Graham, Benjamin & Meredith, Spencer B. - The Interpretation of Financial Statements

Harper & Brothers Publishers, 1937 (2 ed.) [Equity Investing] Grade 4

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

A typical way of valuing a business is with the discounted cash flow (DCF) method. Some value investors don't agree with the use of the method due to the need for forecasting uncertain future corporate prospects. Small changes in input values often result in huge swings in the estimated corporate value. Forecasting is deemed futile by investors such as Warren Buffett, Charlie Munger, Bruce Greenwald and James Montier among others. In today's world of competitive disruption there may be alternatives or complements to the DCF method with less dependency on the future that can be used. By studying the current state and the development of the balance sheet and income statement it's possible to understand the health of the business which, in turn, is essential for the firm’s future prospects.

Benjamin Graham, the father of value investing, needs no further introduction. His co-author Spencer B. Meredith was an instructor in security analysis at the New York Stock Exchange Institute together with Graham. In this book written before Graham's more influential books, Security Analysis and The Intelligent Investor, the authors describe how to understand a business and its health by studying the financial statements.

A quote from The Interpretation of Financial Statements concludes the authors’ view on forecasting: "Of course, the success of an investment depends ultimately upon future developments, and the future may never be forecast with accuracy. But if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."

The Interpretation of Financial Statements is written for those who want to understand the language of business that consists of the financial statements. In the book, the authors describe the most important constituents of balance sheets and income statements one-by-one. The text is structured in three parts. The first part introduces the reader to balance sheets and income statements. Each chapter covers one piece of a financial statement. The authors explain the item and its significance which is essential to know for the security analyst. They also describe different key ratios that are of practical use in order to distinguish if the business is in a favorable condition or in bad shape. In the second part the authors present different financial ratios while the third part is a description of financial terms and phrases.

This is a book for those who would like to understand concepts such as earnings power and book value, which is of essence in the fundamental analysis of a company. By only considering the qualitative aspects of a business the investor is at risk of missing important details that are necessary in order to set a reasonable intrinsic value range. In order to get further guidance on how to use the knowledge in practice, Graham’s Security Analysis is a great place for further study.

If I were to mention anything negative about the book it would be that the examples drawn are from a different time, meaning that they are typically limited to industrials, railroads and utilities. This is of course no criticism of the authors as the mix of listed companies was truly different in 1937. However, it's important to convert the reasoning and language to a broader set of modern businesses. Even more importantly, the financial statements were arguably more easily structured and read in the first half of the 20th century compared to today's often complex reports. This is also commented upon in the introduction.

I would like to conclude with a timeless statement from the book that summarizes the difficult challenge all investors face: "Common stock selection is a difficult art - naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future."

Niklas Sävås, June 07, 2018

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

Bloomsbury Business, 2018, [Business] Grade 2

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

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

Peterson, Jordan B. - 12 Rules for Life

allen lange, 2018, [Surrounding Knowledge] Grade 4

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

According to NY Times Jordan Peterson is currently the most influential thinker on earth. This is surely an exaggeration but he is an Internet phenomenon. Instead of dwelling on Peterson as a public figure and have an opinion on whether he’s a transfobic fascist as some would say, or the savior of men as other would have it, I thought I’d take the road less traveled and simply account for the twelve rules as they read and give my take of what they mean. It will not make much of a book review but at least we will know what’s discussed.

However, it must first be understood that this isn’t the author’s self help advice on how to succeed in life – to Peterson the rules run much deeper. Some years ago the author had something of a personal crisis trying to reconcile the monstrosities performed by the Nazi and communist regimes of the twentieth century with some sort of hope for mankind. Peterson landed in the opinion that the world is a troubled place and while it is hard to know what a good life is, it is reasonably easy to know in which direction to go – and this is away from Auschwitz, Gulag and totalitarianism. The rules are steps on this path.

1.     Stand up straight with your shoulders back – How you behave effects how others treat you. A person who takes responsibility for his life, acts with self-confidence and let this show in his body language will be treated as a winner, also by the opposite sex.

2.      Treat yourself like someone you are responsible for helping – Don’t be consumed by guilt. Instead learn to be proud of yourself and respect the progress you make. If you were to coach someone to become a better person, how would you do it? Now, do it to yourself.

3.      Make friends with people who want the best for you – If a person you know only takes and never gives you cannot waste your only life on them. Walk away.

4.      Compare yourself with who you were yesterday, not to who someone else is today – Act by an inner scorecard instead of an outer.

5.      Don’t let your children do anything that makes you dislike them – Your children will have a better life if they don’t grow up dysfunctional. Be an adult, set boundaries, teach them what’s right and wrong, encourage and mentor them and discipline them if necessary. Help each other as parents as it is hard work raising kids.

6.      Set your house in perfect order before you criticize the world – Discard of any victim mentality and searches for scapegoats. Set your life straight and have the humility to not complain over others before you can govern yourself.

7.      Pursue what is meaningful (not what is expedient) – Those that can delay gratification do best in life. Most people know what is good. Set long-term goals and make the sacrifices needed to reach them.

8.      Tell the truth – or, at least don’t lie – Stand up for what you believe. It is the silent majority that paves the way for totalitarianism.

9.      Assume the person you are listening to might know something you don’t – To get to the truth we have to listen to those who hold other opinions than ours. Either you will see the issue differently and change your mind or you will become more confident in your opinion. Both are good things.

10.   Be precise in your speech – Face your personal monsters by diagnosing what they really are about. In precisely describing the bad you shine light on fears that lurk in the shadows.

