Tag Archives: Finance

The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel

Summary

  1. In finance, the soft skills (how you behave) is typically more powerful than the hard, technical skills. Finance is guided more by psychology than laws and this book will help you better understand this idea and how to counter some of the more deleterious effects that ignoring them might bring

Key Takeaways

  1. Luck and risk are inescapable – nothing is ever as good or as bad as it seems
  2. “Enough” is a powerful word and one of the most valuable financial skills is to keep the goal posts from moving.
  3. Compounding is a true superpower. A mentality of frugality, paranoia, survival is key. Don’t do anything that can wipe you out and understand that staying wealthy is a different skill than getting wealthy
  4. Honor the power of tails, 80/20
  5. Money’s greatest value is to give you control over how you spend your time
  6. Wealth is what is hidden
  7. Reasonable > Rational – having an approach which you’ll sustain and which allows you to sleep at night is better than what is mathematically optimal
  8. Think of volatility as fees rather than fines
  9. More than some dollar amount, seek independence, the ability to do what you want, when you want. Save more than you spend, keep your lifestyle spending in check, understand your priorities, and give yourself a nice margin of safety

What I got out of it

  1. An incredibly applicable, approachable, and useful book for those who want to better understand how to think about money, investing, saving, and what true wealth really means

Quality Investing by Lawrence Cunningham

Summary

  1. In our view, 3 characteristics indicate quality. These are strong, predictable cash generation; sustainably high returns on capital; and attractive growth opportunities. Each of these financial traits is attractive in its own right, but combined, they are particularly powerful, enabling a virtuous circle of cash generation, which can be reinvested at high rates of return, begetting more cash, which can be reinvested again.

Key Takeaways

  1. One of our favorite explanations of quality appears in Zen and the Art of Motorcycle Maintenance, in which Phaedrus tells his student “…even though Quality cannot be defined, you know Quality is!”
  2. The value any business creates, listed or not, is determined by the rate at which it deploys incremental capital
  3. The very best companies enjoy a diversified set of growth drivers through ingenuity in the design of products, pricing, and product mix
  4. Security by obscurity – an obscure industry, even one with appealing economic characteristics, tends to face lower disruption risk, making attractive industry structures more durable
  5. Assurance benefits are often based on reputation. A reputation of high quality or reliability is earned over time. To compete with reputation is almost impossible, no matter how much money is staked on it
  6. Some key characteristics or industries of quality companies
    1. Recurring revenue
    2. Friendly middlemen
    3. Toll roads
    4. Low-price plus
    5. Pricing Power
    6. Brand strength
    7. Innovation dominance
    8. Forward integrators
    9. Market share gainers
    10. Global capabilities and leadership
    11. Corporate culture

What I got out of it

  1. A good look at a dozen or so companies and how they can be defined as “quality”

eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan, and Other Billion Dollar Start-ups by Randall Stross

