Sing Bachher, Jagdeep et. al. - The New Frontier Investors

Palgrave Macmillan, 2016, [Finance] Grade 3

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This is a book on managing financial assets mostly suited to the niche audience of CEOs, CIOs, strategists, asset allocators and the likes at institutional asset owners, i.e. pension funds, endowments, sovereign wealth funds, insurance companies and such other institutions. The text discusses developments and choices with regards to which organizational forms and processes that best favor the management of institutional money, a topic presumably close to heart to Jagdeep Singh Bachher who apart from serving on World Economic Forums’ Global Agenda Council on the future of investing, is the CIO of the endowment at University of California.

The thesis is that as the asset managers that the asset owners engage to manage the money often are situated in international finance centers like London or New York and by this influenced by the culture in these places the asset managers’ process is more short-sighted and risk seeking than what is appropriate for the functioning of the financial markets and not very suited to the long time horizons of the asset owners. It would be better if the asset owners – who are often not situated in international finance centers – brought home the money and managed these in a more sustainable way internally.

The problem is that the financial infrastructure and the mass of financial talent are focused to these centers. This gives them a type of oligopoly that allows them to charge a price premium that comes out of the returns for the end-consumer. Hence, the faulty process of managing the capital of our societies is hard to escape. Still, the authors give their proposals to how it could be done. In my view the book almost takes the form of a collection of essays – selected and not totally aligned short texts on organizational aspects in institutional asset management to alleviate the above-mentioned problem.

There are some creative ideas presented but nothing to change the face of finance. Thoughts that I found useful were a) that since the aim of the asset owner’s processes is more long-term there might not be a need to compete for the expensive top financial talent from the financial centers but it is instead more reasonable to employ staff more closely related to the type of assets they are meant to manage – agri-professionals to handle the farmland assets and so on, b) that cooperations with other asset owners in various types of club structures and the likes might create the necessary resources to invest internally-ish in say, venture capital or private equity and c) I really liked the concepts of a governance budget (since it points to the finite amount of time and resources) and of having an in-house R&D-department as investing is a creative activity and it is those that are early into an asset or a trend that reap the largest benefits.

It is a fairly short book, the language is probably well suited to the audience of CIOs with a somewhat academic tone and at times I found the long lists a but cumbersome. I wonder if the authors don’t place a too heavy burden on the relatively small organizations of institutional asset owners, as they are to save capitalism from the shortsightedness of asset managers and markets. Further, it is almost mandatory of asset owners to claim a competitive edge through having a longer time horizon. The question is if they all can have it as they in aggregate constitute a huge part of financial markets and they might not all be equally equipped to exploit this time-arbitrage.

The best part of the book is the ending that in a way takes the form of an appendix where Sing Bachher to the text adds University of California’s ten “pillars of success” that came out of a work on the organization’s investment beliefs. To me they display a great balance between well-considered structure and creativity. Especially the last part is not usual, yet critical. Overall there are some good thoughts from a set of clearly intelligent and able authors but as a whole I found it a bit too thin.

Mats Larsson, June 04, 2017

Alvesson, Mats & Spicer, André - The Stupidity Paradox

Profile Books, 2016, [Business] Grade 4

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How is it possible that organizations filled with the best and brightest so often end up doing stupid things? Professors and organizational theorists Mats Alvesson’s and André Spicer’s explanation is that there are actually short-term benefits to stupidity both to organizations and to employees – although in the longer term the folly will often prove to be detrimental. Absolutely everyone that has been engaged in the inner life of large organizations will – with a sardonic smile – recognize numerous of situations from this book.

The key concept presented by the authors is what they call functional stupidity, by which they refer to the inability and unwillingness of organizations to let the staff utilize their cognitive and reflective capacity, apart from in relation to very narrow, technical and often repetitive tasks. But it also refers to the, presumably smart, employees’ willingness to self-stupidify. This results in a lack of reflection on the assumptions behind what is being done, in not asking why things are done to start with and not seeing the wider consequences of actions.

It might sound inconceivable that this inanity would be tolerated yet alone often encouraged by companies and public organizations and likewise sought after by the employees. Still, organizations benefit from employees’ stupidity since constant questioning creates doubt, uncertainty and conflict and by this is in the way of productivity. The authors even launch the concept of stupidity management as an organizational process of managing the balance between questioning and efficiency. In my meaning the expression probably gives an illusion of an explicit managerial control that doesn’t really exist. The employees benefit from their stupidity as they by not challenging social norms free up time and energy, they show loyalty and fit in. So stupidity comes with pros and cons. Still over time the process creates alienated and cynical staff with numbed cognitive abilities, it creates loads of non-productive work and worst case sets the company up for disaster.

The book has some structural issues. Although functional stupidity is described as also having positive aspects there is an apparent underlying axiom throughout the book that organizations that utilize the cognitive abilities of their staff will yield superior results. Still, with some exception it isn’t until the last chapter this is explicitly stated. The folly has gone too far and has to be combated! I think it would have been better to come clean with this up front. Similarly, the most comprehensive definition of the concept functional stupidity comes in the conclusion of the last chapter.

The start of the book is quite repetitive as the authors introduce the key thoughts in the preface, repeat them in the introduction and then again with a few examples throughout part one. Part two of the book, covering different types of stupidities, is more varied but also contains a fairly odd chapter on consumerism. The authors are clearly entitled to their opinions but the subject belongs to a different book and Naomi Klein has already written it. All in all there are 8,5 chapters of description and only 0,5 chapter of prescription – some more practical advice on what to do about the problem wouldn’t have hurt.

These issues are however easily forgiven. The authors are in my opinion dead right in their key insights and it isn’t often you bump in to new concepts that frames and explains a lot of what you intuitively know but additionally stimulates and provokes new thoughts. The book also has the extra attraction of making the reader feeling smart, of being one of those select few that have seen through the charade. Not least an intellectual snob like myself is easily seduced by this angle – I did buy the book. There are many texts on the biases of individuals or the madness of crowds in manias but fewer that explain the more mundane day-to-day irrationality of organizational processes.

This is an important and thought provoking book that deserves a wide audience among corporate managers and knowledge-workers alike.


Mats Larsson, May 23, 2017

Clark, David - The Tao of Charlie Munger

Scribner, Inc., 2017, [Equity Investing] Grade 4

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If you collect quotations from one of the broadest thinkers in business who for decades has delivered witty and wise sayings, you cannot really go wrong. The Tao translates as “the way” or “the path” and what we are served here is the way of Charlie Munger, vice Chairman of Berkshire Hathaway and long business partner to Warren Buffett. Munger’s many sayings have over time gained enough status to be christened as “Mungerisms.”

The reference to Taoism is equally apt when it comes to the format of the book. Just as Lao-tzu, the Taoist collection of saying and proverbs, this is a commented assortment of quotations where David Clark, co-writer of the many Buffettology books does the observing and deciphering of the wise musings of the old master. Buffett obviously has a wonderful way with words but I have always enjoyed Munger’s shorter, sharper and more cynical statements more and Clark has done us all a huge service collecting these quotes. It is a book possible to read in one, albeit long, sitting – but please don’t. Take the time to scribble down how Munger’s thoughts reflect on your investments, business and being. Does this make sense to you? If so, how are you living up to it? What can you change? What can you improve?

