Dalio, Ray - Principles

Simon & Schuster, 2017, [Business] Grade 4

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One of history’s highest achieving hedge fund managers is coming of age and wants to share the insights he has made with the hope that these could be of use to others. Ray Dalio, the founder of the systematic macro hedge fund Bridgewater, the hedge fund that has created the highest amount of alpha measured in absolute cash ever, does this through publishing two books. In this first one he shares his life and work principles – his fundamental truths - and describes how he came to acquire them. In a forthcoming book Dalio will lay bare his views on economics and investments.

This 550 page black brick of a book has three sections. First a biographical part that gives an historical background to the specific intellectual events in Dalio’s life that taught him the lessons that shaped his principles and also as such gives an introduction to what they are. Then, one section where the author goes through the principles for how he has chosen to live his life and finally the lengthiest part where Dalio describes how he applies the same principles to the management of the organization Bridgewater – the latter a process that has generated many news articles through the years. The text is based on a large number of statements and then surrounding commentary writing describing the rational. This is hardly the ideal setup for a fluent text but the book is still easy to read. In a way the three sections are in different literary genres; memoirs, personal development and organizational management but for Dalio all are woven into a seamless whole.

Since the internal Bridgewater version of this book has been downloaded as a pdf in millions of copies through the years, many will potentially refrain from purchasing it. Still, the book and the pdf differ quite markedly. Obviously not when it comes to the core message, but the book is greatly expanded compared to the previous pdf. The biographical part has been added and the descriptive commentary around each principle likewise. All this gives additional insights but the numerous repetitions and explanations, in combination with a somewhat preaching style, is the main drawback of the book. I would almost recommend the reader to choose the angle that he is most interested in – personal development or organizational theory – and then read the biography plus the preferred section.

The description of the author and his principles in my view feels very honest and Dalio has a truly fascinating personality. He is consumed by the will to make sense of things. By uncovering truths he, and the organization he leads, evolve. Dalio is bordering on obsessed with attention to details, data gathering, reflection, learning and rationality. At the same time he is hugely inquisitive, innovative, creative and independent minded in his way of drilling down to the core of issues. Dalio’s attitude could be said to be the absolute opposite of the post-truth political debate or relativistic academic doctrines of today.

Dalio who is a former liberal Harvard student that practices yoga and dresses casually views both his own life journey and that of Bridgewater as a machine that in accordance to set output targets constantly must be adjusted in an trial-and-error-and-learning process – much like a automation system in manufacturing. The principles are the algorithms that go into the automation system. The author holds the cards close to his chest when it comes to his family life but to me it feels a bit mechanical to constantly be this analytical and rational about ones life – and this comes from someone that shares some of the personality traits. In my view, in Dalio’s reductionist worldview lies a need for control and a will to quell an unruly world with it’s psychologically biased people.

Ray Dalio invites everyone to share his principles but he is explicit about that they are not the best principles for the reader. Instead he urges us all to explore how to best live the life’s we have. We would be fools if we didn’t follow through on that.

Mats Larsson, November 26, 2017

Hill, Napoleon - Think and Grow Rich

The Ralston Society, 1937, [Surrounding Knowledge] Grade 4

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Have you ever paused to think about what you are doing subconsciously as a matter of routine? How often you procrastinate? The need to think through our actions in a world where everyone wants to grab the attention has possibly never been greater, which is why I think Think and Grow Rich written by Napoleon Hill is more important than ever. This is a book for anyone looking to develop his or her thought process and improve as an investor.

Hill, an American author that focused his writings on how to achieve success, got the assignment to write a book on the methods used by successful people from the steel king Andrew Carnegie. Thus, the text doesn’t reflect the author’s experiences but instead the insights of many of the most effective people and businessmen through history. Hill did not get paid but accepted the offer anyway and spent 25 years gathering facts on people as Abraham Lincoln, Henry Ford, Thomas Edison and Andrew Carnegie among others.

