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

Smith, Terry – Investing for Growth

Harriman House 2020, [Equity Investing] Grade 5

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“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

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.

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

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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

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

Published by Gautam Baid, [Equity Investing] Grade 5

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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

Bernstein, Peter L. - Against the Gods

Wiley, 1996 [Equity Investing] Grade 5

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The sharpest minds of ancient times had a major advantage against modern thinkers. When faced with unexpected outcomes they could answer by reverting to faith or superstition. Greeks, Romans and Arabs came far in many other aspects but failed to develop the theory of probability. Instead, it was two Frenchmen, Blaise Pascal and Pierre Fermat, who made the breakthrough in the 17th century. The impact of the discovery has been massive, not only to mathematicians but also to all those who deal with matters with uncertain outcomes. In the best-selling Against the Gods the reader is taken on a remarkable journey through human history to clarify the subject of risk - which still can't be explained fully.

The author, Peter L. Bernstein was both an investor, a financial historian and prominent within academia. Having been an active investor and an economist is a feat he shares with John Maynard Keynes, an oft-cited character in Against the Gods. Bernstein published ten books and countless articles during his long career and is renowned for his supreme writing skills.

The main difficulty with investing originates from the notion that all the answers are in the past and all the questions are in the future. Many are those trying to predict the future - causing them to expose themselves to risk - or according to Bernstein "the chance of losing money". The author's main idea with the book was to explore the lessons of history to judge the current methods of handling risk. He therefore portrays those who have contributed the most to form the modern theory. This includes ancient thinkers as Aristotle and Al-Khwarizmi, later intellectuals as Pascal, Thomas Bayes and Francis Galton and modern theorists as Keynes and Daniel Kahneman. It's a remarkable history lesson.

Galton's discovery of regression to the mean during the 19th century - covered in one chapter -may be the most important for investors. It can be summed up with these timeless words from the author: "When investors overreact to new information and ignore long-term trends, regression to the mean turns the average winner into a loser and the average loser into a winner." By being contrarians, value investors have used the idea successfully over the last century. Another enticing chapter covers Amos Tversky's and Kahneman's creation of Prospect Theory. They managed to disprove that humans are the rational beings as depicted by traditional economists, by showing that people occasionally make irrational decisions. Keynes was one of the few who had earlier criticized the view of the rational man, as he viewed humans as being driven by animal spirits. Benjamin Graham was definitely another - something he is not credited for in the book. Graham also emphasized diversification as a tool for managing risk, which is not mentioned either in the chapter dealing with Harry Markowitz and his mathematical model of diversification. Overall, I think Bernstein's coverage of the 20th century gives too much credit to academia and too little to practitioners.

The main takeaway from the book is that the lessons of history support today’s preferred method of how to tackle problems involving both skill and luck. Using objective data from the past as the base rate and adjusting the probability by critical reasoning should lead to better decisions - and therefore lower risk. This is highlighted by current thought-leaders as Michael Mauboussin and Howard Marks. The best investors have a tendency to think probabilistically and relate declining prices (without impairments to the intrinsic value of the business) to improved odds. It should be a good way to approach investing for all.

The book is certainly no walk in the park as it takes a lot of effort to grasp the ideas.  It is nonetheless a great start for those who want to join Mauboussin and Marks in making better decisions. Most of all it's a very interesting book - not only for investors but for all interested in acquiring timeless wisdom. The odds are favorable that you will enjoy it.

Niklas Sävås, October 25, 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

Gray, Wesley R. & Vogel, Jack R. - Quantitative Momentum

Wiley, 2016, [Equity Investing] Grade 5

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Momentum investing works - period. I thought momentum was all about buying stocks that have gone up, and coming from a value background I found it a bit idiotic, but little did I know about the quantitative world behind all of this. This might not be as much of an epiphany for you as it was for me, but this book opened my eyes to a world that I was extremely unfamiliar with. If you, like me, find yourself reading the same old Graham-mantras over and over just reiterated by different authors, this is most probably something you should read.