Summary

  1. A behind the curtain look at the early days of Benchmark, one of the premier venture capital firms 

Key Takeaways

  1. Benchmark / VC
    1. It is a wee bit eerie to see, in hindsight, how the Benchmark boys’ original notion of a partnership of equals turned out to have been echoed in impersonal performance statistics. Even the partners themselves would never have guessed in advance that four and a half years after Benchmark’s founding, of the five investments that were the firm’s all-time biggest hits to date, no two had been discovered and directed by the same partner: five hits, five partners.
    2. A group of three young venture capitalists in Menlo Park—Bruce Dunlevie, Bob Kagle, and Andy Rachleff—decided to step free of their old firms, and with software entrepreneur Kevin Harvey they set up Benchmark Capital.
    3. Entrepreneurs who sought venture funding usually did not need to invest any more personal money into the venture than they had already spent to bring it to life. But some venture capitalists did demand more. Arthur Rock, the senior dean of American venture capitalists and an early investor in Intel, always insisted whenever his venture firm put money into a start-up that the entrepreneur co-invest one third of his total net worth, whether it be large or small. If the entrepreneur was extremely wealthy, the venture firm had higher expectations about his co-investing. The venture guys didn’t want the high-net-worth entrepreneur to regard the start-up as a hobby. To prove commitment, he was asked to have skin in the game, and that was what Beirne asked of Borders,
    4. On the golf course the other day, he said, a friend had floated a theory that leaders, in business or anything else, are driven by demons. The best guys have them—implacable, subterranean demons that are the source of greatness.
    5. Daniel Webster: “There is always room at the top.”
    6. No company looks better than the one that professes it does not need your money.
    7. Kagle gently cautioned Beirne: “We all have our blind spots, right? Our greatest strength is our greatest weakness. And I think in this case, Dave, we’re all conscious of the fact that there’s a lot of marquee players around this thing. You’re all about marquee players. So we need to make sure that you’re not getting too colored by that relative to all the other stuff.” “Salesmen are more likely to be sold,” Rachleff added.
    8. What the partners were looking for were categories that were ripe for “disintermediation”—removing a middle layer in the distribution chain. In this case, that layer was the twelve thousand or so art galleries in the country
    9. “There sure are a lot of signs,” Rachleff repeated. He wasn’t concerned about Benchmark’s overall reputation being badly damaged. “The amazing thing about our business is, everyone forgets the losers—they remember the winners.”
    10. Rachleff pointed out that in a portfolio, the emotions that Beirne would experience would always be biased toward the end of the spectrum representing pain. “The amazing thing is it hurts more on the downside than the good feelings on the upside.”
    11. “That’s my experience—three orders of magnitude,” Dunlevie quickly agreed. “Yeah,” Rachleff said, and then redid the ratio of intensity of pleasure versus pain. “One-X versus fifty-X.”
    12. Bob Kagle could not take much pleasure in the event either, imagining, as he did, whispers that the eBay success was a fluke, akin to picking up a winning lottery ticket. He found himself working all the harder after eBay, to silence criticism that he had not actually heard but that he could imagine, beyond his hearing. One monkey don’t make no show, he’d say.
    13. When the Benchmark partners got together, most days, most of the time, their conversations were interrupted by jokes, laughter, word play, self-confessed foibles, and still more laughter. They positively reveled in one another’s company.
  2. Gurley
    1. The cultural fit had to be just right, too. It was this issue that the partners would spend the most time agonizing over. The five Benchmark partners felt keenly the closeness of a basketball team; in moments of private vanity they liked to think of themselves as the Chicago Bulls in the early nineties, but it wasn’t apt—this was a team that was knocking down wins but without a single dominating presence like Michael Jordan. So maintaining the chemistry that permitted all to feel that the others brought out their individual best was regarded as paramount, even if it meant Benchmark could not expand.
    2. Beirne added his own high praise, which was that the attention Gurley received as a sought-after speaker at industry gatherings had secured for Gurley “a lot of mindshare.”
    3. You think he’d be a good investor?” asked Bruce Dunlevie. “I do, but the reason I do is because he’s a rare combination of highly intellectually curious and humble. I think he really is open to questioning his own thought process and what’s really working, what’s not working.”
    4. Benchmark’s self-proclaimed “fundamentally better architecture” was based on a bedrock tenet: equal partners, without hierarchical separation, with equal votes and equal compensation. They had used it brilliantly from the beginning to differentiate themselves from the rest of the firms on Sand Hill Road.
    5. Bill doesn’t know what hiring people is all about. He wants to learn it all. He’s a total learn-it-all guy. He was asking me questions: ‘How do you spend your time? How do you recruit? What do you look for? What do you ask people? What do you do?’ ” “He’s pretty humble,” said Rachleff. Beirne agreed, and added, “He does a very good job at the shows. He doesn’t just stand in the back and not talk to anybody—he’s out talking to everybody.” “How old is he?” asked Kagle. “He’s thirty-two.” “He’s a mature thirty-two, too.”
    6. Harvey had also been impressed by his willingness to chase a wild boar down a steep cliff. “He is kind of an animal,” Harvey said with manifest respect. “I love that,” said Kagle.
    7. Kagle said to Harvey, “Okay, make him the offer.” Harvey turned to Gurley. “First, I want to know if you’ll take it.” This was the way Harvey preferred to seal a deal with an entrepreneur: to secure the agreement before bringing out the term sheet with all of the details. Here Harvey feared that if he brought out the terms of the partnership offer, Gurley’s analytical bent would lead him to say, “Okay, I’ll take this home and think about it.” Harvey wanted him to show trust that the partners had put together a generous package that accorded him fully equal status from day one. Gurley came through and, without asking to see the terms, accepted on the spot.
    8. Gurley cast cold water on the proposal to go public, however, by asking, “Is it built to win?” He explained, “GM is built to last, but it’s got so much bureaucracy, it’s not going anywhere.” Maybe “built to last” was not the right criterion to optimize on.
  3. eBay
    1. When eBay, a small Internet auction company based in San Jose, California, sought venture capital, it had to pass an informal test administered by the venture guys before they would consider making an investment: Was there a reasonably good likelihood that the investors could make ten times their money within three years? 
    2. It was late 1996, and eBay’s online auction business had been solidly profitable since it was launched; the company did not need a cent. But Pierre Omidyar, twenty-nine, the original founder, and his new partner, Jeff Skoll, thirty-one, were the rare entrepreneurs who knew they needed to hire a CEO and other seasoned executives with skills they lacked. It appeared to them that the only way they would be able to attract people with deeper management experience than they had was by obtaining the imprimatur of a well-regarded venture capital firm. Selling a minority share of their equity to venture capitalists was the intermediate step they had to take to get the good people they sought.
    3. Over the next two weeks, he met with Omidyar outside of Benchmark’s office and discovered that he was an anomalous kind of engineer, one who was consumed by the idea of community—every other sentence, he spoke about the eBay community, building the community, learning from the community, protecting the community. It was a passion similar to what, in Bob-speak, Kagle had for deals that brought out the humanity; that’s what Kagle liked most of all, the humanity. The more Omidyar talked about his community vision, the more Kagle, as he put it, was “lovin’ him—this guy is good people.” And Omidyar felt the same way about Kagle.