Within 50 years the book had sold over 20 million copies and successful people still today often recommend the book. Among its supporters is Warren Buffett. Buffett and his partner Charlie Munger often mention the importance of thinking. To think through the long-term prospects and competitive advantages of businesses is seen as one of the keys to successful investing.

The book is about having the correct mindset and to strive for achievement. The importance of setting up goals together with a definite due date are some of the key factors to influence the subconscious mind. A person’s correct mindset is set by his desire and faith plus continuous repetition. Marcus Aurelius once said "the things you think about determine the quality of your mind. Your soul takes on the color of your thoughts" which is a quote that summarizes a lot of this book. In order to achieve success, the thoughts need to lead to action.  Furthermore, few people have succeeded alone. Instead they have progressed with the help of others. Hence, it’s of great value to have people to brainstorm with and also a loving spouse.

The book is easy to read and can be used as a step-by-step guide on how to think and act in order to succeed in life. In the first version, it consisted of thousands of pages which was shorted down to one thousand pages in a later version and then to under 250 pages in this version. A few inspiring examples from the book are about Henry Ford and his V8 engine which his scientists said was impossible to build - but Ford pushed them to triumph. Another describes how Charles M. Schwab convinced JP Morgan and Andrew Carnegie to make a deal which transformed the steel industry.

I think Hill summarizes the ways to become successful in a great way and if the concepts are followed I am confident they will also lead to riches. However, if the book is read only once it probably won't make much difference. In investment circles one of the key factors in getting an edge is having a truly long-term view. In the same mold, I would set the importance of having a good thought process. This is exactly what Think and Grow Rich will help the reader with.

Niklas Sävås, November 23, 2017

Cialdini, Robert B. - Influcence: The Psychology of Persuation

Harper Business Revised Edition, 2006, [Behavioral Finance] Grade 4

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As an investor, it is essential to make rational decisions and at all times choose the alternative where the value is highest compared with price. Psychological biases often distort this thinking, causing investors to make irrational decisions. In this legendary book from 1984, Dr. Robert Cialdini, one of the most influential persons in the field of marketing psychology presents the most important influences on decision making and provides examples where it leads to irrational behavior.

An interesting fact with the book is that Cialdini mainly wrote it to help people to become aware of the tricks that are used by salespeople. Ironically the same salespeople started to use the examples to their benefit. Cialdini describes his interest in the subject similarly to Charlie Munger, they don't want to be fooled or as Munger describes it "be a one-legged man in an ass kicking contest". I don't want to be a fool either and that's one of the main reasons why I chose to read this book. I want to learn more about situations where influences of psychology are strong in order to improve my decision making in life and as an investor.

Cialdini describes situations where animals react to stimuli in certain ways and how humans have inherited a similar pattern of behavior. Automatic behavior is often, but not always, the most efficient form of behaving. The psychological influences presented in the book are: social proof, reciprocity, commitment & consistency, authority, liking and scarcity. These influences are normally the most reliable in helping us to make correct decisions but for the same reason therefore often used to trick us. They are also increased by stress and fatigue, causing them to be amplified by the tempo of the modern world.

What's great with the book are all the powerful real-world events that are presented next to the scientific evidence. Cialdini brings up fascinating examples where the influences described have caused unbelievable situations as when 39 people witnessed a murder without anyone calling the police and when 910 people committed suicide in the jungle of Guyana, both by the impact of social proof. Another fascinating example is the Milgram experiment where students sent supposedly deadly electrical shocks to test persons under the influence of authority.

The structure of the book is really easy to follow and even though the main influences are presented one by one instead of in combinations, which might have been a more logical way, the author succeeds in weaving them together. The focus is not on the investment area but it's unavoidable to draw parallels to such factors as confirmation bias, loss aversion and herding among others and thus get an explanation to why these biases are so powerful.