The book is split in two parts where the first part is all about understanding momentum - what momentum really is, why it works and why it should continue to provide a sustainable edge going forward. The second part is all about the craft of constructing a momentum-based portfolio based on academic proof. To be fair Quantitative Momentum is a…quantitative book. It’s packed with graphs, tables, numbers and references to academic studies. Although its academic nature, the book is written by two PhD’s – go figure, the book is an unexpectedly pleasant read. I had no problem keeping up despite generally reading the book on my busy and chaotic morning commute.

The authors start off with explaining what momentum is, and more importantly, why momentum works. They argue that momentum investing and value investing both work because they are essentially just two different sides of the same behavioral bias-coin. Maybe the reason that active portfolio management actually works is that we humans are overly skeptic in nature. The authors write: “Value investing's edge is often characterized as pessimism in the presence of poor short-term fundamentals, which causes stocks to become too cheap relative to future expectations. Perhaps momentum investing's edge could be characterized as pessimism in the presence of strong short-term fundamentals, which causes stocks to remain too cheap relative to future expectations."

The authors are not trying to make people pick sides with this book, rather they are trying to convince value investors that a quantitative momentum approach would bring great balance to the overall portfolio composition.

The book is packed with “good stuff” but one of my favorite takeaways is the concept of “frog-in-the-pan-momentum” where the path a momentum stock takes makes a big difference going forward. The point is that a stock with lower volatility, but strong uptrend, can continue to have a strong trend while staying under the radar of most value investors. On the opposite side, a volatile stock which spends every other day on the scoreboard of best/worst performers will constantly be in the eye of investors and will therefore have a higher probability of having its trend interrupted by active investors trying to correctly value the asset.

Another key concept for me was that of mean reversion in different time series. That things mean revert in nature is hardly news, but shouldn’t mean reversion work against momentum to cancel out the effect? Well, yes and no. The authors find that stocks mean revert in shorter and longer time periods (under 1 month and over 1 year) but follow the momentum trend in medium-term time periods. Basically, stocks that have gone up the most the last month will tend to mean revert and go down the most in the coming month, and vice versa. On the other hand, stocks that have performed the best over the last 12 months will typically continue to perform well over the coming month or months. In the authors’ stock-selection-model they solve these contradictory concepts by looking at momentum for the past 12 months, while ignoring the last month, thereby using both the medium-term-momentum while also taking the mean-reversion-effect into account.

For those already praying to the momentum god, this is a great book filled with ideas and proofs to improve their momentum stock selection. For the community of Graham-believers, me included, this book is a definite must-read.

Olle Qvarnström, August 22, 2018

Bevelin, Peter - Seeking Wisdom: From Darwin to Munger

Post Scriptum AB, 2007 (3rd ed.), [Surrounding Knowledge] Grade 5

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Seeking Wisdom is about the gathering of wisdom by studying the finest of what others have already figured out. The book is filled with quotes from some of the greatest thinkers in history from fields such as physics, mathematics, psychology, biology, chemistry, economics, business and investing. Charles Munger of Berkshire Hathaway is in the investing world often quoted as coming up with the concept of multidisciplinary thinking. By internalizing a range of mental models on how to think and behave, the theory is that you will make better decisions and stay out of trouble both in life and as an investor. In Seeking Wisdom Bevelin describes many of these models.

Peter Bevelin is the Swedish author and investor who wrote Seeking Wisdom in order to remember what he had learned and to transfer some of the knowledge to his children. The author has been greatly influenced by his friend Charles Munger who read and commented on the book before publication. Another friend of his, Nassim Taleb, has been quoted saying that "Peter Bevelin is one of the smartest people around". Bevelin has written three other books on related topics.

The book is structured in four parts. Part one introduces the reader to why humans make certain decisions by describing how the brain works and why it works as it does. Most of it is explained as survival instincts from having been hunter-gatherers for most of the existence. Humans are wired to seek pleasure and avoid pain. Part two describes the 28 most common psychological misjudgments that humans suffer from due to this ancient hardware of the brain. There is some overlap to Charles Munger's speech on Psychology of Human Misjudgment but the material is presented differently in the book and goes even further into detail. In part three the author presents other situations where humans suffer from misjudgments, by taking examples from physics and mathematics and linking them to subjects as investing and business. The last part gives the reader some well-needed guidelines on how to improve his or her thinking habits. You could argue that the author doesn’t add much to the content himself, but as this probably wasn’t the intention the criticism would be a bit unfair.

