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

Wiley, 2013 [Equity Investing] Grade 3

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

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

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

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

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

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

Mats Larsson, December 20, 2018

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

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

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

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

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

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

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

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

Olle Qvarnström, November 19, 2018

Zenger, Todd – Beyond Competitive Advantage

Harvard Business Review Press, 2016 [Business] Grade 3

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

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

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

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

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

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

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

Mats Larsson, November 4 2018

Doerr, John - Measure What Matters

Portfolio Penguin, 2018 [Business] Grade 3

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What is the secret tool that has created Google’s success? It turns out to come from Intel. In Measure What Matters John Doerr, venture capitalist extraordinaire, presents the Objectives and Key Results model (OKR), where objectives define what an organization or sub-unit tries to achieve and key results detail how these objectives will be met. Hence, it is a type of execution tool that drives an organization and its employees to work in the same direction towards a joint goal. The aim of the book is simply for Doerr to present the model to a larger audience than the companies that he invests in and by this help an even larger crowd to become more industrious.

The book is partly self-biographical as Doerr looks back on the many companies he has funded. Approximately a third of the text describes the OKR-tool and the rest contains a large number of case studies and success stories from various (mostly) technology companies that with Doerr’s help have used the tool with great positive effect. It is certainly an impressing list of contributors to the book as for example Larry Page, Bill Gates, Sundar Pichai, Susan Wojcicki, Bono and loads of others contribute sections to the book. Further, Jim Collins, Sheryl Sandberg, Al Gore etc. add write-ups for the book’s cover so the author obviously has a vast network. The real hero of Doerr and of the book is however the late Andy Groove of Intel. Apart from being an early mentor to Doerr, Groove is also the intellectual father of the OKR-tool – event though much of the ideas were openly borrowed from Peter Drucker.

To work with OKRs means setting aggressive objectives - essentially goals - that are “significant, concrete, action oriented and (ideally) inspirational” and then deciding on 3 to 5 executable action items called key results that lead to the objective if fully met. These results should be specific, measurable, and verifiable and come with clear deadlines. Further, it should be crystal clear who the owner of each OKR is. The benefits of using the model, and also the structuring of the chapters in the book, are according to the author an organizational focus and commitment to the issues that really matter, a transparency and alignment to joint purposes that produces work satisfaction for employees plus a sense of community and team spirit, an accountability that brings power to the execution of initiatives (plus, by this, a flexibility to quickly change direction if so needed) and an ability to reach stretch targets by working towards them in smaller increments. The process is steered through a dynamic and continuous process of performance management the author calls CFR (Conversation, Feedback, Recognition). Doerr recommends a dual cycle with both annual and quarterly OKRs and further that the objectives are set both top-down and bottom-up. Also, one should work to connect teams through cross-functional OKRs. On the look of it, I think this is a great tool for organizational execution but also culture building.

When reading the many case studies I’m quite struck by how very similar the Silicon Valley establishment thinks and sounds. With all their “amazing”, “10x”, “fail fast” and “we are going to be the next xyz”, the attitude of the Silicon Valley contributors to the book is virtually missionizing – it’s a bit like listening to 10 Jehovah’s witnesses, one after another, although, the holy trinity of this cult is rather wealth, productivity and creative destruction – all through the power of technological change. The contributors that stand out as molded in a somewhat differentiated form are the thoughtful Bill Gates and Bono that obviously comes from a totally different environment. In my view the balance of the book could have been shifted somewhat from case studies to a more collected presentation of the OKR and CFR models. With the current structure it is important that the reader doesn’t miss the so-called resource sections of the appendix as they give more meat to the models.

In sum, I like the tool more than the book.

Mats Larsson, August 29 2018

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

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

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

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

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

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

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

Mats Larsson, August 5, 2018

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

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

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

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

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

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

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

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


Mats Larsson, April 22, 2018

Miemietz, Marietta / CFA Institute - The Pharmaceutical Industry

CFA Institute, 2013, [Equity Investing] Grade 3

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

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

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

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

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

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


Mats Larsson, April 8, 2018

Mobius, Mark - Passport to Profits

Warner Books, 1999, [Equity Investing] Grade 3

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

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

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

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

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

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

Mats Larsson, March 10, 2018

Abbink, John B. - Alternative Assets and Strategic Allocation

Bloomberg, 2010, [Finance] Grade 3

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This is an odd book. The author is hugely knowledgeable of the core functionality, the risks and rewards of alternative assets such as hedge funds, private equity, real estate etc. and presents them – to use a phrase true to the genre – in a slightly idiosyncratic, but good, way. On the other hand the text never really goes anywhere – it’s almost like a number of short stories on different aspects of alternative assets, sometimes related to asset allocation but mostly not. The target audience is seen as plan sponsors, trustees, fund-of-fund managers, i.e. “asset owners” as opposed to asset managers.

