Parames, Francisco Garcia – Investing For the Long Term

John Wiley, 2018, [Equity Investing] Grade 5

Link to Amazon… Read as pdf…

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

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

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

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

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

Bo Börtemark, October 19, 2019

Rappaport, Alfred & Mauboussin, Michael – Expectations Investing

Harvard Business Review Press, 2001 [Equity Investing] Grade 5

Read as pdf… Link to Amazon…

A great value investor needs to be a business analyst who grasps the competitive dynamics of businesses, who knows accounting - the language of business, who can value companies and also understand the psychology of others and himself. An excellent investor needs to be a contrarian. Reading value investing books is often a rehearsal on these key themes. Expectations Investing by Alfred Rappaport and Michael Mauboussin is no different. What is yet distinctive is that they endorse starting the analysis with the most reliable signal of all - the price of the stock.

The reason I picked up this book was that I wanted to improve on how to filter out interesting stocks. Screening may be a quick and easy tool but it's just the first step. Multiples don't tell enough about whether a stock is cheap or not. Research shows that the market takes the long-term view and value companies based on discounted cash flows. In a recent podcast episode featuring Mauboussin, he mentioned that "you have to earn the right to use a multiple" and it ticked my interest. When I found out that he had co-written a book with Rappaport named Expectations Investing I decided to read it.

The book is structured in three parts where the first introduces the reader to the activities needed to grasp the price implied expectations (PIE) - the key theme of the book. The second, which is the most important part of the author's view (on which I agree), deals with how to implement the method. The last part focuses on corporate signals and when they should lead the investor to update the outlook. The authors recommend beginning with an analysis of what the market consensus is about future sales, margins, taxes, and investments. Knowing that leads to a free cash flow estimate. Discounted to today, it tells the investor how many years the company is expected to earn a return above the cost of capital. Believing the market is misjudging what the company should reasonably produce in the future, based on a historical analysis or through having special insights about the company and industry, it may be an interesting prospect.

This is where the hard works starts. Will the break from consensus come from unexpected volume growth, a better price and mix, cost efficiencies, barriers to entry or something else? Chapter nine of the book is great for the researcher as it describes the key drivers for physical-, service- and knowledge businesses. Another aid is the concept of the "turbo trigger". If growth in sales is most likely to impact the value of the company, the focus should be on the factors leading to higher sales. What if management is fraudulent? Well, to study its past actions and if the management incentives are aligned with the shareholders are always important. Lastly, and maybe most crucially, beware of psychological biases.

The best piece of the book in my view is a case study of the computer company Gateway which summarizes much of the ideas in the book and that can be used as a template for your security analysis. I have already incorporated some of it in my work as I used the example on a company I was interested in while reading the book. To test concepts of a practical book while reading, is arguably the best way to learn. There is also a website for the book with case studies and free material (

If I were to mention something negative about Expectations Investing it is that the authors use a lot of technical terms that are hard for the beginner to grasp. That is no issue for the more experienced investor though. The authors’ main idea is that it's better to start with the price, which is a contrarian view as most value investors highlight the risk of anchoring on the price. On the other hand, time is a scarce resource and putting a lot of effort into researching stocks that are priced for perfection seems like a waste. Both methods have their drawbacks and are both hard but having read the book, I have tilted my process a bit in favor of Rappaport and Mauboussin's approach.

Niklas Sävås, October 13, 2019

Carreyou, John - Bad Blood

Alfred A. Knopf, 2018 [Business] Grade 4

Read as pdf… Link to Amazon…

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

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

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

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

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

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

Niklas Sävås, August 15, 2019

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

Published by Gautam Baid, [Equity Investing] Grade 5

Link to Amazon… Read as pdf

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

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

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

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

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

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

Bo Börtemark, July 30, 2019

Ries, Eric - The Lean Startup

Crown Publishing Group, 2011 [Business] Grade 4

Link to Amazon… Read as pdf…

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

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

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

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

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

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

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

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

Niklas Sävås, April 22, 2019

Stone, Brad - The Everything Store

Corgi Books, 2013 [Business] Grade 4

Read as pdf… Link to Amazon…

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

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

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

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

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

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

Niklas Sävås, January 28, 2019

Crosby, Daniel – The Behavioral Investor

Harriman House, 2018 [Finance] Grade 4

Read as pdf… Link to Amazon…

This is a book with great ambitions. In the first sentence Daniel Crosby says that the aim for The Behavioral Investor is to be the most comprehensive guide to the psychology of asset management ever written. Dr. Crosby, a psychologist by training, is the Chief Behavioral Officer at Brinker Capital and a leading blogger and podcaster on the subject of behavioral finance – this is his forth book on different topics in this discipline.