This is a fascinating book and an eye-opener for those who haven't yet realized the power of psychology and how it impacts behavior and decision making. The influence of the book is confirmed by the many devoted practitioners in sales and marketing making use of the examples provided. By knowing about the effects that the psychological influences lead to, they can be tackled, which is the key takeaway of this book.

Niklas Sävås, November 6, 2017

Friedman, Yali - Pocket Biotech Industry Primer

Logos Press, 2008, [Business] Grade 4

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If you quickly need to gain a basic understanding of the biotech industry this is a very good place to start. Yali Friedman is the publisher of the Journal of Commercial Biotechnology, the head of data analytics at Scientific American and the founder of the site DrugPatentWatch.com. He should know what he is talking about.

To set the reader’s expectations right the book doesn’t aim to give deeper insights into investing in biotech stocks or to provide a multitude of detailed numbers on the market and its many segments from an economic perspective. The book aims to give a basic understanding of the basic functions of the biotech sector and in my view does a good job. Still, if you understand the sector it is then obviously a lot easier to invest successfully.

The author quite broadly defines biotech as “the application of molecular biology for useful purposes” and then on top of medical functions includes applications for farming, environmental remediation and industrial processes. Most of us still relate biotech to the development of drugs. Biotech pharmaceuticals are produced by living organisms like bacteria, yeast cells or animal cells and are often made up of longer molecular chains compared to the small molecule, chemically produced products of the traditional pharma industry. Then to be honest the two industries are gradually converging.

How can we then enlist living organisms like bacteria to produce the products we desire? To answer Friedman takes a step back and describes the foundations of molecular biology, i.e. how the information in our genes produces proteins with different structural and functional characteristics. By manipulating this process and combining DNA from various sources we can get the organisms to work for us and create targeted compounds in a process very different from the industrialized trial-and-error process of traditional pharma companies.

After an introduction the book starts with a historical representation of the birth and upbringing of the still relatively young biotech industry. It gives a good understanding of the historical reasons for the sometimes slightly odd features of the sector. The author’s long experience with the biotech industry shines through. The above-mentioned following description of molecular biology is short and basic but equally excellent. The author follows up with a strong chapter on the long and tedious drug development process that so dominates the day-to-day activities of biotech companies.

Then the book runs out of steam in the last two chapters. The chapter on tools and techniques gives a helter-skelter description of various industry related topics. Many of them are important but there is no storyline to keep the reader interested. In the final chapter on the applications of biotechnology more than half of the text is devoted to industrial and agricultural uses. While this gives a good broad overview it probably isn’t what the reader would expect.

Still, it’s hard to complain. The Pocket Biotech Industry Primer packs a lot of knowledge into a short format. The 83 well written pages are quite possible to read in one sitting. Fairly complicated issues are explained in a simple – but not too simple – manner and with no over-usage of industry jargon.

Granted, this is only a first glimpse into the exciting biotech industry. For the investor who complements with insights into the economics and market conditions for various therapy areas plus an understanding of biotech companies’ business models this book is still a useful tool.

Mats Larsson, October 28, 2017

Bruner, Robert F. & Carr, Sean D. - The Panic of 1907

John Wiley & Sons, 2007, [Equity Investing] Grade 4

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When historic financial crashes are discussed the US Wall Street crisis of 1929 to 1932 often springs to mind. The less well-publicized crisis of 1907 might not have been just as brutal but it was still severe. The stock market declined by 37%, 42 banks and financial institutions went under and in 1908 the US and many other areas around the world saw an “intense” depression. It was a crisis with classic bank runs that had a long lasting effect on the organization of the American financial system. Robert Bruner and Sean Carr of the University of Virginia set out to explore what we can learn from the 1907 events.

In the introduction the authors propose a loosely held framework for how financial crises can be understood and explained. They offer a model with multiple factors that influence the development, instead of succumbing to the one-trick-pony rationalizations of many pundits – “it was the greedy bankers” or “it was the stupid politicians” etc. The major part of the book describes the historical events but in a concluding analytical chapter Bruner and Carr return to their model.

