Bookstaber, Richard - The End of Theory

Princeton University Press, 2017, [Finance] Grade 4

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This is a text on financial theory and the author advocates a switch from the use of a rigid neoclassical theory based on a number of unrealistic assumptions to a fluent, messy but flexible use of so-called agent based modeling (ABM). Epistemology is the type of philosophy that concerns itself with the theory of knowledge, the nature and rationality of belief. Bookstaber wants to challenge how we understand and think about economics and uses the occurrences of financial crisis as the test environment for his endeavor. The author is the Chief Risk Officer at the pension fund University of California Board of Regents. Earlier he has been both a PM and a risk manager at numerous hedge funds and investment banks. Few have longer experience of financial risk than Bookstaber.

In his 2007 bestselling book A Demon of Our Own Design the author reviews his dramatic experiences from the investment bank and hedge fund world and how liquidity, leverage, crowding and tight coupling – the speedy interconnectedness of events – are key parameters in causing cascading that leads to a full blown financial crisis. He also begins to discuss the topic of complexity. The End of Theory could be seen as a freestanding appendix to the first book. By now the author has had the time to better develop a theory around what he had experienced first hand and he also offers a practical tool to use. Since the theory is so vastly different from conventional economics the book becomes a crusade against how economic theory address crises currently (if it does at all).

The financial system is described using 4 building blocks: 1) computational irreducibility – a system without mathematical shortcuts to describe it, 2) emergent phenomena – that the overall effect is different from the sum of the individuals actions, 3) non-ergodicity – the concept that actions of one agent depend on and are shaped by history, context and the actions of other agents and 4) radical uncertainty – the fact that the system cannot be modeled by using historical events. The really important future developments will be unprecedented. All this creates a financial system that I have come to call a complex adaptive system. It is full of self-enforcing loops; developments are non-linear and unpredictable. Then the author goes on and offers the computer modeling technique ABM as a tool to understand and handle the complexity. ABM tries to simulate system effects by the actions and interactions of autonomous agents with separate decision heuristics. Chapters 11 through 13 model the financial system using the method. The exercise is thought provoking and I especially liked the description of the multi-layering within banks.

Nothing of all this is new and Bookstaber never claims that it is. The notion of complex adaptive systems amongst others builds on George Soros’ concept of reflexivity as described in his 1987 book The Alchemy of Finance, on complexity theory popularized by the Santa Fe Institute and on Andrew Lo’s concept of adaptive markets. The merit of this book is rather the compilation of the many parts into a whole and especially the application on special situations – financial crises. The author doesn’t really take the knowledge about complex adaptive markets further, but he improves our crises-knowledge.

The writing and language is relatively accessible for a text on financial theory, the boundaries of human knowledge and the intricacies of the plumbing in the financial system. The author takes the time to explain and exemplify. At first this is a positive but during the course of reading the book the notion is reversed. What starts out as illuminating turns into being repetitive. In an attempt to win the reader over to the author’s point of view too much is said too many times. The book would benefit greatly from being slimmed down some 40-50 pages.

The End of Theory will advance your thinking on financial calamities but it isn’t always fun to read.

Mats Larsson, August 16, 2017

Bookstaber, Richard - A Demon of Our Own Design

John Wiley & Sons, 2007, [Finance] Grade 4

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Why did I wait 10 years to read this book? It is a joy to read. Richard Bookstaber has had a long career in the financial markets. Today he is the Chief Risk Officer at the pension fund University of California Board of Regents and a senior advisor at the US Treasury’s Financial Stability Oversight Council. When he wrote this book he was a hedge fund portfolio manager and prior to that he was in charge of risk management at both Morgan Stanley and Salomon that later turned into Citigroup. The reason for not picking the book out of the bookshelf was that the subtitle “Markets, Hedge Funds, and the Perils of Financial Innovation” gave me the impression that it was a sensationalist, hedge fund-bashing book written by an outsider. This is obviously completely wrong. Few are more qualified than the author to discuss financial risk.

