Mea Culpa

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Carol Tavris and Elliot Aronson describe in their delightful book Mistakes Were Made, But Not by Me how we humans struggle to come to terms with own mistakes. The principle behind refusing to recognize the beam in our own eye is a simple one of cognitive dissonance: “I see myself as a reasonable human being. I commit an act that no reasonable person would do. Therefore, it has to be someone else’s fault”. This book is easily an all time top five as it undresses our most fundamental mental pitfalls. Putting humble pie on the regular diet we can become better investors (life partners, parents, fellow human beings).

A more practical way to learn of our own mistakes is the game of chess. For us a little too keenly interested in the game the app Lichess is very useful. Besides constantly offering some 10,000 players in the lobby, the app has various tools to improve your game. As everyone knows, computers surpass humans at chess since about 20 years and the distance is growing. With streamed computer power Lichess makes it embarrassingly obvious what you and your opponent have missed in a recent match.

In chess, errors can be categorized according to their seriousness. In my interpretation, Lichess defines errors as deviations from the perfect game. Mistakes are more serious and can be seen as directly costly moves. Finally, there are blunders, which could be bluntly considered loss making moves. 

Perhaps it takes a particularly twisted mind to roll around in the esthetics of failure, and it can take its toll on the ego. The worst part is winning a game and feeling you played well, then order a computer analysis and realizing the only reason for winning was that your opponent made more serious blunders than you.

However, without doubt there are benefits to looking down the abyss of failure. Taking the pain improves your game. In this context, the important question is if this masochistic narcissism is transferable to the investment world and if any practical utility can be gained. So let us use the chess taxonomy of failure and apply it on investments.

I would define investment errors as opportunity costs in some form. For instance, buying shares in company A, which appreciates 20 per cent per year, beating relevant comparisons by a margin, while forgetting to buy shares in company B, showing an even better performance. Or, it could be buying shares in a fantastic company the wrong week or month, a little too expensive, while seeing good returns over time. Another error might be neglecting to sell a stock when it is a tad too expensive, switching to something else and switching back perfectly six months later. If think we can all agree that we can live with these.

Let us define investment mistakes as something that would mean certain defeat against a clever opponent but no immediate disaster. It could be not taking enough risk, anxiously watching your benchmark from the closet. A kind of process error forming a mistake. 

In my experience as coach and instructor in youth sports I can find many examples showing the importance of separating process and results. Unless children (and portfolio managers) feel some kind of basic comfort or security, for instance if team mates mock those making a technical error (or if some middle manager indicates portfolio manager expendability should they perform poorly in the next year), they will never dare to make any mistakes. And then they will never learn the skills necessary to master the situation. It is in the borderlands of your abilities you will find growth and progress. On the verge of failure, sometimes falling on the wrong side, we learn and develop.

With a process with enough room to play, mistakes will be more of the execution kind. So the first question to ask when you stare your own mistakes in the face should be: “did I follow my process?”. Looking back critically at my own behavior as an investor perhaps 80 per cent of all mistakes were due to a lack of discipline. To be carried away by a “story”, not doing my homework, excessive trust in others or making decisions without the necessary mental bandwidth.

As long as we are talking about mistakes, and not blunders, on some level this is all in order, on the condition that we learn and bring this knowledge with us in the future. Mistakes will be made, so why not accept them and love them, in the effort of strengthening your process as well as other good behaviors?

Blunders in the investment world are very similar to mistakes, only with a crucial difference in magnitude. Every investment almanack will include some version of “avoid bombs in the portfolio”. Using stop-losses might be one way to avoid mistakes growing into blunders. However, this technique probably finds its best use in a short term trading portfolio.

Personally, I am more inclined to use position sizing based on an assessment of financial risk associated with the individual stock. Thereby I can hopefully skew probabilities toward mistakes rather than blunders. This can be combined with what I would shortly describe as fundamental stop-losses, simply being ready to change opinion when facts change. In concrete terms this means I would rather sell a stock if it turns out the business model is not sustainable, not if the stock with a business model that has no best before-date (temporarily) becomes a little too expensive.


Geoff Gannon Part 3

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I just love the text below with Geoff Gannon’s book recommendations. So inspirational to make you want to read books, despite myself having read a few of them. 

But this will inspire you to find a book or two, that you haven’t read. And it will make you a better investor. They are all great books, with a lot of great learnings.

Personally I have just read the relevant chapters in the Snowball, where you get to understand how the young Warren made his first 100 million. He worked harder than everyone else, he became an activist, and he made a lot of mistakes. Hidden Champions was also pleasant surprise! All other books recommended, I couldn’t agree more. My bias though is to read the more modern ones before the old, like the heavy read of the 1940 edition of Security Analysis for example. Its summer, and the beach is perfect for Bolton, Lynch and Greenblatt.

My book tip for Geoff is The Art of Execution by Lee Freeman-Shor which is about executing on your ideas. Best of luck and have a great summer. Reading!

Gannon On The Art Of Reading Investment books

I get a lot of questions about what investing books people should read. My advice to most is to stop reading books and start doing the practical work of slogging your way through 10-Ks, annual reports, etc. There seems to be a tremendous appetite for passive reading among those who email me and no appetite for active research. It’s better to read a 10-K a day than an investing book a day.

But, there are good investing books out there. And, yes, I read a lot of books. Still, I’m going to give you a simple test to apply to yourself: if you’re reading more investing books than 10-Ks, you’re doing something wrong.

Assume you’re reading your fair share of 10-Ks. Then you can read some investing books on the side. Which should you read? Practical ones.

How to Read a Book

A book is only as good as what you get out of it. And there’s no rule that says you have to get out of a book what the author intended. The best investing books give you plenty of case studies, examples, histories, and above all else – names of public companies. While you read a book, highlight company names, names of other investors, and the dates of any case studies. You can look into these more on your own later. Also, always read the “works cited” or “bibliography” at the back of any book you read. This will give you a list of related books you can read next. Since I was a teen, I’ve always read the works cited or bibliography to come up with a list of related titles. And I’ve realized talking to other people as an adult, that most people ignore those pages. They’re very useful. Read them.

My Personal Favorite: “You Can Be a Stock Market Genius”

If you follow my Twitter, you know I re-tweeted a picture of ”You Can Be a Stock Market Genius” that my website co-founder, Andrew Kuhn, posted. It’s one of his favorite books. And it’s my favorite. If you’re only going to read one book on investing – read “You Can Be a Stock Market Genius”. The subject is special situations. So, spin-offs, stub stocks, rights offering, companies coming out of bankruptcy, merger arbitrage (as a warning), warrants, corporate restructurings, etc. The real appeal of this book is the case studies. It’s a book that tells you to look where others aren’t looking and to do your own work. It’s maybe the most practical book on investing I’ve ever read.

My Partial Favorite: “The Snowball” – The 1950 through 1970 Chapters

I said “You Can Be a Stock Market Genius” was my favorite book. If we’re counting books in their entirety, that’s true. I like “You Can Be a Stock Market Genius” better than the Warren Buffet biography “The Snowball”. However, I might actually like some chapters of “The Snowball” more than any other investing book out there. The key period is from the time Warren Buffett reads “The Intelligent Investor” till the time he closes down his partnership. So, this period covers Buffett’s time in Ben Graham’s class at Columbia, his time investing his personal money while a stockbroker in Omaha, his time working as an analyst at Graham-Newman, and then his time running the Buffett Partnership. These chapters give you more detailed insights into the actual process through which he researched companies, tracked down shares, etc. than you normally find in case studies. That’s because this is a biography. The whole book is good. But, I’d say if you had to choose: just re-read these chapters 5 times instead of reading the whole book once. Following Buffett’s behavior from the time he read The Intelligent Investor till the time he took over Berkshire Hathaway is an amazing education for an individual investor to have.

Often Overlooked: John Neff on Investing

I’m going to mention this book because it’s a solid example of the kind of investing book people should be reading. And yet, I don’t see it mentioned as much as other books. John Neff ran a mutual fund for over 3 decades and outperformed the market by over 3 percent a year. That’s a good record. And this book is mostly an investment diary of sorts. You’re given the names of companies he bought, the year he bought them, the price he bought them at (and the P/E, because Neff was a low P/E investor), and then when he sold and for what gain. This kind of book can be tedious to some. But, it’s the kind of book that offers variable returns for its readers. Passive readers will get next to nothing out of it. But, active readers who are really thinking about what each situation looked like, what they might have done in that situation, what the market might have been thinking valuing a stock like that, what analogs they can see between that stock then and some stock today, etc. can get a ton out of a book like this. Remember: highlight the names of companies, the years Neff bought and sold them, and the P/E or price he bought and sold at. You can find stock charts at Google Finance that go back to the 1980s. You can find Wikipedia pages on these companies and their histories. A book like this can be a launching point into market history.