    4. EBay was an anomaly: a profitable company that was able to self-fund its growth and that turned to venture capital solely for contacts and counsel. No larger lesson can be drawn. When Benchmark wired the first millions to eBay’s bank account, the figurative check was tossed into the vault—and there it would sit, unneeded and undisturbed.
    5. By temperament, Skoll could not help but pour himself into the work in a scarily total fashion—once he started at eBay, he worked hundred-hour weeks for the next two and a half years. But he wasn’t driven by materialist hungers, and he thought of himself not as a businessperson but as a writer.
    6. EBay had an enormous advantage over the competition that it only then, under challenge, was coming to appreciate: a nicely balanced critical mass of sellers and buyers in each of hundreds of categories. This delicate balance had been achieved through the natural evolution of the eBay ecosystem, without the intervention of any guiding hand. If in any given category there were too many sellers compared with buyers, the sellers would have been discouraged and quick to jump to eBay’s rivals to try their luck there. If there were too many buyers, and in order to win an auction one had to offer up a ludicrously high price, this too would have led to mass defections. Fortunately for eBay, the number of sellers and buyers, while growing exponentially, had remained well apportioned. EBay’s users remained loyal for another reason: feedback ratings. Buyers, after a transaction, could send in a report about their experience with the seller, which future prospective buyers could consult; sellers had an identical opportunity to evaluate their experience with the buyer. Over time, both sellers and buyers accumulated a number of positive-feedback ratings at eBay, a neatly quantifiable reputation, that they were loath to abandon. The eBay “community” stayed put.
    7. “That’s the biggest risk in the whole thing,” Kagle said. “In fact I can argue with you guys very persuasively that keeping this low profile we’ve had in the company has been absolutely the healthiest thing to do. Absolutely the healthiest thing to do. We’ve already broken the systems a couple times, in spite of that. So we’ve been barely able to manage the traffic operationally so far.” Kagle said there had been a second benefit. “This organic growth has led to this very nice set of community values; people are honest, people treat each other fairly, there’s not a lot of scamming going on in it. And if you turn up the volume way high, the woodwork gets filled with a lot of weird guys, and the whole tone of the thing could change. So that’s a risk.”
    8. On the day after eBay’s IPO, when Pierre Omidyar, just back from New York, stood on Benchmark’s terrace, he observed that the world had imputed strategic savvy to the company that it did not really have. “Our system didn’t scale,” he said, “so we didn’t grow big enough to attract competition. Everybody thought we were flying below the radar screen on purpose.” He gave a little laugh.
    9. Up until early summer 1998, eBay’s primary competition was Jerry Kaplan’s Onsale Exchange, which had launched in October 1997 and had failed to attract a critical mass. When Bob Kagle introduced eBay to Benchmark’s limited partners at the annual meeting in early June, eBay had an 89 percent market share. Kagle said that the company anticipated major entrants, but “we think they don’t get it. We think they don’t understand all the stuff about the community and what’s really special and unique about this.” He also noted that in addition to first-mover advantage, economies of scale, and definitive selection in the various categories, eBay also enjoyed another advantage: Users faced high switching costs. “After you get this reputation built up online,” Kagle explained, “you’ve got all these people who have dealt with you, you’ve got seventy-five people who’ve said good things about you. That’s a pretty fundamental thing.”
    10. A good business will attract good competitors. This eBay’s executives knew in the abstract, but like the abstract concept of war, the theory necessarily bore a limited relationship to the thing itself.
    11. But knowing that the CEO was personally fielding calls from angry customers when they could not find someone to speak with in his department would provide all the incentive he needed, and she knew it.
  4. Priceline
    1. Our biggest competition, Walker explained, was cars and couches; Priceline’s system “collected demand” from people who would not otherwise be flying. And by promising to get back with an answer within one hour—why one hour? Glasses in an hour, photos in an hour; consumers already understand the unit—Walker was deliberately creating in the consumers’ mind the idea that Priceline was a virtual gladiator fighting on their behalf: “It’s going to take us an hour to knock on everybody’s door, punch him in the jaw, give him your offer, and get back to you with an answer, but be assured we’re out there working for you!” 
    2. Since we’re not actively shopping for capital, Walker summed up, this isn’t about the money per se. It’s really about two teams—your team, our team. We’ve got a multibillion-dollar asset here if played right. We’re not greedy; we’re not pigs. We’re players. Game theorists that we are, we understand the game trade. And we’re not afraid to make a trade for the right set of circumstances.
  5. Other
    1. The very reason that start-ups had an advantage over these incumbents—speed in execution—was the same reason that the old companies acted so slowly, even when the task was to organize a new entity that would be free to compete without organizational drag. “So they know they’re in a tough spot.” Still, the inertial drag in a big company was the most powerful factor in the equation.
    2. Edward Chancellor’s history of financial manias, Devil Take the Hindmost, urging them to read it. Chancellor’s account of England’s railway mania of 1845 had made an especially deep impression on Kagle, who saw all of the similarities between the railroad, then hailed as a revolutionary advance without historical parallel, and the Internet. In both cases the technological change was as fundamental as its champions claimed, but investors’ enthusiasm about imminent opportunities to reap fortunes moved beyond the reasonable. All businesses must earn a profit in order to be viable; Kagle refused to relinquish this simple truth.
    3. Kevin Harvey took the view that Red Hat could avoid a frontal challenge to Microsoft’s business model; he worked to reposition the company away from the business of selling packaged software in boxes (Harvey’s old business) and move it toward providing support services and a central website for the Linux community. The only way Microsoft could compete with Red Hat, he would say gleefully, “is by abandoning five billion dollars of annual revenue, which they can’t!”
    4. His firm, TVI, had funded Microsoft, Compaq, and other notable technology companies, but it was not these that McMurtry wished to talk about. Rather, he wanted to talk about the companies that did not succeed. He recalled that in the mid-1970s, having been in the business a number of years, he had become depressed because “out of ten start-ups, we would lose three or four—lose all our money. Maybe just get our money back in two deals. Then you’ve got two or three where you get one to five times your money. That leaves just one or two deals [out of ten] where you make more than five times your money.” The high payoffs for one or two never erased the pain of those that did not survive: “You feel so responsible for the disasters.”
    5. The claim was empty bluster, however. Mike Moritz, of Sequoia Capital, peeled back the truth with mordant detachment: “One of the dirty little secrets of the Valley is that all the jobs-creation we like to talk about is probably less than the Big Three automakers have laid off in the last decade. One of the best ways to have a nice Silicon Valley company is to keep your head count as low as possible for as long as possible.”

