Iddings, Sean & Cassel, Ian - Intelligent Fanatics * 2

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This is the joint review of Intelligent Fanatics Project from 2016 and Intelligent Fanatics from 2017. The books written by microcap investors Sean Iddings and Ian Cassel are chronicles of corporate and management success in the same genre as iconic business books like In Search of Excellence by Tom Peters and Robert Waterman, Good to Great by Jim Collins and The Outsiders by Bill Thorndike. Iddings and Cassel are also in various ways behind the Anglo-Saxon investor forum MicroCapClub.com and the website intelligentfantatics.com dedicated to sharing case studies of so called intelligent fanatics - the archetype successful businessman profiled in these books. The aim is partly to guide investors in finding companies that will outperform thanks to great management, partly to help CEOs emulate the winning characteristics.

Charlie Munger coined the expression intelligent fanatic. Idding’s and Cassel’s definition from the 2017 book reads as follows: “Founder, CEO or management team with unconventional ideas and a fanatical drive to build a high-performance organization. A learning machine that can quickly adapt to change. Able to create a trust based culture that aligns everyone to think like owners. Focused on acquiring, training and motivate their best talent. Their time horizon in in ten-year increments, not quarterly, and they invest in their business accordingly. Regardless of the industry, they are able to create an impenetrable moat that competitors initially cannot understand and eventually fear.” Almost every word in this definition is in my view critically important as an ingredient for - at least the chance of - sustained business success. The core of the term is however an obsessive drive towards a visionary goal guided by sharp analytical reasoning.

The first book also offers a formula that is said to embody an intelligent fanatic:

Intelligent Fanatic = (Long-term vision + Focus + Energy + Integrity + Intelligence) * Execution

The formula – more so than the definition – zooms in on how Warren Buffett and Charlie Munger have described the management qualities they search for. It is obvious that the authors are themselves standing on the shoulders of giants in their quest of trying to distill what it is that leads to business accomplishment. In the first book’s definition they had a second paragraph where an intelligent fanatic also could mean the “outsider CEO” of Thorndike. However, the capital allocation angle of business management isn’t at all as prominent among the intelligent fanatic case studies as in those of The Outsiders and this section was subsequently dropped. My feeling is that the authors by the second book had gained the confidence to move on from their towering heroes.

These two books are very simple when it comes to their set up. A brief introduction and short conclusion frame 8-9 case studies of about 15-20 pages that each profile a – often relatively unknown - CEO and how he (the profiled intelligent fanatics are exclusively men) managed to steer his company to a roaring long-term success. No one will be surprised that the traits and actions from the definition show up in various forms in almost all chapters. The similarities certainly underline the point that there are key traits and actions that can lead to success but it also makes the chapters somewhat alike and thus the reading in my view becomes a bit repetitive.

Iddings and Cassel deserve huge credit for their painstaking groundwork in finding, researching and presenting these CEOs in two books. Still, in my view, the next book from Intelligent Fanatics LLC cannot simply picture an additional batch of CEOs. The success criteria are now set (although it is always tough to weed out survivorship bias). The next step should according to me be to help investors detect indications of these criteria and present a methodology of how to handle tradeoffs. For now however, these books are a great start.

Mats Larsson, August 12, 2018

Harari, Yuval Noah - Homo Deus: A Brief History of Tomorrow

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Liberal humanism has overtaken traditional religion as the dominating narrative to drive the world forward. Still, the dominance is only temporary and in time dataism will take over. Homo Deus is the story of how this will happen and how the human race potentially will succumb in the process. Yuval Noah Harari who is a professor of history and teaches at the Hebrew University of Jerusalem is the author of Sapiens that looked to the history of mankind. Homo Deus is the sequel where the historian instead looks to the future.

In a very condensed form the story Harari presents is the following one. Humans are only different in grade from animals. We are just slightly more advanced with regards to certain abilities but not others. The reason why the unexceptional humans have come to rule the world is our ability to rally behind shared narratives in large groups and the collective power that comes from this. Historically the dominating stories were various religions as they both provided a purpose to life and processes that helped mankind’s progress. Still, there was no free will as god ruled supreme. With the breakthrough of science traditional religions were proven false. By killing god humans seized power over their own destiny but by doing this they risked losing life’s purpose.