Some fifteen years ago I fell in love with behavioral finance as it so obviously described aspects of investing and financial markets that traditional finance and economics didn’t. Over time the interest has however started to wane since the academics in the area devoted their energy towards adding yet another insult towards the previously dominant efficient market hypothesis creating an ever growing list of interesting and quirky behavioral biases but no real practical applications for investors. According to the author “[…] all this ends today, as we will take [these biases] and speak to the particulars of what they mean in the context of making money.” I would argue that the aim of being the most comprehensive guide is reasonably well met for a book of “only” about 250 pages. With regards to fulfilling my wish of an applied behavioral finance investment method The Behavioral Investor unfortunately only gives fairly broad guidelines.

The author is well read in both academic literature and more practical investing books. Despite the author’s learnedness the language is very readable and clear as Crosby’s writing comes with a humorous and personal touch. This is a finance book without most of the technical finance jargon – although at times it instead contains some psychology terminology. Nevertheless, it’s undoubtedly a very readable book.

The book is structured in four parts with the first outlining the sociological, neurological and physiological foundations to the biases investors exhibit. Then the author summarizes the many documented psychotically based follies of investors into four primary tendencies regarding ego, conservatism, attention and emotion. Part three tries to list practical measures to overcome the previously described problems and finally the book ends with the author’s “third way” of investing (as opposed to passive investing and active investing) called rules-based behavioral investing (RBI). Hence, the first half gives a background and the second half tries to apply the learnings in real life. Throughout The Behavioral Investor Crosby discusses most of all the psychological experiments and subsequent findings that a frequent reader of behavioral finance literature will ever have heard of but without it ever getting tedious.

RBI is as the name suggests rules based with a high base allocation to equities implemented through a combination of value and momentum quant based equity portfolios and with an overlay of valuation (Tobin’s Q, CAPE etc.) and momentum (200-day or 10 month moving averages etc.) based rules for when to very occasionally lower the allocation of equities. The focus is to find a rational and evidence based methodology where the room for behavioral biases is kept to a minimum. Although this is only one of several good ways to manage money I personally think this is a great setup, but regrettably Cosby only gives a very fleeting description of what his RBI actually looks like. Further, the Achilles heal of the rational quantitative strategy is that it needs permanent money or else it will suffer redemptions at the exact wrong moment from its less than rational human investors.

If this is one of the first books you read on behavioral finance you are to be congratulated as it will surely be mind-blowing. If you have followed the area during its development, The Behavioral Investor is a very good inventory of current knowledge but it adds relatively little new. And perhaps it’s a good thing that a best selling book cannot deliver a detailed best practice behavioral finance investing method as it is then up to me to develop it myself.

Mats Larsson, December 31, 2018

Pettis, Michael – The Great Rebalancing

Princeton University Press, 2013 [Economics] Grade 4

Read as pdf… Link to Amazon…

World trade doesn’t work as most pundits think it does. At least the author argues that the effects on national current account balances, savings ratios, investments etc. are too often poorly understood. The author Michael Pettis - formerly a banker at Bear Stearns and a trader at today’s JP Morgan - is a professor of finance at the Peking University and a well-read, prolific blogger, discussing topics like global trade and the Chinese economy. In this book Pettis tries to set the record straight and explain why trade policies, in a broad sense, was one of the major factors behind the 2009 financial crisis and what this says about the future for the Chinese economic growth model etc.

Apart from an introductory chapter and a concluding one (including some predictions about the future) the book is structured to try to explain three “confusions” in the trade debate. The first confusion has to do with the causes of trade imbalances and how these generally are the result of distorted economic policies in one or more countries (chapters 2 to 4), the second is related to the relationship between trade, the savings rate and international capital flows (chapters 5 to 7) and the final confusion is that the role of the USD as the global reserve currency is an advantage for the US (chapter 8). As I read the 2014 printing of the book it also contains an appendix with an explanation to why the imbalances discussed in the book emerged to start with. If your copy of the book contains this appendix I would advice you to start your reading with this as it provides background and further details the macro economic accounting identities that are frequently used in the book. Although several countries and regions are discussed, the symbiotic relationship between the US and China is really the key topic of the book.

You get the feel that The Great Rebalancing is written out of frustration that so few understand global trade economics. The big advantage of the book is that it looks at the economic causes and effects of trade as an interconnected international system where every country is affected by every other one through the capital and current accounts. Hence, where many economics textbooks look at theoretical examples containing only two countries Pettis discusses the real-world, complex web of relationships. Still, the book also very much feels like sitting in on a slightly repetitive academic economics course in trade theory, but instead of equations and arrows that point to chains of events everything is described in text only. It would have been more enlightening if the author had added some occasional pictures with the described equations. Hence, the best advice for getting the full benefit of this book and making reading it a valuable learning experience is to write down the equations that Pettis uses on a piece of paper and have it handy while reading the book.

Pettis views imbalances between production and consumption – or rather “underconsumption” as once discussed by Karl Marx – to be the primary source of economic instabilities and from this argues that the economic growth model of China has actually been tried several times before and as it is imbalanced it will have to reverse. In the case of Japan it reversed through a crisis while in Brazil it did so by a lost growth decade. It is this later fate the author sees for China in the end. The growth model builds on financial repression (in China’s case through low regulated interest rates), currency manipulation and a wage growth that is slower than the productivity growth. The author claims that there are only three ways that China realistically can rebalance and this is through higher unemployment, increasing debt or through wealth transfers. The best way would be to shift the economic model in a way that shifts means from the state and the corporate sector to consumers. Although this would be relatively painless the GDP-growth will have to slow substantially and it is also a policy that threatens many vested economic interests.