John Abbink is an analyst and banker with decades of experience from Merrill Lynch, Credit Suisse, Deutsche Bank and the likes. It is obvious that he has seen many types of markets as he has a good grip of how various assets react in times of stress. Topics like changes in price volatility, convergence of correlations and also skew and kurtosis might sound obscure and academic but in a crisis they become anything but – then they present a hit on the head with a blunt object. Without knowing, I would guess that Abbink during his days often has worked with derivatives, judging from how he dissects different sources of risk and return for the assets and his knowledge of financial theory and statistics.

The book has four different sections. At first Abbink presents how he views the World of alternative assets, divides them into the three main segments directional, cash flow and arbitrage and shows how the alternative set of assets share most of their traits with the traditional ones; secondly Abbink goes through a large number of alternative assets and strategies used in this space applying his above segmentation. In the third section he dives deeper into some of the themes that have come up previously, i.e. the same alternative assets are viewed from the traits they share or don’t share. Finally, a number of practical aspects of including alternative assets in a portfolio of alternative and more traditional assets are discussed.

The book is too long. The first two sections are mainly there to set the stage for the latter two. The problem is that this means that the book doesn’t really start until page 237. The language is well versed but since Abbink hardly economizes with words the text is much too winded. If the first two sections were cut down by two thirds and the latter two by one third, this would be an interesting 240-page book. On the surface the language is quite simple and the writing is without the hyperbole often associated with alternative assets, and it is even humorous – for the genre. The simplicity is a bit misleading since the author is in the habit of using concepts in a slightly different way than they usually are. Hence the reader mustn’t miss the definitions or the text could be confusing.

This quirkiness is also a positive trait since it means Abbink often sees issues from a fresh angle that adds insights to the topic. The topics in question can be the optionality of strategies, their trade capacity, the liquidity of assets, the effects of portfolio liquidity in a crisis and the potential liquidity premium, tactical allocation, the ebb and flow of opportunity and crowding in market niches, the changing faces of risk, investment time horizons and much more – all very important and often forgotten themes. The author is very partial to the thoughts of David Swensen, Andrew Lo and Richard Bookstaber – not a bad set of influences. Although I like the segmentation into directional, cash flow and arbitrage, it is still hardly unique and the author could have spent more time building his case for using these segments instead of traditional asset classes. This feels symptomatic as the book in the end mostly results in some interesting discussions rather than any firm advice.

Read the last two sections for their offbeat insights into central and less discussed issues in institutional asset management.


Mats Larsson, February 11, 2018

Wucker, Michele - The Gray Rhino

St. Martin’s Press, 2016, [Surrounding Knowledge] Grade 3

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Language commends a powerful grip over the mind. That which we have no words for hides in the shade while an expression like for example the black swan as popularized by Nassim Taleb spurs discussion around the subject at hand. In this book the Chicago based journalist, author and opinion maker Michele Wucker launches the concept of a gray rhino as a highly probable and largely predictable, high-impact, yet willfully neglected threat. The question the book tries to answer is why decision makers often keep failing to address these obvious hazards until they turn into a full-blown imminent crisis. Wucker’s aim with this book is to make people react earlier.

After two introductory chapters defining the gray rhino concept, presenting the general outline of the book and discussing the difficulty of forecasting the future, the book dedicates one chapter each to the stages of the below described framework before finishing of with a couple of concluding sections – including a side note on real rhinos. The framework describes a typical but unfortunate five-stage response to facing a gray rhino: 1) denial, 2) muddling, 3) diagnosis, 4) panic and 5) action. The response is unfortunate as it’s too slow. Activities to handle the issue are only done when the threat is imminent and immediate, not earlier when it would have been much cheaper to do something. The gray rhinos that the author brings up are generally something out of the UNs Sustainable Development Goals or sometimes from the last financial crisis but the framework can clearly be applied to any crisis. The human capacity to procrastinate is universal.

In the first stage of the framework the delay, as I read Wucker, is mainly psychological and the threat simply isn’t picked up due to individual biases or groupthink. Since the future is never set in stone the uncertainty gives an excuse to turn the other way. In the second stage the threat is recognized but then more social and institutional obstacles for actions come in play. Naysayers are disruptive for the efficiency of organizations as they walk in the opposite direction from everybody else and the cost of postponing something is in the future while the cost of action hits this year’s budget.