11.   Do not bother children when they are skateboarding – If we overprotect our children they will grow up incapable of handling the world. This is especially destructive for boys with more innate aggressiveness that must be channeled into something constructive. If it is instead suppressed it will take nasty forms later.

12.   Pet a cat when you encounter one on the street –Appreciate the small joys of everyday life.

This somewhat odd book that draws on biology, literature, psychoanalysis, philosophy, religion and even folklore is unusual in that it salutes virtues like owning up to responsibilities. I like most of it.


Mats Larsson, May 12, 2018

Marshall, Kenneth Jeffrey - Good Stocks Cheap

McGraw Hill, 2017, [Equity Investing] Grade 4

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

Value investing might be described as the practice of buying and holding stocks that according to the investor’s best judgment have a suitable probability of having a substantially higher value than current price. The insistence on such a margin of safety is in part a philosophical issue but – similar to the requirement of tilting probabilities in one’s favor – is also a very practical issue of applying a suitable and rational investment process. In Good Stocks Cheap Kenneth Jeffrey Marshall, an investor and academic who teaches value investing and asset management at the Stockholm School of Economics and at University of California, shares his personal value investing process.

Although the author covers the basics of value investing it has to be said from the outset that this is not a book for anyone seeking deeper knowledge of finer nuances on the topic. This is a book on process. And mainly the process of selecting stocks to invest in. As such, important topics worthy of entire books in themselves, such as capital allocation, insider dealings, selling positions, moats etc. are covered in one or a few pages each. The benefit of this book instead lies in how explicit it is in penciling out how to actually perform the craft of value investing. Execution matters greatly in the potential success of investing.

The title is an apt description of the content as value investing in this case refers to the currently popular quality-compounding genre, not investing in low valuation multiple, bombed out, deep value stocks. This is a Joel Greenblatt Magic Formula-type of stock selection but with a quality bent.

The author suggests a sequential process of analytical steps for a stock to pass to qualify as a portfolio holding. Firstly, by looking to a number of angles the investor must be able to say that he truly understands the business of the company. If not, he should move on to another candidate. Secondly, it must qualify as a good business. In this Marshall looks to the historical financial success of the company, the indications of whether this success will continue into the future and of how shareholder friendly the management is. After weeding out bad businesses the next needle(s) to pass is the parallel decision on if this good stock is also cheep judging from the absolute level of a number of valuation multiples and if the investor in the process of analyzing the qualities and inexpensiveness of the stock has been free from biases. If all boxes are ticked it could be warranted to allocate 10% of the portfolio to the stock. It’s quite easy to visualize what a flowchart of the process would look like - and Marshall offers his version. He subsequently presents a short chapter on idea generation that logistically perhaps should have been placed earlier in the book. Further, there is no advice on what to do during the times when no stocks qualify, as all good stocks are expensive. Is cash then the preferred option?

The text is written in an accessible language making it suitable for the novice investor, but is not at all dumbed down due to this. Writers who have taught value investing – such as Ben Graham and Bruce Greenwald – have often had the chance to refine how they explain topics to an audience and this gives great clarity to their texts - so also in this case. The one section that doesn’t come out as well is chapters 6 to 10 that gives a combination of a basic accounting course and further shows which adjustments to the accounting Marshall thinks necessary to render the financial ratios best suited for his process. This section would have benefited from incorporating a case study to be followed throughout the chapters. Instead the reader in appendices and 10-K’s online get to work with the accounting of GAP, but few readers ever read appendices or look up online annual reports in parallel to reading a book. Still, this section is already a quarter of the book – perhaps Marshall didn’t want to burden the text further?

Growth and momentum has ruled this investment cycle. Value investing isn’t chic anymore. Thus, now might be the time to catch the turning tide. This book shows one way forward.

Mats Larsson, May 6, 2018

Bevelin, Peter - Seeking Wisdom: From Darwin to Munger

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

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

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

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

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

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

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

Ang, Andrew - Asset Management

Oxford University Press, 2014, [Finance] Grade 5

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

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

Kindleberger, Charles P. - Manias, Panics and Crashes

Palgrave Macmillan, 2015 (7th ed), [Economics] Grade 4

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

There are countless opinions about whether it's preferable to have a top-down or a bottom-up approach to investing. Typical value investors embrace the bottom-up approach where they mainly look at company fundamentals while others have a more open approach of considering factors as the business cycle and various macro factors. The top-down investor risks falling into the trap of predicting the unpredictable and the bottom-up approach got criticism after the financial crisis which hurt many value investors badly. Many have recovered well since then though. It is in my view useful for all investors to study financial history in order to learn from events of the past as it often repeats itself. In the words of George Santayana "Those who don't remember the past are condemned to repeat it".

Charles P. Kindleberger's Manias, Panics and Crashes is an oft-cited book in the realm of financial history and used in MBA programs across the world. Kindleberger was an economic historian and author of over thirty books and he originally published Manias, Panics and Crashes in 1978. During his career, he held senior roles within the US Treasury, the Federal Reserve and Bank for International Settlements. He finished his career as Professor of International Economics at MIT where he worked for more than thirty years. Robert Z. Aliber, who has updated the last three editions of the book, is a professor emeritus of International Economics and Finance at the University of Chicago.