I’m not a good enough economist to know if Pettis is right but despite the somewhat dry writing this is an important book to have read.

Mats Larsson, December 26, 2018

Ang, Rusmin & Chng, Victor – Value Investing In Growth Companies

Wiley, 2013 [Equity Investing] Grade 3

Read as pdf… Link to Amazon…

To succeed in the equity market it is important not to succumb to the psychology of the market. Vital to this resilience is then to have - or cultivate - the right mindset but also to follow sound investment philosophies and stringent processes. Rusmin Ang and Victor Chng, two Singapore based chief investment analysts at 8 Investment, the largest value-investing network in Asia, offer to guide readers of their book Value Investing In Growth Companies to just this.

The preface and the first chapter gives an account of the journeys that the authors have made – both personally and with regards to becoming devoted value investors ingrained in the teachings of Warren Buffett, Peter Lynch, Philip Fisher, Ben Graham, Charlie Munger, Anthony Bolton and the like. After a chapter on how to understand investment psychology the main part of the book is then dedicated to the duo’s research method called the Jigsaw Puzzle, focusing on the business of the company, the management, the financial results it produces and the valuation of the shares. Lastly, they finish off with some thoughts on practical implementation and portfolio management (including screens to filter out good prospect stocks) plus how to avoid common mistakes.

I appreciate that the authors start by laying the groundwork discussing investment psychology and they also correctly caution readers from using their method if they don’t have the constitution for it. There are many ways to invest; you should chose one that fits your personality. Further, the method in itself requires the investor to take certain steps and to make sure firm objective criteria are met before investing in a stock, which in itself gives some protection from being psychologically swept off ones feet by the latest glamour stock.

Although useful for professional investors, I would argue that this is primarily a book for private investors interested in investing in small-cap, GARP-type of stocks – or GAUP as the authors’ calls it; Growth at Undervalued Prices. The prospect companies are those with simple understandable business models but the method still requires the investor to do a fair amount of “scuttle-butting” à la Fisher and store visiting à la Lynch so there is some fair amount of labor required. I must admit that I find the method and the book a bit commonplace – robust, correct and well crafted but not something out of the ordinary. The amount of detail and depth in the book isn’t huge. This doesn’t prevent it from potentially being incredibly operational for the private investor if well used. It is often more important to find a good practice – which this is – stick with it and perfect it, rather than to constantly chase after an illusive perfect method. Depth and detail can be added by the investor himself from real world experiences.

As a Western European, one main take from the book is that investing is pretty much the same wherever you practice your craft. There are some culturally distinctly Asian features such as the authors’ unabashed declarations to become rich which is more socially accepted in a part of the world where such large parts of the populations have managed to do so in a relatively short period of time and there are obviously references made to the quite speculative stock markets in south east Asia. Also, companies and specific persons differ from what a westerner is used to. Still, there is nothing specifically Asian about the philosophy or the research process – instead it should be universally valid for all.

This is an able book on investing in smaller growth companies that could serve its reader well but it offers no real revelations.

Mats Larsson, December 20, 2018

Marks, Howard - Mastering the Market Cycle

Houghton Mifflin Harcourt, 2018 [Finance] Grade 4

Read as pdf… Link to Amazon…

The holy grail of investing is market timing and its realization is about as elusive. This is a guide on how to master the financial market cycle, which is something in a way related to market timing, but still very, very, very different. The master (that word again…) corporate bond investor and investment writer Howard Marks at Oaktree Capital Management is among those whom I admire most in financial markets and his first book The Most Important Thing ranks among my top five all time investment books. In a way this is a slight problem when it comes to Mastering the Market Cycle. A classical advice to companies reporting their financials is to “under-promise and over-deliver” – the thing is that Marks’ first book drives up expectations for this one to a level it cannot fully live up to. But it’s still a really inspiring book on an important and under-discussed area that I will put to good use immediately.

A fundamental cornerstone for the author is that financial markets cannot be predicted with any practically usable precision in the short to medium term. This doesn’t mean that all market outcomes are equally probable at all times. By looking to current conditions and by this forming an opinion on where we are in the market cycle an investor, according to Marks, can tilt his portfolio to take advantage of what is more likely to happen in the years ahead. It’s both about what one thinks will happen depending on where one is and about the probability of this happening compared to other scenarios. If an investor is good at this game it should pay off in the long run and he tilts the odds for success in his favor. Prepare, don’t predict. I think he is totally spot-on in this respect.