There are three parts to this book although they aren’t presented chronologically. There is one extremely interesting theoretical part comprising of chapter 1, 8 and the conclusion; there is a brilliant autobiographical part covering Bookstaber’s Wall Street career (chapter 2-7) and then chapters 9 through 11 present a somewhat less vivid, semi-theoretical, discussion around hedge funds and much more. For me the chapter on the 1987 crisis was a revelation. Why are researchers still debating what triggered the downturn? Here it’s written out in black and white from someone who had the benefit of both a front row seat and the oversight and understanding to make sense of the event. In short it was a combination of investor psychology, a mismatch in liquidity between the futures market and the cash equities market to act as a trigger and the widespread usage of portfolio insurance that created a self-enforcing negative loop of selling.

In the Wall Street section the author describes the full palette of financial mishaps that he experienced at the investment banks - including the debacle of LTCM, which was closely affiliated to Salomon. In general too many think that only what has recently happened is likely to happen next or that things that seldom happen, will not happen – at least not on their watch. Combine this with the non-linear effects of a constant stream of newly invented derivatives plus complex organizations with plenty of politics and you have an accident waiting to happen. Time after time new financial products are launched without the understanding of unintended consequences. Sometimes the risks are even deliberately ignored as the gains will fall to the banks’ personnel but they will not face the losses.

The theoretical part and especially the chapter “Complexity, Tight Coupling, and Normal Accidents” should be required reading to be eligible for employment at financial regulators. A combination of complexity and tight coupling creates unforeseen events that often cascade through the financial system as a crisis. The complexity arises as the agents in the system change their behavior depending on others behavior and events are often triggered by the use of derivatives – and this is written before the 2007/08 crash. Due to the constant need for liquidity when using derivatives - and the often high leverage - agents in the financial system are critically interdependent and the speed of the market gives little room for error or time for adjustment when things go wrong. That accidents occur in such a system is according to the author to be expected – they are so-called normal accidents that arise by the design. The need for liquidity, not new information, is the main driver of short-term price movements. Less leverage and an incubation period for financial innovation is suggested to tame the system.

The text is colorful, quick-witted and written with a self-irony that adds to the readability. Bookstaber is a quant with a splendid way with words! At this point the book merits a 5-star rating. Unfortunately the hedge fund part isn’t fully up to par. It’s untidy, a bit defensive about hedge funds, searching, and the author doesn’t seem to have fully completed his thoughts. In contrast to earlier parts, no colorful interior from the hedge fund world is offered - pity. In all, if you are to understand financial calamities you should have read this book.

Mats Larsson, August 11, 2017

Partridge, Matthew - Superinvestors

Harriman House, 2017, [Equity Investing] Grade 3

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This book is at the same time in a rewarding but ungrateful genre. Learning from the best is always worthwhile and getting to know the secrets of those who have been the most successful in equity markets never fails to interest a wide audience. Still, profiling a collection of famous investors and turning this into a book has been done numerous times before – it is hard to add much to what has been written previously. In Superinvestors Matthew Partridge, a UK financial journalist, historian and previous investment bank employee, presents his selection of 20 investors to study. Further, the author takes on the hard task of rating those profiled and name the “best” investor of all times.

The structure of the book is – as expected – fairly simple. After a brief introduction 20 “super investors” are portrayed and the book finishes off with the conclusions the author draws from the many individual fates and fortunes. For each investor the reader is served with a short personal and professional history, a discussion on the investor’s method, his performance and potential mistakes made. Then Partridge seeks to distill some learnings from the above and ends the section with a rating where the investor gets a score from 1 to 5 on performance, longevity, influence and ease of replication for the private investor. Many of the profiled names like George Soros, Warren Buffett, Benjamin Graham and Peter Lynch will be well known to many readers.