The first couple of chapters presents a background of historical financial manias and typical patterns of how a mania evolves and how it turns to a panic and eventually a crash. Fraudulent behavior that is a typical theme towards the end of a mania is described with the examples of Charles Ponzi and Bernie Madoff as well as with instances of corporate frauds including Enron. The author summarizes some of the worst financial panics from the tulip mania in the 17th century, through the Great Depression in 1929 to the latest financial crisis in 2008 among others. The last couple of chapters of the book are primarily written for policy makers, advising on how to understand financial calamities in order to decide on the right policy from a fiscal and monetary perspective.

To sum up the main thesis of the book there are some typical factors that usually leads to a forthcoming mania and crash. The two most important factors have been increases of cross-border investment inflows as well as credit. The increases have typically led to rising stock- and real estate prices which have led to further increases in cross-border investment inflows and credit and in turn further increases in asset prices in a positive feedback cycle supported by behavioral phenomena. To cite from the book: "Asset bubbles - most asset bubbles - are a monetary phenomenon and result from the rapid growth of the supply of credit". The party has typically stopped when the creditors have got worried that debtors won't be able to pay back the loans and have in turn stopped issuing new loans. The debtors have relied on new loans to cover the interest payments and when the flow stops bankruptcies erupt.

As there are regularities in the financial crises the reading gets a bit monotonous at times. Also, I felt it was difficult to get a flow in the reading but that can probably be explained by it being a book written by academics for academics. It is not a must to read this book from cover to cover. The book is still a great source for investors who want to learn history in order to be able to be on alert for future occurrences. It's also a great start for those who want to dig into a specific event.

This is a book that is beneficial for both bottom-up and top-down investors. Just as individual companies, the stock market and currencies follow the investment market’s pendulum swings of euphoria to depression and overpricing to underpricing to use some of the terms often used by the legendary value investor Howard Marks.


Niklas Sävås, April 11, 2018

Miemietz, Marietta / CFA Institute - The Pharmaceutical Industry

CFA Institute, 2013, [Equity Investing] Grade 3

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

Together with the CFA Institute Belgian financial analyst and consultant Marietta Miemietz delivers a knowledgeable but quite short first introduction into the art of analyzing pharmaceutical companies. This sub-50 page booklet first explores the industry basics in the introduction and a chapter each on the lengthy drug development and on the protection of intellectual property. Then the investment and business topics take over with chapters covering business models, financial analysis and pharmaceutical company valuation.

Skillful bottom-up investing is hard work. There are several skills and competences needed and knowledge of a number of areas required. There is a vast amount of investment literature but also business literature that can aid an investor in gaining required understanding. One of the required sets of knowledge is the understanding of the industries in which investments are made. Still, there are surprisingly few publications that attempt to give a broad overview over the full set of industries represented by the companies on listed exchanges. There are books covering industries but they often focus on the most spectacular ones and often they also push an opinion like anti-Big Oil books or books that argue for or against Big Tech. From what I know Fisher Investments is the only firm that has published a series of books to help investors to understand the full range of sectors from an analytical point of view. The CFA Institute should be well placed to do the same and this book is one in a series of such introductions. Still, there are so far few books published in the series and it is unclear if there is an ambition to issue a comprehensive set of texts.

Most large companies sustain a collection of current commercial products that at some future point in time will be phased out, plus a pipeline of future product candidates that hopefully will take the place of the existing ones. This portfolio approach is however seldom as obviously important as with pharmaceutical companies. The long lead-times in developing a drug, the unpredictable ebb and flow of blockbuster drug sales, the patent cliffs and looming danger of competition from generica (and more recently biosimilars) make the pharmaceutical industry an unusual place.

Because of this the author’s opinion is that it is critical to build bottom-up models of each drug and drug candidate that a company has. Even though I probably agree that it has to be done by some, I’m not sure if there is much edge in doing it – even corporate insiders usually have a very hard time estimating the future commercial success of prospective drug candidates. Large companies with broad diversified drug portfolios will at times experience relative headwinds compared to their competitors due to low R&D-productivity or others breaking into their markets with novel treatments. Still, these headwinds generally will shift into tailwinds. For the long-term investor it should be a good strategy to buy diversified companies in times of investor pessimism and then wait for the reversal of fortunes. I also think it is a strategy well worth perusing to bet on the better R&D-productivity of the smaller company. Hence, all else alike a portfolio of 15 companies with 1 drug candidate each will probably yield more success than investing in one company with 15 drug candidates.

Miemietz has produced a well-crafted text. Even though the booklet is short the novice investor in the pharmaceutical industry will come away better prepared after reading The Pharmaceutical Industry. For a higher-grade rating a more thorough coverage would have been needed – the writing on intellectual property is for example very summary. The text could also have benefited from including more illustrations, partly for enhanced understanding but also to simply make the text less dense.

Books like these are well needed. If the CFA Institute upped their ambition for the texts just a bit this series would fill a void for many investors.


Mats Larsson, April 8, 2018

Marshall, Tim - Prisoners of Geography

Elliot & Thompson Limited, 2015, [Surrounding Knowledge] Grade 4

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

There are many prisms through which our complex world can be understood. Out of those that really matter geopolitics is perhaps the most underappreciated one in the democratic western world. For anyone that wants to understand how Putin or Xi thinks about civilizations this is a great place to start. In Prisoners of Geography the journalist and former foreign affairs editor Tim Marshall with experience from the frontlines in the Balkans, Afghanistan and Syria gives the reader a crash course in the Real Politik of region after region such as the Middle East, Korea etc., and by this briefly covering the power politics of the entire globe including the predominant power struggle of the future between the US and China.