Apart from presenting explanations to why we think the way we do, the author describes ways to act in order to make sure that we learn. For example, by always asking the question "why?" we force ourselves to understand the meaning and not just the name. By designing checklists for our investment procedure, we may reduce the probability of making silly mistakes. By writing post mortems we can learn from our mistakes and prevent them from happening again. In order for the post mortem to be effective we need to write down our decisions from the outset and how we felt emotionally at that point. Otherwise there is a risk that we will fool ourselves and according to Richard Feynman: "the first principle is that you must not fool yourself and you are the easiest person to fool".

This book has influenced me a lot and has taken me on the path of becoming a multidisciplinary thinker. Reading it once will hopefully get you on your path of learning but this is a book to be re-read on a frequent basis as it's difficult to take in all of the condensed wisdom the first couple of times. Seeking Wisdom is possibly an even greater source for further reading due to its vast bibliography.

Peter Bevelin's aim is to put the reader on the path to multidisciplinary thinking and for me he greatly succeeds.

Niklas Sävås, May 1, 2018

Ang, Andrew - Asset Management

Oxford University Press, 2014, [Finance] Grade 5

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This is something as scarce as a readable textbook. The subtitle is A Systematic Approach to Factor Investing but the bulk of the book is really a broad, comprehensive and accessible primer on asset management that combines the basics of financial academic theory with the latest academic findings and a fair amount of real life examples and practical applications. The author Andrew Ang, currently at BlackRock and previously a celebrated finance Professor at Columbia, advises the reader to view the field through the lens of underlying factors but with the book being so broad this almost becomes a side story. First and foremost Ang wants to see better practices in institutional asset management over all.

Asset Management provides an introduction into the character of asset classes, investment strategies and factor premias. The book provides a step-by-step guide in traditional portfolio theory without expanding too much into the underlying math. Then Ang goes further and discusses new findings, extensions and critique of the established models in a good-tempered and easy-going style. Each chapter starts with an illuminating story from real world asset management, then the academic theory is presented and in the end Ang takes the – now more knowledgeable – reader back to the introductory story to discuss it in a new light. The book in a way resembles Antti Ilmanen’s Expected Returns in its breadth and in that it gives the reader a good insight into the latest thinking in finance and portfolio theory.

The book largely substitutes equations for well thought out illustrations which will make the subject more comprehensible for a larger audience. It is quite an impressive trait of the author to be able to make discussions on, for example, the use of utility functions in mean-variance optimization models this understandable and interesting. It is also symptomatic that the author during his career has been able to switch back and forth between consulting for various asset managers and having a successful career in academia.

Thus, although it sometimes shines through that Ang isn’t an experienced asset manager, he still skillfully merges academia with practical advice. Where academia often make too many unrealistic assumptions and almost have a fetish for explaining market movements with information, practical asset management can on the other hand at times be dominated by a lazy continuation of old obsolete practices and self interests.

The last quarter of the book called Delegated Portfolio Management is essentially concentrated on agency problems and discusses mutual funds, hedge funds and private equity. Ang is extremely critical towards hedge funds and private equity specifically, showing that they generally underperform risk-adjusted benchmarks composed of the factors that build up their return streams. His advice is to “walk away”. Still, this categorical statement saves Ang from engaging in a discussion that is vitally important for most portfolios; how to best construct a portfolio that combines liquid and illiquid assets, where the latter renders most of the standard risk and reward measures useless. Also, one minor irritation – how hard can it be to spell Warren Buffett’s surname with two “t’s”? Often it is too hard for the author apparently!

Andrew Ang clearly champions liquid securities and factor investing as the latter gives a deeper analytical insight into what drives the risk/reward in the portfolio. All factor returns give compensation for enduring various types of bad times. Ang wisely advices the reader to figure out which of these “bad times” that he can endure better than others because this is where his portfolio will have a competitive edge.

Asset Management will be a cornerstone of the reading list for asset management classes for years to come. For anyone wanting to gain a thorough understanding of the current best practice in institutional multi-asset, portfolio management this is the place to start.