The selected quotations are grouped into four parts covering investing, banking and the economy, business and philosophizing on life at large. Sections one and three are delivered with authority and Ben Graham’s saying that investing is the most intelligent when it is most businesslike springs to mind. At the same time the investing of Munger and Berkshire Hathaway is hardly unknown material due to the vast coverage of Buffett’s investing success.

The danger with adding commentary is that it isn’t always better to say something in a lengthier format when it has already been delivered crisp and clear in a short pitchy way. There is a balance to be kept to not over-explain things. Clark is mostly on the right side of the tracks but he delivers rather similar explanations to many of the quotes and is forced to add quite a few “as we have said earlier”.

Further, just as it comes to later commentary of, say old Taoist texts, it is always possible to debate if the interpretation of the original scriptures from one specific scholar is optimal. Occasionally I would have chosen to make alternative reflections. I think the selection of quotes Clark has made is a good one. Perhaps it could have hade been tilted a tad more towards psychology given Munger’s wisdom in the area. There are few real gems missing apart from this favorite on investing “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – a typical Mungerism in it’s lack of flattery.

The second part of the book is the least interesting - but every time one hears figures about the gross exposure of global derivatives one marvels. The best and most inspiring part is the fourth, on Life, Education and the Pursuit of Happiness. Below are some of our favorites. “Being rational is a moral imperative. You should never be stupider than you need to be”; “Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve” and especially close to our heart “In my whole life, I have known no wise people who didn’t read all the time – none, zero. You’d be amazed at how much Warren reads – and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” Amen. If you ever find yourself hesitating over a decision, simply ask yourself “What would Charlie Munger do?”

Mats Larsson, May 14, 2017

Cassidy, Donald - It's When You Sell That Counts

Global Professional Publishing, 2011 (3rd ed.), [Equity Investing] Grade 3

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Selling stocks is less fun and less easy than buying them. Also, you can get plenty of advice on how to buy stocks and which stocks to buy, but few tell you when to sell. Therefore, a sell strategy is vital for investment success. Donald Cassidy who has been a research analyst since the mid 1970s aims to give the trend following investor with a medium term investment horizon of 6 – 18 months the tools to develop this sell strategy.

I first want to dig into the main problem of the text before turning to the positive sides. The four sections are named 1) Understanding the Selling Problem in Depth, 2) Developing the Proper Mindset, 3) Mastering the Contrarian Approach and 4) Using Smart Selling Tactics. Although this looks like an organized setup where the first part discusses the difficulties of selling, the two in the middle cover how this could be mended and the final part gives hands on advice on the execution of selling, structure isn’t what comes to mind when reading the text.

There are 30 very short chapters and it’s hard to see the logic of many of them as a number of recurring themes are repeated multiple times in basically all sections of the book. For someone advising on how to set up a well-thought-out sell strategy this doesn’t inspire confidence - and this is the 3rd edition of the book.

A large number of reasons for selling and methods of selling are discussed but there are few attempts made to connect them or direct specific investors to tools that are more suitable for them. Further, many of the pictures of the book – at least in my print - are sadly of such low quality that it is virtually impossible to interpret them.

All this is a shame since there are some definitive qualities to the book. Fist and foremost the strength of the text is the author’s understanding of trading psychology. The keen psychological interest makes the book come to life and the reader can very easily relate to what is said. The topic of trading psychology is also covered broadly, it describes buying as well and pops up at various places in the book but this is more easily forgiven by the shear enthusiasm Cassidy shows for the topic.

Apart from the apt account of trading psychology the author, benefitting from 4 decades in the financial markets, delivers plenty of sound advice and insights into the investing world. His account of the brokerage industry and why sell-side analysts don’t give the recommendation “sell” very often is clearly cynical but probably not entirely wrong. It simply hasn’t been good for business with the business model that has been in use.

Further, while I above noticed that the author had a mid-term investment horizon the methods portrayed could also be quite useful to longer-term oriented investors (or stale buy-and-holders and stock collectors as the author describes them – I’m always surprised how different types of market participants form separate religions), as they are to sell their winners. Especially, value investors tend to buy too early and sell (winners) too early and could do well by studying techniques such as for example trailing stop losses. Finally, the checklist in chapter 29 starts to bring everything that has been said in the book into order.

There is much to learn in this book for the retail investor with a medium term horizon. Unfortunately it takes some serious work to distill a clear selling strategy out of this text. A forthcoming edition slimmed down from 280 pages to 180 with more structure and less duplication would be a real winner in my mind.

Mats Larsson, May 7, 2017

Elder. Dr. Alexander - Sell & Sell Short

John Wiley & Sons, Inc., 2008, [Equity Investing] Grade 4

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This book isn’t really for me or any other more fundamental and long-term investor – but it is excellent. Short sellers come in many forms and just as there are short term contrarian traders on the long-only side there are those on the short side. Dr. Alexander Trader is one such swing trader with an investment time horizon that is probably between a few days up to a month. The strategy is to trade the short fluctuations around a trend. To profit from these price wiggles it is only natural to try to exploit movements both as prices go up and as they go down.

Apart from being an active trader the author is since long a teacher of other traders and has written a large number of books on trading and trading psychology. The last angle is important since Sell & Sell Short clearly excels when it comes to the description of the psychology of being invested in the financial markets. Interestingly, the experienced mental joys and pains of putting on short-term trading positions and holding a longer-term fundamentally based portfolio are remarkably similar.

Despite being a book on selling and short selling, those two subjects are complemented by one section on buying. They probably cover one third each of the books volume. In many cases this kind of branching out from the main subjects detracts from the worth of a book. This time it adds to the worth since the reader gets a feel for all the necessary angles of succeeding in markets, be it knowing ones edge, keeping records to learn from mistakes or handling money management, i.e. portfolio risk.

Paradoxically, Elder describes his trading strategy as a value strategy. He buys when the price is lower than the value and the price is looking as it is about to turn up. He sells when the price reaches the value zone, or he might ride it a little further into overvalued territory if the momentum of the share price is really strong. He sells short when the stock is in expensive territory and has started to decline and then covers his position when the stock is back down in the value zone. The thing is, what the author calls “value” is the zone between two rolling averages, i.e. the underlying medium term trend of the share price, rather than the intrinsic worth of the company.

While buying is fun and offers opportunities, selling is an unsmiling business. This is why books on selling are important but rare. If a stock goes in the wrong direction doubts start to swirl in the back of the trader’s mind. If it goes in the right direction he is torn between taking profits but then risk not taking part in potential further profits.

Selling situations can according to Elder be split into three categories: a) selling with a profit at a pre-determined profit target, b) selling with a loss using a protective stop and c) selling between the profit target and the stop level since conditions have changed and you no longer want to hold the position – “when in doubt, get out”. Covering short positions very much follows the same logic only with the price trend turned on its head.

A long teaching career, trying to explain something to others, makes wonders when it comes to how illuminating and clear this text is in explaining Elder’s very hands-on method to trading. I also appreciate the author’s wide knowledge of other investment styles as he can readily discuss similarities, differences, advantages and disadvantages of what he is doing himself compared to quants, fundamental investors, momentum traders, short sellers, long-onlies and so on. The key message is that to succeed any investor must do what suits his own disposition.