What I got out of it

  1. Really fun book that gives an inside look at VC investing – power law returns and their importance really stuck out to me, as did the culture at Benchmark and how they thought about their investments 

Margin of Safety: Risk-Averse Value Investing for the Thoughtful Investors by Seth Klarman

Summary

  1. “My goals in writing this book are twofold. In the first section, I identify many of the pitfalls that face investors. By highlighting where so many go wrong, I hope to help investors learn to avoid these losing strategies. For the remainder of the book, I recommend one particular path for investors to follow—a  value-investment philosophy. Value investing, the strategy of investing in securities trading at an  appreciable discount from underlying value, has a long history of delivering excellent investment  results with very limited downside risk.”

Key Takeaways

  1. Introduction
    1. Ideally this will be considered, not a book about investing, but a book about thinking about investing. Like most eighth-grade algebra students, some investors memorize a few formulas or rules and superficially appear competent but do not really understand what they are doing. To achieve long-term success over many financial market and economic cycles, observing a few rules is not enough. Too many things change too quickly in the investment world for that approach to succeed. It is necessary instead to understand the rationale behind the rules in order to appreciate why they work when they do and don’t when they don’t. I could simply assert that value investing works, but I hope to show you why it works and why most other approaches do not.
    2. The temptation of making a fast buck is great, and many investors find it difficult to fight the crowd.
    3. Regardless of the market environment, many investors seek a formula for success. The unfortunate reality is that investment success cannot be captured in a mathematical equation or a computer  program.
    4. Ultimately investors must choose sides. One side—the wrong choice—is a seemingly effortless path  that offers the comfort of consensus. This course involves succumbing to the forces that guide most  market participants, emotional responses dictated by greed and fear and a short-term orientation  emanating from the relative-performance derby. Investors following this road increasingly think of  stocks like sowbellies, as commodities to be bought and sold. This ultimately requires investors to  spend their time guessing what other market participants may do and then trying to do it first. The  problem is that the exciting possibility of high near-term returns from playing the  stocks-as-pieces-of-paper-that-you-trade game blinds investors to its foolishness. The correct choice for investors is obvious but requires a level of commitment most are unwilling to  make. This choice is known as fundamental analysis, whereby stocks are regarded as fractional  ownership of the underlying businesses that they represent. One form of fundamental analysis—and  the strategy that I recommend—is an investment approach known as value investing. There is nothing esoteric about value investing. It is simply the process of determining the value  underlying a security and then buying it at a considerable discount from that value. It is really that  simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when  prices are attractive and to sell when they are not, avoiding the short-term performance frenzy that  engulfs most market participants. The focus of most investors differs from that of value investors. Most investors are primarily oriented  toward return, how much they can make, and pay little attention to risk, how much they can lose.
    5. The value discipline seems simple enough but is apparently a difficult one for most investors to grasp  or adhere to. As Buffett has often observed, value investing is not a concept that can be learned and  applied gradually over time. It is either absorbed and adopted at once, or it is never truly learned.
  2. Where Most Investors Stumble
    1. Mark Twain said that there are two times in a man’s life when he should not speculate: when he can’t  afford it and when he can. Because this is so, understanding the difference between investment and  speculation is the first step in achieving investment success.
    2. Investors believe that over the long run security prices tend to reflect fundamental developments  involving the underlying businesses
    3. Investors in a stock thus expect to profit in at least one of three possible ways: from free cash flow  generated by the underlying business, which eventually will be reflected in a higher share price or  distributed as dividends; from an increase in the multiple that investors are willing to pay for the  underlying business as reflected in a higher share price; or by a narrowing of the gap between share  price and underlying business value.
    4. In reality, no one knows what the market will do; trying to predict it is a waste of time, and investing  based upon that prediction is a speculative undertaking.
    5. The distinction is not clear to most people. Both investments and speculations can be bought and sold.  Both typically fluctuate in price and can thus appear to generate investment returns. But there is one  critical difference: investments throw off cash flow for the benefit of the owners; speculations do not.  They return to the owners of speculations depends exclusively on the vagaries of the resale market.
    6. If you look to Mr. Market as a creator of investment opportunities (where price departs from underlying  value), you have the makings of a value investor. If you insist on looking to Mr. Market for investment  guidance, however, you are probably best advised to hire someone else to manage your money.
    7. Many unsuccessful investors regard the stock market as a way to make money without working rather  than as a way to invest capital in order to earn a decent return. Anyone would enjoy a quick and easy  profit, and the prospect of an effortless gain incites greed in investors. Greed leads many investors to  seek shortcuts to investment success. Rather than allowing returns to compound over time, they  attempt to turn quick profits by acting on hot tips. They do not stop to consider how the tipster could  possibly be in possession of valuable information that is not illegally obtained or why, if it is so  valuable, it is being made available to them. Greed also manifests itself as undue optimism or, more  subtly, as complacency in the face of bad news. Finally greed can cause investors to shift their focus away from the achievement of long-term  investment goals in favor of short-term speculation
    8. It is human nature to seek simple solutions to problems, however complex. Given the complexities of the investment process, it is perhaps natural for people to feel that only a  formula could lead to investment success. Just as many generals persist in fighting the last war, most investment formulas project the recent past  into the future. Some investment formulas involve technical analysis, in which past stock-price  movements are considered predictive of future prices. Other formulas incorporate investment  fundamentals such as price-to-earnings (P/E) ratios, price-to-book-value ratio, sales or profits growth  rates, dividend yields, and the prevailing level of interest rates. Despite the enormous effort that has  been put into devising such formulas, none has been proven to work.
  3. Nature of Wall Street Works Against Investors
    1. Wall Streeters get paid primarily for what they do, not how effectively they do it. Wall Street’s  traditional compensation is in the form of up-front fees and commissions. Brokerage com-missions are  collected on each trade, regardless of the outcome for the investor. Investment banking and  underwriting fees are also collected up front, long before the ultimate success or fail-ure of the  transaction is known. All investors are aware of the conflict of interest facing stockbrokers. While their customers might be  best off owning (minimal commission) U.S. Treasury bills or (commission-free) no-load mutual funds,  brokers are financially motivated to sell high-commission securities. Brokers also have an incentive to  do excessive short-term trading (known as churning) on behalf of discretionary customer accounts (in  which the broker has discretion to transact) and to encourage such activity in nondiscretionary  accounts. Many investors are also accustomed to conflicts of interest in Wall Street’s trading activities,  where the firm and customer are on opposite sides of what is often a zero-sum game.
    2. The point I am making is that investors should be aware of the motivations of the people they transact  business with; up-front fees clearly create a bias toward frequent, and not necessarily profitable,  transactions.
  4. The Institutional Performance Derby: The Client is the Loser
    1. Economist Paul Rosenstein-Rodan has pointed to the “tremble factor” in understanding human  motivation. “In the building practices of ancient Rome, when scaffolding was removed from a  completed Roman arch, the Roman engineer stood beneath. If the arch came crashing down, he was the  first to know. Thus his concern for the quality of the arch was intensely personal, and it is not  surprising that so many Roman arches have survived.”
    2. Remaining fully invested at all times certainly simplifies the investment task. The investor simply  chooses the best available investments. Relative attractiveness becomes the only investment yardstick;  no absolute standard is to be met. Unfortunately the important criterion of investment merit is obscured  or lost when substandard investments are acquired solely to remain fully invested. Such investments  will at best generate mediocre returns; at worst they entail both a high opportunity cost—foregoing the  next good opportunity to invest—and the risk of appreciable loss.