Mats Larsson, April 15, 2018

Zweig, Jason - Your Money & Your Brain

Simon & Schuster Paperbacks, 2007, [Behavioral Finance] Grade 5

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“The investor's chief problem – and even his worst enemy – is likely to be himself.” Many of the readers are probably familiar with this profound quote from Benjamin Graham in the Intelligent Investor. In Your Money & Your Brain, Jason Zweig presents many of the reasons to why the sentence by Benjamin Graham is true. The book is aimed at helping the reader to profit for the long term both in terms of wealth and also living a more meaningful life by understanding the psychological reasons for our actions.

Zweig has been working as a financial journalist for more than 30 years. More than the last 20 years have been spent with the Wall Street Journal where he has been writing weekly columns. His columns are most often focused on subjects such as financial history, behavioral finance and neuroeconomics. Zweig is passionate about helping people to avoid bad investment decisions which includes criticizing bad practices in the financial market.

For value investors Zweig is probably most known for having updated the latest edition of the Intelligent Investor. The author describes how his interest for neuroeconomics started in 1998 when he picked up a newspaper at an airport which included an article about neuroscience. The subject led Zweig to insights he couldn't have dreamed of acquiring simply by reading typical investment material highlighting the importance of learning from multiple disciplines.

Your Money & Your Brain can be used as a source to gain understanding about why humans react as they do and why. The human brain is ancient and is still optimized for the hunter gatherer society where humans have spent most of their existence. Many readers may be aware of some of the concepts in the book, having already read books such as Daniel Kahneman's Thinking Fast and Slow.

The book starts with an introduction to neuroeconomics and how the brain works. The reader is then presented with areas and feelings that have huge impact on investors and other decision makers. Some of these are fear, greed, confidence and regret. In every chapter, Zweig describes the neurological background to the feelings and also presents recommendations on how to live and act as an investor in order to avoid them. He presents which part of the brain is causing which feeling and introduces the reader to further studies about the brain. He backs up all the material with references to scientific studies.

Both this book and Zweig's The little book about safe markets, published in 2010, is directed to a broad mass of people and to personal finance readers, making some of the material a bit basic for the experienced investor. The benefit of this is that the language is really easy to grasp. Zweig is a terrific writer in how he is making a difficult topic feel simple.

Having read a lot of books about behavioral economics and neuroeconomics I have gotten the impression that the most important thing is to set up habits and routines to avoid ending up in certain situations, instead of trying to overcome them. That impression only got stronger having read this book. Zweig steer his readers in a very clever way as he is ending every chapter with suggestions of habits that could help the reader avoid getting tricked.

Myself, I have already started to introduce some of the habits in my daily life which I see as a great compliment to the author. As many other investors, I have felt the pain of having fooled myself and am working hard to avoid it. Your Money & Your Brain is of great aid in that regard.  

Niklas Sävås, January 31, 2018

Haidt, Jonathan - The Righteous Mind

Penguin Group, 2012, [Surrounding Knowledge] Grade 5

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The last few years’ capital markets have been heavily influenced by politics. Hence, a political understanding is important. This book offers the most illuminating road map to politics I’ve read in years. It covers the differences in moral view between what in the US is called liberals (the political left wing) and pretty much everybody else in the world. Jonathan Haidt is a social psychologist and a professor of ethical leadership at Stern School of Business. He is unusual in that his work mixes psychology, sociology, biology and, importantly, cultural anthropology, allowing him to transcend normal academic departmental boundaries and view issues from new angles. He is also a very accomplished popular science writer letting him to eloquently argue for his sometimes-controversial opinions.

The book has three fairly different parts. The first shows that the systems that Daniel Kahneman calls system 1 and system 2 is equally at play when it comes to moral. We have an immediate, instinctive and emotional intuition on moral issues and only afterwards the slow and deliberate logic comes into play – and mostly the logic is simply used to rationalize the instinctive intuition. The aim of our moral actions is further more a PR effort towards our tribe than a search for truth.