This book is highly recommended for the swing trader looking to profit from all types of short-term price movements – but also for those interested in understanding equity markets and investment psychology at large.

Mats Larsson, May 05, 2017

Kumar, Amit - Short Selling

Columbia Business School, 2015, [Equity Investing] Grade 3

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Columbia Business School is the academic home of value investing so it’s only fitting that it is their publishing company that provides Amit Kumar’s expose of short selling. Fundamental shorting of stocks is a discipline related to value investing since it is based on detecting a discrepancy between price and value through research of business fundamentals. But where value investing focuses on the situations where the value is deemed to be higher than the price, short selling zooms in on the opposite situations.

The author Amit Kumar who is a portfolio manager at Columbia Threadneedle Investments and a business professor at Rutgers Business School, has also written a book that is clearly influenced by the value investing discipline. The text has three sections. In the first Kumar lays out a framework to identify short selling opportunities, then he presents a number of interviews with investors and in the finishing third section he covers the risks and mechanics of shorting.

In short the presented categories of structural short opportunities are in companies 1) with business model issues, 2) that are unsustainably leveraged, 3) in structural decline making them value traps, 4) that are broken growth stories and 5) with accounting issues. The chapters in part 1 loosely follow this setup and the author develops his thoughts, provides some detail and present a large number of case studies – all more or less successful for the short seller.

If there is an overriding theme to the author’s short cases I would say that the core of a case is centered on businesses model problems. High leverage, high valuations, accounting warning flags etc. are secondary factors. There has to be a fundamental shift to the worse in business fortunes acting as a catalyst. And it is definitely a no-no to short open-ended growth stocks on the fact alone that they are overvalued.

The interview section is clearly interesting but considering the theme of the book, not very well aligned. First there is a section on the value investor icons Ben Graham, Warren Buffett and Charlie Munger and although Graham at least did some shorting (is there something he didn’t do?) this is hardly where his legacy lies. Then follows an interview with famed value investor Jean-Marie Eveillard who doesn’t short stocks at all and the activist investor Bill Ackman that only occasionally (but very publicly) take short positions. Finally, in the last interview with Mark Roberts, analyst at Off Wall Street, there is a contribution from a dedicated short seller. Names like Ackman and Eveillard clearly sell books but it really would have been more appropriate to seek other interviewees.

The finishing section with one chapter on when to cover short positions and one on the mechanics of short selling would probably fit equally well as a part of the first section. At least the basic knowledge of how to actually short a stock should have been presented in the very beginning, for the benefit of those less familiar with the process.

Most investment books explore the angle of finding winning (long-only) stocks as the road to success, but a portfolio that avoids losers will almost certainly also outperform. Short Selling will as such not only instruct those who are interested in short positions, but also help long-only investors avoid disaster positions. Success is often about sidestepping the stupid actions. However, although perfectly fine, in my opinion this is not the definite primer on short selling.

All investors benefit from learning about stocks that risk failure. This book provides some clues.

Mats Larsson, May 1, 2017

Staley, Kathryn F. - The Art of Short Selling

John Wiley & Sons, 1997, [Equity Investing] Grade 3

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There are very few books on fundamental short selling of stocks but this is one of the more well-known ones. It covers many aspects of the trade very well but leaves others out. Unfortunately we are still waiting for the definite book on shorting, preferably written by some of the veterans of the game.

There are three parts to the book where the first gives an okay background to the area and its practitioners. Short candidates are categorized into companies that a) lie to investors through their accounting, b) have expensive valuations and c) will be negatively affected by external events. Signals used by those shorting are according to the author a) accounting warning flags, b) signs of “insider sleaze”, c) stellar stock price rises, d) cash consuming companies and e) overvalued assets or ugly balance sheets.

Then the absolute bulk of the book is a number of rather old case studies meant to exemplify different types of short selling cases – although not exactly linking to the categories in part one. The author has had good access to commentary from a number of veteran short sellers through interviews. I still think the author could have drawn more explicit deductions from these, as they now mostly resemble a line-up of successful war stories.

The storyline is that clever short sellers first see something that daft Wall-Street analysts or long-only investors couldn’t detect. Then the investment case either takes longer to pan out than expected or the short sellers are tormented by violent short squeezes causing pain but in the end they are always vindicated and the company lead by the evil managers dwindles into disaster. Finally, there is a short wrap up where Staley draws some general conclusions about the field but also gives a historical account of shorting.

Kathryn Staley have, as I understand it from the sleeve of the book, worked with both hedge funds and brokerages in trying to find stocks to short. She has taught financial statement analysis for AIMR, the Association for Investment Management Research and “reads balance sheets and footnotes for fun and profit”. Despite her experience as a short seller there is very little of technical detail in the book as it is written in an anecdotal, almost journalistic, style. As an example, if Days Sales of Inventory is one of the most reliable signs of trouble as is claimed, how is the ratio calculated, what are the pros and cons of using it and which other indicators are useful to complement it with? Even though the title points to the “art” or short selling I think the “craft” could have deserved some space.

Even though the tone can sometimes become a bit too idolizing the strong aspect of the book is that you get a fair grip of the psychology of shorting and above all of the character of short sellers. Their contrarian nature is described as ambitious, cynical, driven, single minded – even pigheaded – and sometimes frugal and anti-social. They are curious, hard working and find pleasure in finding the truth and being smarter than the gullible investment crowd as stocks blow up. The author describes an almost moralist disposition since short sellers enjoy exposing the corporate fraudsters who waste the shareholders money. I also like how the book defuses short selling and shows how very similar the research into investment cases is on the short side and the long side. Long-only investors can actually learn plenty from the attention to accounting detail among short sellers.

Despite the mixed review the unfortunate truth is that there aren’t many other books to recommend instead so the book could still be worth purchasing. We are still waiting for the definite reference book on shorting.

Mats Larsson, April 23, 2017

Carlson, Ben - Organizational Alpha

2017, [Finance] Grade 4

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Institutional asset managers create value by taking risk, that is by making investments. The two dominating investment processes are asset allocation and the pursuit of alpha generation within asset classes. However, neither of these activities exists in a vacuum. Instead there is a supporting framework around them and this can add to investment returns or it can detract from it. The topic of Ben Carlson’s short 80-page book is how to make smart choices when constructing this framework.

Apart from being the Director of Institutional Asset Management at Ritholtz Wealth Management, Carlson is an author of books and runs the perhaps most popular blog on asset allocation there is. He is certainly a very gifted writer who blends astute psychological wisdom, an ability to explain the complicated in plain words with a seemingly genuine interest for the wellbeing of his readers’ money. The combination is all too unusual.

The stated aim of the book is to help the 99%, i.e. the many small institutional investors that lack the resources of a PIMCO or a Yale Endowment. The author stresses the importance of not joining the hype of the “latest black” in the asset management business, that almost certainly is a rather complex construction with high fees. Nor should the small institution focus too much of its time on searching for alpha in securities selection.