Although it’s always arguable who should be included in such an illustrious group I would have made some different choices. Even if it is quaint that Paul Samuelson privately acted at odds with what he preached as the high priest of efficient market theory I don’t think that his profile, nor the one on fellow economist David Ricardo (1772-1823), adds much to the discussion and the venture capital pioneers of George Doriot and Kleiner & Perkins feels a bit misplaced. Further, there is obviously much to learn from Jack Bogle but he is more successful as a businessman and advocate of an idea than a successful stock market investor. Who would I want to see instead? Jim Simons, James Chanos and Seth Klarman could in my view be fair alternatives. On the other hand the book benefits from the author’s deep knowledge of UK investors who are less documented in literature and Anthony Bolton’s track record in China will come as a surprise to many – as it did to me.

In my opinion the texts on UK investors Neil Woodford and Nick Train were the most interesting. Also, even though I had heard of Robert Wilson as an early short seller, I knew nothing of him. Overall Partridge, with some minor disagreements, in my view gives a short but fully accurate picture of the investors I had previous knowledge of. The author is clearly well read and even the cover is inspired by Ken Fisher’s 1984 book Super Stocks. My only objections are that I think George Soros’ concept of reflexivity is too vaguely described and given its huge influence on the hedge fund community and its closeness to the current concepts of complexity theory and adaptive markets it is a bit harsh to say that the theory has left little mark. Further, to describe what Ed Thorp did as “nothing new, but more systematic” is to diminish a person who long before academics Black and Myron Scholes came up with an option pricing model that allowed rational derivatives trading.

Even though the book is over 200 pages long it is an easy read and it is quite tempting to time after time read “just one more profile”. The conclusions at the end are sound but hardly novel. So who does Partridge rank as the best investor of all times? Those on the short list are Philip Fisher, Buffett, Bogle and Graham (skip Bogle and add Soros and Thorp and I would have agreed). The winner is Graham, much thanks to his huge influence on later day investors. A good choice.

It is never possible to do an investor justice over 6 to 8 pages. However, it is through books like this that many up and coming investors have gotten a glimpse of their role models for the first time.

Mats Larsson, August 8, 2017

Cotton, David - The Smart Solution Book

FT Publishing, 2016, [Business] Grade 4

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Some books will hardly blow your mind but they can still broaden your professional toolbox and as such be very handy and practical. Independent on which line of business you are in you will have to solve problems and this book presents a number of tools for doing this. David Cotton is a former employee of Arthur Andersen and PwC turned freelance corporate trainer and author. The focus of many of the solutions Cotton discusses is to use the so-called wisdom of the crowd – or at least a small group – to generate the desired results or insights.

The book has a center part where each of the 68 problem solving techniques gets a short chapter. The tools are further divided into those that are more suitable for individuals and small groups, for larger groups and for groups engaged in business games. In reality though, many of the methods can be scaled up or down to work for groups of varying sizes so the division is hardly set in stone. Two introductory chapters and one closing chapter frame all these methodologies. In the introduction Cotton discusses which tools to use plus some problem solving essentials. The text on essentials I found to be perhaps the most rewarding part of the book as it looks to more overarching and general themes in problem solving such as the stages the process often contains and the problems that frequently occur. Then the closing chapter very briefly discusses how to share and implement the solutions that have been generated.

For each method Cotton starts the section with a description of the tool, when to use it and what is needed in terms of material. Then he presents a chronological checklist on how to practice it and finally brings forward the potential pitfalls in its usage. The recurring headlines make it very easy to get a grip of each tool but it also makes reading the book from start to finish a bit choppy. Each of the 68 tools is presented over 1 to 4 pages. Some are more elaborate but some are quite simple.

The author places a heavy emphasis on activities meant to foster free associations and to get everybody in a group to contribute their creativity – improved varieties of collective brainstorming. Often the methods are meant to get to the core of a problem or to bring forward details around it through harvesting the opinions of many and without letting dominating persons in the group biasing the solution generation process.

