduction of this main author. As it is now, Burke’s name is only shortly mentioned in a passage of the publisher’s acknowledgments.

Apart from the introductory chapter the book has two main parts. Chapters 2 – 5 plus chapter 7 gives an introductory course in human biology, at least the parts the size of molecules and cells. Then chapter 6 and 8 – 10 describes how a biologically cultivated drug functions and is developed into a commercial product. The text is well written, the storyline is logical and enlightening and there are numerous excellent explanatory illustrations (if only in black and white). Even though it is an introductory primer the text doesn’t back away from giving a fair amount of detail and dropping quite al lot of medical terms, instead of just describing topics in a general manner.

The industry standard definition of biotechnology is the use of cellular and bimolecular processes to solve problems and make useful products. A large part of those useful products are drugs to treat a vide range of life threatening diseases. In contrast to pharmaceutical drugs that are chemical - often man-made - small molecule compounds, the biotech equivalent called biologics is made in a cell or a living organism. Because of this the molecules in biologics are generally much larger. On the one hand this means that the drug cannot enter cells directly and has to deliver its effect outside the cell walls. On the other hand the larger complexity of the molecule allows for a much more tailored effect, better targeted at what is being treated.

One of the key breakthroughs in turning our knowledge of DNA into useful drugs was the 1970’s discovery of an enzyme in bacteria that could cut DNA strands at particular sequences plus another enzyme that had the ability to glue two loose DNA strands back into one. Through this so-called recombinant DNA technology it became possible to tailor DNA strands with specific purposes and specific traits and have them mass copied – in essence manufactured - in for example bacteria, or animal cells. Most of these DNA strands have large human sections as this allows them to be accepted by the body’s immune defense and thus deliver the targeted effect.

This is a book on biology and on drug development and manufacturing. Only some of the business aspects of the biotech industry are covered and it is not a biotech-for-investors type of text. For example, the important industry trait of licensing the products to larger companies that have the marketing muscles is only cursorily mentioned. Still, for any serious investor it is obviously vital to understand the basics of the industries where investments are made. How to form joint ventures and negotiate licensing deals will have to be learnt elsewhere.

So far this is the best non-scientist primer on biotech that I’ve read. Highly recommended.

Mats Larsson, February 18, 2018

Millstein, Ira M. - The Activist Director

Columbia Business School Publishing, 2017, [Business] Grade 4

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In this text spanning more than 60 years, Ira Millstein portrays the huge changes that have occurred within the area of corporate governance. Millstein at the business law firm Weil, Gotshal & Manges was one of the early pioneers in establishing an area that we today take for granted. The direction of the field was no so certain in the 1950’s when Millstein set out to improve structures and by this came to challenge many imperial minded CEOs.

In the first chapter the author paints a bleak picture of today’s stock market. He then provides a solution in a board centric imperative. In chapters 3 through 9 noteworthy events during Millstein’s long career are presented. Most of these are disasters due to lack of board oversight and accountability and where the author was called in to clean up the mess. In the last formal chapter Millstein returns to deeper discuss the desired profile of a director. In this section the author adds a number of checklists for interviewing and choosing potential activist directors. These are immediately useful as they as a complement to more practical issues, focus on integrity, courage, intentions etc. Finally, a short written biography in an appendix binds together the previous events.

Even though Millstein’s story told clearly depicts the benefits of breaking the hegemony of the managerial capitalism without accountability to owners that long was the norm, Millstein is not pleased with the state of current owners. There are wolf packs of activist hedge funds and increasingly power is concentrated to index funds or relative performance funds that have few incentives to look to the long-term development of companies. Too many CEOs cave in to the demands of the myopic market and passive directors dare not protest. As long as the company earns money they don’t want to rock the boat.

The solution to this mess and the protection from the market is in Millstein’s mind a board centric cultural revolution. He advocates so-called activist directors who know the business and its finances in depth, who are fully engaged and can act as partners to the CEO in strengthening the long-term competitiveness of the company and by this benefit the shareholders over the long-term. At the same time the activist director must protect the shareholders’ money by preventing the CEO from venturing on foolish projects. More compliance issues should be delegated to committees to free up time for the board to discuss strategy.