To a large extent I agree in the quest of avoiding complexity. It results in fewer unintended consequences and frees up time to both focus on the long-term big issues and the attention to perfect the things that the organization actually has chosen to do. At the same time it is a balance where one shouldn’t entirely close one’s eyes for the fact that the knowledge of asset management is progressing. The trick is understanding the institutional hype cycle as asset managers are surprisingly fashion prone in how they work. To talk with Warren Buffet “What the wise man does in the beginning, fools do in the end”.

The book is choke full with intelligent and sensible opinions. You can sometimes judge the quality of a book by the amount of underlinings and scribbles in the margin. In this book it was hard since all text pretty much got underlined. My main objection is the structure – I don’t see it. The definition of organizational alpha seams to be very broad; basically anything in institutional asset management that isn’t the actual investment choices. Yet, some things that could be considered “organizational” like human resource management get little or no attention. Without a visible structure the book simply becomes too much a list of a few things that are good to think about if you are one of “the 99%”.

Also, chapter six is something of an outlier. The other chapters concern topics like the concept of fiduciary duty, the goals of the asset management, decision-making, developing an investment philosophy, the investment process and the use of consultants and external advisors. Chapter six is about alternative investments, or mainly about some pros and lots of cons of hedge funds and private equity. The thing is, alternative investments is one of many asset classes and admittingly it is diverse and important to discuss given its trendiness, but it still begs the question why there isn’t a chapter on commodities, bonds or equities?

Overall however this is a book that should be read. Ben Carlson shows a level-headedness that is atypical and hugely important when it comes to the area of asset management where too many intelligent people imitates strategies that, as the author puts it, won the last war.

Mats Larsson, April 15, 2017

Madura, Jeff - What Every Investor Needs to Know About Accounting Fraud

McGraw-Hill, 2004, [Equity Investing] Grade 2

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Reading this book I went from mildly pleased, to incurious and finally downright irritated. The subtitle is “Proven Techniques to Avoid Questionable Stocks”. In reality Jeff Madura, a finance professor at Florida Atlantic University and an author of several finance textbooks, provides nothing of the kind in this book written after the Enron and WorldCom scandals burst in the early 2000s.

The author has divided the text in 5 different parts and the book starts off by displaying a number of ways that companies historically have used to look more profitable - by increasing sales alternatively decreasing costs - or look more financially stable than they actually were and Madura clarifies with some of the then recent examples from the bust after the TMT-bubble. It is fairly basic but illuminating and written in good spirit. It’s an okay introduction to the subject of financial deception.

In the next chapter Madura tries to explain why so few have the ability but more importantly the incentive to uncover the shenanigans. The short answer is that they are all on the payroll of the corporations who cheat. Auditors are paid by the companies and apart from doing audits earn money on doing extra corporate consulting. The firms that Wall-Street analysts work for earn the big bucks from corporate finance services for the companies and the analysts are dependent on the goodwill of the companies for their flow of information. Credit rating agencies depend on the audited accounts prepared by the auditors who are on the take. This was prior to the debacles of the rating agencies in the GFC so the fact that companies pay for the rating agencies’ ratings as well isn’t discussed. Still the bottom line is that no one wants to bite the hand that feeds them.

Then follows two sections on how board practices should serve the owners of the companies and governmental regulatory initiatives and bodies related to financial supervision. These sections are fairly basic (SEC should get more resources), they have a kind of academic ivory tower touch to them (FASB should be allowed to write really detailed accounting rules), also they are a bit dull and don’t really speak to the investor who wants to understand how to protect himself from investing in the wrong kind of stocks.

The last part is called “How Investors Can Cope With Deceptive Accounting” and at last we should presumably in the six chapters that follow learn how to “protect your investing portfolio from accounting fraud”. I expected some discussion on how to use financial tools like cash conversion, change in accruals, change in Days Sales Outstanding, Days Sales in Inventory or other less frequently used metrics perhaps in combination with other more subtle signs of ethical collapse in companies.

One of the chapters can be summed up with that the reader shouldn’t trust anyone. This is a rather superfluous message since it has to a large extent been the overall message so far. However, Madura now also adds that the reader shouldn’t even trust his own ability to uncover financial tricksters. Consequently the advice in three of the other chapters is “give up”! Invest in mutual funds, ETFs, T-bills and bonds instead of individual stocks. Talk about a let down! Yes, by investing in bonds the investor clearly “avoids questionable stocks” but that was probably not quite the type of advice that people expected to get and what got them interested in purchasing the book.

In all honesty there are two other chapters that look into investing in stocks. The author advices the reader to look for corporate management teams that run their companies for the long term and to do detailed fundamental research on all aspects of the company’s business operations, sector and management and then make common sense judgments on the corporate quality. This is fair advice, but it’s hardly very specific.

Buy Howard Schilit’s Financial Shenanigans or Thornton O’glove’s Quality of Earnings instead.

Mats Larsson, March 25, 2017

Eldred, Gary W. PhD - Investing in Real Estate

John Wiley & Sons, 2012 (7th edition), [Finance] Grade 3

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This book is a good resource for the small-scale real estate owner with one or a few smaller apartment houses or for the person who would want to enter the business. Partially, the logic and advice applies to the operations of larger real estate companies. The author Gary Eldred is a real estate investor who has written several books on the subject and who is a sought after public speaker on investing in property.

A number of areas are covered that all aim to increase the returns from the property ownership. Eldred discusses how to gain from price appreciation by purchasing real estate at the right time in the cycle and using appropriate amounts of leverage to magnify the gains from the hopefully increasing prices and the rental income. With increasing prices and cash flows from the operations, the landlord can pay back loans and increase his equity that will allow him to refinance to better interest rates as the risk goes down. Alternatively he can keep the loan-to-value ratio constant and use his now more valuable property as collateral for new purchases.

The real estate management also gets a chapter and over his real estate investing career the author has gradually come to appreciate that it is actually more profitable to keep the properties clean and well maintained. It will lead tenants to care for the houses and even accept reasonable rent increases.

Eldred dedicates several chapters to the many types of projects that could be undertaken to increase the value of the real estate such as converting it to the use that generates the most income (from commercial to residential or vice versa etc.) and utilize various untapped opportunities for the buildings or the site or alternatively sell the development rights so that others can use them. He even discusses how to improve the location of the property. By joining forces with other nearby landlords and engage tenants, municipalities and shop keepers, areas can be transformed and made much more pleasant, i.e. a location that didn’t use to be seen as especially favorable can improve by time.

An important insight from the book is how non-standardized the market is. Those who are creative developers of properties, savvy negotiators and have good industry contacts can buy and sell properties at prices that differ from current market prices. In the equity or bond market everybody gets the same price quote at any given time.

Eldred manages to strike a fair balance between being a real estate bull and keeping a sound and healthy attitude with regards to the booms and busts of the sector. The text is directed to the non-professional so it’s light reading. For a 7th edition you could perhaps have expected the text to be a bit tighter and more distinct.

I liked the fact that Eldred spares no punches when it comes to the many snake oil salesmen that promise quick riches with minimal effort from investing in real estate. The tone is spirited, opinionated and the approach taken is generally quite practical and focused on execution but at times it could also be a bit too generic.