The savior turned out to be humanism that Harari defines as ideologies that worship humanity or the human – communism and Nazism are included but the chief humanist religion is democratic liberalism. Our belief in our own exceptionalism has managed to both free us from the deterministic reign of religious thought and still keep a purpose. Humanism has created a golden age – at least in relative historical terms - where starvation, war and plagues are manageable issues and where those in the elite now are looking to more ambitious goals such as eliminating death, creating artificial life and by this reaching a semi-divine status as a species.

Unfortunately science and artificial intelligence instead conspire against our ability to eat the cake and still keep it. Neuroscience threatens to degrade us to biological automata without free will that just react to external stimuli and all that we can do robots will soon do much better. Intelligence is decoupling from consciousness. Humanism’s revering of the human will falter and with it the meaning of human life will do the same. Still, people need an algorithm to live by. Just as humanism during its era was more useful than the defeated traditional religious faith, the next phase will require a new belief. The ideology that the author sees winning is called dataism where the purpose basically is data processing. “Dataism declares that the universe consists of data flows, and the value of any phenomenon or entity is determined by its contribution to data processing”. People will degrade to units in a universal data processing system.

I’ve given Homo Deus an average rating. Still, there is nothing average about this book. The author is encyclopedic in his knowledge-scope and the topic is the survival of the human race. The grade instead reflects the intellectual dishonesty of almost force-feeding a narrative down the reader’s throat without openly discussing any uncertainties or qualifying the assumptions made along the way. What if we are exceptional - also in isolation and not only as a collective? What if we do have free will? What if Harari’s rather pointless dataism attracts no-one and something else emerges? Annoyingly, three pages from the end and after spending the book bulldozing any attempt to argue against his narrative, the author hints that he himself might not believe in his own Silicon Valley dystopia. Further, the sunny description on the book sleeve describes the many wonders of human achievement, while the book in itself portrays how we are relentlessly marching towards Ragnarök. It’s almost false advertising.

If you know what you are getting into and have the time to dwell on paths alternative from the author’s this is a very worthwhile book to read – but don’t judge it by its cover.

Mats Larsson, August 5, 2018

Robbins, Tony - Awaken the Giant Within

Simon & Schuster Paperbacks, 1991 [Surrounding Knowledge] Grade 4

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To know yourself and how you act is often described as essential attributes for the investor. Having patience and a long-term perspective are two examples of such traits. Certainly, you also need to master the craft of investing and finance but in order to stick out from the crowd it is necessary to master your own emotions. Most of the literature on psychology is theoretical where the guidance on how to avoid negative reactions is slim. Awaken the Giant Within turns this upside down and is purely written for the practical person who wants to understand how to use the theories in real world situations.

Tony Robbins is one of the leading self-help influencers in the world. He is widely known as a speaker, advisor and author and is also a very successful entrepreneur. He wrote Awaken the Giant Within as a 31-year-old having studied the subject of psychology voraciously from a very young age. Robbins calls himself a coach and wants to create a way of life for others where negatives are turned into positives and where they become able to master their emotions, physiology, relationships and financial situations. He has advised numerous influencial people as Bill Clinton, Wayne Gretzky, Margaret Thatcher and Nelson Mandela. One example of a successful investor who Robbins has been able to transform is Guy Spier who talks warmly of Robbins in his book The Education of a Value Investor.

The book is organized in four sections. All sections consist of various practical challenges which forces the reader to be active. The first part presents most of the theoretical background on why we feel and act as we do and what measures can be taken to improve. Part one is more than half of the text. The second part confronts and challenges the reader to figure out which values and rules his life is based on and how they should be changed and re-arranged in order to lead to improvements. The whole third part is a seven-day challenge consisting of a step-to-step guidance on how to improve emotionally, physically, relationship-wise and financially. The last part is all about philanthropy and how it's possible to become a better person and at the same time help people in need by giving.