Another key basis in mastering the cycle is to understand that things don’t just happen one thing after another in – unfortunately irregular – cyclical patterns. What happens in one stage of a market cycle is instead causing it to move on to the next stage. Cycles are chains of cause-and-effect relationships. After a pair of introductory chapters the main part of the book is devoted to describing a large set of interrelated and parallel such cycles: the economic cycle, the profit cycle, the risk attitude cycle, the credit cycle and so on. Underlying all these is the cyclical patterns in investor psychology – a topic clearly nearest to Marks’ heart. To a large extent Marks reads various psychological markers and positions himself in the cycle by these. Next comes one chapter that tries to assemble all the above cycle inputs into the full mosaic of the market cycle. The book finishes with a few concluding more practical chapters and a needlessly cut-and-paste type of summary.

It is honestly a luxury to have 50 years of hard won experience condensed in such a graspable format. Marks is a simply superb writer. Much like Warren Buffet the language can be deceptively simple, causing fairly complex issues to sound like child’s play. Make no mistake – this is investment thinking on the highest level. Still, compared to the high standards set by the author’s investment letters some passages of the book are a bit repetitive with their long and recurring chains of cause-and-effects and some newly written chapters that don’t build on previous investment letters, but are required to make an coherent story, are perhaps slightly less inspired than the others.

There are clearly others who have made contributions to the understanding of market cycles such as Hyman Minsky, various Austrian economists, the books from Marathon Asset Managed edited by Edward Chancellor plus many others. However, since Marks is so focused on reading non-fundamental and non-economic signposts I think the most complementary book might be Big Debt Crisis by the more Borg-ish Ray Dalio with his “economic machine”-concept, who obviously mostly zeros in on the central bank dominated cycle of monetary policy.

When it comes to books on market cycles this is a must read – but it could have been even better.

Mats Larsson, December 15, 2018

Saraogi, Rahul – Investing in India

Wiley, 2014 [Equity Investing] Grade 4

Read as pdf… Link to Amazon…

India is a country of interest to investors as it offers many of the characteristics that made the West such a fertile place for business and investing during the 20th century: young demographics, a rapid rate of urbanization and improving education. The best investors have often prospered from using a bottom-up approach, investing in stable countries with a clear rule of law, a strong financial infrastructure and with capitalism and not socialism as the ruling principle. The question is if the opportunities in India outweigh the risks for investors. Judging by the title of this book from Rahul Saraogi, Investing in India: A Value Investor's Guide to the Biggest Untapped Opportunity in the World, the answer is a clear yes!

Saraogi is a value investor who was born in India and moved to the US to study. It was at that time he became interested in economics and investing. He also became enthralled by Indian economic history and realized that both Indians and Westerners had problems with understanding India. He saw an edge that he decided to pursue. He moved back to India to become an investor and now manages Atyant Capital. Saraogi wrote the book in 2014 – a time when the Indian markets had suffered from a severe downturn.

Investing in India is structured in six chapters where the first four focus on giving the reader an understanding of India from a social, political and economic perspective. The fifth chapter is about value investing in India where the author presents examples of what businesses to avoid (those with bad governance and poor capital allocation) and what to look for. Throughout the book the author presents case studies to describe and strengthen the points made.

Some quirks that may be surprising for the reader is that Indians avoid buying property and machinery at certain times during the year due to spirituality and superstition. Another is that debts in Indian villages are not forgiven by death but is left with the heirs. Another central theme is that of the important roles of land, property rights and gold. It's not allowed to lend for land-buying, but prices are still high as it’s seen as a valuable consumption item. Gold has been a good store of value, as it often is in countries suffering from currency debasement and instability. The country imports gold worth $60 billion a year. Strong property rights are central to a free-market system but also act as a hindrance for building infrastructure, an area where India has huge needs of improvement.

India should not be seen as one country as the differences between the 28 states are huge - some states are likely to prosper in the near- and long-term while others have worse outlooks (the richest state has seven times the GDP per capita of the poorest). In terms of sectors, agriculture is the largest measured in people employed while services are largest in terms of GDP. On the macro side the country has a large current account deficit but at the same time a low level of external debt.

The Indian markets have often traded higher than the other “BRIC” countries. While Brazil, Russia and China have lots of cyclical and commodity companies, India has strong franchises which according to the author should command higher valuations. Saraogi is certainly bullish on the future of India, a view he shares with great investors such as Mohnish Pabrai and Prem Watsa. He thinks the groundwork has been laid and compares it with a bamboo plant that grows very slowly during the first four years while it develops its root system. In the fifth year it grows 80ft in 6 weeks! The future will tell if something similar can occur in India.

One should always invest within one’s circle of competence. The book is a comprehensive guide to one of the most important countries in the world and a great start for the investor who wants to know more about the ins-and-outs of investing in India. The reader will certainly get a better understanding of interesting sectors and might even pick up some stock-tips.

Niklas Sävås, December 04, 2018

Duke, Annie – Thinking in Bets

Prentice Hall Press, 2018, [Behavioral Finance] Grade 4

Read as pdf… Link to Amazon…

If you were to analyze poker, it’s basically a game of decision making under uncertainty. Should I call? Raise? Go all in? Or maybe fold? The only thing you know for sure is the hand you are dealt. The uncertainty lies in everything else.