Personally I didn’t really do my due diligence before buying Investing in Real Estate and I had expected a book covering how to invest in listed real estate stocks. Hence, when I started to read the book I wasn’t too pleased. But then it grew on me and I don’t at all regret purchasing it.

Buy it for inspiration on how to get started in small scale real estate investing or, as a landlord, for gaining insights on how to revitalize and get more out of your existing business.

Mats Larsson, March 19, 2017

Damodaran, Aswath - Narrative and Numbers

Columbia Business School, 2017, [Equity Investing] Grade 4

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The procedure of valuing a stock through is rather simple once it has been learnt. And when looking in retrospect on why old valuations turn out to be incorrect it is rarely due to getting the mechanics of the valuation tool wrong. Instead it is almost always because the sales or profits turned out very differently from what was forecasted since the company, its strategy or business environment developed in an unanticipated way – the narrative was wrong. This is a book on how to combine the numbers of the valuation tools with a narrative that brings life, understanding and, by this, increased precision into the valuation made. The author is a well-known finance professor at NYU who has written a large number of finance books.

As I understand it the book started with the author posting and updating the narratives and subsequent valuations for a number of stocks like Uber, Amazon, Apple, Alibaba etc. online. They now feature as case studies throughout the book. Taking a step back, Narrative and Numbers is also a personal journey for Damodaran as he over time has developed from a pure number cruncher to taking a more holistic approach. I find that when a reader is invited to share an author’s personal development the result is often very likable. This book is no exception and it is evident that the author has enjoyed writing it.

The structure of the text is very, well… structured. Damodaran tells you that he will combine narratives and numbers, he describes the basics of one of those, then he describes the basics of the other one, he merges them and finally discusses the consequences. The author who describes himself as a “teacher first” gives us short but thorough accounts of the two components before merging them into a greater whole. And to clarify, the narrative referred to in this book is the fundamental story of long-term value creation drivers for the company, not the flimsy, often biased and constantly shifting stories that always surround listed companies on the stock exchange. All the way through the book we get to follow the described process through the case studies and there are further several illuminating pictures giving good oversights of the reasoning.

The advocated valuation process is to:

1.      develop a narrative for the business,

2.      test the narrative to see if it is possible, plausible and probable,

3.      convert the narrative into drivers of value,

4.      connect the drivers of value to a valuation and

5.      keep the feedback loop open.

Interestingly the author calculates one value of the company as a going concern and one liquidation value and then estimates the probabilities of each life-or-death scenario. I very much appreciate the 3P test in stage 2 and the openness for change in stage 5 importantly tries to ensure that the narratives are reasonable and don’t becomes stale and outdated in the light of changes. Damodaran’s arguing for the importance of having enough humility to alter ones opinion brings to mind similar arguments from George Soros.

My main caveat is that the process doesn’t explicitly enough ensure a combination of an inside view and an outside view when developing the story. When forming a narrative it is very easy to focus on the uniqueness and thrill of the situation at hand and extrapolate from the recent history. Often this leads to too high expectations and bottom-up sell side analyst estimates are partly due to this almost always too optimistic. The outside view treats the situation statistically and takes into account the outcome of many similar historical situations. In business where success is governed by both skill and luck both viewpoints have merit.

To make good forecasts narratives must meet numbers. Without the verbal structuring of the fundamental business story of a company it isn’t even possible to understand the numbers to start with. Damodaran shows that good decisions benefit from several points of view such as the numerical and the verbal and I fully agree.


Mats Larsson, March 03, 2017

Wray, L. Randall - Why Minsky Matters

Princeton University Press, 2016, [Economics] Grade 4

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After the financial crisis a lot fewer need to be convinced that Minsky does matter. This is a short overview of the academic working life of the late Neo-Keynesian economist Hyman Minsky written by his apprentice, the University of Missouri professor in economics, Randall Wray. After the carnage of the GFC there was a search for improved explanatory models and many found one in Minsky’s Financial Instability Hypothesis. It even became fashionable to make use of the expression “Minsky moment” among financial market actors. In this book we get a broader understanding of the theories of an unconventional economist.

Minsky’s writings centered on financial instability, on employment, inequality and poverty and finally on how to reform capitalism since it is instable in its present form. I will focus more on the financial parts. Underlying his work was the view that economists - Keynesian and neoclassical alike - has it wrong; market processes are not stabilizing around an equilibrium to which they according to conventional thought are supposed to return after being exposed to external shocks.

Minsky’s claim that all his academic colleagues were wrong combined with an impermeable writing style full of self-invented Wall Street-like expressions made him an outsider during a career that spanned from the 1950s to the 1990s. Minsky’s background was indeed eclectic as he was a devoted Keynesian who also had had the great Joseph Schumpeter as his dissertation advisor. Minsky, as his starting point for economic models, focused on the investment of the entrepreneur and the financing of that investment – similarly to the Austrian business cycle or J. M. Keynes himself, but not the Keynesians or neoclassicists. In addition to his radical political views he sat on the board of a bank and befriended people like Salomon Brothers’ investment strategist Henry Kaufman and famed investor Leon Levy.

An important contribution of Minsky is that he adds the functionality of financial markets to the core of macroeconomic models – something that mainstream economics still fail to do. With regards to the financial system Minsky’s key idea is that “stability is destabilizing”, i.e. periods of calm change the psychology of the market, making participants take on more risk, which in the end leads to a crisis that ends the calm. There can be no stable equilibrium as the stability of such a state changes behaviors, policies, and business practices in a way that in the end prevents it.

A key part of this pendulum motion between stability and disturbance is the use of leverage and the pro-cyclical behavior of both lenders and borrowers. Minsky developed a classification for financial fragility where “hedge finance” described a situation where the income of a borrower is sufficient to pay both interest and principal, in a “speculative position” only the interest payments are covered and in a “Ponzi position” the obligor will even have to borrow additional funds to finance his interest payments and he can only continue his operations as long as the lender allows the loan balance to grow. Loan growth chases asset values in an upwards spiral until it doesn’t. Profit maximizing banks provide liquidity and leverage through financial innovation until they don’t. The Minsky moment, a concept that was minted by Paul McCulley at PIMCO after Minsky’s death, is the tipping point in time where the spiral goes from positive to negative.

The above cycles and the rejection of equilibrium resonate with most people active on financial markets. However, even though the diagnosis is well executed, I’m not sure all in the financial markets would appreciate the recipe that Minsky prescribed. He was a Keynesian with a belief that the enlightened governing of the big state and the wise handling of central banks could right the inherent wrongs of capitalism as diagnosed.

Wray guides us through the opaque writings of his master. At times it is slightly hard to distinguish the views of the author from those of Minsky but overall this is an important job well done.

Mats Larsson, Feb 3, 2017

Lussier, Jaqcues - Successful Investing Is a Process

Bloomberg Press, 2013, [Finance] Grade 4

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Jacques Lussier, the CIO of the Canadian asset Manager Dejardins Asset Management, has written an essential book on asset allocation for the serious investor. The topic at hand is not the tactical type of asset allocation that investment banks try to advice you on but the strategic asset allocation – the base setting, the important stuff – plus the practices around the SAA.