This is a book that can help investors and others to break out of negative thought patterns. The author describes easy methods as how the usage of less negative words to describe a situation will improve the actual temperament of the reader. If you are saying that you are stressed out, exhausted or angry the negative emotion will become even stronger. As humans, we are trying to avoid pain and instead experience pleasure. An example in how that can distort rationality is in situations when the proof tells us that we are wrong and we disregard it due to the truth being too hard to bear, a concept named cognitive dissonance. This is not a recipe of good thinking for the rational investor. Some simple, but hugely important, wisdom from the book is to prioritize the long-term versus the short-term, to avoid distortive substances and to be aware of the shortcomings of oneself and how to tackle them in order to improve.

I was positively surprised by how much of Robbin’s work is built on the latest theories in human psychology. For me that created trust in the tools presented in the book. Awaken the Giant Within is for the active reader and needs to be read with a pen in hand. The commitment to read the book is therefore greater than the mere 500 pages. To get the full benefit of the book the reader needs to be open for change and take on the challenges the author presents. This is therefore a commitment stretching from weeks to years. The end result is likely to be a game changer for your life and who you want to be as a person.

If you are not willing to put in the substantial effort of reading it now I suggest you read something else and pick up this book when you are ready and motivated to transform yourself and people around you. But why wait?

Niklas Sävås, July 31, 2018

Lo, Andrew - Adaptive Markets

Princeton University Press, 2017, [Finance] Grade 4

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Due to the immense influence of Paul Samuelson economics in the mid twentieth century adopted much of the mathematical and statistical methodology of physics. The economic theories became all-explaining, exact and mathematically beautiful - but wrong. Starting in the 1980s a bunch of half-economists and half-psychologists emerged and formed the sub-discipline behavioral economics and were rude enough to point to the inaccuracies. Still, these new guys had no real alternative economic system to offer. They could tear down what was foul but had little ability to build anew. “It takes a theory to beat a theory” to speak with Milton Friedman. Then the Hong Kong born Andrew Lo, one of the more free-thinking economists of our age, a Professor at MIT and chairman of the hedge fund AlphaSimplex, launched a theory that it might actually be concepts from biology that will fit both traditional economics and behavioral economics into one unifying grand scheme. The framework became known as the adaptive market hypothesis (AMH) and it is the topic of this important book.

Broadly the book is structured so that chapters 1 through 5 give the reader background knowledge of the efficient market hypothesis of traditional finance, behavioral economics, neurofinance and biology’s evolutionary theory. Then chapters 6 to 8 present and exemplify the AMH. Finally, the last 4 chapters try to show that financial crises could be understood through the AMH and how we by this could form regulation and practices to if not prevent a crisis, at least stop it from escalating into something more severe.

Lo is a very good storyteller with a fair dose of humor. My only big complaint of Adaptive Markets is that it’s too comprehensive and thorough. The first 175 pages give necessary pieces of the puzzle so that the reader can understand Lo’s theory, but the reader probably hasn’t bought the book to read exactly these long sections on the basics and history of economics, psychology, biology etc. – we want the juicy stuff; the AMH. Then in chapter 9 there are another 30 pages giving a basic context behind the recent financial crisis. All in all these background stories are long enough to fill a normal length book by themselves. Although they clearly show the broad scholarship and knowledge of the author these sections should probably be cut in half for the second edition.

According to Lo price formation in markets follows the principles of evolution with its competition, adaptation and natural selection – or death - of spices in an ever changing environment. The spices in question are different groups of market participants that in a “satisficing” manner apply varying strategies and heuristics to compete for market profits. The choice of strategies are decided by an innovative (mutational) is interactive trial-and-error process, where the market feedback reinforces the use of some and deters the practice of other in an ever ongoing feedback loop towards refinement. A strategy that doesn’t fit the current environment would be deemed irrational by the traditional economist but is simply not adapted to the surroundings in an evolutionary meaning.

Now, unfortunately the environment isn’t static but depends on both external forces and the behavior of the competing spices. When too many populate the same habitat, i.e. uses the same strategies, the potential for profits is exhausted and a strategy that was well adopted becomes unprofitable, leading to a flight from the habitat. Eventually this exodus might restore the potential for returns and we get an ever oscillating market environment. An efficient market is simply a model of an unchanging market, something that only exists for so long. Interestingly, some “irrational” behaviors discovered by behavioral finance look to be unconsciously designed to spread one’s bets in case of change.

Anyone with an intention to have an edge in financial markets should really have read Adaptive Markets – because their competitors will have.