Poker is about making the right decisions when you don’t have all the information available. When looking at the stock markets it’s not hard to spot the similarities. The market is just a big pile of uncertainty with you stuck in the middle trying to make money.

Internet poker was a big thing when I grew up, and my enthusiasm for the sport (if it is one?) has indeed served me well. I stumbled across Annie Duke when she was interviewed on The Capital Allocators Podcast. When I heard that she was writing a book about how to approach life as a betting game, I was already sold.

This is a book about decision strategy, and Annie is a very experienced decision strategist. Even if the book is filled with anecdotes from Annie’s poker career this is far from a poker book. Instead it’s a book about making good decisions when you can’t see all the cards, both figuratively and literally. It turns out, this is a situation we find ourselves in almost all the time. When we decide to go to the movies we’re taking a bet on that the movie will be a better experience than staying home. When we order meat at a restaurant it’s a bet that it will prove a better experience than the fish. Every decision is a bet on something - we are just not used to think about decisions this way.

Duke suggests that by analyzing our decision process we can subsequently use tools that makes it easier activate system 2 (it’s time to read Daniel Kahneman’s Thinking, Fast and Slow if you for some unexplainable reason haven’t already) and think more rationally.

One interesting example of this is one about actual betting. Most people are in the habit of making statements as if they were always true. We often accept these at face value since it instinctively seems at least moderately accurate. If we instead reply with “Wanna bet?”, the mindset shifts dramatically. Now we try to think hard if the said statement is maybe 70% or 100% true. The difference is of course enormous, but without forcing ourselves to make a bet, we take mental shortcuts and jump right to the, often wrong, conclusion. By trying to ask ourselves if we would place a bet on something, we can help ourselves along the path to Kahneman’s famous system 2.

Another very helpful idea that the author taught me was the idea of setting up decision groups whose only task is to analyze and evaluate each other’s decisions. The group is in itself an interesting concept, but what its mere existence does to you is far more interesting. Before deciding, try to foresee what your decision group will make of it. What objections might they have? Which questions will they ask? What will they think about your decision? Will they approve of your action or will you walk away embarrassed? By anticipating the decision-group’s feedback before you even make up your mind in the first place, you are far more likely to make a rational decision based on facts and not gut feeling alone. You don’t even have to go to the group, as long as the group’s pressure affects your decisions.

If you’ve read a book or two on behavioral finance you will certainly feel at home with Thinking in Bets. It takes all the common concepts and tries to find a more practical approach to beating biases and poor decision-making. This is a great book for anyone; buy it for Christmas for everyone you know. It is not an investing book; it’s a book about not being a dumbass. Which for sure is a goal I have as an investor.

Olle Qvarnström, November 29, 2018

Tsoi, Tony - Living Value Investing

Read as pdf… Link to Amazon…

Right off the bat, it would be appropriate to bring some preconditions to this review out in the open: The author of the book, Tony Tsoi, has previously worked at Value Partners, the investment boutique founded by Cheah Cheng Hye – the very person profiled in Living Value Investing. And it is obvious he holds Mr. Cheah in very high regard. Furthermore, this reviewer owns shares in Value Partners in his day job as a fund manager – in no little regard due to the appreciation of Mr. Cheah’s capabilities and the brand name Value Partners has built. So, with that out of the way: this is a fascinating rags-to-riches story, profiling a person that have built a company labelled ”The Temple of Value Investing in Asia” and been invited to hold the keynote presentation at The Ben Graham Centre as the first person from Asia to do so. But this outcome was certainly not written in the stars. It is perhaps his ability to surprise in his success that has left people around him - including the author - the most impressed. As he states early on: ”Throughout the history of Value Partners, there has never been a shortage of doubters - not even now”.

Living Value Investing was originally published in Chinese in 2016 but after some persuasion an English version came out early this year. The first half of the book is broadly organized in chronological order, starting with Cheah’s early life in a poor Malaysian rural area, through the 17 years as a journalist in both Malaysia (editor at age 19!) and for WSJ in Hong Kong, concluding with the formative period of building Value Partners. The remaining four chapters then deal with certain aspects of Value Partners, including the decision to go public, its focus on China and Cheah’s evolving role at the company he created. This last part was no walk in the park as many founders can attest to - particularly after trying to sell the company a couple of years ago, but then reversing course as the take-over price could not be agreed upon. Probably because of the ”currentness” of the situation, but also due to my appreciation of the other topics covered in the latter half of the book, I tended to like that part more than the biographical chapters. In no way should they be viewed as fly-over chapters however. The experiences Cheah made in early life has certainly had a tremendous impact on his investing beliefs and how Value Partners was built. The feeling of always being the outsider wherever he went, the lone wolf, looking in from the outside – isn’t that the perfect description of a dyed-in-wool value investor? 