    3. Remaining fully invested at all times is consistent with a relative-performance orientation. If one’s goal  is to beat the market (particularly on a short-term basis) without falling significantly behind, it makes  sense to remain 100 percent invested. Funds that would otherwise be idle must be invested in the  market in order not to underperforms the market. Absolute-performance-oriented investors, by contrast, will buy only when investments meet absolute  standards of value. They will choose to be fully invested only when available opportunities are both  sufficient in number and compelling in attractiveness, preferring to remain less than fully invested  when both conditions are not met. In investing, there are times when the best thing to do is nothing at  all. Yet institutional money managers are unlikely to adopt this alternative unless most of their  competitors are similarly inclined.
    4. Investing without understanding the behavior of institutional investors is like driving in a foreign  land without a map. You may eventually get where you are going, but the trip will certainly take  longer, and you risk getting lost along the way.
    5. Avoiding losses is the most important prerequisite to investment success
  5. Defining Your Investment Goals
    1. Warren Buffett likes to say that the first rule of investing is “Don’t lose money,” and the second rule is,  “Never forget the first rule.” I too believe that avoiding loss should be the primary goal of every  investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t  lose money” means that over several years an investment portfolio should not be exposed to  appreciable loss of principal.
    2. Greedy, short-term-oriented investors may lose sight of a sound mathematical reason for avoiding loss:  the effects of compounding even moderate returns over many years are com-pelling, if not downright  mind boggling. Table 1 shows the delightful effects of compounding even relatively small amounts.
    3. Investors must be willing to forego some near-term return, if necessary, as an insurance premium  against unexpected and unpredictable adversity.
    4. Rather than targeting a desired rate of return, even an eminently reasonable one, investors should  target risk
  1. Value Investing: The Importance of a Margin of Safety
    1. Value investing is the discipline of buying securities at a significant discount from their current  underlying values and holding them until more of their value is realized. The element of a bar-gain is  the key to the process. In the language of value investors, this is referred to as buying a dollar for fifty  cents. Value investing combines the conservative analysis of underlying value with the requisite  discipline and patience to buy only when a sufficient discount from that value is available. The number  of available bargains varies, and the gap between the price and value of any given security can be very  narrow or extremely wide. Sometimes a value investor will review in depth a great many potential  investments without finding a single one that is sufficiently attractive. Such persistence is necessary,  however, since value is often well hidden. The disciplined pursuit of bargains makes value investing very much a risk-averse approach. The  greatest challenge for value investors is maintaining the required discipline. Being a value investor usually means standing  apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment  winds. It can be a very lonely undertaking. A value investor may experience poor, even horrendous,  performance compared with that of other investors or the market as a whole during prolonged periods  of market overvaluation. Yet over the long run the value approach works so successfully that few, if  any, advocates of the philosophy ever abandon it.
    2. Value investors continually compare potential new investments with their current holdings in order to  ensure that they own only the most undervalued opportunities available. Investors should never be  afraid to reexamine current holdings as new opportunities appear, even if that means realizing losses  on the sale of current holdings. In other words, no investment should be considered sacred when a  better one comes along.
    3. Because investing is as much an art as a science, investors need a margin of safety. A margin of safety  is achieved when securities are purchased at prices sufficiently below underlying value to allow for  human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.  According to Graham, “The margin of safety is always dependent on the price paid. For any security,  it will be large at one price, small at some higher price, nonexistent at some still higher price.” Buffett described the margin of safety concept in terms of tolerances: “When you build a bridge, you insist it can carry 30,000 pounds, but you only drive  10,000-pound trucks across it. And that same principle works in investing.”
    4. How can investors be certain of achieving a margin of safety? By always buying at a significant  discount to underlying business value and giving preference to tangible assets over intangibles. (This  does not mean that there are not excellent investment opportunities in businesses with valuable  intangible assets.) By replacing current holdings as better bargains come along. By selling when the  market price of any investment comes to reflect its underlying value and by holding cash, if necessary,  until other attractive investments become available. Investors should pay attention not only to whether but also to why current holdings are undervalued. It  is critical to know why you have made an investment and to sell when the reason for owning it no  longer applies. Look for investments with catalysts that may assist directly in the realization of  underlying value. Give preference to companies having good managements with a personal financial  stake in the business.
    5. A market downturn is the true test of an investment philosophy. Securities that have performed well in  a strong market are usually those for which investors have had the highest expectations.
    6. Investors should understand not only what value investing is but also why it is a successful  investment philosophy. At the very core of its success is the recurrent mispricing of securities in the marketplace. Value investing is, in effect, predicated on the proposition that the efficient-market  hypothesis is frequently wrong. If, on the one hand, securities can become undervalued or overvalued,  which I believe to be incontrovert-ibly true, value investors will thrive. If, on the other hand, all  securities at some future date become fairly and efficiently priced, value investors will have nothing to  do. It is important, then, to consider whether or not the financial markets are efficient.
    7. The efficient-market hypothesis takes three forms. The weak form maintains that past stock prices  provide no useful information on the future direction of stock prices. In other words, technical analysis  (analysis of past price fluctuations) cannot help investors. The semistrong form says that no published  information will help investors to select undervalued securities since the market has already  discounted all publicly available information into securities prices. The strong form maintains that  there is no information, public or private, that would benefit investors. The implication of both the  semi-strong and strong forms is that fundamental analysis is useless. Investors might just as well select  stocks at random.
    8. An entire book could be written on this subject alone, but one enlightening article cleverly rebuts the  efficient-market theory with living, breathing refutations. Buffett’s “The Superinvestors of  Graham-and-Doddsville” demonstrates how nine value-investment disciples of Benjamin Graham,  holding varied and independent portfolios, achieved phenomenal investment success over long  periods.
    9. In a sense, value investing is a large-scale arbitrage between security prices and underlying business  value. Arbitrage is a means of exploiting price differentials between markets.
  2. At the Root of a Value-Investment Philosophy
    1. There are three central elements to a value-investment philosophy. First, value investing is a bottom-up  strategy entailing the identification of specific undervalued investment opportunities. Second, value  investing is absolute-performance-, not relative-performance oriented. Finally, value investing is a  risk-averse approach; attention is paid as much to what can go wrong (risk) as to what can go right  (return).
    2. In investing it is never wrong to change your mind. It is only wrong to change your mind and do  nothing about it.
    3. The risk of an investment is described by both the probability and the potential amount of loss. The risk  of an investment— the probability of an adverse outcome—is partly inherent in its very nature. A  dollar spent on biotechnology research is a riskier investment than a dollar used to purchase utility  equipment. The former has both a greater probability of loss and a greater percentage of the investment  at stake.
    4. Unlike return, however, risk is no more quantifiable at the end of an investment than it was at its  beginning. Risk simply cannot be described by a single number. Intuitively we under-stand that risk  varies from investment to investment: a government bond is not as risky as the stock of a  high-technology company. But investments do not provide information about their risks the way food  packages provide nutritional data. Rather, risk is a perception in each investor’s mind that results from analysis of the probability and  amount of potential loss from an investment. If an exploratory oil well proves to be a dry hole, it is  called risky. If a bond defaults or a stock plunges in price, they are called risky. But if the well is a  gusher, the bond matures on schedule, and the stock rallies strongly, can we say they weren’t risky  when the investment was made? Not at all. The point is, in most cases no more is known about the risk  of an investment after it is concluded than was known when it was made. There are only a few things investors can do to counteract risk: diversify adequately, hedge when  appropriate, and invest with a margin of safety. It is precisely because we do not and cannot know all  the risks of an investment that we strive to invest at a discount. The bargain element helps to provide a  cushion for when things go wrong.