When there are so many tools to chose from it is easy to find a number of personal favorites. I appreciated some like Cartesian Logic (#7), GROW (#13), Osborn-Parnes’ Critical Problem Solving Process (#15), Deming’s PDSA Cycle (#21) and Challenging Assumptions (#29) that helps you structure the problem solving process; Reverse Brainstorming (#5), Appreciative Inquiry (#16), Who Else Has Solved This Problem (#31) and Retirement Speeches (#58) that allow you to change perspectives; and finally The Ripple Effect (#39), The Solution Effect Analysis (#43) and Action Learning (#49) which allow you to analyze the potential consequences of a proposed solution before it is implemented.

Still, the tools portrayed in The Smart Solution Book are in my view mainly targeting the internal or external person who is to lead exercises at corporate events. For me this is a bit too narrow to generate a top rating. For someone that is about to host such a session it could instead prove very useful. Indeed, simply finding one tool that solves the Gordian knot and delivers the business result required would obviously make the book a bargain.

Mats Larsson, August 06, 2017

Bowden, William G. - The Board Book

W.W. Norton & Company, 2008, [Business] Grade 3

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In any area it is almost always a good idea to learn from those with great experience. The late William G. Bowen (1933 – 2016) was certainly a person with an abundant familiarity with boards. The former president of Princeton University and Andrew W. Mellon Foundation served on the boards of a number of Americas largest listed companies as well as being a trustee for numerous non-profit organizations. This book aims to shine some light on the topic of how a board functions. It provides many wise and common sense opinions from an experienced person who has also taken the time to contemplate about the finer details of how board work should be performed.

Still, Bowen hasn’t written a boardroom primer. Instead The Board Book is a text where the author picks up on and discusses a number of aspects of a director’s work as he sees them after a lifetime of experience. Further, when writing the book he collected the opinions of other directors in his large network and concludes that consequently it should be seen as a collective endeavor as well has his own work. Although Bowen says that he doesn’t want to be normative but pragmatic, he still clearly argues for his opinions, like for example that a former CEO shouldn’t stay on the board of the company he once led etc.

The 8 chapters of a combined 170 easily read pages start with a more philosophical introduction around the role and purpose of boards. Then the next 4 chapters, comprising more than half the book, center on the board’s work towards the CEO. The discussions target the board-CEO relationship and how it has changed, the evaluation and compensation of the CEO and finally CEO transitions and how the process of succession planning could be developed. The latter activity is according to the author the aspect of board work that perhaps shows the most potential for improvement. The next 2 chapters are on the composition of people on the board and then the mechanics of board work follow. The book is then summarized in a concluding chapter where Bowden returns to the themes he thinks most important including the relationship between the CEO and the board.

In the preface Bowen notes how autobiographical most his and other peoples’ opinions are with regards to governance. What has worked out for someone is generalized as a good solution overall. This is both a strength and a weakness of the text. The reader gets personal advice from a veteran director but at the same time the book has a subjective feel and it might not be especially all-inclusive. Another significant trait of The Board Book also comes with Bowden’s career. He served on a mix of public and non-public boards and throughout the book there is ample space dedicated to discussing them both and the differences between them. Personally, I would have liked to see less space devoted to the non-profit area but that is my own preference.

The discussion that the author presents is clearly American. And while one reflection is that the trends around how board work is developing are international and the opinions of what constitutes best practice in the US have clear parallels around the globe, it also continues to astound me how weak the position of the owners is in the US. While references are made to creating value for shareholders, Bowden’s thoughts concerning the board are generally rather decoupled from the owners. The board is not seen as the owners’ representatives with regards to the governance of the company but as an autonomous entity. There is no reference made at all to the general meeting in the text and institutional investors aren’t seen as fully proper owners, they are more like surrogate owners. Even though the opinion is rather typical among directors, many institutions hardly have stepped up as business owners and it is never the less problematic.

Read this as a personal, likable and thoughtful complement to a more comprehensive primer on the workings of boards.