A More Modern Example: Investing Against the Tide (Anthony Bolton)

There are fewer examples in Bolton’s book than in Neff’s book. But, when I read Bolton’s book, it reminded me of Neff’s. A lot of Neff’s examples are a little older. Younger value investors will read some of the P/E ratios and dividend yields Neff gives in his 1970s and 1980s examples and say “Not fair. I’ll never get a chance to buy bargains like that.” As an example, Neff had a chance to buy TV networks and ad agencies at a P/E of 5, 6, or 7 more than once. They were probably somewhat better businesses 30-40 years ago and yet their P/Es are a lot higher today than they were back then. Bolton’s book is more recent. You get more talk of the 1990s and early 2000s in it. So, it might be more palatable than Neff’s book. But, this is another example of the kind of book I recommend.

Best Title: There’s Always Something to Do (Peter Cundill)

This is one of two books about Peter Cundill that are based on the journals he wrote during his life. The other book is “Routines and Orgies”. That book is about Cundill’s personal life much more so than his investing life. This book (“There’s Always Something to Do”) is the one that will appeal to value investors. It’s literally an investment diary in sections, because the author quotes Cundill’s journal directly where possible. Neff was an earnings based investor (low P/E). Cundill was an assets based investor (low P/B). He was also very international in his approach. This is one of my favorites. But, again, it’s a book you should read actively. When you come across the name of a public company, another investor, etc. note that in some way and look into the ones that interest you. Use each book you read as a node in a web that you can spin out from along different strands to different books, case studies, famous investors, periods of market history, etc.

You’re Never Too Advanced for Peter Lynch: One Up On Wall Street and Beating the Street

Peter Lynch had a great track record as a fund manager. And he worked harder than just about anyone else. He also retired sooner. Those two facts might be related. But if the two themes I keep harping on are finding stocks other people aren’t looking at and doing your own work – how can I not recommend Peter Lynch. He’s all about turning over more rocks than the other guy. And he’s all about visiting the companies, calling people up on the phone, hoping for a scoop Wall Street doesn’t have yet. The odd thing about Peter Lynch’s books is that most people I talk to think these books are too basic for their needs. Whenever I re-read Lynch’s books, I’m surprised at how much practical advice is in there for even really advanced stock pickers. These are not personal finance books. These are books written by a stock picker for other stock pickers. The categories he breaks investment opportunities into, the little earnings vs. price graphs he uses, and the stories he tells are all practical, useful stuff that isn’t below anyone’s expertise levels. These books try to be simple and accessible. They aren’t academic in the way something like “Value Investing from Graham to Buffett and Beyond” is. But, even for the most advanced investor, I would definitely recommend Peter Lynch’s books over Bruce Greenwald’s books.

An Investing Book That’s Not an Investing Book: Hidden Champions of the 21st Century

I’m going to recommend this book for the simple reason that the two sort of categories I’ve read about in books that have actually helped me as an investor are “special situations” (from “You Can Be a Stock Market Genius”) and “Hidden Champions” (from “Hidden Champions of the 21st Century”). It’s rare for a book to put a name to a category and then for me to find that category out there in my own investing and find it a useful tool for categorization. But, that’s true for hidden champions. There are tons of books that use great, big blue-chip stocks as their examples for “wonderful companies” of the kind Buffett likes. This book uses examples of “wonderful companies” you haven’t heard of. In the stock market, it’s the wonderful companies you haven’t heard of that make you money. Not because they’re better than the wonderful companies you have heard of. But, because they are sometimes available at a bargain price. As an example, Corticeira Amorim (Amorim Cork) was available at 1.50 Euros just 5 years ago (in 2012). That was 3 years after this second edition of the book was published. Amorim is now at 11.50 Euros. So, it’s a “seven-bagger” in 5 years. More importantly, if you go back to look at Amorim’s price about 5 years ago versus things like earnings, book value, dividend yield, etc. – it was truly cheap. And yet it was a global leader in cork wine stoppers. Amorim is not as great a business as Coca-Cola. It doesn’t earn amazing returns on equity. But, it’s a decent enough business with a strong competitive position. And it was being valued like a buggy whip business. That’s why learning about “hidden champions” and thinking in terms of “hidden champions” can be so useful. There are stocks out there that are leaders in their little niches and yet sometimes get priced like laggards. As an investor, those are the kinds of companies you want to have listed on a yellow pad on your desk.

 The Canon: Security Analysis (1940) and The Intelligent Investor (1949)

Do you have to read Ben Graham’s books? No. If you’re reading this blog, visiting value investing forums, etc. you’re sick and tired of hearing about Mr. Market and margin of safety. Those concepts were original and useful when Ben Graham coined them. I’ve read all the editions of these books. People always ask me my favorite. So, for the record: I like the 1940 edition of Security Analysis best and the 1949 edition of The Intelligent Investor. I recommend reading Graham’s other work as well. Fewer people have read “The Interpretation of Financial Statements” and collections of Graham’s journal articles that can be found in titles like “Benjamin Graham on Investing: Enduring Lessons from the Father of Value Investing”. Don’t read any books about Ben Graham but not written by him. Instead look for any collections of his writing on any topics you can find. He was a very good teacher. I especially like his side-by-side comparative technique of presenting one stock not in isolation but compared to another stock which is either a peer, a stock trading at the same price, or even something taken simply because it is alphabetically next in line. It’s a beautiful way of teaching about “Mr. Market’s” moods.

Out of Print: Ben Graham’s Memoirs

Ben Graham’s memoirs include only a few discussions of investing limited to a couple chapters. I found them interesting, especially when I combined the information Graham gives in his memoirs with historical newspaper articles I dug up. Some of the main stories he tells relate to operations he did in: 1) the Missouri, Kansas, and Texas railroad, 2) Guggenheim Exploration, 3) DuPont / General Motors, and 4) Northern Pipeline. The Northern Pipeline story has been told elsewhere. In some cases, I’ve seen borderline plagiarizing of Graham’s account in his memoirs. But, if you’ve ever read a detailed description of Graham’s proxy battle at Northern Pipeline, it was probably lifted from this book.

And if you really want to know what Ben Graham thought, read the 1940 edition of Security Analysis and the 1949 Edition of The Intelligent Investor. Don’t read a modern book that just has Ben Graham’s name in the title.

Bo Börtemark

InvestingByTheBooks, June 2019


Interview: Geoff Gannon Part 2

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For those who thought, as I did, that Part 1 of Gannon meeting Investing By The Books was very interesting, I asked Geoff to share what he considers some sources that can educate your further. Enjoy.

Investingbythebooks: What are the podcasts that you have taken part in that you are most happy with?

Geoff Gannon: My 3 favorite episodes Andrew and I have done over at the Focused Compounding Podcast are “The Most Important Concept for Investors – Deep Work”, “The Importance of Temperament in Investing”, and “Investing in Overlooked Stocks”.

IBTB: Please name the top 3 podcast you listen to, and if possible, the best episode of each.

GG: The best investing podcast I ever listened to was “The Value Guys” podcast. It ran for many years. Every episode is good. They just went through the Value Line Investment Survey and talked about whatever stocks they liked in that week’s issue. It’s a great show. And it’s the best format for listeners to learn from.

I’ve done interviews on Eric Schley’s Intelligent Investing Podcast (Episode #61 on NACCO and an April 11th, 2017 show more generally about me as an investor) and the Ryan Reeves’s Investing City Podcast.

IBTB: Please name top 3 fin tweets to follow.

GG: I don’t use Twitter. My partner, Andrew Kuhn, runs the @FocusedCompound twitter account. I don’t use social media.

IBTB: Some links with key content you have made!

 GG: My most recent stock write-up was Farmer Mac (AGM). If you look at my partner’s Twitter account (@FocusedCompound) you can find examples of full stock reports I’ve done. You may also be able to find them just by searching “Geoff Gannon Singular Diligence” (Singular Diligence was the name of the stock newsletter I wrote). Those reports are each about one stock and are about 10,000 words long. They’re a good example of the content I’ve done.