The text is organized in 4 parts and a number of chapters. According to the author the book is aimed for institutional investors, asset managers and sophisticated individual investors. I would skip the last of these. This is rather a book written by a CIO for other CIOs, asset allocators or strategists at pension funds, endowments, sovereign wealth funds or insurance companies. Although the writing is surprisingly fluent and there are very few equations, the technical and detailed nature of the topics and the academic bent of the writer make this a book less suited for the individual investor.

Considering this knowledgeable target audience I found Part I of the book largely superfluous (and also the chapter on tax effects – nearly all institutional investors are tax exempt). The author in chapters 1 through 3 pretty much covers the standard understanding of any institutional investor that has some notion of what is the knowledge du jour of intuitional asset management. Then things pick up considerably. The chapter on the effects of volatility on long-term wealth might even be the most illuminating I’ve read and I liked the breakup into the determinants of equity returns.

What is Lussier trying to convey? A number of things, but in my opinion the most important are: 1) an asset manager should formulate a logic process that he believes in and sticks to and because of this has time to perfect, 2) there is still more benefits to be had from good honest portfolio diversification using liquid securities and rebalancing using objective functions, so there is less need to lock the money up in endowment-style solutions that will make rebalancing difficult and deprive the asset manager the chance to buy cheaply after large drawdowns, 3) improve the functionality of the underlying asset class portfolios by using cheap non-market cap based constructions that are rebalanced, don’t waste time searching for alpha and look to long horizons and 4) preferably use volatility based solutions for allocation and rebalancing.

By making many small right choices the author claims the combined effect over time of this “evidence based portfolio management” could be higher Sharpe-ratios and an annual return increase of 1.5-2%. Even better than the books excellent and very true title is Lussier’s notion that “[o]ur objective is not so much to outperform the market, but let the market underperform”. Overall, Lussier has written a very impressive and voluminous text combining insights from academic research, from external product suppliers like Bridgewater, Research Affiliates etc. and from a fair amount of his own research.

Why not give the book full marks then? I can’t shake the “conventional” feeling that I picked up from start. Since the GFC all everybody has talked about is to lower the risk contribution of equities, volatility based solutions are everywhere etc. I’m a bit afraid that the last 30 years’ bull market for bonds has affected what we see as the cutting edge knowledge in more ways than we realize. We may just have switched one set of risks for another. For example, volatility based allocation or rebalancing implies selling equities as they become more volatile before a presumed downturn. This is okay as long as not everybody does it at the same time. Further, there is no discussion on the difference between risk factors/style factors that have offered a return premium without repricing and those that have just become expensive.

For the serious investor engaged in strategic asset allocation this book is an absolute must. For the non-CIO there are more suitable alternatives.

Mats Larsson, Jan 24, 2017

Haidt, Jonathan - The Righteous Mind

Penguin Group, 2012, [Surrounding Knowledge] Grade 5

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

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

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

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

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

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


Mats Larsson, Jan 3, 2017

Duckworth, Angela - Grit: The Power of Passion and Perseverance

Scrobner, 2016, [Surrounding Knowledge] Grade 4

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I initially intended postponing writing this review until next year but given the topic of Angela Duckworth’s book it felt out of place to put it off. This is a book on following through on the goals you set up and the results that over time come with showing grit. The overriding theme is that effort trumps innate talent when it comes to which personality traits that drive success. 

While there are several academics that study positive psychology and related topics Angela Duckworth, who is a psychology professor at the University of Pennsylvania, literally invented the research field of grit. Wikipedia defines grit as “passion for a particular long-term goal or end state, coupled with a powerful motivation to achieve [the] objective.” Related concepts are said to be perseverance, conscientiousness, resilience, hardiness, ambition etc. 


There are three parts to the book. The first lays out the theory framework of grit that is said to consist of two parts; passion and perseverance. The latter is perhaps more intuitive but without passion it’s hard to muster the strength to be perseverant. The passion in question is of an enduring, slow burning kind, allowing a person to consistently and stubbornly over time work towards a set direction despite at times suffering setbacks. It’s the intrinsic motivation that brings hardiness in effort. 


Gritty people often have their priorities in order and consciously or unconsciously work towards a hierarchy of ambitions but doable goals where each lower one supports a higher in a consistent fashion, in the end leading to the desired state where the sum of all the efforts creates something larger. In achieving one’s goals Duckworth shows that effort counts twice as much as talent. Talent multiplied by effort builds skill. That skill multiplied by more effort builds achievement. Hence, putting in even more effort is what makes skill productive. “Without effort, your talent is nothing more than unmet potential. Without effort, your skill is nothing more than what you could have done but didn’t.” 


The question is whether the capability for grit that overpowers talent is itself in the genes? The answer is yes, but as the author shows the environment is even more important. One study she refers to assigns a roughly 70/30 split for the environment and for innate talent when it comes grittiness. This means that grit can be grown and part two and three of the book address how to grow grit inside-out and outside-in, i.e. how to grow one’s own grit and how to grow grit in others. 


Part two goes into detail of much of what’s already been stated and the author brings forward 4 key concepts for building one’s own grit: 1) interest – where the quest to find something to arouse passion is usually a trial-and-error process, 2) practice – where we get a quick tutorial in the concept of deliberate practice as popularized by Anders Ericsson, 3) purpose – that adds in the motivation that comes from doing work that in some way matters also for others and 4) hope – that deals with the grinding work with the ambition locked in, helped by what Carol Dweck calls a growth mindset. Part three addresses how to build grit through parenting or coaching sports teams. Apart from bringing forward the concept of the social multiplier where grit rubs off in groups I found the ending part less worked through, with more anecdotes and the author’s own opinions. 


This is an engaging and at the same personal book. Duckworth starts and ends Grit with how her father had noted that she wasn’t a genius when she was a child. From a fixed mindset this might have been true but Duckworth showed that grit and a growth mindset mattered more. Where Anders Ericsson’s book Peak focuses on the type of practice needed to be an expert performer, Duckworth’s publication answers much of the questions around how to find the motivation to pursue this training. Reading Grit first and Peak thereafter will give anyone the ammunition to become the best version of who they aspire to be – and it also turns out that grittier people are happier than others! 
 
Mats Larsson, Dec 23, 2016

Ericsson, Anders & Pool, Robert - Peak: Secrets From the New Science of Expertise

Bodley Head, 2016, [Surrounding Knowledge] Grade 4

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Anders Ericsson is the world’s leading expert on expertise. Ericsson who is a professor at Florida State has spent 30 years researching human performance – and yes, he is Swedish. Together with the journalist Robert Pool he gives the inside view of how experts are made.

There are several myths when it comes to expertise. Perhaps the most prevalent one is that ability is innate and by this predestined – “I’m simply not good with math”. In fact Ericsson’s research shows that genetic predisposition plays a very marginal role compared to the work put in when it comes to developing a skill. And it isn’t too late. Our brain retains much of its adaptability through out life, so while some things might be easier to learn as a child we can all develop. Other misconceptions are that one gets better the longer one does something, or that all it takes is effort – or 10,000 hours of practice specifically.