    5. The trick of successful investors is to sell when they want to, not when they have to. Investors who may  need to sell should not own marketable securities other than U.S. Treasury bills.
  3. The Art of Business Valuation
    1. In Security Analysis he and David Dodd discussed the concept of a range of value:
      1. The essential point is that security analysis does not seek to determine exactly what is the intrinsic  value of a given security. It needs only to establish that the value is adequate—e.g., to protect a bond or  to justify a stock purchase—or else that the value is considerably higher or considerably lower than the  market price. For such purposes an indefinite and approximate measure of the intrinsic value may be  sufficient.
    2. To be a value investor, you must buy at a discount from underlying value. Analyzing each potential  value investment opportunity therefore begins with an assessment of business value. While a great many methods of business valuation exist, there are only three that I find useful. The first  is an analysis of going-concern value, known as net present value (NPV) analy-sis. NPV is the  discounted value of all future cash flows that a business is expected to generate. A frequently used but  flawed shortcut method of valuing a going concern is known as private-market value. This is an  investor’s assessment of the price that a sophisticated businessperson would be willing to pay for a  business.
    3. How do value investors deal with the analytical necessity to predict the unpredictable? The only  answer is conservatism. Since all projections are subject to error, optimistic ones tend to place investors  on a precarious limb. Virtually everything must go right, or losses may be sustained. Conservative  forecasts can be more easily met or even exceeded. Investors are well advised to make only conservative  projections and then invest only at a substantial discount from the valuations derived therefrom.
    4. The other component of present-value analysis, choosing a discount rate, is rarely given sufficient  consideration by investors. A discount rate is, in effect, the rate of interest that would make an investor indifferent between present and future dollars. Investors with a strong preference for  present over future consumption or with a preference for the certainty of the present to the uncertainty  of the future would use a high rate for discounting their investments. Other investors may be more  willing to take a chance on forecasts holding true; they would apply a low discount rate, one that  makes future cash flows nearly as valuable as today’s. There is no single correct discount rate for a set of future cash flows and no precise way to choose one.  The appropriate discount rate for a particular investment depends not only on an investor’s preference  for present over future consumption but also on his or her own risk profile, on the perceived risk of the  investment under consideration, and on the returns available from alternative investments.
    5. A valuation method related to net present value is private-market value, which values businesses  based on the valuation multiples that sophisticated, prudent businesspeople have recently paid to  purchase similar businesses. Private-market value can provide investors with useful rules of thumb  based on the economics of past transactions to guide them in business valuation. This valuation  method is not without its shortcomings, however. Within a given business or industry all companies  are not the same, but private-market value fails to distinguish among them. Moreover, the multiples paid to  acquire businesses vary over time; valuations may have changed since the most recent similar  transaction. Finally, buyers of businesses do not necessarily pay reasonable, intelligent prices.
    6. The liquidation value of a business is a conservative assessment of its worth in which only tangible  assets are considered and intangibles, such as going-concern value, are not. Accordingly, when a stock  is selling at a discount to liquidation value per share, a near rock-bottom appraisal, it is frequently an  attractive investment.
    7. In The Alchemy of Finance George Soros stated, “Fundamental analysis seeks to establish how  underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock  prices can influence underlying values.”7 In other words, Soros’s theory of reflexivity makes the point  that its stock price can at times significantly influence the value of a business. Investors must not lose  sight of this possibility.
  4. Investment Research: The Challenge of Finding Attractive Investments
    1. Value investing by its very nature is contrarian. Out-of-favor securities may be undervalued; popular  securities almost never are. What the herd is buying is, by definition, in favor. Securities in favor have  already been bid up in price on the basis of optimistic expectations and are unlikely to represent good  value that has been overlooked.
    2. Obviously investors need to be alert to the motivations of managements at the companies in which they  invest.
  5. Portfolio Management and Trading
    1. The challenge of successfully managing an investment portfolio goes beyond making a series of good  individual investment decisions. Portfolio management requires paying attention to the portfolio as a  whole, taking into account diversification, possible hedging strategies, and the management of  portfolio cash flow. In effect, while individual investment decisions should take risk into account,  portfolio management is a further means of risk reduction for investors. Even relatively safe investments entail some probability, however small, of downside risk. The  deleterious effects of such improbable events can best be mitigated through prudent diver-sification.  The number of securities that should be owned to reduce portfolio risk to an acceptable level is not  great; as few as ten to fifteen different holdings usually suffice. Diversification for its own sake is not sensible. This is the index fund mentality: if you can’t beat the  market, be the market. Advocates of extreme diversification—which I think of as overdiversification—live in fear of company-specific risks; their view is that if no single position is  large, losses from unanticipated events cannot be great. My view is that an investor is better off  knowing a lot about a few investments than knowing only a little about each of a great many holdings.  One’s very best ideas are likely to generate higher returns for a given level of risk than one’s hundredth  or thousandth best idea.
    2. Diversification, after all, is not how many different things you own, but how different the things you do  own are in the risks they entail.
    3. Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today.  This is because the financial markets are prolific creators of investment opportunities. Investors who  are out of touch with the markets will find it difficult to be in touch with buying and selling  opportunities regularly created by the markets. Today with so many market participants having little  or no fundamental knowledge of the businesses their investments represent, opportunities to buy and  sell seem to present themselves at a rapid pace. 
    4. Being in touch with the market does pose dangers, however. Investors can become obsessed, for  example, with every market uptick and downtick and eventually succumb to short-term-oriented  trading. There is a tendency to be swayed by recent market action, going with the herd rather than against it.  Investors unable to resist such impulses should probably not stay in close touch with the market; they would be  well advised to turn their investable assets over to a financial professional
    5. The single most crucial factor in trading is developing the appropriate reaction to price fluctuations.  Investors must learn to resist fear, the tendency to panic when prices are falling, and greed, the  tendency to become overly enthusiastic when prices are rising. One half of trading involves learning  how to buy. In my view, investors should usually refrain from purchasing a “full position” (the  maximum dollar commitment they intend to make) in a given security all at once. Those who fail to  heed this advice may be compelled to watch a subsequent price decline helplessly, with no buying  power in reserve. Buying a partial position leaves reserves that permit investors to “average down,”  lowering their average cost per share, if prices decline.
    6. All investments are for sale at the right price. Decisions to sell, like decisions to buy, must be based upon underlying business value. Exactly when  to sell—or buy— depends on the alternative opportunities that are available. Should you hold for  partial or complete value realization, for example? It would be foolish to hold out for an extra fraction of  a point of gain in a stock selling just below underlying value when the market offers many bargains. By  contrast, you would not want to sell a stock at a gain (and pay taxes on it) if it were still significantly  undervalued and if there were no better bargains available.
  6. Investment Alternatives for the Individual Investor
    1. Obviously a manager who has achieved dismal long-term results is not someone to hire to manage  your money. Nevertheless, you would not necessarily hire the best-performing manager for a recent  period either. Returns must always be examined in the context of risk. Consider asking whether the  manager was fully invested at all times or even more than 100 percent invested through the use of  borrowed money. (Leverage is neither necessary nor appropriate for most investors.)