After a foreword by a former head of MI6 and a short introduction the chapters of the book each covers one relevant region after another. The chapter starts with a map to set the stage. Still, the book is best read with a proper atlas at hand and preferably one that also has topographic maps, to be able to clearly see the mountain ranges, desserts, jungles, plains, rivers, lakes and oceans that for centuries have set the stage for and shaped the power politics of regions. Marshall shows that geography but also natural resources and climate to a larger extent than often realized defines what a nation is and can be.

Africa for example is much larger than the US, China and India combined and has ample natural resources plus a hefty head start since it’s where humanity originated. However, the continent has few natural harbors, apart from the Nile the rivers cannot be used for transportation due to the violent and frequent waterfalls and the terrain is often not very friendly towards those who try to venture outside their home environment. Further, the amount of arable land is small and the animals of the continent are not easily domesticized. Hence, Africa is a continent with innumerable tribes, clans, religions and peoples but value-creating trade between regions is limited. Roads and railways that connect the continent are still to a large extent sorely absent. One of the many misfortunes of colonialism was leaving the power structure of an artificially made up state in a region with multiple rivaling groups that never thought of themselves as in anyway united within a country - a recipe for disaster.

It is also striking how similar geographic locations of the heartlands of Russia and China through centenaries have shaped comparable power politics. Both civilizations’ core is situated on in principle indefensible plains, without any obstacles for advancing armies, leading them to being attacked multiple times. The North European Plain for example stretches from the Ural Mountains to the Pyrenees. The solution has become to create strategic depth by expanding outwards building moats of subordinated and expendable landmasses where attackers will be worn out before reaching the heartlands. The tragedy of Europe, and the so-called “German Issue”, is that Western Europe’s mightiest civilization - the German - is situated on the same plain open for attack from two flanks and thus the concept of lebensraum is a geopolitical parallel to for example the invasion of Tibet.

The book gives a stark reminder that even though man has gained the ability to fly and the Internet to some extent changes the playground to a very large extent, the struggle of civilizations over power and resources looks as it has always done shaped by geography but also the cultural, religious and demographic factors of the hand dealt. There is clearly a risk that those with a trusting, short sighted and self-centered post-conflict mindset in the western world are exploited by more cynical rulers who thinks in 100 year time frames and doesn’t obey any international rules that would give them a disadvantage in the pursuit of power.

Although undoubtedly presenting the reader with a rather bleak view of the world this book actually brightened up my Easter weekend. You will look differently at the world after reading Marshall’s book. Definitely recommended.

Mats Larsson, April 2, 2018

Ellenberg, Jordan - How Not To Be Wrong

Penguin Books, 2014, [Surrounding knowledge] Grade 4

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

Part of the daily life as an investor is about making choices between alternatives. Is this stock at a more attractive valuation than that? Shall I buy, shall I sell or do nothing? A famous quote is: "investment is an art not a science", which doesn't mean that math is not needed, but instead that it's unlikely for anyone to become a successful investor by just looking at the numbers. Finance professor and value investor Aswath Damodaran describes people as either number crunchers or storytellers but insists that you need to tackle both to become a good investor. The book How Not To Be Wrong is focused on math but it's also likely to help you improve your storytelling capabilities.

The author, Jordan Ellenberg, is an American mathematician and writer. He has competed in the International Mathematical Olympiad three times, winning two gold medals and one silver medal. He has been writing about math for a general audience for the past fifteen years and he has penned pieces for many of the largest newspapers in the US. Ellenberg has also published two books where The Grasshopper King was his first.

How Not To Be Wrong is structured in five chapters describing linearity, inference, expectation, regression and existence. There are further sub-chapters where different real-world situations are described to clarify the subjects.

Some of the nuggets from the book are the description of a lottery called Cash WinFall which at some points had a positive expected value for the buyers. Some mathematically minded people noticed this and took advantage of the favorable odds in the game. As the author writes: "If gambling is exciting you are doing it wrong" - but in this specific example the opposite was true. Another gem is the story about the mathematician Abraham Wald who during World War II got the question from the US military on where the amount of armor on the air fighters should be strengthened. He was widely expected to answer to strengthen them where the bullet holes of the surviving planes were, but instead answered that the armor should be placed on the parts which were not hit on the surviving planes arguing that the destroyed planes were likely hit on those places, namely the engines. This is an example of survivorship bias. It is also an example of inversion where thinking like a mathematician, to prove something by showing that what can't be true, often gives us the right answer. The author brings up a profound quote from Sherlock Holmes on the topic: "It is an old maxim of mine that when you have excluded the impossible, whatever remains, however improbable, must be the truth".

In science, statistical significance is a method used to distinguish if a hypothesis is true or false. It may be hard for the scientist to accept that a hypothesis failed and that the result was negative, wasting years of scientific work as the scientist is not rewarded for unsuccessful studies. This is an example of bad incentives. Similarly, it's hard for the investor who has put a lot of work into analyzing a stock, to accept that the numbers don't add up and move on to the next opportunity. By tweaking some numbers in the excel spreadsheet it may look like a compelling opportunity after all - confirmation bias at work. The author also brings up a study of the rate of return of 5 000 funds where the return was 20% higher if the dead funds were excluded which is another example of where it's possible to use statistics to suit the purpose.

For the most part, it’s easy to follow the reasoning in the book without knowing much math but in some parts, especially in the later parts of the book, it is a bit more difficult. The examples brought up throughout the book span across a wide spectrum of subjects and in a few examples I thought the point made by the author was a bit incomplete. However, I don't think of this as a great disturbance as the point is brought home anyway.