Mats Larsson, August 2, 2017

Clayton, Mike - How To Manage a Great Project

Pearson, 2014, [Business] Grade 4

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This is what the title implies, a step-by-step guide on how to plan and execute a project. With flattening organizations and a quickly changing business environment more work is done in projects and the value of project management skills are increasing. The audience for the book is the prospective project manager.

Mike Clayton is a UK author and public speaker who spent the 1990’s as a project manager at Deloitte and since 2002 gives coaching seminars for project managers. His books cover subjects like negotiation, influence, risk management, personal effectiveness, time and stress management, professional development and project management. The thesis is that “when you have the right process and follow it diligently, you will put yourself in the best position to succeed.” Clayton is obviously motivated by teaching and the book does its job with excellence but I think the reader should do more than just read it from cover to cover to benefit the most. More on that later.

The content is a “how to” manual on managing the four stages of a project; defining it, planning it, delivering on the plan and closing the project. After a preceding introduction that discusses projects and their management in more general terms, the stages form the basis for the 8 chapters of the book. A worry with the focus on strict adherence to a set process is that the content might feel ridged. This is not the case. With a long practical experience the author designs tools like contingency planning, risk management, change mechanisms, scheduled go/no go decisions and reviews into the process to allow for the complexities of a live project. With the book’s heavy emphasis on planning the author also stresses the importance of structure in projects.

An introductory “how to” manual is hardly read for its intellectual stature and wit but for its practical use. With a long experience of leading projects and coaching of project managers Clayton has chiseled out what is really important for project management and he delivers a useful book. It is easily read as the language contains very little project jargon and there isn’t too much text on each page. While the focus is on process the author is very open with that the main task of the project manager often is to juggle the tasks of the process with the feelings and wishes of people. How To Manage a Great Project was published in 2014 and even if this was somewhat before today’s ridiculous hype around “agile” projects the book might still have commented on the concept.

Would I recommend the book? Yes, clearly. However, the plot of the book is chronological while in projects many processes run in parallel. At some places I felt that this simultaneousness could have been emphasized as the reader otherwise might question the order of the topics described. To put the contents of the book to its best use I would recommend the reader and soon-to-be project manager to re-write his own short version of it where he takes out the parts that is relevant to him and the type of project he is to lead, where he perhaps switches the order of topics so they feel natural to him and so on.

For the experienced project manager executing large scale projects involving large teams and multiple stakeholders there are other more in-depth texts on project management but as a start for anyone that is about to manage smaller projects this is an excellent introductory guide – especially if the reader takes control of the content and makes it his own.

Mats Larsson, July 15, 2017

Vance, J.D. - Hillbilly Elegy

William Collins, 2016, [Surrounding Knowledge] Grade 4

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Wow, where to start? This elegy is a touching cocktail of one part gripping family saga spanning three generations, one part intimate account of the emotional maturing of the author plus finally a sociological study of the Scots-Irish decedents in the Appalachian mountains and surrounding states that the author calls hillbillies. Political pundits, experts and commentators who have awakened to the new reality of Donald Trump’s presidency have focused on the latter part but at hart Hillbilly Elegy is the very personal story of young J.D. Vance born in Middleton, Ohio but with his roots in the mountain town Jackson, Kentucky.

The account of J.D.’s family history is dramatic, tragic, fascinating and often totally absurd. It contains violence, drug abuse and an acute lack of father figures but also love, support and pride. While the author is the storyteller and there are several important and colorful characters like for example his sister Lindsey, his mom and J.D.’s grandfather Papaw, the towering figure of the family and of the author’s upbringing is his grandmother Mamaw – a crazy hillbilly by her own account. And this is meant in a positive sense.

My feeling is that Hillbilly Elegy as much as anything is a piece of self-therapy for the author – a way to analyze and understand his persona and how it is shaped by his upbringing. With all skeletons out in the open daylight, they are significantly less daunting. We are invited to follow the transformation from a person fostered into and culture of “learned helplessness” characterized by low trust (as people always fail you), honor culture, a feeling of victimization and a fair amount of ignorance of the outside world, to a person married to a Asian immigrant, living in “Silicon-everything-is-possible-Valley” working with the super entrepreneur Peter Thiel.