Interview: Geoff Gannon Part 1

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Below is a Q&A we recently held with Geoff Gannon. It brings us great pleasure to bring the below to our readers. Enjoy.

Investingbythebooks:  Could you please introduce yourself for our readers?

Geoff Gannon: Sure. I co-host the Focused Compounding podcast with Andrew Kuhn. And I write-up stock ideas at The first 2,000 words of each of those stock write-ups goes out in a free version each week via email. You can sign up for those free emails at I also manage accounts for investors at Focused Compounding Capital Management. Basically, I’m a guy who talks about value investing, writes about value investing, and manages money using a value investing approach.

IBB: What’s the story behind how you found your investment style?

GG: I got started investing around age 14. I would talk stocks with my dad each week. And he happened to read a magazine article about Benjamin Graham and thought Graham’s approach – especially his “Mr. Market” metaphor sounded like the way I invested. I read the magazine article. And Graham sounded interesting. So, I went out and bought Security Analysis and The Intelligent Investor. I read them both that weekend. After that, I was hooked on value investing. 

IBB: How has it evolved over time? Is there a right style, or will it always change, i.e., a key trait is to be able to change over time?

GG: There was probably a period where my style shifted from just being about owning a few simple businesses I knew well mostly on qualitative grounds – sort of the “Warren Buffett” approach – to more of a scattershot “Ben Graham” approach of buying a wider range of stocks that were statistically cheap.

There’s more than one right style. High quality works. And low-price works. If the price is low enough, you can afford to get a little less quality. And if the business’s quality is high enough, you can afford to pay a higher P/E. 

No. There’s no need to have a style that evolves. Buffett’s style evolved. But Walter Schloss’s style never did. Schloss had much better results with an investment style that never changed than most investors had with their changing styles. If you find a style that suits you, just stay focused every day on applying that style. Tune out the market. There will be periods where you underperform the market for a few years in a row. But, who cares? If you’re managing money for yourself – that’s your big advantage. An individual investor can afford to underperform for a few years. Only long-term performance matters to you. I have clients that may fire me after a year where I underperform. You don’t. I don’t think an evolving style is something you should be proud of. Buffett had to evolve, because he got to a point where he was managing too much money. You don’t have that problem. There’s no need for your style to evolve.

IBB:  I really like that you stress, the need to do the work, and at the minimum read more 10-Ks than books! Still clearly you have read a lot of books & I just love your article which is about the books you recommend! So in order to get better at reading 10-Ks, are there any books about that? What companies have produced the overall most readable 10-Ks, and can you give an example or two, of your own research that can inspire other?

GG: I can’t recommend any books that are specifically about reading 10-Ks. But, I can recommend investing books that focus on case studies. So, anything where a fund manager takes you through his day-to-day Two examples are: “You Can Be a Stock Market Genius” by Joel Greenblatt and “Common Stocks and Common Sense” by Edgar Wachenheim. 

I’m not going to recommend any most readable 10-Ks, because I think that’s a trap value investors fall into. They learn about a company because that company does a good job explaining itself in the 10-K. The real money in investing is made in cases where you are right about something other people aren’t right about. Other investors are less likely to be right in cases where the company is complicated, the 10-K isn’t very communicative, the accounting is unusual, no analysts cover the stock, etc. So, it’s best not to look for the 10-Ks that read the easiest. Anyone can understand those. Instead learn to really dig into situations where the company isn’t going out of its way to clearly communicate with investors. Learn to do the work yourself. You want to become an investigative journalist, basically. So, don’t look for the 10-Ks that are easy to read. Just find an industry you want to learn about and then read the 10-K of every company in that industry back-to-back over a few days, weeks, etc. By the time you’ve read about every publicly traded supermarket or coal miner or TV station owner or whatever – you can go back to the first 10-K you read in that industry and re-read it. You’ll find you understand it better now that you’ve homeschooled yourself in that industry.

Yeah. I’ll give one example of my own research. I heard a company called NACCO – the name stands for “North American Coal Company” was spinning-off a small appliance maker (so things like toasters, microwaves, coffee makers, and blenders) business called Hamilton Beach Brands (HBB). A bunch of special situations value investors were interested in the spin-off company: HBB. I was interested in the remaining company: NC. I got interested in the remaining (coal) business after reading the 10-K. The way the company’s accounting worked kind of disguised how big a business it was. Under U.S. GAAP (Generally Accepted Accounting Principles) a company can’t consolidate a subsidiary that the parent company would be unable to sufficiently capitalize itself. NACCO had a 100% equity ownership in its coal mines – but, in all but one case, it didn’t provide any of the capital for those mines (the power plants buying the coal from NACCO put up all the capital). As a result, the company’s worst mine was fully consolidated in the financial statement. But, all the best mines weren’t consolidated. Their earnings appeared at the bottom line. But, the revenue of those subsidiaries didn’t appear at the top line. I read about the length of the contracts, their terms, etc. in the 10-K. I became convinced it was a predictable business with an adequate return on equity. Regular coal miners (ones that don’t have long-term contracts at fixed real prices) aren’t predictable and don’t earn good ROEs over a full cycle. So, NACCO’s 10-K told me that what would be left after the spin-off was the best coal mining business I knew of. I suspected the stock price would be low post spin-off (since most investors liked HBB better). And it was. NACCO was an idea I think you could only get from a 10-K. Most people would just hear the company is a coal miner and stop right there. But, the 10-K was clear that this wasn’t a company exposed to the market price of coal in any way. Not a lot of people understood that. Maybe they didn’t read the 10-K. There were some questions on the company’s first earnings call as a standalone company where the questioner (an investor in the company) didn’t understand the fact NACCO wasn’t selling any coal at the market price of coal (it was selling everything under long-term contracts). So, a lot of people who don’t read the 10-K assume that every business model in an industry (like coal) is the same. Every investor who doesn’t read the 10-K – which is most investors – is going to assume a coal miner’s profits are tied to coal prices. You have to read every 10-K to find situations where that’s not true. NACCO was one of those situations.

IBB: When do you admit that you have been wrong? Didn’t meet your numbers, initial thesis didn’t play out, or found something better?

GG: I wrote an article one asking “Have My Sell Decisions Really Added Any Value?”. I looked back at 3 stocks I had owned as a teenager. I owned those stocks 17 years before writing that article. And I sold them at different points over the following 17 years. The conclusion I came to is: No, my sell decisions don’t add value – in cases where I was right about the business. You sell a stock when you realize you’ve misjudged the business. Selling is usually best when you do it quickly. So, you buy a stock and hold it for 3 weeks or 3 months or 3 quarters or something short and decide you were wrong. Selling after 3 years? I’m less convinced that’s a good idea. Once an investor really gets to know a stock and own it and is comfortable with the business – it’s often a mistake to sell a business like that. It’s not always a big mistake. But, the reasoning is usually that the investor thinks the stock has gone up a bit too much, it’s a little expensive, etc. If you have a much better idea – sell the worse idea to buy the better idea, absolutely. But, most investors sell a stock because of some combination of A) The stock went up since they bought it and B) They’re bored. Those aren’t great reasons for selling a stock. So, be quick to admit mistakes about your misjudgment of a business. But, be forgiving about a business you like a lot that has gotten a bit more expensive while you’ve owned it. And always try to do less than other investors. Most of the buying and selling I’ve done over the years has accomplished nothing. All the good results can be traced to a few situations where I was really right in a big way about a business and didn’t let myself sell the stock too soon. 

IBB: Spend time on new ideas or existing portfolio?

GG: New ideas. I try to spend as close to 100% of my time on new ideas as possible. All of your future profits come from your new ideas. Very few investors are good at selling old ideas at the right time. So, always spend time on new ideas. Don’t waste time watching the portfolio you have today. If you chose the right business in the first place you’ll almost never need to read the latest quarterly results. The right business shouldn’t change rapidly. If you feel like you need to read the latest quarterly press release to feel confident continuing to hold a stock you bought – sell the stock now. You shouldn’t have bought it in the first place. Any business you need to check in with more than once a year is a business you shouldn’t own.

IBB:  How to combat key biases, for ex confirmation bias.