One of the more fascinating discussions revolve around the future role of Hong Kong, its diminishing role since 1997 and what its competitive edge ought to be going forward. The author argues convincingly that what the island needs is not another Li Ka-shing (property and trade) but rather several new Cheah Cheng-Hye’s (financial services). A part I have re-read several times. Another topic that the author covers well is the corporate culture Cheah and the early partners have (figuratively) built into the walls of Value Partners. The pragmatic says ”performance is all that matters”, but as everybody working in the industry knows, performance is far from everything and the examples and standards you set early on impact the quality of people you attract. There is much to learn from the examples set forth in the book, despite the obvious translational differences in business conduct between East and West.

Another trait of Cheah, avidly described throughout the book, is his image as a bookworm. Almost every person interviewed brings this up. At no time is Cheah not reading something, even occasionally in the shower. To no surprise, this certainly adds to our appreciation of the man! He and VP has surely come a long way since having to sneak into an invitation-only seminar behind the back of a good friend working for Fidelity. Today, $17bn later, Cheah and Value Partners are working hard to be the ones leading the way, creating the Asian version of Fidelity. ”Today in China is similar to the US (financial markets) in the 1950s. The opportunity-set is there”.

Henrik Andersson, November 25, 2018

Wainwright, Tom – Narconomics: How to Run a Drug Cartel

Public Affairs US, 2016, [Surrounding Knowledge] Grade 3

Read as pdf… Link to Amazon…

In the age of legalization of recreational drugs, what could be more relevant than learning about the South American cartels that completely own this market today? I know, the subject might seem a bit unorthodox for a finance book review, but bear with me.

To say that it’s impressive that this book exists is an enormous understatement. The fact that the author survived writing this makes you wonder if it’s actually true or a complete work of fiction. Tom Wainwright, the author of Narconomics: How to Run a Drug Cartel, has literally risked his life for this research. Wainwright paints a picture that the cartels are not that different from large international companies - with a little bit of torture, murder and what have you thrown into the mix.

From my experience, the world is best understood through the eyes of a textbook on economics, and Tom really proves this to be the case. Levitt and Dubner’s classic Freakonomics opened my eyes to the power of incentives and economic powers. Wainwright continues along this path and suggests that if we are to understand cartels, we must analyze them like every other structured organization. The cartels suffer the same problems as everyone else with finding recruits, keeping salaries down, keeping competition away and of course keeping prices high. Considering the hard work of finding good employees that are loyal and keep their mouths shut, it becomes increasingly important to treat your employees well. It seems somewhat unlikely that Wal-Mart would force all their employees to have facial tattoos done in order for them to never be able to change employer, but maybe the business world has a thing or two to learn about keeping employees around?

There are quite a few interesting tidbits throughout this book, many of them somewhat controversial, but nonetheless thought provoking. A specific part that stood out for me is that most of the cartels covered in the book are mono-cultural organizations with little to no diversity. According to a Dutch study on internal gang disputes, 29% of those conflicts when involving people of the same ethnicity were solved with violence, whereby the number is 53% for internal gang conflicts involving people of different ethnic background. There seems to be no studies made in “legit organizations” for this question so it’s quite hard to fact check these statements. Regardless how unpopular it would be, it tickles my curiosity to find out how an extremely homogenous organization would fare. Would they all be friends but get nothing done? Would the people eventually clash? Or would it be the most successful organization we’ve ever seen? I don’t think I will ever find the definite answer.

Academic research brought forward by Michael Mauboussin shows that there are different types of diversity; social diversity that reflects to differences in ethnicity, gender and the like, cognitive diversity that includes differences in knowledge, experience etc. and value diversity that captures differences in the perception of the group’s task or goal. To foster good decision-making you need a) relevant competences, b) high cognitive diversity to ensure that there are multiple sharp tools in the toolbox to solve problems but also c) low value diversity to make sure that people strive in the same direction. Social diversity is positively correlated to cognitive diversity and so is generally a positive. However, social diversity can also lead to some process losses as the group has more difficulties in interacting and the level of conflict therefore rises.

When peeking through the eyes of an economist, the world makes a lot of sense, and the global drug trade is no different. This might seem surprising to most people, but are we really that surprised that criminals also follow the rules of market economics? I can’t say that I am. No one is immune to the forces of the market economy. I picked up this book at the airport, and that’s kind of where it fits. It’s perfect for vacation reading. Prepare to be baffled and amused, but don’t expect to be a better person or investor.

Olle Qvarnström, November 19, 2018

Sommers, Tamler – Why Honor Matters

Basic Books, 2018 [Surrounding Knowledge] Grade 4

Read ad pdf… Link to Amazon…

In this his third book the relatively young Texan associate professor of philosophy at the University of Huston, Tamler Sommers, defines the virtue of honor, describes the pros and cons of honor cultures and claims that honor is underrated in our modern world. The author argues that the Western world has made a mistake in suppressing the concept of honor to the extent that has been done and that we need to adapt a “constrained” honor concept to live a good life. Although clearly interesting, Why Honor Matters fails to fully tie together all the loose ends.