How Not To Be Wrong is another great example of a book that, while not focused on finance, nevertheless is a great source of knowledge for the investor.

Niklas Sävås, March 25, 2018

Mobius, Mark - Passport to Profits

Warner Books, 1999, [Equity Investing] Grade 3

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

For 30 years emerging markets equities have been synonymous with the bald, Yul Brynner-like head of Mark Mobius, the portfolio manager of The Templeton Emerging Markets fund. Over the period Mobius, often called the global nomad for his relentless 250 travelling days a year, managed to return 12.6% per year – an outperformance of about 2 percentage points per year. Mobius, now aged 81, has recently announced his retirement from Templeton – but only to launch his own ESG-funds. Some of the tireless energy remains.

The legendary investor John Templeton hired Mobius in 1987. Apart from being one of the truly iconic value investors Templeton, less well known, has also sometimes been called the godfather of emerging markets investing. This book is written just one third into Mobius’ fund manager career. Still, since the author prior to his fund management vocation, had run several companies, he possesses the oversight and perspective of a much more seasoned emerging markets PM. In Passports to Profits (perhaps a bit clichéd title?) the reader gets to accompany Mobius and his team on their travels to Estonia, Russia, Hong Kong, Thailand Brazil, Nigeria and South Africa. In each part of the world the author meets a string of companies and uses these case studies to discuss the development of the region at hand – this is written only a year or two post the 1990’s Asian crisis - and to teach the reader the investment lessons needed to invest in less mature equity markets.

Mobius clearly has emulated Templeton with regards to his investment style. The focus is on the change in fundamentals on a five-year time frame with a well-defined contrarian stroke as crashes are seen as buying opportunities instead of something negative. Since EM countries often differ substantially when it comes to inflation levels Mobius adjusts for this when looking to valuation multiples. Due to the relative lack of corporate information and the sometimes shaky shape of the corporate governance in many emerging market countries, visiting management is absolutely vital. On top of the managerial sales pitch Mobius tries to overlay a less emotional view of the environment, history and situation of the company.

Mobius hasn’t always been popular in all camps as he’s flamboyant, cocky and self-confident and seldom holds his punches when it comes to advocating the free market economy as a force of positive change or in criticizing the crony capitalism of many corrupt third world leaders that often labeled themselves socialist. In fact, many of Mobius’ best investments have been in recently privatized companies liberated from centrally planned corporate governance that induced a destructive land grab mentality instead of creating values for the customers. Mobius’ record is great overall but it has been volatile, giving his critics ammunition during less successful times.

The author’s elevated self-image isn’t always fully beneficial for this book. Most of the investment lessons are given in the form of sometimes a bit pompous “Mobius Rules”. The ting is, there are 84 rules listed throughout the book and they are of quite different depth and often overlap. If all these rules had been distilled down to perhaps 20 rules they would in my view have been more memorable. There are numerous rules and also case studies throughout the book, sometimes at the expense of more generalized lessons. Reading this text almost 20 years after publication gives a useful reminder of the end-of-history-sentiment at the time. The potential of Russia and Eastern Europe is on par with that of China and the Asian tigers. The liberal democratic market economy was to lift all boats into prosperity. It was at the time obviously hard to forsee how different these regions would develop going forward.

Mobius delivers a well-crafted story of fundamental kick-the-tires fund management well worth reading for those that are into EM stocks.

Mats Larsson, March 10, 2018

Russell Hochshild, Arlie - Strangers in Their Own Land

The New Press, 2016, [Surrounding Knowledge] Grade 4

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

Ever since the election of Donald Trump there has been a scramble for the liberal intelligentsia to try to understand and explain the events that came as such a complete and utter shock and so profoundly shook their worldview. The lack of understanding largely came from the dichotomy between the coastal and urban US and the middle and rural parts of the country; the country has grown ever more bifurcated the last decades. The liberal, left wing Berkeley sociologist professor had already prior to the 2016 presidential elections embarked on a journey to climb over to the other side of what she calls the empathy wall in a multi-year project to understand the emotional selves of the Tea-party members on the other side. In this particular case, the inhabitants of the areas of Louisiana that had suffered the most polluting effects of the oil industry but stilled stubbornly voted for politicians who opposed any further governmental regulation of the industry.

As the book progresses we get to follow how the author discusses with and eventually befriends a number of southerners. To some extent the narrative is a bit speculative since ever so often the reader will say “but you surely must understand that people think in this or that way” and then in the next chapter that specific angle is often covered. Or at least I hope it is speculative, or else the author started from a hugely naïve position. In chapter nine Russel Hochschild formulates the so-called deep story of the right wing republicans. “A deep story is a feels-as-if story-it’s the story feelings tell, in the language of symbols. It removes judgment. It removes fact. It tells us how things feel. Such a story permits those on both sides of the political spectrum to stand and explore the subjective prism through which the party of the other side sees the world.”

To a large extent I think the author quite impressively nails the deep story and the character types it produces - I leave the details for the reader to explore. Equipped with this deep story she quite easily understands why people vote as they do. Still, being empathetic towards her newfound friends isn’t entirely enough in my view. First of all, the reader only partially and just at the very end learns of her liberal deep story, thus it is a republican deep story seen through an undisclosed subjective liberal prism that the author unveils. It is as if the liberal deep story is so obviously the norm that it doesn’t even have to be explained or understood by the reader.