GG: I’m not as big on behavioral finance stuff as other value investors. In most cases, even if you could be confident the bias existed – I don’t think knowing a bias exists does much to reduce the bias. I don’t know if it reduces bias: but I know I look at stock prices a lot less than other value investors. I’m the portfolio manager for Focused Compounding Capital Management – but, I leave the actual trading to my partner (Andrew Kuhn) to avoid focusing too much on short-term price movements. We have a once a week meeting on Fridays after the market has closed where I give him all the trading instructions for the week ahead. I don’t check in on the price of the stocks we want to buy or sell during the week. I’ll recommend that approach to all investors. Your investment results won’t be any worse if you check stock prices once a week instead of once a day. And your mind will be more focused on what matters: reading a new 10-K, deciding if it’s a business you want to own, and then deciding what price you’d be willing to pay for it. Any activities that take your attention off those tasks are a waste of your time.

IBB: What do you know today that you wished you would have known at an earlier stage in your career?

GG: I wish I had known more about how driven people – like insiders, portfolio managers, etc. – are by non-financial incentives. In predicting behavior – I have probably underestimated people’s concerns for being liked by others and overestimated their desire to maximize their own wealth. I invested in a couple situations where this misjudgment was costly, because it meant that insiders were willing to do things that would cost them – and their shareholders – a lot of lost time and money. Basically, most people don’t want to do hard things that might make some people like them less. Even in cases where know they need to do those hard things – they delay. So, it’s easy for an outside investor to overestimate how quickly a company will make the changes it knows it needs to make. Knowledge often translates into action slower than an outsider might expect.

Bo Börtemark

InvestingByTheBooks, June 2019


Author Interview: Rahul Saraogi

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Rahul Saraogi is a value investor who was born in India and moved to the US to study. It was at that time he became interested in economics and investing. He also became enthralled by Indian economic history and realized that both Indians and Westerners had problems with understanding India. He saw an edge that he decided to pursue. He moved back to Chennai, India to become a full-time investor and now manages Atyant Capital. In 2014 he wrote a book called Investing in India: A Value Investor's Guide to the Biggest Untapped Opportunity in the World. Please read more about Atyant Capital and Saraogi on:

His insightful book Investing in India is available on Amazon. Read our review of the book here:

InvestingByTheBooks: First of all, thanks a lot for taking the time to answer our questions and for sharing your wisdom with our readers. You wrote in the book that you felt that neither Indians nor others have a good understanding of India from an investment perspective. Do you think that has changed over the last years?

Rahul Saraogi: No, I don't think that has changed much. I see very few investors looking at context when evaluating India and opportunities in India.

IBB: With yourself, Mohnish Pabrai, Sanjay Bakshi, Prem Watsa and Sauraab Madhaan and many, many more, India has a fantastic group of value investors. What do you attribute that to? Is the search for bargains embedded in the culture in some way?

RS: India is an old civilization with 5,000 years of recorded history. It has had property rights and private capital for millennia. Indians therefore intuitively understand capital and return on capital. India also has one of the oldest stock markets in the region. It is probably the combination of the two that creates so many value investors.

IBB: In 2014 when your book Investing in India was published the Indian market was at a low, how is the situation now after the peak in September 2018? From a perspective of a bottom-up value investor I guess that should be measured with how many bargains it’s possible to find at the moment…

RS: I find that the Indian market is full of opportunities and my enthusiasm today is higher than it was when the book came out in 2014.

IBB: As an outsider it’s not easy to get exposure to Indian equities, of course there are mutual funds, but you begin the book by explaining that foreigners have a hard time understanding India (and Indians themselves too!) and many funds are managed by managers that are not on the ground. Do you have any advice for us?

RS: I will repeat that it is a poor idea to sit far away and buy individual Indian stocks. My recommendation is to access the market either through a mutual fund or an alternative investment fund.

IBB: Have anything major happened in India over the last years that has been a game-changer for investors? Are you worried that the upcoming election might change the ground rules in some direction?

RS: India's financial system is fully deleveraged and cleaned up. Macro indicators are in great shape. Inflation is low and there is plenty of spare capacity. Combine this with attractive valuations and the opportunity appears quite asymmetric.

IBB: On a different note, we have understood that you practice the ancient meditation technique Vipassana. Can you tell us a bit about how it works, how it's helping you and where to read more about it?

RS: Vipassana changed my life. You can read more about it at It is the original teaching of the Buddha and is a very simple path. It helps one build equanimity and is essential for anyone affected by the manic-depression of Mr. Market.

IBB: Now I will go over to the book specifically. When I read it I didn’t know a lot about India - I really liked that it covers investing but also how it’s a story about the country and its culture. There are so many investing books that can be found to understand the basics. Why did you focus so much on describing the country and relatively little on describing the craft of value investing?

RS: The beauty of value investing is that it is very simple. What there is to be learned about value investing has already been written by the investment greats. The hard part is practicing value investing. To really be able to practice value investing you have to become an established Vipassana meditator. Wiley would not have published a book about Vipassana meditation :-), so I thought I would write about things that would be important for a value investor who is looking at India to know.

IBB: Something you emphasized was the difference between the 28 states of India which may be surprising for people who don’t understand the country. When researching a specific idea would you recommend investors to have a larger margin of safety, or possibly completely stay away from companies in certain states?

RS: My attempt was not to say that some states are better than others. It was to highlight the dramatic differences which you clearly picked up. The consequence of these stark differences is that it is very dangerous to invest in India with broad "generalizations." It related to the metaphor of the 6 feet man drowning while crossing a river that was on average 5 feet deep. One should always have a large margin of safety in investing.  The future is always unknown.

IBB: I was fascinated with your metaphor between India and the bamboo plant and how it spends years developing the root system and then in a matter of weeks shoot out of the ground. Which states have improved the most since you wrote the book?

RS: I once again do not want to single out states. I believe every state has improved from where it was a few years ago.

IBB: What (if something) would you have changed with the book if you had written it now?

RS: I got a lot of feedback that people wanted “more”, and they wanted more detailed specifics. If I was to update or re-write the book, I would go into greater detail on many aspects and write more. 

IBB: As you can understand from the name of our website - we love books! Which Indian investment books would you recommend and also what are your other favorites (they don’t need to be about investing)?

RS: There are no Indian investment books that I want to recommend. Investing books that are worth reading:

1. Reminiscences of a Stock Operator by Edwin Lefèvre

2. Poor Charlie's Almanack by Peter Kaufman

3. Essays of Warren Buffett by Lawrence Cunningham

4.You Can Be a Stock Market Genius by Joel Greenblatt



Traditional Value Investing or Compounders?
I don't know the difference. I like to buy compounders at a discount (when I can find them) which is value investing

Buffett or Munger?
Munger - he is the bigger thinker

Gold or Cash?
Cash. Gold is a bigger hallucination than cash. (All money is a hallucination - it is a story - read Sapiens by Yuval Noah Harari)

Goa or Florida?
I like both places for short periods.

Management or Company Fundamentals?
One without the other is useless (by Management I mean good governance)

Niklas Sävås

InvestingByTheBooks, April 2019


Author Interview: Jake Taylor

Read as pdf…

Jake Taylor is the CEO of Farnam Street Investments, the host of the author interview series Five Good Questions, creator of the world’s first hikecast, and was an adjunct professor at UC Davis’s Graduate School of Management for several years. The Rebel Allocator is Jake’s first literary effort. He lives in Folsom, California with his wife and two boys where he enjoys being the second best-selling author in the house. Please see more of his fabulous work on:


And you can pre-order the book on Kindle here:


InvestingByTheBooks: Jake – thank you so much for taking the time out to answer some of our questions. We really appreciated the opportunity to spend time with your book at an early stage. Even though a printed pdf is far from the feel of an actual hard-copy book, with covers and all…But how does it feel to be “on the other side of the table”, where you are the one getting questions instead of the other way around?

Jake Taylor: It’s a nice change of pace.  I’m honored to have the opportunity for a fun Q&A session.   

IBB: We won´t just be asking five questions, you know…

JT: That’s OK. I originally named the series Five Good Questions because I knew I had to put a constraint on myself. Otherwise, I’d ask fifty mediocre questions and every interview would be interminably boring because of me.  

IBB: “The Rebel Allocator” – take us to the very beginning of how this book came about. How long have you worked on it in a sense from conceptual idea to finished product?