What I got out of it

  1. A beautiful overview on value investing from one of the all-time greats

On Howard Marks’ Memos

I spent a couple of months reading Howard Marks’ memos and have attempted to make a distilled “teacher’s reference guide” which (hopefully) describes his investing philosophy in a clear, effective, and concise manner. His focus on simple and truly important ideas throughout these nearly 30 years of memos was amazing to read about and I hope this comes across!

*The vast majority of the content is from Howard’s memos and not my own words. I’ve simply distilled, compiled, and added a few notes and references.

Business Adventures by John Brooks

Summary

  1. Brooks discusses 12 classic financial cases 

Key Takeaways

  1. The Ford Edsel disaster – Ford spent $250m in designing and selling the car but it was an absolute flop. 
  2. The Saunders’ story about how the founder of Piggly Wiggly tried to corner the market. 

What I got out of it

  1. I’ve heard so much about this book and was a bit disappointed. Some fun stories, but overall wouldn’t recommend

The Hour Between Dog and Wolf: Risk Taking, Gut Feelings, and the Biology of Boom and Bust by John Coates

Summary

  1. The story about traders on Wall Street, how the body and mind react to stressful moments, and how the mind does it so quickly that we aren’t consciously aware of it. It is the biology of stress and risk that the author will analyze and explain

Key Takeaways

  1. When there is a bull market or potentially a bubble, there are excess profits and this tends to lead to excessive risk taking, overconfidence, and general mania for those who are benefiting from it. 
  2. Some fascinating questions have been raised whether the increased use of anti-depressants and other drugs could have been so widely and regularly used in the early 2000’s that it changed the brains and risk-aversion tendencies of the traders who used them, exacerbating the dot com bubble
  3. Women were relatively unaffected during the dot com boom and the author argues it is because of their lower levels of testosterone which leads to lower risk taking and more independent thinking when everyone else around them is losing it
  4. Mistakes are made when we artificially separate and silo systems which are truly united. This happens in economics when we assume a perfectly rational human and, in this case, the author argues that the mind and body should be considered one – what happens in the mind affects the body and what happens in the body affects the mind
  5. The feelings we experience during stress comes about because our body is changing, preparing itself for physical movement
  6. There is a hypothesis that when fuel is running low our bodies and minds function by a last in first out methodology meaning that the things that evolve last such a self-control are the first to go when food is scarce
  7. Importantly, novelty, uncertainty, and situations which are out of our control can have as big of an effect on our bodies and minds as real danger does
  8. Goes deeply into the effects that cortisol and testosterone have on the body. Too little and we’re lethargic but too much leaves to overly risky behavior. Have to find the happy medium, flow
  9. The best traders, like the best athletes, are able to toggle between high stress moments and deep relaxation. The more amateur are in a consistent level of stress, never able to relax. The different physiological changes is also manifested in higher HRV in the higher level traders and athletes 
  10. Physical exercise, especially very intense and short spurts and cold exposure, can help us train our physical and emotional toughness 

What I got out of it

  1. Some decently fun stories about finance, risk taking, intuition. I’d recommend Sapolsky’s Why Zebra’s Get Ulcers if you’re interested in this

How Asia Works: Success and Failure in the World’s Most Dynamic Regions by Joe Studwell

Summary

  1. This book is about how fast or not economic transformation is achieved. It argues there are 3 interventions the government can take to influence this process: maximize output from agriculture with highly intensive household farming (pushing up yields and outputs to its highest level which primes demands for goods and services), direct investment and entrepreneurs towards export-oriented manufacturing as it makes use of the limited skills of labor by working with machines and technology (subsidies should incentivize spending in technology and manufacturing), and interventions in the financial sector to focus capital on intensive small scale agriculture and manufacturing development. The state’s role is to keep money targeted at a development strategy which gets the highest rate of technological learning, giving the highest rate of return, and helping the country grow as sustainably as possible, improving the lives and outcomes of everyone .