Further, as pointed out in the above quote on the deep story, such a story removes judgment and facts. The author’s own deep story is strongly anti-business (and Wall-Street is surely hell on earth) and the appropriateness of this is never really discussed. The view is further reinforced as she on purpose has sought out a small subset of the victims of the potentially nastiest crony capitalism in the US for her study. Unfortunately it leads to a subtle belittlement of her newfound friends. Although they might not be evil Ayn Rand-reading bigots, their emotional deep story - which includes being pro-business - makes them unprotected victims of the corporate oppression the suffer. They are not evil, but they are like ignorant children that need protection from themselves. The book is in this respect equally a sociological study of the author herself. All corporate activities must abide to the law and ensuring this in my view entails a law that is upheld and an uncorrupt police force – not necessarily the big stat she advocates.

Despite my quarrels it’s a book well worth reading since the psychological portrait of the republican voter has seldom been painted. Still, if only to pick one book with this purpose I would chose J.D. Vance’s Hillbilly Elegy any day.

Mats Larsson, March 4, 2018

Ridley, Matt - The Rational Optimist

Forth Estate, 2010, [Surrounding Knowledge] Grade 4

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

The most successful investors in the past and present are often optimists. The investor who best showcases this is of course Warren Buffett. Buffett often mentions how future generations will enjoy even higher standards of living than those of today. With this he doesn't say that there won’t be periods where pessimists will be thriving financially but that in the long run the optimists are likely to win. The most important thing is of course to be rational and see the world as it is in order to prosper. In The Rational Optimist Matt Ridley explains why it's likely that optimists will continue to be the winners in the centuries to come.

Ridley who is a British journalist, businessman and science writer has written books such as: The Red Queen, Genome and The Evolution of Everything, as well as The Rational Optimist. He is an advocate of free markets. As such, Ridley wrote the Rational Optimist in order to satisfy his own curiosity of why people think that they would be better off being more self-sufficient; that technology has not improved living standards or that the exchange of things and ideas are not needed. When he wrote the book, the world had been through the financial crisis of 2008 and pessimism was thriving.

Ridley presents the reader with an historical background to how humans have evolved. He brings up examples of situations where the future has looked gloomy and where we humans have always come out stronger. Every chapter describes a period in history and brings up events of certain significance. The common thread is that humans have been able to tackle problems by working together. Through human exchanges people – for the good of all - are able to utilize the skills of others and not only their own. Ridley calls this the collective brain. Due to technologies as the Internet, people can easier than ever share ideas and skills, which is the key to prosperity. This is one of the main reasons to why Ridley is so optimistic of the future.

If asked early in the 20th century if the world would be better or worse off a hundred years from then, what would you have answered if you had been informed that the world would suffer from two world wars, the outbreak of HIV, as well as many other crises? Most likely your answer would have been worse. How wrong you would have been and how many opportunities you would have lost out on. The opportunity cost for staying out of the markets due to coming crises and macro factors would have been devastatingly high. Obviously, during shorter time intervals macro factors can have huge impacts but by being an optimist and by having a long-term investment horizon it’s quite rational to dismiss this.

I find it fascinating how Ridley presents facts that go against the common view of things. Some examples are that the growth of the world population is decelerating, meaning that the world population is likely to peak during the next century. Another is how important fossil fuels are likely to be in the next century. By reading the news it sometimes feels that fossil fuels will be obsolete within the next couple of years, which would be fantastic, but unfortunately far from the truth according to Ridley. What's important from an investment standpoint is to think about what facts like these will lead to for the future.

I chose to read the book after hearing that Tom Gayner, the CIO of Markel, recommended it. I thank him for it. What I think the book gives the reader is some well-needed filters against the pessimism coming from sources like news stories or from people around you. The pessimism will create biases that will lead to irrational decisions. The book will help you to separate signal from noise by taking a more positive long-term view.

Niklas Sävås, February 25, 2018

BioTechPrimer/Burke, Emily - The Biotech Primer

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

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

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

Abbink, John B. - Alternative Assets and Strategic Allocation

Bloomberg, 2010, [Finance] Grade 3

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

This is an odd book. The author is hugely knowledgeable of the core functionality, the risks and rewards of alternative assets such as hedge funds, private equity, real estate etc. and presents them – to use a phrase true to the genre – in a slightly idiosyncratic, but good, way. On the other hand the text never really goes anywhere – it’s almost like a number of short stories on different aspects of alternative assets, sometimes related to asset allocation but mostly not. The target audience is seen as plan sponsors, trustees, fund-of-fund managers, i.e. “asset owners” as opposed to asset managers.

John Abbink is an analyst and banker with decades of experience from Merrill Lynch, Credit Suisse, Deutsche Bank and the likes. It is obvious that he has seen many types of markets as he has a good grip of how various assets react in times of stress. Topics like changes in price volatility, convergence of correlations and also skew and kurtosis might sound obscure and academic but in a crisis they become anything but – then they present a hit on the head with a blunt object. Without knowing, I would guess that Abbink during his days often has worked with derivatives, judging from how he dissects different sources of risk and return for the assets and his knowledge of financial theory and statistics.

The book has four different sections. At first Abbink presents how he views the World of alternative assets, divides them into the three main segments directional, cash flow and arbitrage and shows how the alternative set of assets share most of their traits with the traditional ones; secondly Abbink goes through a large number of alternative assets and strategies used in this space applying his above segmentation. In the third section he dives deeper into some of the themes that have come up previously, i.e. the same alternative assets are viewed from the traits they share or don’t share. Finally, a number of practical aspects of including alternative assets in a portfolio of alternative and more traditional assets are discussed.