Diagnosing the threat to know how to counter it might be necessary but the process could turn into a delaying tactic in itself. The success of handling the threat comes from the speed of recognizing and defining it plus in prioritizing and acting on the choices made. If the analyzing phase has taken too long leading to inaction, the next stage is panic – ironically leading to everyone freezing for a period before finally acting. The problem of acting while under stress is that the choices made tend to be less thought through.

The author’s solution, which I think is a very wise one, is to create automated systems to aid in the handling of gray rhinos - a system that sends up progressively more red flags as the threat grows larger and that automates responses in accordance to procedures thought out in advance when everyone was in a calm and rational state of mind. Otherwise the general advice from the author is to set up processes and incentive systems to create the ability to think in long-term horizons.

The topic is interesting, I agree with the solutions although it isn’t always easy to - from historical experiences - construct automated systems that will handle future events, but the book isn’t as good as it should have been. Wucker never strongly motivates her framework to start with and the later chapters where the response stages are discussed contain tons of loosely connected stories that bounce back and forth – I lack a stringent story-line. If one removes the many case examples there are very little new generalizable detail in later chapters compared to the initial presentation. The presentation of this important topic, in my opinion, becomes superficial and jumbled.

Instead of focusing too much on unknown unknowns, we should try to handle the unknown knowns; what we should know but refuse to acknowledge. Wucker at least gives us a fair start.


Mats Larsson, January 03, 2018

Tian, Charlie - Invest Like a Guru

Wiley, 2017, [Equity Investing] Grade 3

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For the last decade of declining interest rates traditional low valuation multiple, deep value investing has not fared at all well. Thus, value investing has gradually migrated to a position of investing in quality growth, compounding franchise types of stocks. Charlie Tian, the founder of the popular value investing website GuruFocus.com, has written a useful beginner’s guide to this value investing 2.0 style. Quite fittingly Tom Russo has written one of the recommendations on the cover, as he is probably the closest to the ideal investor in the genre that Tian advocates.

Tian gives the largest credit to Peter Lynch, Warren Buffet, Donald Yacktman and Howard Marks in shaping his thinking. I would argue that the largest impact might instead have been the TMT-crash of 2000/02. The author who is a physicist by training and who used to work with fiber optic communication lost his shirt on investing in the companies he thought had a great future and where he knew the technology inside out. Like all good learners Tian turned this setback and defining moment to something positive and he immersed himself in the ways of successful value investors and soon started his website – which must be said, is now a great resource for value investors.

Invest Like a Guru contains numerous wise thoughts from the obviously very learned author. Still the level is quite basic and I sometime miss the nerve of the writing of Tian’s heroes such as Howard Marks. The structure is also fairly basic with a description of what the author has picked up from his role models, why an investor should chose the franchise value type of investing and how to execute it, including the selection of holdings and the portfolio construction. Tian advocates quite categorically for investing in a fairly thin slice of the equity market but he describes the process well. Perhaps somewhat too much attention is given to the historic performance of companies and too little to how to secure that they will perform equally well in the future. A chapter on barriers-to-entries and competitive advantages wouldn’t have been out of place.

At times there are a bit too many references to the author’s web site, which some readers can potentially find disturbing. This isn’t my main objection to the text however. It is the grudge the author seems to hold against deep value investing. Chapter 2 is dedicated to arguing against this “value investing 1.0” and correctly points to the many difficulties it entails. Then later on in the book Tian returns to discuss the main problem with deep value investing – the problem with value traps. Again it is a fair or even good description of the topic but it is to me quite unclear why it’s there. Why discuss the problem of an investment style that you are not writing a book about when you leave out the main difficulty when it comes to investing in high quality growth companies – the gravity of the reversal-to-the mean in performance that so often creates a double whammy when valuation multiples follow the profitability south? What is Tian’s advice in differentiating between temporary problems and a decline that is really the first phase of a secular return to normality for a once great company?

One further unaddressed issue in this is how the allegedly contrarian value investors reconcile their 2.0 style choice with the fact that all value investors now are quality growth investors and almost non – save Seth Klarman – are deep value investors. This makes most value investors more mainstream investors than they should really be comfortable with. This is an okay book. However, it needs to be more forward looking.

Mats Larsson, December 02, 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

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

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

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

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

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

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