It is obviously a good thing to bring these perhaps too forgotten events into the spotlight. The historical account is despite its sometimes-complex content very readable. The main character of the book is undoubtedly John Pierpont Morgan. Even if the details, companies and persons of this crisis are specific to 1907 the chain of events are easily recognizable from other late day crashes. One thing is however different, the US had no central bank in today’s meaning. J.P. Morgan accompanied by George Baker at the First National Bank and James Stillman at the National City Bank instead shouldered the role as the lender-of-last-resort, in the end - and after many late night sessions - bringing calm to the markets.

The public reactions to the rescue endeavors were however mixed. Some hailed Morgan as a hero. In an increasingly radicalized US where the public opinion often was against Big Finance others accused the “money trust” to have exploited the crisis to their own gain. Morgan had to appear in a number of hostile congressional hearings. In 1913 the Federal Reserve System was formed to take on the role that Morgan and his partners had had previously. Ironically the FED was formed from a blueprint drawn up by much the same investment bankers the bank was set to replace.

So what are the components of the authors’ model of financial crises? They start with the statement that the financial market must be seen as a system where the actors interact with each other by decisions taken on imperfect information. This opens up for contagion where trouble will travel and the chain of events are more often than not non-linear and thus impossible to predict. Some pre-conditions for a bust is a preceding economic boom with increasingly voluminous and loosely controlled credit growth and add to this political decisions within financial and monetary policies that too often affect the market pro-cyclically. An economic shock that manages to reverse the psychological climate then triggers the crisis and greed turns into fear. When collateral values and trust disappear, liquidity quickly does the same. Collectively beneficial calmness is tossed aside as everyone runs for the exit simultaneously.

This book is published pretty much on the top of the 2002 - 2007 bull market. Yet, even if the authors in my opinion identify the components of a crisis correctly the forward looking part that rounds up the concluding section is completely devoid of the factors that only a few months later will create an even worse crisis than the one in 1907. This is no critique but only serves to show how hard it is to foresee financial calamities in advance. For anyone that wants to understand the coming financial crisis – whenever it arrives – it will be beneficial to read this well written account of the events that helped to shape the world we live in today.

Mats Larsson, October 19, 2017

Faber, Meb - The Best Investment Writing, vol. 1

Harriman House, 2017, [Finance] Grade 4

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In a world overflowing with material, the trick is no longer obtaining information but to select what is relevant and screen out what is not. As the CIO of Cambria Investment Management and author of several best selling investment books Meb Faber is perfectly positioned to help out with this task in the investment arena. Faber has taken on himself to select what he thinks to be a collection of the best writings from high quality investment thinkers.

As many collections of short stories these are loosely arranged under broad headlines. Some contributions – unknowingly - argue against each other, for example with regards to the efficacy of the CAPE-ratio. By this they provide the reader with the pros and cons of the topic. Some of the writings are better than the others but the scale is rather from good to excellent. Some of the writings are shorter than others and some are simpler than others but none is too advanced for the lay reader. This has no bearing on the importance of the texts. What is said in a simple way is often the most essential.

Presenting a number of authors in a format like this gives the reader a splendid chance of finding new favorite writers that he or she could follow more closely online. Still, given that authors with quite different vantage points write the texts, not all of them will fit all readers. For me the writings on personal finance that conclude the book feels a bit misplaced since the target audiences for most of the preceding texts are probably professional investors.

Which are my favorites? The introductory text where Jason Zweig draws investment lessons from his antiques hunting as a youth is superbly written. Jason Hsu and John West touch on the partiality for complex solutions in finance - which is one of my pet topics. Wesley Gray discusses the well-known but underappreciated problem of randomness in investment track-records in a very punchy text called Even God Would Get Fired as an Active Investor.