According to the author the Western world is virtually schizophrenic when it comes to honor. The concept has little place in the discourse apart from when we horrify over the blood feuds, racism and bullying of women in honor cultures. On the other hand we admire the courageous hero of books and movies that rights the wrongs and in sports honor is still a valid concept. The first two chapters of the book define what honor is and discusses why it’s a problem that the West has abandoned the concept. Chapters three through five, drills deeper in the various aspects of honor cultures. Then “the most ambitious and […] the most important chapter” six argues for introducing so called restorable justice in the Western criminal justice system. Finally, the last chapter tries to present a picture of how the contained type of honor concept might look.

Sommers distinguishes between a Western dignity framework with its roots in the enlightenment and honor cultures – and to be clear, honor cultures could be attributed to both the populations of the Appalachian mountains and the Afghan mountains as well as the Navy SEALS, Mexican drug cartels and NHL hockey teams. Dignity is in this respect a universal unbreakable value that comes with being a human being and it is as such skeptical of narrowing forms of identifications with for example nation, class, race etc. This is because too close identification risks excluding others from the moral sphere. Honor is a much more fragile value that takes the opposite view. Giving equal moral weight to outsiders and insiders of a group is seen as immoral. While others should be treated with respect and hospitality, caring for your own is absolute priority. In a dignity culture living a moral life is a pursuit and choice of the individual while in honor cultures the individual moral is a part of a group’s norms and a moral life a necessity to be accepted by, and gain status in, the group. Dignity is independent of social structures and this has huge value in breaking free from oppressive structures. The downside is a loss of stability and structure plus of the self-respect that comes from standing up for yourself. To the author the western focus on the free will and the independence from others is too abstract where an atomization is prioritized over the meaning and solidarity that exist in honor cultures. Without the, granted not always positive, group cohesion of group norms dignity societies instead come to depend on an all powerful state penetrating deep into civil society.

Although I agree that a person to his best ability should live an honorable life of integrity, I reserve this as a choice for myself. My quarrels with the book are three. The discussion around restorative justice comes up now and again in the book and not just in chapter six. I think that it could have been better flagged that a debate on procedural structures in the US court system were such a large part of the book. Further, at times the author in my view comes a bit too romanticizing of the “honorable savage” of Jean-Jacques Rousseau. The ending chapter on how to create the contained type of honor isn’t very developed. Basically Sommers says that since honor norms are not universal they are changeable. What we need to do is to have norms that prevent violent escalation and that utilize less violent methods for standing up for oneself. Examples given are the dance-offs in Hip Hop culture, NHL norms, poetry slams and the Chicago BAM-project (Becoming a Man) - a bit slim basis for the change of western culture.

An important debate worthy of a stronger finish.

Mats Larsson, November 7, 2018

Zenger, Todd – Beyond Competitive Advantage

Harvard Business Review Press, 2016 [Business] Grade 3

Read as pdf… Link to Amazon…

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

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

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

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

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

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

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

Mats Larsson, November 4 2018

Bernstein, Peter L. - Against the Gods

Wiley, 1996 [Equity Investing] Grade 5

Read as pdf… Link to Amazon…

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

Read as pdf… Link to Amazon…

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

Scruton, Roger - Fools, Frauds and Firebrands

Bloomsbury, 2015 [Surrounding Knowledge] Grade 4

Read as pdf… Link to Amazon…

This is a deconstruction of the ideas of most of the leading socialist thinkers during the last 70 years including for example Jean-Paul Sartre, Michael Foucault, Jürgen Habermas and Antonio Gramsci. The author Sir Roger Scruton, who is a Cambridge philosopher, describes the theories of the thinkers, dissects what they really mean and by this exposes emptiness and charlatanism as well as intellectual vanity and the pursuit of power.

My big take from this exposé of over 20 post-world war socialist-Marxist thinkers is that they are largely all the same. The socialist intellectual movement is a purely academic discipline advanced by well-situated university professors who criticize the society that supports them. They all share a conspiracy theory type of framework where a secret force governs a system and by this is able to exercise power over a mentally sedated people. The culprit thus extracts the spoils of power. The tranquilized and deceived people on the other hand miss out on living in the paradise-like utopia that would materialize if they weren’t - unknowingly to themselves - ruled by this secret force. The academic is the only one who sees through the fog of domesticizing norms of power and must as part of a self-elected elite - a true philosopher king of Socrates’ - lead the people’s rebellion and by this liberate the enslaved noble savage of Rousseau so that he can live a life in spiritual harmony.