The book is too long. The first two sections are mainly there to set the stage for the latter two. The problem is that this means that the book doesn’t really start until page 237. The language is well versed but since Abbink hardly economizes with words the text is much too winded. If the first two sections were cut down by two thirds and the latter two by one third, this would be an interesting 240-page book. On the surface the language is quite simple and the writing is without the hyperbole often associated with alternative assets, and it is even humorous – for the genre. The simplicity is a bit misleading since the author is in the habit of using concepts in a slightly different way than they usually are. Hence the reader mustn’t miss the definitions or the text could be confusing.

This quirkiness is also a positive trait since it means Abbink often sees issues from a fresh angle that adds insights to the topic. The topics in question can be the optionality of strategies, their trade capacity, the liquidity of assets, the effects of portfolio liquidity in a crisis and the potential liquidity premium, tactical allocation, the ebb and flow of opportunity and crowding in market niches, the changing faces of risk, investment time horizons and much more – all very important and often forgotten themes. The author is very partial to the thoughts of David Swensen, Andrew Lo and Richard Bookstaber – not a bad set of influences. Although I like the segmentation into directional, cash flow and arbitrage, it is still hardly unique and the author could have spent more time building his case for using these segments instead of traditional asset classes. This feels symptomatic as the book in the end mostly results in some interesting discussions rather than any firm advice.

Read the last two sections for their offbeat insights into central and less discussed issues in institutional asset management.


Mats Larsson, February 11, 2018

Zweig, Jason - Your Money & Your Brain

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

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

“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

Meadows, Donella H. - Thinking in Systems

Chelsea Green Publishing, 2008, [Surrounding Thinking] Grade 4

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

We are systems and we are surrounded by systems. The hydrological cycle of water precipitation and evaporation is a system inside the larger system that is the natural environment. The stock market is a system and it’s a part of the larger systems of financial markets and the economy as a whole. A cell is a system and a building block for the larger system of your body. According to the author, the late Dana Meadows, a systems researcher originally at MIT, a system is “an interconnected set of elements that is coherently organized in a way that achieves something”. Systems always contain elements, interconnections and a function/purpose. A system is more than the sum of its parts and displays varying degrees of complex behaviors. The author aims to show the reader a complementary way to see and understand the world.

Thinking in Systems contains three sections. In the first the author in a reductionist fashion presents the components of systems, then shows how they are interconnected to produce various effects and finally displays an array of archetype systems - what Meadows calls the systems zoo. A key insight is how no system can be understood by analyzing its parts but, if at all, by their exchanges.

In the second part the author goes deeper into her analysis of how systems function – or sometimes mal-function, as in the case of for example the so-called tragedy of the commons. Systems are not always easy to understand or even detect as they manifest themselves through a series of singular events. Mankind is easily seduced by spectacular happenings but by this easily misses underlying patterns and large slow changes. By thinking in systems a different understanding is gained which, if nothing else, often serves as an antidote for the need to find individual scapegoats or succumbing to conspiracy theories. To a very large extent systems cause their own behavior. The concluding section discusses various ways to change system behaviors by focusing on their main leverage points.

Meadows was the lead author of the hugely influential The Limits to Growth, published 1972 and associated with the so-called Rome Club, and she was as such lionized by later day environmentalists. The thoughts then presented by Meadows and her co-writers paved the way for much of the thoughts on peak-oil and a critique of growth-obsessed economism. The reader of Thinking in Systems gets an easily read and well-articulated primer on the topic but must be prepared for an anti-business tone. Economic growth is generally deleterious, GDP is a faulty and perilous measure, interest rates are one of the worst ideas of mankind, the industrial culture has destroyed our moral and companies are compared to cancers – from a systems function aspect, at least. Without getting into the debate of the limits to growth, today it’s not hard to conclude that the authors at that time underestimated the effects of technology and innovation and didn’t understand how the pricing mechanism leads to substitution and change. That said, throughout the book Meadows – probably due to her deep knowledge of complex systems – generally displays a humble and curious attitude.

Those investors who are well versed in George Soros’ concept of reflexivity or in the stock market as a complex adaptive system, as popularized by for example Michael Mauboussin, will feel very much at home in Meadows’ view of systems. Interplays between reinforcing and balancing loops, delays between cause and effect and stocks that reach tipping points cause behaviors that we with our limited rationality only partially can understand. Quite poetically Meadows concludes “We can’t control systems or figure them out. But we can dance with them!” To succeed in the stock market it helps to get a feel for the flow of the market and to respond seamlessly to feedback from it.

For anyone wanting to understand systems this is definitely the place to start. And yes, it will give the reader a different perspective of the world.

Mats Larsson, January 22, 2018

Gladwell, Malcolm - The Tipping Point

Little, Brown and Company, 2000, [Surrounding knowledge] Grade 4

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

At an early stage, it's often hard to know if a new idea or product will transform into something big or not. This is why value investors typically stay away from businesses without a track record. They are well aware that some of these ventures will turn into great successes but argue wisely that they are too hard to evaluate and prosper from. Still, some upstart businesses do reach a point of accelerating growth, why it would be great to be able to recognize patterns and signals for when it's about to happen. The author of this book describes a tipping point as an event when something reaches critical mass and begins to accelerate at a much higher rate.