Dave Nadig presented some genuinely new scary insights for me discussing the discrepancy in liquidity of bond ETFs and the underlying securities. It will be crowded by the exit door when the fire alarm rings for that market! The best text in my opinion is Todd Tresidder’s Five “Must Ask” Due Diligence Questions Before Making Any Investment. What is really presented is the framework for building a strong personal investment process.

The book would have benefited from one more editing session. Copying and pasting digital material sent in can prove troublesome as fonts etc. have a tendency to change. Just a pair of examples; in one text two paragraphs are included twice and in another a missing hyphen brings the percentages of 80-90% up to a staggering figure of 8090%. The pictures are in black and white although printing them in their original color often would have improved the understanding of their message greatly. That the text is sometimes bordering on microscopic doesn’t help. It is obviously a publishing budget issue but still.

Whether you like the format with a collection of short texts is rather personal. I do like it and I always have with the books from Michael Mauboussin and James Montier as personal favorites. It is very effortless to continue to read one text after another. Naturally some readers will find the overall impression of such a book somewhat too fragmented.

I very much enjoyed the reading. So, this is volume 1? Where can I sign up for a subscription?

Mats Larsson, September 27, 2017

Mishra, Pankai - Age of Anger: A History of the Present

Farrar, Straus and Giroux, 2017, [Surrounding Knowledge] Grade 4

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I’m quite torn about this book. On the one hand it is monumental and thought provoking, on the other hand I feel that it’s intellectually dishonest. Indian born but UK resident, Pankaj Mishra is an author of several books, a columnist for a number of well known publications in the US and UK and he is a fellow of the Royal Society of Literature. The Age of Anger has been tooted as a book that lets us understand the new post-liberal world we are entering. The author’s thesis is that the “angriness” of our age, be it expressed by Islamistic terror, the election of aggressive populist leaders - like Narendra Modi in India or Donald Trump in the US - or by the UK exodus from the EU, is really a global sequel to an earlier European resistance towards the enlightenment and its acolyte the liberal market economy. Osama Bin Laden is our time’s Mikhail Bakunin. Mishra tells a story of a pendulum movement through time. Just like the romantic movement of the late 18th century until the mid 19th century in the author’s narrative was a countermovement against the enlightenment that ended in Marxist and fascist outbreaks of violence, our time’s reactions against the globalized neo-liberal market economy will, according to Mishra, end in World War III.

The structure of the book is that the author first over a few chapters outlines his thesis, then the voluminous mid-section is dedicated to endless examples and historic references that are meant to display the connection between the previous European counter-movement and the current global one. Finally the author in the end again outlines his proposed Hegelian process towards human destruction. The amount of name-dropping in the central part is close to numbing. For those not supremely interested in a detailed exposé of historic anti-enlightenment composers, poets, philosophers, writers etc. and who only want the gist of the author’s argument the middle section can be disregarded.

Why do I think the writing to be intellectually dishonest? The author tries to portray himself as an objective observer and analyst of this pendulous movement between the enlightenment and its critics. He is only reporting the truth as he (alone) has discovered it. Mishra is anything but impartial. It is not that he shies away from describing the violence of fascists and Islamists but he understands them and their actions are explained by the necessity to react. They are almost excused. When describing the enlightenment, globalization and market economy the tone is hardly equally understanding. The contempt, loathing and scorn displayed when discussing the guilty party is distasteful and frankly bordering on childish.

Enlightenment critics have always seen the belief in reason as oppression and the conviction around universal truths as Western cultural imperialism. Also, from day one the industrial revolution as well as the scientific revolution that followed the enlightenment was accused of killing the spirituality of mankind. The Age of Anger adds nothing new in this respect. Mishra is obviously right in that the argumentation of earlier German romanticists, Marxists and fascists as well as today’s Islamists, populists and left wing neo-colonialists often are strikingly similar when it comes to these topics. This is however hardly a solid foundation for a theory of a deterministic road to hell for humanity.