Only part of the change can come from board practices. The other part must come from the institutional owners who too often have little experience in managing corporations and thus are ill equipped to search for new directors. During his career Millstein has worked to improve the communication between board directors and institutional investors and to help the latter to find their role as owners. With the increasing power of institutional owners comes a societal obligation to look beyond one’s own portfolios and work for the benefit of the business sector and the economy.

Most change is small and gradual but at times there are large, dramatic breakthroughs that over decades tips the balance from the CEO to the board and shareholders. The most attention-grabbing event described in the book is the board revolution in GE where Millstein was instrumental. A string of CEOs were running the company towards the abyss while keeping the board in the dark. It was seen as betrayal if independent directors discussed issues without executive managers present. In the end the board revolted to save the company, sacked CEOs and as one of the first firms wrote their own corporate governance guidelines.

It would surprise few if a text by a lawyer was winded and complex. The opposite is the case here. Perhaps the book is a bit two-pieced as part memoirs, part pamphlet on corporate governance, but if you want to understand how today’s practices developed and why they need to develop further Millstein’s book is perfect.

Mats Larsson, December 14, 2017

Dalio, Ray - Principles

Simon & Schuster, 2017, [Business] Grade 4

Read as pdf... Link to Amazon...

One of history’s highest achieving hedge fund managers is coming of age and wants to share the insights he has made with the hope that these could be of use to others. Ray Dalio, the founder of the systematic macro hedge fund Bridgewater, the hedge fund that has created the highest amount of alpha measured in absolute cash ever, does this through publishing two books. In this first one he shares his life and work principles – his fundamental truths - and describes how he came to acquire them. In a forthcoming book Dalio will lay bare his views on economics and investments.

This 550 page black brick of a book has three sections. First a biographical part that gives an historical background to the specific intellectual events in Dalio’s life that taught him the lessons that shaped his principles and also as such gives an introduction to what they are. Then, one section where the author goes through the principles for how he has chosen to live his life and finally the lengthiest part where Dalio describes how he applies the same principles to the management of the organization Bridgewater – the latter a process that has generated many news articles through the years. The text is based on a large number of statements and then surrounding commentary writing describing the rational. This is hardly the ideal setup for a fluent text but the book is still easy to read. In a way the three sections are in different literary genres; memoirs, personal development and organizational management but for Dalio all are woven into a seamless whole.

Since the internal Bridgewater version of this book has been downloaded as a pdf in millions of copies through the years, many will potentially refrain from purchasing it. Still, the book and the pdf differ quite markedly. Obviously not when it comes to the core message, but the book is greatly expanded compared to the previous pdf. The biographical part has been added and the descriptive commentary around each principle likewise. All this gives additional insights but the numerous repetitions and explanations, in combination with a somewhat preaching style, is the main drawback of the book. I would almost recommend the reader to choose the angle that he is most interested in – personal development or organizational theory – and then read the biography plus the preferred section.

The description of the author and his principles in my view feels very honest and Dalio has a truly fascinating personality. He is consumed by the will to make sense of things. By uncovering truths he, and the organization he leads, evolve. Dalio is bordering on obsessed with attention to details, data gathering, reflection, learning and rationality. At the same time he is hugely inquisitive, innovative, creative and independent minded in his way of drilling down to the core of issues. Dalio’s attitude could be said to be the absolute opposite of the post-truth political debate or relativistic academic doctrines of today.

Dalio who is a former liberal Harvard student that practices yoga and dresses casually views both his own life journey and that of Bridgewater as a machine that in accordance to set output targets constantly must be adjusted in an trial-and-error-and-learning process – much like a automation system in manufacturing. The principles are the algorithms that go into the automation system. The author holds the cards close to his chest when it comes to his family life but to me it feels a bit mechanical to constantly be this analytical and rational about ones life – and this comes from someone that shares some of the personality traits. In my view, in Dalio’s reductionist worldview lies a need for control and a will to quell an unruly world with it’s psychologically biased people.

Ray Dalio invites everyone to share his principles but he is explicit about that they are not the best principles for the reader. Instead he urges us all to explore how to best live the life’s we have. We would be fools if we didn’t follow through on that.

Mats Larsson, November 26, 2017