JT: I had the incredible good fortune of having lunch with Warren Buffett in my first year of business school. Like many others, I was so impressed I started reading everything about Buffett. So you could say the journey started in Omaha more than a decade ago. One of Mr. Buffett’s observations that struck me early was how many CEOs weren’t very good at capital allocation when it’s clearly so important. It’s not their fault though—they get to the top spot by being good at other things like sales, engineering, or organizational politics. Mr. Buffett describes it as if the final step for a talented musician was not to perform at Carnegie Hall, but instead to be named Chairman of the Federal Reserve. No wonder they struggle! One of the early working titles I had was “From Carnegie Hall to the Fed.” (Yes, I have a lot of bad ideas.) I started really working in earnest on the book about three-and-a-half years ago. I guess I’m no John Grisham.          

IBB: You talk about some of the thought-processes in the foreword (which is fantastic!). At first starting down the more traditional non-fiction path, doing a tremendous amount of research, but then “a thousand little nudges from the universe convinced me I had to tell a story if I wanted the work to have a lasting impact”. Tell us more about those nudges.

JT: Right, I was working hard on a non-fiction guide to proper capital allocation. It felt like different books, podcasts, and conversations at that time were telling me I needed to write a fictional story if there was any chance of my book still mattering in ten years. The emotion of a story is all that persists. Around that same time I lost a close friend my age to a tragic hiking accident. It was a wake up call. If I were to disappear tomorrow, what kind of book would I want to leave as a literary legacy for my two young boys? It certainly wasn’t a dry, non-fiction, vanity project that no one would care about in six months. I had to try something radically different and tell a story. This lead to researching hero’s journeys and even screenplay writing to learn about character arcs and dynamic pacing to engage the reader. I hope the book reads a little like watching a movie. (And no, there aren’t any plans for The Rebel Allocator coming to the big screen.)

IBB: Towards the end of that introduction, there is a fantastic quote from Henry David Thoreau along the lines of “the price for something is the amount of life you exchange for it”. It also resonates with Charlie Munger’s sentiment that our main asset is our time. So, is Jake Taylor’s balance sheet stronger now than pre-book?

JT: I learned A TON researching and writing this book. I taught a class on value investing at UC Davis for a number of years and I used to think having to teach was the best way to learn a subject. I was wrong. Writing a book takes it to a whole new level of necessary understanding. The medium is too permanent to risk faking your way through it. So yes, I would say I added assets to the balance sheet. Unfortunately, I also accrued some liabilities. Writing a book is an emotionally draining rollercoaster. My friends and family have been very supportive during the process, even when they weren’t getting my best.       

IBB: Admittedly, it is difficult to do it completely right when it comes to the topic of capital allocation. There is the trade-off of describing after-the-fact success stories (nice, but just documenting history with winner-bias) or trying to decipher a journey of capital allocation done right here and now (better, but risk looking like a fool after five years). But as far as “lasting impact” goes, “The Outsiders” by William Thorndike seems to fit that mold…?

JT: Capital allocation decisions face all the same problems as judging an investor. Luck versus skill gets separated over a long enough timeline, but who has twenty or thirty years to observe before checking the scoreboard? That’s where process can help. Does the decision-maker’s process make sense to you? I purposely built a framework to help a capital allocator navigate any environment and make more thoughtful decisions—giving them a better process. I start at the individual customer transaction level and build all the way up through dividends, share buybacks, and more. I absolutely loved Thorndike’s “The Outsiders.” It’s one of my all-time favorite books. Yet it’s more descriptive of the success stories. I wanted to provide the framework that would inspire confidence in a new batch of outsider CEOs to trust their judgement and work a better process. Especially if they were starting at a deficit where the default becomes seeking the safety of following the herd.

IBB: Excluding your kids, who do you see as the book’s target audience? Or is that an outdated question in today´s direct-to-consumer world, making “target-groups” a product of the world of Mad Men and ad-agencies in the 60s?

JT: No, I think any product should have a target audience you’re trying to help if you want it to resonate. My desire is to have an impact on business decision-makers. CEOs are obviously part of that group, but there are lessons in the book for boards, small business owners, even venture capitalists. I chose the coming-of-age genre of a recent college grad finding his way on purpose. I wanted to skew younger toward the leadership of tomorrow. The clay is still wet for them and I think this book could make a big difference when embraced by young people. Especially if it’s given as a gift from a mentor. I purposefully included overtones that celebrate the miracles of capitalism in our everyday lives. When business is done right, it conspires to delight customers, provide meaningful jobs, and conserve natural resources. It’s remarkable how it gets us all on the same page. Profit doesn’t have to be a four-letter word. I tried not to be preachy, but it’s easy to forget and take these mundane miracles for granted.     

IBB: The cover shows two people, the main characters of the book (“Nick” and “Mr. X”). Are the portraits inspired by anyone?

JT: Not really. I just thought it’d be nice to give the reader faces for the main characters. 

IBB: Without spoiling the plot too much, the question still needs to be asked: assuming the Nick-character leans heavily on the real-life Jake Taylor, and assuming Mr X. has borrowed heavily from Charlie Munger (the gruff personality, wise-ass jokes, a few similar events in his family and so on) – what other persons and why have you baked into these two personalities?

JT: They say to write what you know, so I tried to put Nick into situations I have been in so I could add realistic color. Nonetheless, I took a lot of liberties to keep it interesting. Nick’s upbringing was very different from mine, and I’ve never had Nick's overwhelming sense of feeling lost (poor kid). People who know me well said they enjoyed figuring out what was Nick and what was Jake. Mr. X is an amalgam of a lot of heroes: Charlie, Warren, Henry Singleton, Ray Croc, Sam Walton, among many others.            

IBB: The Guy Spier-experience working for a ruthless investment bank (chronicled in his great book “The Education of a value investor”) is déjà vu’d in my mind when the book paints a similar picture of the culture of Nick’s work at “Big Rock”…

JT: I confess my description of Big Rock is simplistic and paints private equity in broad, unflattering strokes. I don’t believe that’s a fair treatment, but I needed Big Rock to be extreme to provide contrast for Mr. X’s approach to business: focusing on doing right by customers, being a fiduciary for his shareholders, conserving resources, and maintaining the highest ethics. A light shines brightest in a sea of darkness.  

IBB: Another smallish spoiler-alert: Why hamburgers (as the book’s “third main character”)?

JT: I chose a business that anyone could understand. I also wanted something that would still be around in 100 years that the reader could relate to—restaurants aren’t a bad bet. Plus, I just love hamburgers!     

IBB: We mentioned “Outsiders”. Are there other non-fiction books you have liked and found inspiration in that deal with the topic of capital allocation?

JT: Warren Buffett’s letters to shareholders (and Cunningham’s arrangements of them) are great places for capital allocators to start. Michael Mauboussin has also written several canonical white papers on the subject. He’s one of my heroes. There are a few academic corporate finance books that have value. But a useable framework for a business person is notably absent from the lineup. My goal for this book was to fill that gap in an entertaining way that might still be useful twenty years from now. I would have gladly saved three years of my life had someone already written that book!     

IBB: Actually, let’s step back. Why capital allocation as the topic of the book? Out of all aspects of business-life and investing?

JT: David Foster Wallace told a joke I like: Two young fish swim passed an older fish heading the other way. The elder says, “Morning boys, how’s the water?” The two younger fish swim on. Eventually one looks at the other and says, “What the hell is water?” Capital allocation is the water surrounding all of our business fish. From seemingly mundane budgeting processes to boardroom strategy to mergers and acquisitions, capital allocation is ubiquitous in business. Yet its effects remain highly under-appreciated; it simply blends into the background. The thoughtful allocating of resources is one of the most important societal functions entrusted to business leaders. If I thought it might help, how could I NOT write a guidebook on capital allocation and try to get it into leaders’ hands? It sounds grandiose to say, but I truly believe the ripple effects of a book like this could be massive, though impossible to measure. The wasteful expense that gets cut to make room for an initiative that wows the customer. The doomed factory that doesn’t get built just because everyone else is building factories. The jobs that aren’t trained for and now lost. The abuse of shareholders via buybacks at silly prices. Enough little improvements and they start to become meaningful.       