Mats Larsson, July 24, 2018

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

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

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

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

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

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

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

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

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

Mats Larsson, July 14, 2018

Rosling, Hans - Factfullness

Flatiron Books, 2018, [Surrounding Knowledge] Grade 4

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Very few persons hold a factual view of what the state of our world is. We consistently think our problems are grimmer than they are. In Factfullness the late Hans Rosling points to biases that shape our faulty views and also shows us how to correct them. Rosling was a physician, statistician and Professor of International Health at Karolinska Institute who took the TED Talks audience by storm with his folksy style and enlightening diagrams showing us the world as we hadn’t seen it before. The aim of his public talks as well as this book was simply to combat the ignorance of how the world looks, since without a correct worldview we will make the wrong decisions.

First out the reader is put to the test as Rosling asks thirteen multiple choice questions about the state of the world, i.e. topics like population growth, life expectancies, literacy, income distribution, education, health and global warming. The same test has previously been put to 14.000 persons globally and excluding the global warming questions the average number of correct answers was two out of twelve. We significantly underperform blind chance and the results are little different or even worse among population groups with higher education. We are actively and systematically misrepresenting the world.

The problem isn’t a lack of facts, an evil conspiracy or fake news, but our own biases. We are hard wired to over-dramatize. We notice and remember spectacular events while we ignore gradual but more important changes. Further, negative events render a lot more interest than positive. A commercial media industry that competes for consumer attention then naturally serves us exactly this; a never ending array of spectacular negative news items. This is what sells, and this is also what we as media consumers want to buy. Incentives also matter in other ways. Rosling, who at least in his youth politically had a leftish bent, in one of his public speeches notices that professional investors were among those with the most fact based view and showed the most interest to learn and correct what they had gotten wrong. The reason was simple. If they got it wrong they lost money. In contrast, developing world aid workers knew less and also didn’t really want to change. A world in disarray was what they thought necessary in order to mobilize the rich to help the poor. At least some even felt threatened by a world view where the developing world wasn’t a helpless victim being brutalized by their former colonial masters.

Factfullness isn’t a book that tries to show the true state of the world, but a book that in ten chapters lists ten cognitive biases in how we understand our surroundings. Rosling calls them the Gap Instinct, the Straight Line Instinct, the Blame Instinct and so on. Some are due to our less developed ability to instinctively grasp statistics, some are due to how emotions often trump analytical reasoning. The chapters all contain introductory anecdotes from Rosling’s upbringing and life as a practicing medical doctor in for example rural Africa and as such the book also becomes a type of memoir. The chapters also give practical advice on how to correct the biases so that we can see the world as it is for ourselves.

Rosling charmed the audience of TED Talks with his energetic, enthusiastic, down to earth and almost naïve style presenting a combination of real life stories and graphs on global developments. His combination of integrity and empathy is rare and the distinctly Swedish dialect only added to his popularity. To me, Rosling’s style that in public presentations was so disarming and endearing, at first felt a bit banal in written text. In the end however I had to capitulate. Rosling is above all extremely rational and his pursuit to make the world a better place through facts is admirable. The plain language might actually be what gives the book the broad readership it deserves.

Read Factfullness both to gain a fact based worldview but also to gain peace of mind as so much is getting better over time.

Mats Larsson, July 9, 2018

Walton, Sam & Huey, John - Sam Walton: Made in America

Bantam Books, 1992 [Surrounding Knowledge] Grade 4

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Sam Walton: Made in America pushes the reader to become a better and more honest person by presenting the standards that Sam Walton set on himself and others. "I'd hate to see any descendants of mine fall into the category of what I'd call "idle rich" - a group I've never had much use for." There are dozens of similar quotes in the book which summarizes Walton's worldview. The book is a biography filled with wisdom and real life lessons on business and management.

Sam Walton was the founder of one of the most successful businesses of the 20th century, Wal-Mart. What started with one store in the small town of Bentonville, Arkansas, developed into a store network covering the whole US. Walton who in building Wal-Mart became the richest man in America, co-authored the book together with John Huey in the end of his life while struggling with cancer. Huey, an author and journalist, has, among else, served as the editor-in-chief of Time Inc.