It’s a journey from what Carol S. Dweck calls a fixed mindset to a growth mindset and it is made possible by Mamaw’s and Papaw’s insistence on education, the possibility of a refuge (and pure physical protection) at Mamaw’s house during the most chaotic periods and the transformative experience of joining the US Marine that instilled a sense that effort pays, that later resulted in a law degree from Yale. Still, no one can fully escape his upbringing and even today J.D. has to actively control his violent reflexes when it comes to minor injustices and he has had to learn how to handle domestic disputes without destructive fighting.

However, the journey shouldn’t unequivocally be seen as originating in bad and ending in good. Yes, the hillbilly culture includes suspicion towards outsiders, sexism and a lack of agency, i.e. a feeling that nothing a person does matters for how his life will turn out. But it is also an environment of loyalty, toughness, courage, independence, frank hillbilly justice and a deep love of both the extended family and of country. Unfortunately, it is the author’s view that the negative traits increasingly are gaining the upper hand. In a knowledge-economy manliness is defined as aggressiveness and good grades in school are for sissies and fagots. Those that try to make a better life elsewhere are seen as outcasts. There is a cynical feeling of isolation and being left out but also an inwardly culture that discourages doing anything about it. No wonder the social mobility of the US Scots-Irish group is the lowest of any in the US. Problems are psychologically suppressed, drug use is rampaging and with no confidence in media at all conspiracy theories set the agenda.

Globalization has created a divide between an international and increasingly speed-blinded liberal elite and a western world blue color population that cannot compete on a global manufacturing market and therefore hardly appreciates the long-term structural wealth creation that comes with global trade. Hence, increasingly western world politics is influenced by the working class’ feelings of fear and anger and a sense of being under attack. However, this story isn’t just a melancholic, plaintive elegy, it advocates a culture revolution from within: “We hillbillies must wake the hell up”.

Mats Larsson, July 05, 2017

Barnevik, Percy - On Leadership

Sanoma, 2013, [Business] Grade 3

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Percy Barnevik is one of the more iconic corporate CEOs in Swedish history. Already in the preface he declares that it is the effective execution of business strategies that differentiates the successful company from the less so. While management literature often focuses on high level strategies the more mundane topics of how to handle organization, delegation, incentives and motivation to facilitate the carrying through of those strategies attracts less interest. It is rarely a secret how to succeed in a line of business, those who still don’t manage it generally lose due to their execution.

Percy Barnevik on Leadership contains 200 short paragraphs of a half to one and a half pages each. The many topics are loosely sorted under 20 headlines and the subtitle of the book is 200 lessons from 50 years’ experience. The short paragraph format brings to memory the stories often told about Barnevik, on how he generally presented a huge amount of overhead slides in a flow much too fast for anyone to fully grasp the message conveyed in the pictures.

Given the stated focus on execution the section covering this topic over 10 paragraphs and 8 pages obviously attracts interest. The short version of the content is that Barnevik thinks that the road to corporate achievement is 90% execution and 10% strategy. And out of those latter 10% about half is tied to analysis and half to gut feeling. A company must decide on a sufficiently good strategy and as long as the execution is energetic, fast and efficient enough they have a good chance of succeeding. The ability to follow through and see things to the finish line often go hand in hand with a sense of urgency. Individuals who go the extra mile can make a huge impact on their organizations.

A very broad description of the strategy is needed. Then work with the right people and powerfully move in the approximately right direction. Adjust the direction along the way as needed. “The success of a strategy is dependent on the force and speed of the execution process; this is perhaps my most important piece of advice of all.” In following through the execution of a strategy, project management skills are a hugely important craft. Keep things simple, don’t complain about circumstances and don’t waste time on endless investigations to try to do the optimal – instead do the “nearly right thing” and to it quickly.