What it takes to become an elite performer is instead dedicated training that rewires the brain – so-called deliberate practice. What Ericsson has found is that while true elite performers practiced a lot they all practiced in essentially the same way. Without this specific type of practice, 10.000 hours and spent effort will not amount to much. The hands-on almost physical ring to the expression deliberate practice is carefully chosen. There is a difference between knowledge and skill. The bottom line is what someone is able to do, not what they know. Expert skill in this respect is the practical application of something.

Deliberate practice is purposeful and informed in that it is guided by an understanding of what makes elite performers great and has a clear understanding of how they achieved their excellence. A large part of being an expert is in developing and internalizing what Ericsson calls mental representations, “a mental structure that corresponds to an object, an idea, a collection of information, or anything else, concrete or abstract, that the brain is thinking about” allowing the expert to see patterns where non-experts only sees randomness. The concept is similar to, but broader, than Charlie Munger’s mental models. Ericsson’s concept for example also includes physical and musical skills.

So what is this magic formula? Well the short version is to identify the real experts, identify what makes them great (generally what they do differently) and design a practice that leads you to do the same. The practice should preferably be overseen by a coach that has set up a plan with a number of milestones that in combination leads to a bigger change. The coach also monitors the progress. The practice should be designed to stay just outside the trainee’s comfort zone and as such it requires effort, attention and isn’t always enjoyable and importantly the process involves feedback and modifications of the practice in response to the feedback. The training focuses on aspect after aspect (or mental representation) of something and improves them specifically. Over time new skills are built on top of old skills and skills regarding different aspects combine to form something larger than the sum of the parts.

I must admit that I was initially skeptical of this book as it might well be the tale from the horses mouth, but still a tale that has been told several times as Malcolm Gladwell’s Outliers, Carol Dweck’s Mindset, Daniel Coyle’s The Talent Code, Geoff Colvin’s Talent is Overrated and so many other books have already presented Ericsson’s research to the general public. Not unsurprisingly however it turns out that listening to the original source gives a special depth – then the reader will have to accept that he probably has heard all the examples previously and that in the name of being perfectly clear the authors repeat themselves slightly too often.

In the end this is a book of hope and enthusiasm – after having read it you find yourself making plans for how to improve the sub skills that are holding you back from reaching the next level; Focus. Feedback. Fix it.

Mats Larsson, Dec 13, 2016

Gonzalez, Javier - How to Make Money With Global Macro

2016, [Finance] Grade 3

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In his book the Penn State economist and investment strategist Javier Gonzalez takes the reader to the dynamic world of global macro trading, or “higher dimensional puzzle” as he calls it. To succeed in investing you need to think and do things differently than the mainstream crowd. Gonzalez presents an intellectually spirited view of the world that I think could serve him well as a macro trader. 


The book has two parts but the first of them could in turn be divided into two themes. The first topic in part one is a presentation of the theoretical model that Gonzalez utilizes to understand the workings of the global economic machine. Then follows a chronological review of the historic global macro events decade-by-decade starting with the 1970s, including a set of price graphs to illustrate the happenings. In the second part of the book the author writes a number of chapters on various themes within economics, politics etc. that influence a global macro trader’s environment. 


A centerpiece in Gonzalez’s worldview is the core-periphery paradigm that divides world currencies into the reserve currency – currently the USD, hard currencies that appreciate in times of risk aversion and soft currencies that do the opposite. The key to understanding is the global flow of resources and the importance of the reserve currency. The reserve currency country’s central bank dictates much of the global monetary policy allowing it to optimize the conditions to its benefit. Having a global demand for its currency the US can engage in counter cyclical monetary and financial policy measures without the same market restrictions as other countries. 


One of the topics in the second part is war. As Gonzalez sees it the successful macro trader cannot only think in terms of cyclical or secular changes, he must also consider structural changes – i.e. the events that alter the basic conditions for the functionality of the economy and invalidate previous patterns and experiences. Only if this additional dimension is added on top can the macro trader make sense of the world in a profitable way. In this the author is obviously influenced by George Soros and his former chief analyst Jim Rogers. Others who Gonzalez quotes extensively are Warren Buffett, Jesse Livermore and Bernard Baruch. The most number of quotes however goes to a number of central bankers, but then the purpose is not to gain inspiration but to point to their low understanding of the machine they are trying to run. 


According to the author most economic relationships are time dependent and hard to invest by. Then some are more permanent like how various assets react to the varying strength of the global reserve currency. The investor should focus on these key variables and then react to trend shifts in these. Gonzalez views the events in the economy as effects of underlying causes and catalysts. If one instead views the economy as a complex adaptive system many of the events could instead be generated by the intrinsic functionality of the system itself making the case-and-effects even harder to decipher. The more important then to focus on understanding what is happening instead of forecasting what is supposed to happen. 


I very much appreciated how the book portrayed the dynamic nature of the global economic system and how the actions of the FED start a number of multinational self-feeding loops that other countries must react to. The book would have benefited from illustrating the many cause and effect chains described. The book could also do with some editing. For me the second part was the less interesting one, as the text became so dystopian with regards to war and the environment and unnecessarily agitational on how Wall Street and other vested interests run the political-economic institutions. It didn’t really fit well with a book on macro trading. 


An interesting view into global macro trading while not entirely solid as a coherent book. 
 

Mats Larsson, Dec 11, 2016

Davis, Ned - Being Right or Making Money

John Wiley & Sons, 2014 (3rd ed), [Finance] Grade 3

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Ned Davis, the Senior Investment Strategist and founder of Ned Davis Research, has become legendary in the finance industry for his market letters combining fundamental data with technical indicators over the last 40 years. Without having the data to back it up I am also of the view that he’s often been quite correct in reading the market.

The name of the book refers to the practice of making forecasts (trying to predict what the market will do in the future, i.e. “being right”) versus developing an investment strategy that could make you money despite the fact that forecasting doesn’t work. In the introductory chapter Davis points to the keys to making money as being; using objective data instead of gut feeling, following a disciplined strategy, being flexible to adjust in response to changing environments and employing risk management practices to ensure mistakes don’t get out of hand.

The setup of this book is somewhat unusual. The first 4 chapters (or about 115 pages cover) the philosophical aspects of Davis methods, the practical aspects of how to build models to be able to trade financial markets and further examples of a market model for equities and bonds respectively. Then the remaining 3 chapters or 100 pages add on some somewhat unrelated thematic pieces on the risk for a bear market in 2014, the investment implications of demographic developments and whether the US will become energy independent. Most chapters are written by others than Ned Davies and I’m frankly not sure what to make of the second part of the book – is the reader being served samples of the type of research Ned Davis Research can perform? For me the first part is the core, the rest is an appendix – albeit with interesting features.

With the aim of “trying to get into harmony with the reality of the current numbers” Ned Davis Research builds multifactor models out of a number of indicators of different types to gain a trading view of a specific market. The indicators look to market prices, monetary policy, investor psychology etc. and some of the internal rules at Ned Davis Research are “don’t fight the tape”, “don’t fight the fed” and “be wary of the crowd at extremes”. The book gives examples of a number of the indicators in use, including graphs and some data on how they have faired historically. A full model is constructed by giving an indicator +1 if it is sending a positive signal, -1 if it sends a negative and 0 if it’s neutral. The models sums up to a total score, although some indicators could have higher weight than others. The combined score is the view on the specific market.