The second part is the vital one. Through his research around the globe and in various US environments the author has shown that there are 6 innate moral “taste buds” that we all to some extent share: a) care-harm, b) liberty-oppression, c) fairness-cheating, d) loyalty-betrayal, e) authority-subversion and f) sanctity-degradation. The conservative westerner is similar to most people around the world in that all 6 facets of morality matter about equally, while the western liberal almost only focuses on (in decreasing amounts) a, b and c. With regards to b the focus is on liberty from the oppression of big corporations through the state, while conservatives and libertarians instead want liberty from the oppression of the state itself. The low emphasis on d-f gives liberals and libertarians a very autonomous world-view while the others look more to relationships. A person with one type of moral matrix has a very hard time understanding that there can be more than one form of moral truth for people and the most trouble in understanding others the liberals have as they have the narrowest set of moral principles. The advantage (?) of the liberal will be that he will instead experience less moral dilemmas than the more diverse conservative.

In the third part Haidt brings forward the notion that the Darwinian selection that shapes our behavior not only is at work at the individual level but also on a group level. Groups that manage to better bind people together and foster stronger commitment have tended to out-compete less captivating ones. Natural selection favors group efforts and this is the explanation for the fact that people often experience the greatest joy during moments when they become a part of a whole. Unfortunately this also makes groups very competitive towards each other, making discussing differing moral world-views extremely hard.

In the tradition of psychology Haidt’s work on moral is descriptive, it displays the map of different moral matrixes but doesn’t really argue that any group’s view is more or less right or wrong. Haidt is more of a moral anthropologist than a moral philosopher. On the plus side the description is a lot more interesting and nuanced than I had expected but personally I think that the question of morals cannot only concern itself with how it works but also with how it should work. To be fair the author gives a few brief suggestions for a moral middle ground between liberals, libertarians and conservatives that could be seen as normative.

With Haidt’s map at hand one’s navigation between various expressed political opinions becomes ridiculously easy. You will understand were everybody is coming from – even though they don’t necessarily will themselves.

Mats Larsson, Jan 3, 2017

Chancellor, Edward (ed) - Capital Returns

Palgrave, 2016, [Equity Investing] Grade 5

This is the even more brilliant sequel to the already superb 2004 book Capital Account. Edward Chancellor, the author of the classic Devil Takes the Hindmost, picks and chooses among the 2002 to 2015 Global Investment Reviews written by money manager Marathon Asset Management... Further reading... Link to Amazon...

Chancellor, Edward (ed) - Capital Account

TEXERE, 2004, [Equity Investing] Grade 5

There lies a danger in rereading books after a long time – it’s not always they age gracefully. The subtitle of Capital Account is A Money Manager’s Reports on a Turbulent Decade, 1993-2002. The time period corresponds roughly to the first half of my time in the equity market so far and I... Further reading... Link to Amazon...

Freeman-Shor, Lee - The Art of Execution

Harriman House, 2015, [Equity Investing] Grade 5

I’m a terrible snob when it comes to investment literature. Books written for private investors rarely interest me. This is different. This might be the most important book on investments that a private investor can read – if he can gather the discipline to follow the advice. It might actually... Further reading... Link to Amazon...

Thiel, Peter (with Masters, Blake) – From Zero to One

Crown Business, 2014, [Business] Grade 5

From Zero to One is the brilliant title of Peter Thiel’s new book on innovation and startups. He argues that we have only focused on “globalization” (taking things that work somewhere and making them work everywhere) or 1 → n for the last 40 years or so. I have to agree, and we all... Further reading... Link to Amazon...

Spier, Guy – The Education of a Value Investor

Palgrave Macmillan 2014, [Equity Investing], Grade 5

“Hang out with people better than you, and you cannot help but improve”. This book by one of the most prolific second-generation Buffetteers is about building the appropriate investment foundation, about setting up the right environment, about the triumphs of an inner scorecard...  Further reading...  Link to Amazon...

Frydman, Roman and Goldberg, Michael D. – Beyond Mechanical Markets

Princeton University Press, 2011, [Economics] Grade 5

Beyond Mechanical Markets is among the best and most rewarding books I have read for a long time. Two renowned professors at NYU and UNH, present an economic theory—Contingent Market Hypothesis—that explains how the financial markets really work. I believe most... Further Reading...  Link to Amazon...