IBB: The “three straws” as an illustration of a framework for dealing with immensely complex business challenges – tell us how you came up with it? Because it is certainly genius in the Einstein-sense of making a problem as simple as possible but not simpler than that…

JT: Thank you—that’s very nice of you to say. Nick Gogerty wrote a terrifically underrated book called “The Nature of Value.” In it he describes the Iron Law of Economics: the cost to produce < the price you charge < the value you deliver. Anything other than [cost < price < value] is unsustainable. I spent a lot of time tinkering around with that idea and it yielded some interesting insights, like the tradeoffs between profit and brand. The straws were a natural extension of props that would be laying around a restaurant. I had one person tell me the book was worth reading for that mental model alone.   

IBB: We would agree, even if that grossly diminishes the other treats one gets as a reader. On another note, there are a fair amount of sad streaks in the book. But I think the underlying tone is very optimistic and inspirational, driving the story forward. Is that how you approached it as well?

JT: I wanted the book experience to be like you were reading Nick’s diary during a formative phase. There are some sad moments in the book, just like in real life. The gravitas is tempered by Nick’s (hopefully funny) inner-dialogue as he navigates the world. Not to spoil it, but ultimately, there is redemption as Nick finds his purpose after being adrift. And like it is for all of us, the dots only connect in hindsight. There’s nothing more beautiful than someone discovering their true calling. I’m generally an optimistic person, which no doubt leaks into the writing.       

IBB: On a more technical note – a substantial portion of “The Rebel Allocator” is made up of conversation and dialogue. Why did you choose this method of telling the story?

JT: I submitted an early draft to a friend who is an accomplished writer. She had the courage to call me out and tell me the writing stunk (which it did!). She also pointed me toward some great books on the writing process which helped immensely. One of the big takeaways was to trust that your reader is smart—you don’t have to over-explain everything. Another was show, don’t tell. Let the characters’ personalities come out through their conversations and actions, rather than be explained by narration. The lessons I was hoping the reader might learn are buried in the conversations. I’m probably still guilty of over-explanation (ask my wife), despite my best efforts at mitigating the problem. 

IBB: On a more private note. I guess your answer will follow along the Buffett-route of “I am a better investor because I am a businessman, and…”, but how do you juggle being CEO at Farnam Street work with doing “5GQ”?

JT: Being the CEO of Farnam Street is my dream day job. Although the position comes with a feeling of immense responsibility for the financial well-being of our clients (they’re nearly all close friends and family), I’m blessed with a lot of day-to-day autonomy. It’s controversial to say, but professional investment management is probably better practiced less than full time. I’m not saying it’s a hobby, just that you have to be careful how you direct your efforts. It depends on the market you’re in. There are periods with a lot of bargains and you don’t have enough research hours in the day. Conversely, there are markets where you probably shouldn’t be digging that hard, lest you talk yourself into marginal ideas (which is very easy to do—I can talk myself into anything with enough idle time). If it’s not blindingly obvious that you’re getting a bargain, maybe you’re better off being productive in other ways. For me, staying productive has taken different forms. With The Rebel Allocator, I’m hoping to educate a generation of business decision-makers. The Hikecast is about getting out in nature for blue sky conversations. Five Good Questions is all about connecting with authors of interesting books. I’ve needed worthwhile projects to keep me from making unforced errors during the recent expensive market period. And interestingly enough, I believe these side-projects have each made me a better investor in unforeseen ways that will prove beneficial for decades to come.               

IBB: Could you see yourself quitting one of your two day-jobs?

JT: The only thing I can imagine prying me away from investment management would be a Berkshire or Fairfax type of situation with permanent capital and the opportunity to be a cheerleader of great operating businesses run by wonderful people. Farnam Street has an amazing collection of clients who give me wide investment latitude. Yet there’s something to be said for the long time horizon of truly permanent capital. I serve on the board of a private energy consulting company and I have to admit I love staying involved with high-level business operations and strategy. I’m weird, but it’s just flat out fun. Maybe I can scratch that itch with friendly activism at Farnam Street and by joining a few public boards. I’m not in a big hurry to quit anything though. I wake up every morning excited about what I’m going to work on that day. And I have about five other businesses I’d start tomorrow if I wasn’t already worried about my lack of focus.  

IBB: We have taken up too much of your time. One of the beauties (and scary things!) about writing a book is, I guess, that two people can read and interpret the same sentence entirely differently - not to mention an entire book. But, what key concepts do you hope your readers will take to heart after they put down “The Rebel Allocator”?

JT: My sincerest hope is the reader is so engrossed in the story, they don’t realize they’re learning a lot about capital allocation and the importance of business in making our lives better. Granted, that’s a tall order, but that was the book I felt compelled to write. That was the book that wouldn’t let me sleep at night until I had dislodged it from inside my guts. That was the book I felt could have the biggest impact on helping humanity, if I could pull it off.    

IBB: Thank you very much Jake. We would urge everyone with any interest at all in business, investing or life’s serendipitous ways to read this book. Check Amazon daily for when you can pre-order! One copy for your own notes, scribbles and to keep. Then to hand out to people around you whom you care for and want to impact. There are few things in the world apart from jewelry that carry the weight of giving someone a book especially for them, that you think would impact that specific human being in a particular way. As I read “The Rebel Allocator”, the list of names I want to give this book to grew fairly long! But compared to stepping into Tiffany’s, the Value vs Price gap is obviously still massive…



California or Midwest? 
I’ve lived in Cali for 35 years. In 90 minutes I can be on a Tahoe ski slope or downtown San Francisco. Hard to imagine living anywhere else.

Five Good Questions or The Hikecast? 
That’s like asking which of my kids do I love more?! 5GQ is probably more useful to humanity so it gets the nod.

Traditional Value Investing or Compounders?
I’ll always be a sucker for dirt cheap garbage stocks that everyone hates, but there’s something comforting knowing your money is being looked after by a quality capital allocator. Very anti-fragile.  

Another book or Interviewing Other Authors?
The idea of starting work on another book right now makes me queazy. Let me get back to interviews please! 

Fairfax or Berkshire?
I love Prem’s infectious positivity, but Berkshire is the gold standard.

Henrik Andersson

InvestingByTheBooks, November 2018


Author Interview: Sean Iddings and Ian Cassel; Intelligent Fanatics

Read as pdf... Link to Amazon... 

Sean Iddings and Ian Cassel are…

Sean is the founder of Unconventional Capital Wisdom, a registered investment advisor in New York State seeking to invest in high quality microcap companies led by intelligent fanatics. He is a member of MicroCapClub and writes about investments, entrepreneurship and leadership on a number of blogs and publications.

Ian is a full-time microcap investor and founder of MicroCapClub. Ian started investing as a teenager and learned from losing his money over and over again. Today he is a full-time private investor that supports himself and his family by investing in microcaps. Microcap companies are the smallest listed companies, representing 48% of all public companies in North America. Berkshire Hathaway, Wal-Mart, Amgen, Netflix and many others started as small microcap companies. Ian’s belief is that the key to outsized returns is finding great companies early because all great companies started as small companies.

MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States, Canadian, and UK markets. MicroCapClub was created to be a platform for microcap investors to share and discuss stock ideas. MicroCapClub’s mission is to foster the highest quality microcap investor community, produce educational content for investors, and promote better leadership in the microcap arena.

Both Sean and Ian co-created the book “Intelligent Fanatics Project: How Great Business Leaders Build Sustainable Businesses” (2016). The book is a culmination of years of experience, intense study and collaboration on the common patterns between some of the most successful companies and leaders of the 19th and 20th century. Their goal is to help both investors and entrepreneurs generate extraordinary long-term returns and positively impact the world. Now they are releasing their next book “Intelligent Fanatics – Standing on the shoulder of Giants” – with deep dives into nine new fanatics and their business stories.;; @iancassel; @iddings_sean

InvestingByTheBooks: Sean – it has barely been one year since we spoke about your first book, but it feels much longer. So much has happened in that time-span. How has the year been for you, both releasing the first Intelligent Fanatic-book but also working on this new one?

Sean Iddings: It has been a wonderful year. We released the first book a week before my daughter was born. So it’s been a fun trip balancing my new role as a father, co-writing another book and launching our new website along with everything else.

Let me say that I’m very thankful for the wonderful “partnerships” in my life, most notably my wife Samantha and in business with Ian. Life is so much more enjoyable when you get the right partners.