Still, to execute and adjust along the way there has to be feedback and analysis. Things must be measured and followed up on. Barnevik is fond of ABC-analysis, uses straight forward tools like decision trees with subjective probabilities, SWOT analysis etc. and advices to prioritize and choose on the course of action with the 80/20-rule in mind – although he says it should perhaps be called the 90/10-rule. That’s it. The above is in a shortened form all what is being said under the key headline execution.

Yet, it isn’t all. Probably half of the paragraphs in this eclectic text under any of the other headlines are also related to the efficiency of the practical implementation of that particular subject and as such a part of the discussion on how to carry through what has been decided. Overall the bias of the topics is no doubt towards execution but they also cover almost anything and everything related to the business life of a CEO. However, not counting the paragraphs on personal efficiency and personal development, there are only one or two pages reflecting on Barnevik’s personal life. This is clearly not his memoirs – instead Barnevik is passing on the tricks of the CEO trade.

To a large extent Barnevik’s opinions are typical of a Scandinavian or European large company corporate executive. Although shortly put and sometimes a tad cliché, they are always well motivated and I largely agree with what is being said. The paragraphs are so brief that they barley scratch the surface of each individual topic. Still, in a relevant situation they can provoke thoughts that can help a leader. Personally I would have preferred a little more reflection by the author.

Mats Larsson, July 03, 2017

Levinson, Marc - The Box

Princeton University Press, 2016 (2nd ed), [Business] Grade 4

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If you haven’t spent much time thinking about shipping containers you should reconsider – they have revolutionized the world, as we know it. The “boxes” as they are called in the shipping industry are the building blocks of globalization. Economist Marc Levinson writes the autobiography of the box and by this vividly brings to life the phenomenon of containerization that is crucial for anything from e-commerce and just-in-time supply chains as well as trafficking and arms smuggling – very few containers are ever inspected.

The story of the box is to a large extent the story of US entrepreneur Malcom McLean. The trucking company owner McLean operating in a very regulated US 1950’s environment realizes that it is would be cheaper to load a number of truck trailers on a ship, transport them along the US east coast and have new trucks picking up the trailers for the last mile of transport. Further, if the frames and the wheels were to be removed, the square trailer bodies could be stacked on top of each other. In 1956 McLean’s containership Ideal-X makes its virgin journey between New Jersey and Huston carrying 58 boxes. What followed is a change that started out slow but over time gained momentum and turned into an avalanche. Along this journey no one had the overview to understand the full picture or really saw the secondary consequences. Plenty of mistakes were made but in the end economics won out. Sea freight shifted from loading, stuffing, unloading, reloading of thousands of loose items using general purpose ships and massive amounts of manpower to an automated seamless flow of anonymous steel boxes over trains, trucks and ships that all were purpose-built to handle same-size containers. Instead of being separate businesses, trains, trucks and ships are in the same business – transporting cargo.

As a result of the standardization and specialization freight costs today are a negligible part of most products' manufacturing cost, production chains have moved from being local to being global meshes where components from all over the world are shipped to a manufacturing site and the finished product again is sold anywhere in the world. Sourcing became global, competition did the same and while some companies adjusted others didn’t. With foresight enough to invest in large container ports, the containerization allowed East Asia with low labor costs to enter the global economy creating the largest wealth increase the world history has ever seen.

Shipping turned from a sleepy, locally regulated industry into a scale driven, high fixed cost, global commodity business where the lowest cost producer, in terms of the cost of transporting a box a certain distance, who can offer lower rates attracts more volumes, which in turn generates higher profits to invest further into larger ships that lowers the cost per box further. For each generation the ships grew larger and ports had to grow in parallel. To maximize the utilization of the giant vessels, unloading and loading is now so fast that the crew almost hasn’t time to leave the ship. And since ports have moved out of urban areas to giant transport hubs there wouldn’t be much to experience anyway. About 50% of all containers pass just 20 ports globally.