The Tipping Point was the first book by the now famous author Malcolm Gladwell. He has today written five bestsellers - all with a focus on sociology and psychology. He became interested in the subject of tipping points and critical mass after having witnessed the sudden drop in crime rates in New York in the 1990s. After having analyzed the reasons for the escalation of crimes in the 1980s and the subsequent drop, he then shifted focus to other situations that showed similar characteristics. One of these is the story about the Airwalk shoes that had an exponential increase in demand - which then quickly disappeared. Indeed, retail and especially fashion is a sector that value investors often shun due to its unstable characteristics.

Gladwell starts with introducing the reader to how something can turn into an epidemic by describing situations covering the spread of viruses, trends and criminal acts. He describes the ingredients that he finds have led to tipping points with three features. A few special individuals are needed, the power of the few. It needs to be difficult to switch from, stickiness, and the environment or situation needs to be right, power of the context. Thereafter he presents in-depth case studies of different kind of epidemics where he uses the concepts earlier introduced to the reader.

As an example of the power of the context, it has been found that the number of 150 is a “magic number”. The company Gore along with the Hutterites and various military organizations have experienced first-hand that the efficiency suddenly drops drastically when groups surpass a size of 150 persons. The rule of 150 is explained by the fact that in a smaller group the members know each other’s strengths and weaknesses and this increases efficiency. It's vital to know who the best person is for a specific task but when the group becomes larger than 150 people a tipping point is reached and beyond that size this becomes exponentially harder. Gore has solved this by opening a new plant when an old plant reaches 150 workers and it has worked fantastically well for them.

Many of the author’s ideas are very easy to grasp and therefore it's important to stay critical. Gladwell has been critiqued for over-emphasizing the broken window theory when explaining the change in NY crime rates. The theory explains how a broken window or graffiti in the subway leads to more criminal acts if it's not removed. Gladwell has since admitted that he overstated its importance. The concept of tipping points is however an essential mental model with parallels to other powerful concepts. Gladwell for example mentions that it's difficult to grasp how a paper folded over 50 times could reach the sun and that it doesn't make intuitive sense that a 15% compounded return leads to more than 16 times the money after 20 years. But it does and this is also one of the most important insights for an investor.

I chose to read The Tipping Point to try to understand why ideas and businesses take off in order to be able to look for patterns as to when this is in the process of happening. After reading it, I don't think the book gave all the answers but it definitely delivered some. In the end, the greatest takeaway for me is the reinforcement that it's possible to create change with small means. The small details that differentiate one business from another may well be why one survives and thrives while the other goes away which is important to think about when evaluating moats. The book will hopefully also help the reader be even more conscious of the limitations in being a human as well as an investor.

Niklas Sävås, January 18, 2018

Rosenzweig, Philip - The Halo Effect

Free Press, 2014, [Behavioural Finance] Grade 4

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

The Halo Effect is something as paradoxical as a business book about how bad business books are. The main objection is that while most management books describe their formulas for success as the result of scientific study they are in fact often just pseudoscience combined with good storytelling. The author, Philip Rosenzweig, has written several books on business performance and behavioural finance. After earning a PhD at Wharton he spent six years at Harvard Business School. He is now a professor of strategy and international business at IMD in Switzerland.

The key premise is that it is hard to know why one company is a success and another is a failure. It is therefore difficult to distil a simple formula for success, as so many management books try to do. An important business delusion that Rosenzweig discusses is the halo effect. It means that a company’s performance creates a halo that affects how the company is perceived. The story of Percy Barnevik and ABB is given as an example. When profits tripled between the years 1988-1996 Barnevik was described by the business press as brilliant, hardworking and humble. A part of the success was also attributed to ABB’s unique organizational structure that made the company action orientated and nimble. But when ABB’s fortunes turned in the early 2000s and profits declined the story changed significantly. Suddenly Barnevik was arrogant, imperial, and resistant to criticism. The organizational structure which was previously a key success factor was now labeled as chaotic and a reason for the company’s problems.

Hence, Rosenzweig argues that there are no simple answers to the question: What leads to high performance? According to him company performance is the result of strategic choices and execution. But there is no simple generic formula that works for all companies and situations.

The book starts with describing the challenges of studying company performance objectively. After some real-world examples, the author describes 9 different delusions when it comes to understanding business performance, focusing on the halo effect. Rosenzweig ends the book with some proposed solutions to the described challenges. The book is a quick, easy and enjoyable read.

The ideas covered in the book are important and I agree with Rosenzweig in his critique against most management books and how business performance is analyzed. Companies that have had recent financial success are often assigned positive and maybe even unique attributes. In a way the book deals with physics envy. Business and management are not exact sciences like physics and should not be treated as such. There are no exact formulas that will tell you how to achieve success. As a manager and investor, you need to be able to handle uncertainty and change. This book is a great reminder of that.

That said, I think the book is a bit unbalanced in terms of how it is structured. Rosenzweig spends the majority of the book discussing the halo effect and criticizing two management gurus and their books. Although those gurus are famous, the majority of authors, journalists and analysts are subject to similar cognitive biases. I would have liked the book to be broader in terms of discussing different pitfalls in analyzing business performance instead of just focusing on the halo effect and the three mentioned books.

Although the book is mainly written for managers, the described delusions are important to keep in mind for investors as well. For example, it is sometimes tempting to assign a competitive advantage, a superior culture or excellent management to a company that happens to be on a good performance streak. The lessons from this book might prevent that mistake. 

So, if you enjoy reading management books or analyzing businesses, the sooner you read The Halo Effect, the better.


Mikael Tarnawski-Berlin, January 11, 2018