InvestingByTheBooks: Our exact feeling as well, working with! You decided to “eat your own cooking” in a way with your first book (“Intelligent Fanatics – How Great Leaders Build Sustainable Businesses”), which you unconventionally in true intelligent fanatic-style self-published (thanks Amazon!), instead of walking the beaten-down path of using a big publisher. How was that experience?

Sean Iddings: We’ve enjoyed the experience. Ian and I have been free to build the Intelligent Fanatic brand as we see fit. We continue to evolve and iterate it as we learn. I can imagine that traditional publishing would have been more restrictive. Our vision has always been much more than writing books. You can start to see that with our new website and research community.

InvestingByTheBooks: How much is this new book a “sequel” (in the sense of incorporating feedback and lessons learned from the first book), and how much is it meant to be a stand-alone product?

Sean Iddings: I’d say “Standing on the Shoulders of Giants” is the natural progression. It’s an extension of the first book in that it provides nine more intelligent fanatic case studies. We look at each leader’s story and identify what made them and their organization special. What’s different, thanks to feedback and personal reflection, is that the new book contrasts these leaders and their organizations against competitors. We feel it gives the reader a better picture of how special these leaders and their organizations truly were/are. And this book is less from an investor’s perspective. It’s more holistic.

This time we asked ourselves: how do these leaders deliberately prepare? We want to know so we can apply the same techniques ourselves.

 We believe this is the question everyone should be asking themselves if they want elite level results in any endeavor they choose. Be it investing, and operating or leading a business. Work to become an intelligent fanatic and you’ll have few “competitors”.

 And the pattern we find amongst nearly all our cases is that they optimised the use of mentors – either directly or indirectly. 

 InvestingByTheBooks: At InvestingByTheBooks, we used to have the full “Standing on the shoulder of giants” - quote on our website. It’s such a powerful concept. Tell us why you chose this title for the book?

Sean Iddings: It comes back to the master-apprentice model. I wasn’t surprised when I saw the pattern occurring again and again amongst intelligent fanatics. I have a jazz/rock music background where “standing on the shoulders of giants” is very common amongst those who achieve the highest levels. And I have experienced it personally, although I’m not an elite musician by any means, so it’s in my bones.

You could even call many of these virtuoso musicians intelligent fanatics themselves. And you find these people in other fields as well. We felt this was a perfect angle to go with the book especially since we all want to achieve intelligent fanatic-level results.

InvestingByTheBooks: There is one chapter on each of the nine Intelligent Fanatics and the company they created/changed. In terms of how you built the stories this time around – did you change anything in the creative process? Why/why not?

Sean Iddings: Nothing changed in our process. We kept our eyes and ears open to finding this book’s cases. For instance, we stumbled on Milliken & Co. while doing a due-diligence trip for a microcap company. We actually took a tour of one of Milliken’s plants, talked with one of the senior executives and heard stories of Roger Milliken. And we’re thankful to the many contributions from readers of our first book as they gave us many great potential candidates to look into.

InvestingByTheBooks: Most of the intelligent fanatics in the book have been the subject of a memoir or biography. Was this something you saw as an added benefit? Which one would you really recommend we read?

Sean Iddings: There is a method to our madness. We are fanatical about the details. We prefer to get as close to our subjects as possible. When there is a memoir, autobiography, or possible interview(s) from an IF this is gold to us. We want to internalize their experiences, their wisdom, their words direct from the source. The more layers between us and the fanatic, the higher the chance of missing the true lesson. It’s the same as the musician internalizing the sounds of their musical heroes. They go directly to the source material. It’d be silly to internalize the hacked up versions of those same songs done by the 15 year old down the street, right?

Of course when an autobiography, memoir or interview is not possible it is best to get accounts from people close to them. Well done biographies get as close to the source as possible and provide varied views.

Our books and case studies really are just a launching point in studying these individuals. We suggest reading all the sources in our book’s Notes. And to make it even easier we’ll have all our extensive notes from each book and cases available to premium members of our site.

InvestingByTheBooks: The definition – your definition! - of an Intelligent Fanatic on the book´s back cover is really dense with key words, all extremely important. I have really tried to memorize and internalize these lines, in order to bring it into my work. But I think a key concept is also the discussion you have inside the book of the difference between an IF and a genius. How does one go about trying to tell the difference between the two?

Sean Iddings: We’re humbled that you are trying to internalize our definition, but be warned. It changes constantly as we continue to learn. So be prepared to relearn it often.

But you made an astute observation. There must be a clear line in the sand drawn between genius and an intelligent fanatic.

First, you don’t want to be misguided by the genius. Geniuses naturally see the world differently then us common folk. Warren Buffett is one of a kind because he naturally absorbs practically everything he reads. When he says read 500 pages a day that works for him. It’s horrible advice for everyone else. It’s like Mozart, who could recall and play perfectly every song he heard once. It’s once a generation or less that someone has that ability (in the whole world). I’m more interested in how the fanatics work to get close to genius because most aren’t endowed with a naturally superior mind like Warren’s.

Second, geniuses are so rare that once they’re gone the company often loses its luster. Walt Disney was a genius. When he was gone there was a long period of stagnation. No one could fill his shoes. Intelligent Fanatics on the other hand often are better at building their future leadership bench. Take for instance Peter Kiewit. He built Kiewit Corporation into a mammoth mentoring machine. The company continues to excel more than 40 years after he has left.

InvestingByTheBooks: The level of detail in the stories is just phenomenal and give the selections a very authentic feel. But still you have managed to keep the book very concise. What specific areas of the narrative around the IF and the company did you choose to focus on and what parts do you leave out?

Sean Iddings: We focus on the most important attributes of each story, culture and leadership method. We cherry picked the better attributes, as we want to internalize the best qualities of others. No human being is perfect. We all have flaws. So it’s best to throw them out.

There are a few examples where we showed an IF’s flaws just to prove that each fanatic is not perfect, and also because those flaws were material to the story.

InvestingByTheBooks: The chapter about Jack Henry is one of my favorites in the book, mainly because of the richness of the story with many aspects about an employee-first culture. But I also found it fascinating how close they were to never get to achieve all this success, due to a “mid-life crisis” and a takeover that was aborted at the last minute. They share this with many other IFs of course. But could their “fix the problem, no matter what” philosophy eventually fizzle out as the company is now too big, making oversight and trust hard to enforce?

Sean Iddings: That is a great question. In my opinion, I could be wrong, the stronger the culture the less likely that things fizzle out as the company gets larger. I can imagine that it does get harder to maintain, though. The one area where I do see a problem is with growth by acquisition, which Jack Henry has been focused on. There gets to be a point where a company gets too big and can't find the "right" acquisition candidates. And I've found that many companies have a very hard time changing around a well-ingrained decent to poor culture. I like to study nature, and there are many instances where mother nature has a natural limit to growth. For instance, bee colonies get to a certain size and will start to break off into new colonies. There are other examples. Bigger surely isn't better, and I think companies need to be aware of reaching the size that is suitable to them and start to figure out ways to break up and focus on managing internal growth. I think Kiewit Corporation provides a great model. Level 3 Communications started out as a subsidiary of Kiewit's Diversified Group and was later spun off in 1998. The company turned out to be a huge win to Kiewit in terms of returns and impact on the telephony/internet industry. Now if Level 3 continued to be a part of Kiewit Corp., there would have been less focus on that operation as well as their core construction business

InvestingByTheBooks:  The dilemma in the chapter on McDermid Inc and Dan Leever upon being rolled up into Platform Chemicals is certainly familiar. What would have been your course of action here?

Sean Iddings: I hope that now given what I know about McDermid's past, that I would have not done the LBO with private equity Dan did. It's a continual reminder to pick the right partners, ones who are aligned in spirit, vision, and finances. Give up some of that control to non-like minded partners, and you are at their mercy. I'm fortunate to be learning this lesson vicariously while I'm still young.

 InvestingByTheBooks: Both your first book and this one deals with past Intelligent Fanatics. Is there a danger of running into a “Good To Great” problem (where the staying power of a few companies profiled proved to be less than stellar) preventing a book on current IFs?

Sean Iddings: While such a book might be interesting, and probably sell well, we think there is more to be learned from with proven past fanatics. Like footprints in the sand, we can see the exact path past fanatics took and what happened. And with careful study, see what they saw along the way. These individuals then provide us the perfect “roadmap” for us to follow forward today.

InvestingByTheBooks: We are glad that somebody values principle over sales…! And it might be a discussion that is more interesting to have as an interaction with your members on the site, as it is more of a debate rather than learning valuable lessons from previous, proven “giants” of corporate history?