Levinson builds his story around McLean but skillfully blends earlier and later history into the narrative to explain how freight transport has changed. Further, the repercussions for adjacent businesses, waterfront neighborhoods, global trade and even the general industrial manufacturing process come to life. My only minor complaint is the length of the book. The second edition pocket certainly looks like a box in itself and while I don’t mind lengthy texts per se, some topics do get repeated here and there.

A prosaic metal box can be a disruptive technology. I gained a container load of knowledge from Levinson’s mighty tail. If you want to understand how the world works this is an important book to have read. It doesn’t hurt that it’s a good read as well.

Mats Larsson, June 28, 2017

Thorp, Edward O. - A Man For All Markets

Random House, 2017, [Finance] Grade 3

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Ed Thorp is to quantitative investors what Ben Graham is to value investors – the founding father. Thorp, a mathematics professor and overall science genius, has an incredible investment track record. From 1969 to 1988 the two Princeton Newport Partnership funds showed an annual return of 19.1% and 15.1% vs. a return of 10.2% for S&P 500. Further, between 1992 and 2002 Thorp's statistical arbitrage portfolio returned 18.2% per year with 6.7% annualized volatility compared with 7.8% and 15.1% respectively for S&P 500. Still, this isn’t as much a book on investing as it is an autobiography plus – unfortunately – a strangely added on mix of chapters with personal finance advice and contemplations on financial markets.

There are 4 sections in the book. First we learn about Thorp’s modest upbringing with a reclusive father and a mother who ran off with another man and Thorp’s college money. The young Thorp uses knowledge and reasoning as his way forward in life. Since he is largely self-taught he is motivated to think differently and empirically test theories. When Thorp as a young academic asks world famous physicist Richard Feynman if it is possible to beat the game of roulette and receives a negative answer, he is encouraged – if Feynman thinks it is impossible then there will be no competition. The first part of the book is a bit flat and the text makes it obvious how important it was for the underdog Thorp to be smart. The book comes to life in the next two sections.

Thorp uses his unusual combination of mathematical knowledge and practical bent to first figure out ways to tilt the odds in the favor of the gambler in Black Jack and then does the same with roulette. In both cases he validates his systems by heading to the casinos and making some serious big bucks. In beating the game of roulette he uses the first handheld computer, constructed together with Claude Shannon, the father of information theory. After being banned, cheated on and threatened by the casinos, Thorp survives a murder attempt and re-focuses on Wall Street.

What Thorp brings is the notion of the necessity of a combination of an edge and risk management to stay in the game. For Thorp the edge is found in the budding derivatives markets. He first comes up with a groundbreaking method of better valuing options and designs a strategy of buying undervalued options and selling overvalued ones. After a lunch and a game of bridge with Warren Buffett Thorp launches the Princeton Newton Partnership, using the same model as Buffett’s partnership. Sometime later Fisher Black and Myron Scholes launch their Black-Sholes Model of valuing options, the same model that Thorp has been using for a while. What follows is a period when Thorp plays cat and mouse with the academic establishment, coming up with ways to price derivatives and then trading on this knowledge until similar academic findings are published. In 1988 he, after a regulatory scandal unrelated to Thorp, closes the partnership. After two decades the academics pretty much have caught up. Instead a Thorp switch to statistical arbitrage and for another decade continues his investment success. In 2002 he finally closes down to spend more time with his family as the influx of hedge funds is starting to eat away his edge.

The final part of the book is a strange jumble of 10 chapters with fairly ordinary texts, ranging from compound interest to the 2009 financial crisis, that in my view only clouds the structure of the book. I think they should have been edited away. Surely there would be nothing wrong with publishing a book of “only” 250 pages?

As the author explains, when he thinks about problems he does it in words, numbers, images and in models – combine this versatile thinking with curiosity and drive, and great things are achieved. Thorp is a remarkable man with an astonishing career but this is not a remarkable book.

Mats Larsson, June 26, 2017

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