As evident we are talking about trading models with relatively short time horizons. The approach is data driven and very objective and in that way supports the trader in handling his own market psychology. With 40 years’ practice Davis and his coworkers have also thought long and deep on which indicators to use to read the market. The indicators used actually look to fairly different time horizons where most are trend following and some are shorter-term contrarian. As they have such different characters I wonder if it’s the best practice to simply sum them up. Also adding up to 35 indicators on top of each other to give one numeric grade of what is happening surely brings a valuable simplicity but could also in my view risk concealing what happens beneath the surface and as such obstruct deeper market understanding.

Although I’m not a trader myself I have huge respect for the work Ned Davis does as he looks to numbers and validates what makes money and what does not. I like the approach of reading what the market is doing instead of trying to guess what it will do. As a book however, the first part is relatively short and sketchy and the second fairly unnecessary. If Davis in the next edition would use all of his available space to share his insights into model building that could become a trading literature classic.

Mats Larsson, December 4, 2016

Gramm, Jeff - Dear Chairman

Harper Business, 2016, [Equity Investing] Grade 3

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Activist investors create headlines in the business media. With their aggressive stile they fit the dramaturgy of media as a glove – the battling of huge egos sells newspapers. But what is the historic background to today’s high profile characters like Christer Gardell, Bill Ackman and Dan Loeb? In his book Dear Chairman the hedge fund manager and adjunct Columbia professor, Jeff Gramm, tells the tale of shareholder activism. 


Activists buy shares in companies and through engaging with the board they try to create an event that unlocks value for the shareholders. The story of the dreaded activists is told through 8 case studies dating from 1927 when a young and polite Ben Graham convinces John D. Rockefeller Jr. and Northern Pipeline to distribute excess capital all the way to the aggressive attacks of 2005 and the fight about BKF Capital. 


In the US the governance system gives a huge amount of power to the often-combined president and CEO. For long shareholder rights were very low on the agenda. The early proxyteers who engaged in proxy fights in the 1950s and corporate raiders of the 1980s like Carl Icahn and T. Boone Pickens - funded by Michael Milken’s junk bonds - shook up what was often a quite sleepy and inefficient business community paving the way for today’s activists. The relationship between CEOs and the owners of companies surely got more complicated but the efficiency in the business sector improved greatly as boards couldn’t sleep on their watch anymore. 


In some respect this is three books in one; a number of historic case studies accompanied by the original letters, Gramm’s opinions on governance and ownership and a broader historic account of shareholder activism where the author uses the case studies as a starting point but branches out in various directions describing a number of other shareholder controversies. 


Over time activist investors have reacted to very much the same issues as they do today. They try to replace underperforming management teams, crack down on corporate wastefulness, restructure poor business portfolios and get access to excess cash piling up in companies. Reading history adds to the understanding of an area since it gives context to today’s practices. Current practices have often been formed through a much more hap-hazardous and random process than is generally assumed – so also in the world of activism. 


The title is brilliant and in my view this is a very good-looking book. The language is surprisingly legible and it is obvious that the author knows and really likes the subject. I very much appreciate that Gramm is honest enough to both present cases where activists do long term good for all shareholders by confronting adverse practices by poor corporate executives but also displays cases where the activist in reality was more engaged in a smash and grab heist to the detriment of long term shareholder value. 


However, I’m afraid that I found the book too lightweight. It added historic background but I didn’t learn much new about activism per se – there simply isn’t much detail. The triple theme of the case studies, the telling of a broader story of the shareholder activists and Gramm arguing the case for the good of activism in the end becomes too fragmented – especially as some case stories are described very briefly and more function as an excuse to tell a story of something else. No doubt some of the original letters are quite amazing but I would personally have preferred either a straight chronological historic account with a both deeper and broader scope or a fact based primer on shareholder activism. I’m sure the author could write both with flying colors. 


Read this for a pleasant and amiable account of financial history. You will have a good time but perhaps not come out that much wiser. 

Mats Larsson, November 27, 2016

King, Mervyn - The End of Alchemy

Little, Brown, 2016, [Economics] Grade 4

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The scope of this book is ambitious. Mervyn King, the former Governor of the Bank of England, aims to explain the financial crisis and the state of the global economy today, he proposes a reset of the construction of the banking sector and attempts to transform the understanding of economics to better function as a practical tool for central bankers and politicians. The book targets the “interested general public” and while the language is unpretentious and simple enough some background knowledge of economics is advisable.

After a very promising and interesting introductory chapter covering the standard story of the financial crisis minus the blame game, a teaser of what King refers to as the alchemy in the banking sector plus a number of observations on today’s economic situation the book separates into two parts – the first addressing banking in chapter 2 to 7 and the second economic policy in chapter 8 and 9.

The discussion on banking is coherently structured but also a bit longwinded. The author presents a number of textbook type chapters on subjects like what money is, the function of financial markets, how a bank works, the role of a central bank and the relationship between nations and money. The chapters are eloquently written and it is obvious that the learned King enjoys expressing himself well and as a true Britt he’s using a fair amount of colonial dry humor.

At the same time the texts are nothing out of the ordinary. If you know something about for example maturity transformation in banks, optimal currency areas etc. this is pretty much how you would describe it. You cannot help but feeling that these chapters are there only as a long introduction to the author’s proposal around the banking system and when we get to this in chapter nine the book is already 250 pages long. The most interesting point in this “second introduction” is the emphasis on money and markets as tools to handle the fact that people due to “radical uncertainty” cannot foresee and plan the future.

In chapter 7 the text picks up pace. King suggests that Central banks should take on the role of “the pawnbroker for all seasons” for a banking sector with considerably lower leverage and that would be incentivized to hold more liquid assets. The main problem with banks, as the author sees it, is the inherent conflict between the leverage used in a fractional reserve system and the liquidity risks of these depository institutions. At the same time, we today have a situation of massively inflated central bank balance sheets coupled with an ineffective money multiplier. If the multiplier would normalize there could be a distinct risk of inflation and central banks would have to dismantle their balance sheets as a reply. If however bank leverage was reduced when the propensity to spend increased the central banks could sit on their inflated balance sheets indefinitely.

The less leveraged banks would still face some liquidity risks and the “pawnbroker” is there as a last resort but only as banks pay an “insurance fee” upfront and with significant risk adjusted haircuts. This would transfer much of the bank supervision and regulation from the legislator to the central bank – not an unexpected opinion from a central banker. The problem with the suggestion is in my view that the ROA of banks today is so low that to be viable as businesses using lower leverage they would have to double or triple fees and interest rates – not what the economy needs.

The ending chapters on economic theory present a more humble view of central banks as King suggests that the models used to understand and steer economies are wrong. In a way these chapters are less well structured and a bit repetitive but in my option more noteworthy. It is not everyday a senior central banker deviates from economic orthodoxy in this way and I wholeheartedly agree on the mixed blessings of today’s monetary policy. It is always a privilege to take part of the ideas of a man who has spent plenty of time to think deep and new on hugely important topics. You don’t have to agree to enjoy King’s important book.


Mats Larsson, November 13, 2016