I am not one to take the rootlessness of people in a globalized world lightly. Liberalism is just a framework of freedom that should be filled with things that give meaning to life. At the same time it becomes absurd to describe our age’s Western World as bordering to hell on Earth. It makes you wonder why Mishra would want to stay in London and attend the meetings of the Royal Society? One is reminded of the intellectual father of the post-colonialist theory, Edward Said, who sat in comfort at his Columbia University professor’s chair.

This book will delight the anti-Western cadre. Its confrontational style will however make any discussion of the relevant topics impossible.

Mats Larsson, September 11, 2017

Jennings, Marianne M. - The Seven Signs of Ethical Collapse

St. Martin’s Press, 2006, [Business] Grade 3

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Successful investing in stocks is just as much about dodging the loser stocks as it is discovering and keeping the winning ones. The process of knowing what to avoid could focus on qualitative factors such as companies with high leverage, poor return on capital, weakening profit momentum, high valuation multiples or accounting ratios that indicate dodgy accounting. It could also focus on qualitative signs regarding the corporate culture. Marianne Jennings, at the time professor of business ethics at Arizona State University, has with the experience of corporate collapses during three stock market cycles written the latter type of manual. It’s not just a handbook in detecting companies approaching the abyss but the author also gives a number of suggestions for improving the culture, to be used by companies.

The structure of the book is simple. There is an introductory chapter and preface, there are two concluding chapters and in-between there is one chapter for each of the 7 signs that in the author’s view point to the risk of an ethical collapse in the company. Each of the 7 chapters starts with a discussion of the issue, a number of examples mostly centered on the corporate scandals of Enron, WorldCom etc. in the early 2000’s and then a comes number of suggested antidotes that are summed up in a list at the very end. Mild forms of one or two of these signs might not indicate an imminent disaster but extreme cultures and multiple warning signs should be taken notice of.

Which warning signs should we as investors or corporate executives be on the lookout for in Jenning’s opinion? The signs are: 1) “Pressure to Maintain Those Numbers” – an unhealthy and unreasonable obsession in meeting earnings numbers that in the end makes the temptation to make the numbers up too great, 2) “Fear and Silence” – a culture that offers no venues to air concerns or punishes those employees who try, 3) “Young ‘Uns and a Bigger-than-Life CEO” – iconic, idolized and charismatic CEOs surrounded by young and sycophantic executive managers, 4) “Weak Board” – a board comprising of inexperienced, incompetent or too-busy directors or directors with too many business or friendship ties with the management, 5) “Conflicts” – companies full of nepotism, mutual back-scratching and the extraction of benefits on the expense of shareholders, 6) “Innovation Like No Other” – differentiated, innovative and successful companies that over time come to embrace a view that they in their uniqueness stand above petty wordly obstacles like rules and 7) “Goodness in Some Areas Atones for Evil in Others” – CEOs that use shareholder’s money for public and self-glorifying philanthropy or engage in what’s called corporate social responsibility and by these good deeds permit themselves to lie and cheat in others.

Unfortunately, the structuring of the chapters could have been more stringent. Often the texts on suggested antidotes too much continue to describe and exemplify the proposed problem. The author’s writing is somewhat stilted and declamatory at the same time as the opinions and antidotes are in my view sound and fair. I also quite like that she spares no punches – for example, with regards to Jack Welch, the former CEO of GM: “Mr. Welch was often touted as the greatest manager of all times. Mr. Welch would perhaps be more accurately described as the greatest earnings manager of all time”.

I would further love to see the propagation of the virtues discussed by Jennings in business life – and even more pressing in the political life. The question is how to go from wishing to execution of that hope – the author gives no real hints. As a side note, the book is published 2006, today a decade later when corporate social responsibility has developed into an all-embracing religion, the author’s text regarding the seventh sign would be almost impossible for an academic to write.

Often it is reading the subjective, quantitative signs that separates the great investor from the ordinary one. Jennings offers one potential framework to interpret the signals of an approaching fall.

Mats Larsson, August 22, 2017

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