The structure of the book follows the life of Sam Walton in chronological order. The reader is set on a journey from Walton's early days working in a retail store, to when he started his own shop and thereafter the development of his huge legacy. Every chapter is filled with viewpoints from family members and Wal-Mart employees which gives the reader a more objective view of how things where.

Customer obsession and constant improvement are core themes when describing Wal-Mart’s strategy. Similar to the founder of Amazon, Jeff Bezos, Walton had the idea that if you always try to do a bit more for the customer then you will stay ahead of the competition. Bezos has mentioned that Sam Walton and Wal-Mart was a big inspiration for him when building Amazon. Walton was studying the competitors deeply and was in the words of the super-investor Mohnish Pabrai ”a shameless cloner” as he applied the good concepts that he learned from his competitors. A quote from the book reads: "most everything I have done I've copied from somebody else". Another quote is about the learning’s from Sol Price, another highly successful manager within retail: "I guess I've stolen - I actually prefer the word "borrowed" - as many ideas from Sol Price as from anybody else in the business". By studying others, Walton created a great corporate culture driven by incentives to his partners which led to better customer treatment. He constantly adjusted the business to what he thought was for the best. These constant adjustments were probably one of the keys for Wal-Mart to stand out from the competition in one of the most competitive industries around.

A further lesson to learn from Wal-Mart is the growth strategy the company used. The business grew in smaller towns in areas close to its distribution centers in order to benefit from economies of scale in the specific area. A less well-known and riskier aspect of the growth strategy was that it was built on debt financing. From the start of Wal-Mart until the listing in 1971 the company and its owners were saddled with debt. Since Walton used debt in order to grow the business he was relieved when he got rid of the burden when going public.

There are a lot of interesting facts in the book that are important from an investment standpoint. The reader will get a better idea of the retail industry and what it takes to become successful but especially what to look for in a manager. Walton mentions that the investors who profited most from Wal-Mart were the ones that had a long-term view and that studied the company and got familiar with the strengths and the management approach.

Even though the book is written at the very end of Sam Walton's life I don't think it shines through. Possibly, this is due to the skill of the co-author John Huey. I think all managers, investors and people in general would become better in their professions and in life by learning from Sam Walton. This book is a great place to start.

Niklas Sävås, June 30, 2018

Galloway, Scott - The Four

Portfolio/Penguin, 2017, [Business] Grade 4

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

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

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

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

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

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


Mats Larsson, June 25, 2018

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

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

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

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

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

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

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

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

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

Niklas Sävås, June 07, 2018

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

Bloomsbury Business, 2018, [Business] Grade 2

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

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

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

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

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

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

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

Mats Larsson, May 27, 2018

Peterson, Jordan B. - 12 Rules for Life

allen lange, 2018, [Surrounding Knowledge] Grade 4

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Mats Larsson, May 12, 2018

Marshall, Kenneth Jeffrey - Good Stocks Cheap

McGraw Hill, 2017, [Equity Investing] Grade 4

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

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

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

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

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

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

Mats Larsson, May 6, 2018

Bevelin, Peter - Seeking Wisdom: From Darwin to Munger

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

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

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

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

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

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

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

Niklas Sävås, May 1, 2018

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

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

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

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

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

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

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

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


Mats Larsson, April 22, 2018

Ang, Andrew - Asset Management

Oxford University Press, 2014, [Finance] Grade 5

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

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

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

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

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

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

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

Mats Larsson, April 15, 2018

Kindleberger, Charles P. - Manias, Panics and Crashes

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

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

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

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

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

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

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


Niklas Sävås, April 11, 2018

Miemietz, Marietta / CFA Institute - The Pharmaceutical Industry

CFA Institute, 2013, [Equity Investing] Grade 3

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

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

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

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

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

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


Mats Larsson, April 8, 2018

Marshall, Tim - Prisoners of Geography

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

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

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

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

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

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

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

Mats Larsson, April 2, 2018

Ellenberg, Jordan - How Not To Be Wrong

Penguin Books, 2014, [Surrounding knowledge] Grade 4

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

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

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

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

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

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

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

Niklas Sävås, March 25, 2018

Mobius, Mark - Passport to Profits

Warner Books, 1999, [Equity Investing] Grade 3

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

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

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

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

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

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

Mats Larsson, March 10, 2018