The secret force varies between thinkers. It can be the bourgeois, the western world/the US, the rational scientist, the corporation, capitalism, neo-liberalism, universal truths and rights, the consumer society, the society of the enlightenment and - later on - the man, the white man, the heterosexual (man) etc. etc. It is a rejection of the very society and context of the academic – making it an exercise in theatrical cultural self-loading (“their revulsion is a kind of holiness” as Scruton puts it). The arena of the coming revolution also conveniently varies with the academic discipline of the thinker and could be language/literature, the historic narrative, philosophy, sociology, art, architecture etc. It is always very unclear what the utopia really looks like. The important thing is instead the struggle and the solidarity of the select elite who leads it. “The contradictory nature of the socialist utopias is one explanation of the violence involved in the attempt to impose them: it takes infinite force to make people do what is impossible.” All thinkers are obliged to add their contribution to the ever-growing terminology swamp of academic socialism to mask that they all say pretty much the same thing.

Thus, the structure of the framework is the same as the one initially constructed by Karl Marx and Friedrich Engels but the arena is now almost always cultural rather than a “materialistic”-economic one as in old-school Marxism - the exception perhaps being Gramsci, staging his revolution from below through the infiltration of all of society’s most important institutions (with regards to their power to influence the mind of the masses). Obviously, the “worker” still has to be paid tribute by all thinkers and generally functions as a lazy type of alibi in their theories, but in reality he is immaterial to these culture wars of the learned class. The worker is simply there to be governed by someone. The existential struggle is by whom – the progressive learned intellectual or the fascist Other.

It is indeed interesting to learn the historic origins of many of the expressions and phenomena that one is exposed to when reading the culture pages of daily newspapers. The reader for example learns the history of critical theory (Max Horkheimer’s “systematic critique of capitalist culture”), concepts like late-capitalism (Habermas’ spätkapitalismus) and “the gaze” and why communist thinkers’ texts seemingly confuse subject and object in the most peculiar way. The one large drawdown of the book is the language which is that of an elderly British philosophy professor. The book is no picnic to get trough but it’s totally worth it in the end.

Frightening but brutally vital knowledge.

Mats Larsson, October 8, 2018

Gunter, Max - The Zurich Axioms

Harriman House Ltd, 1972 [Finance] Grade 4

Read as pdf… Link to Amazon…

At its core this is a book containing 12 rules – or axioms - for speculation in financial markets in the same vein as previous learning’s about risk, reward and human behavior that have been passed on by the likes of Jesse Livermore, Gerald Loeb and Bernard Baruch, i.e. the notorious financial speculators of the early part of the twentieth century. It is the investment philosophy of a former group of Swiss bankers.

The Zurich Axioms also comes with a quite fascinating background story. Max Gunter is a journalist, an author and the son of Franz Heinrich – in the US called Frank Henry. The author’s father was during a long period the US head of what is today UBS and also a core member of an unofficial network of Swiss expats on Wall Street that met irregularly at the bars around where they worked, starting in the mid 1940s all the way until the early 1970s. The topic for discussion was always the currently available investment opportunities – or speculative opportunities, as they would have put it themselves. Thus, the author grew up with a father that socialized with Jesse Livermore, Gerald Loeb etc. and that often invested in stocks or commodities side by side with them. The book came about when Max Gunter one time, when being advised by his father to make an investment, asked him what the basis was for the advice, what Frank Henry and his Swiss acquaintances actually based their decisions on. The thought process that followed in the Swiss network in trying to formulate their rules for speculation resulted in this book, first published in 1972.

The axioms advocate taking large stakes in a few meaningful opportunities at the time, to set targets for when to take profit and to immediately get out if a position is turning sour – and never try to average down or get in again on a loosing position. Positions are based on the judgment of the speculator regarding what is happening now and not on forecasts or other people’s opinions. The time horizon is short to medium term (months, rarely years) and even if the author never uses the old saying “let your profits run and cut losses short” the thinking is very much aligned with this. Overall, the philosophy of Frank Henry and his fellow Swiss bankers is based on trading psychology that much later formed parts of what is today know as behavioral finance. Much, like the advice to disregard the consensus as it probably is wrong or the distrust in forecasts, should resonate well with more long-term fundamental investors. Other advice will not and the last “minor axiom” from Max Gunter reads, “Shun long-term investments”. We will post the full list of axioms of the website separately.

The odd axiom out is number eight, On Religion and the Occult, that is not only a plea to keep superstitions out of one’s speculations (but not necessarily ones life) but also discussions on why it is inadvisable to base positions on the statements of fortune tellers and the use of tarot cards – but if you do, don’t bet too much on the positions advocated. It might just be me, but I surely hope this axiom is a bit dated.

Interestingly the axioms for speculating in financial markets also tie in to a parallel view on how to live one’s life. To make any gains in life something – money, time, love etc. - has to be placed at risk – nothing ventured, nothing gained. And even if this in the end means that now and then a person loses money, wastes his time or gets his heart crushed, this is still better than never having dared to live life to the fullest. Life should be an adventure. The Zurich Axioms are about calculated and intelligent risk taking in all straights of life.

The Zurich Axioms is a charming short and lively book with a pedigree that it is very easy to feel sympathetic about. And even if it perhaps doesn’t add that much new to trading philosophy it fits well on the shelf beside Reminiscences of a Stock Operator or The Battle for Investment Survival.

Mats Larsson, September 27 2018