Sean Iddings: That, too. And we can test to see how well such a corporation is doing today.

InvestingByTheBooks: In a choice between a more well-known person/company or someone flying below the radar to portray, was there a conscious decision to mainly go for the latter one in the book?

Sean Iddings: Yes, we specifically looked for under the radar fanatics. We think there are hundreds if not thousands of them that are out there that few people are aware of. And their stories/lessons are amazing!

InvestingByTheBooks: Can you have a true IF in a large cap company? Apart from Warren, who would be your pick for best Large Cap IF of today?

Sean Iddings: Sure, there are plenty IFs in large cap companies, especially in private companies.  As I mentioned earlier, Warren is more of a genius so I wouldn’t pick him. And for me it’s like picking my favorite musician or song. There are a few good ones and you can learn something from all of them.

InvestingByTheBooks: We have already taken up too much or your - and our readers´- time! Final question; when will we have the first profile of a female Intelligent Fanatic?

Sean Iddings: We already profiled Mary Kay Ash in our first 40-page case study to members on our site. There are other examples, but there are fewer females in history of course leading businesses of large size. This is changing though.

InvestingByTheBooks: Thank you so much. A true pleasure. All the best to you and your family – at home and at work!

 InvestingByTheBooks, December, 2017


Author interview: Aswath Damodaran - Narrative and Nubers

View as pdf... Link to Amazon...

Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University where he teaches corporate finance and valuation courses in the MBA program. He received his MBA and Ph.D degrees from the University of California at Los Angeles. Mr. Damodaran’s research interests lie in valuation, portfolio management and applied corporate finance. His papers have been published in several of the most prestigious academic journals and he has published 10 acclaimed investment and finance books, including the best-selling Damodaran on Valuation.

InvestingByTheBooks: Thank you for agreeing to talk to us about your latest book Narratives and Numbers. I very much enjoyed reading it and one thing contributing to this was that you seamed to enjoy writing it. Could you start by discussing this personal journey of yours from being a numbers guy to a more balanced position?

Aswath Damodaran: I am a natural number cruncher and when I first starting doing and teaching valuation, I gravitated towards a purely numbers approach. It was a few years into the process that I realized that while I could work through the mechanics of valuation, I had no faith in my own valuations (partly because I knew how easily I could make them move by changing a few numbers). It was then that I started recognizing that my spreadsheets would become valuations only if I attached stories to them. When I started, it was hard work but I have to tell you that it has become easier over time.


IBB: With regards to valuing corporations with a very wide value potential distribution compared to those with a more narrow potential I agree that both are technically possible to value with a DCF. However, while the latter type more rarely gets mispriced, when they occasionally do, you can be relatively more certain about your margin of safety and given our human propensity for over-optimism I’m afraid that a wide distribution simply means a larger outlet for that bias. What is your view on this?

AD: I think that the margin of safety is one of the most over rated concepts in investing. While there is the notion that having a large MOS is somehow costless, it is worth reframing the trade off in using a MOS. In effect, you are trading off one type of error (that you will buy an over valued stock by mistake) for another type of error (that you will not buy an under valued stock). In my view, that trade off starts to cut against you sooner than you think and as your portfolio gets larger. If you are one of those incredible investors who keep finding stocks that go up 40% a year, by all means have a large margin of safety. When For the most part, when I hear an investor boast about having a 40% MOS, my response is that the investor either is mostly invested in cash or that he or she has no concept of value.


IBB: How will we ever persuade sell-side analysts to treat quarterly earnings releases as opportunities to revisit and update their view on the long-term fundamental story instead of playing the “against the consensus-game”?

AD: Why bother? That’s their job. Treat them for what they are… Equity research analysts are traders, not investors, and they play the momentum game. They have only a glancing interest in the value of stocks and have far more incentive to keep track on the mood on a stock. I just wish that they would stop doing their “kabuki” DCFs.


IBB: Daniel Kahneman has when it comes to forecasting been discussing what he calls the inside view and the outside view where the latter relates to the more statistical answer to the question: when others in general have been in the same situation, what on average happened? I read your narrative process as a way to improve on the inside view but aren’t you still missing to factor in the outside view?

AD: My step 5 in converting stories to numbers is, keeping the feedback loop open and it, is just my way of saying that the only way that you will improve your stories is by listening people who think least like you and disagree with you the most. So, listen to others when they tell you that you are wrong, don’t be defensive and don’t be afraid to say those words “I was wrong”.That outside view does not necessarily come from other valuation people or analysts but from the world around you.


IBB: I liked the notion that exactly as stock market stories can create herding and mispricings on the stock markets, quantitative over-usage of the same type of factors can do the same. You mention somewhere in the book that you think that it is those who can remain flexible in their thinking that will succeed. Could you explain further what you mean?

AD: To the extent that we look at the same data and see the same patterns and follow those patterns, big data is going to create its own form of herding. You see this in almost every aspect of life where data has become a big part of decision making. One reason that I trust multi-disciplinary thinkers more is that they use both the data and common sense. Being flexible requires you to be open to information in every form.


IBB: What you call narratives are really the description of the fundamental value creation of the company but how do you prepare your students for the constant cacophony of shorter term stories, rumors, suggestions and emotions on the stock market? Do you for example feel that checklists can help?

AD: I think of your core story as a filing mechanism that allows you to read news about the company as it happens and file into the right folder. In fact, I try to do this with Uber in the book when I explain how I used the hundreds of news stories that came out about Uber between June 2014 and September 2015 to reframe my story.


IBB: I think the concept of blending a going concern valuation with a liquidation valuation is very interesting. How would you go about when thinking about the probability of default given the reportedly shortening life span of companies?

AD: Shortening life span does not necessarily translate into default. Most companies just fade away over time or get acquired as going businesses, rather than come to an abrupt end. What causes default is the addition of a triggering mechanism, usually in the form of debt. And with debt, estimating that probability of default becomes easier since you are looking at the likelihood of a firm not being able to make contractual payments.


IBB: With regards to the limited success rate of macro forecasting I agree fully. Does this mean that investors should simply stay away from stocks where one or two top-down variables determine the stock price or do you have a solution for how to handle them?

GZS: It is not that they should stay away. You can still find a macro stock at a micro moment. For instance, with banking stocks, it is quite clear that the dominant risks now are regulatory changes and interest rate levels, both macro variables. But in October 2016, I valued and bought Deutsche Bank because I felt that there were enough micro variables that I could focus on to make it a good buy.


IBB: Thank you for taking the time and sharing your insights. Lets hope your book unites the two camps of numbers people and storytellers.

InvestingByTheBooks, March 3, 2017

Author interview: Tren Griffin "Charlie Munger - The Complete Investor"

Tren Griffin spends his days at Microsoft. Previously, he was a partner at Eagle River, a private equity firm established by Craig McCaw. On nights and weekends he writes blog posts, most under the heading “A dozen things I learned from….” For those of us who follow him religiously... Further reading... Link to Amazon...

Author Interview: Wesley R. Gray - DIY Financial Advisor

InvestingByTheBooks: Wesley, thank you very much for taking the time to talk about your latest book, “DIY Financial Advisor”. Actually, there are three of you that have contributed to the book, so why don´t we start there: Normally, writing a book is a lonely-wolf game until the end when... Further reading... Link to Amazon...

Guy Spier – Guide to Reading

Guy Spier is a Zurich based investor. In June 2007 he made headlines by bidding US$650,100 with Mohnish Pabrai for a charity lunch with Warren Buffett. Since 1997 he has managed Aquamarine Fund, an investment partnership inspired by, and styled after the original 1950′s Buffett partnerships. Prior to starting Aquamarine Fund, Spier worked as an investment banker in New York, and as a management consultant in London and Paris. Mr. Spier completed his MBA at the Harvard Business School, class of 1993, and holds a First Class degree in PPE (Politics, Philosophy and Economics) from Oxford University. Upon graduating, he was co-awarded the George Webb Medley prize for the best performance in that year in Economics. While at Oxford he was a contemporary of David Cameron at Brasenose and attended economics tutorials with him. Spier is the CEO of the Spier family office. He also serves on the advisory board of Horasis, and is a co-host of TEDxZurich. The list is reprinted with Mr. Spier's kind permission.  

Further reading...