Key Takeaways

  1. Agricultural
    1. Agriculture is the place to start with up-and-coming countries because the vast majority of their people are tied to the land. Structuring incentives so that these people can prosper creates the foundation for further economic success 
    2. By approximately evenly dividing up the land amongst the peasants and incentivizing a maximization of output (rather than profit), yields go through the roof which helped pay and feed these families. It allowed everyone to compete on an approximately equal footing and everyone believed they had a chance st success – which they did. This “gardening” approach is the most appropriate way to think about and structure agricultural societies early on as it can make full use of all the available labor. Surprisingly, these smaller plots owned by the farmers had far greater yields than many plantations – busting the myth of efficiency in large scale agricultural operations
    3. The political elite tend to be out of touch with the agricultural peasants and therefore undervalue and under-appreciate their power and ability to help the economy 
    4. If you want industrialization, first fix agriculture
    5. Even a total outsider can tell the difference between a plot of land tended by an owner vs. a tenant
    6. A consistent application of these policies across different cultures and regions is a stark reminder that geography is not destiny 
    7. Farmers laid the foundation for industrialization and their household savings provided the base to build factories and later the market for the goods these factories made. Taiwan is the prime example in this case as many factories were built in rural areas and many farmers became industrial entrepreneurs. Indonesia and the Philippines are the negative examples – they nationalized land before the farmers could build up wealth and plantation inefficiency took hold. In addition, loopholes in policies so the rich could amass massive land holdings, put the poor at a disadvantage and worsened conditions
    8. Besides owning the small fields, the farmers need the extension, marketing, and credit to progress 
    9. As rural laborers begin moving into higher paying industrial and service jobs, farming needs to rebalance from productivity towards profitability – shifting towards more mechanized farms away from gardening plots. The countries will need to specialize at this point, moving away from farm protection and subsidies and to a niche they can compete in. This shifts money to this area and gives other poor countries the chance to follow the same playbook 
  2. Manufacturing 
    1. If there is one thing economic history can teach us is that there are no economic policies or laws which are sound forever 
    2. Manufacturing helps local people learn skills and to leverage the machines which they initially import, increasing productivity. Local entrepreneurs know the local market but they must compete with international firms in order to continue improving and to survive long-term without protection 
    3. Government must incentivize – through protection and subsidy – their rural entrepreneurs so they can get into large scale manufacturing rather than service industries at this phase. They must have export discipline – proving that their goods are competitive on a global stage and thus merit subsidies to grow.
    4. The government shouldn’t pick winners as much as weed out losers. South Korea did this which is why they ended up with one or two massive companies in each sector without explicit state investment or control. Protectionism hurts in the short term but helps economies evolve and it’s people learn useful skills and in the long term is beneficial
    5. Growing economies typically start industrialization with textiles later moving on to steel, shipbuilding, food stuffs, petro-chemicals, and eventually cars other heavy industry
    6. While Taiwan what is the exemplar in land redistribution, South Korea took over as the exemplar of industrialization – setting up their entrepreneurs to have to compete with international markets and companies by providing enough subsidy and protection to let them grow, learn, and thrive
    7. It is interesting to look in hindsight that Taiwan, South Korea, and Japan accomplish their amazing feats with no, or at least very few, trained economists. They simply followed the model of early America and later Germany 
    8. Government must not ask entrepreneurs to innovate for moral reasons. Rather they must accept and incentivize their animal spirits so that they can innovate, industrialize, and develop the country as is needed for their own benefit and for the benefit of all
    9. More than ever, firms are able to flourish if they have the right state industrialization policies in place. Hyundai was able to flourish and become one of the world’s most successful car manufacturers from an unpromising start and a family with no automotive experience thanks to the favorable Korean policies 
    10. The goal is technological learning which hopefully leads to internal, domestic innovation. While land reform and infant industry regulations are difficult, there are no better options. Technical and technological progress equates to economic progress and history has shown that these difficult but necessary steps must be taken 
    11. Big business is incredibly important. There are smaller countries with big firms which have gotten rich but never the other way around. However, government must continuously restrain their entrepreneurs or else you end up with oligarchs like in Russia or SE Asia
  3. Financial
    1. Bank deregulation and removal of capital controls too early hurt developing economies such as Thailand or Indonesia. The agricultural and industrial sectors must be ready before these financial policies are enacted. Several different monetary and fiscal policy approaches have led to success but they all had the right policies, pointing at the right targets 
    2. In the Philippines, private banks would lend to the rich entrepreneurs at favorable terms which of course help them but didn’t help the country develop at all. However, ultimately what led to the downfall of economic collapse of the Philippines was their lack of export discipline which would have provided them with export loop feedback so that they could continuously improve and better compete on a global stage – improving their technical know-how across the country
    3. Korea and the Philippines both borrowed extremely heavily and were in a lot of debt but Korea used that money to improve the technology and scale to a global level where the Philippines did not
    4. Malaysia pumped too much money into real estate and the stock market instead of directing it towards industry. They tried to skip a step in order to compete and out do Singapore but this eventually led to an economic collapse and stagnated technological progress 
    5. Capital allocation must be tied to industrial policy and export performance or else capital will be deployed in low return investments. Government must incentivize and cajole entrepreneurs towards manufacturing and international markets. The financier is not the economic savior some suggest but responds to the environment around him which the government helps create. Foreign funds must not be allowed in too early and deregulation can only happen once manufacturing is humming and technological progress is underway 
    6. Banking systems are so effective because they respond to central bank policy which is controlled by government policy. It is a simple and effective method, easier to to control than bond and stock markets
    7. There is no good understanding today of when a country should deregulate 
  4. China 
    1. China first tried the mass scale agriculture approach but soon realized it was ineffective so they transitioned to the gardening approach which greatly helped feed and put to work hundreds of millions. They also abandoned an approach where they would try to come up with everything internally and opened up trade to buy, borrow, and steal the best inventions and processes rather than trying to come up with everything internally
    2. Chinese government has always been paranoid of being at the mercy of necessary food stuff importers. They have taken away a lot of farmland dedicated to these grains in the past decade and may soon change the policy so they secure enough food to be continue to be independent 
    3. It is yet to be seen if China’s close control of oligopolies can help the economy long term. So far they have been able to strike a balance between control and allowing the entrepreneurs and employees to profit 
    4. China has a heavy bias to public and state owned enterprises rather than private companies. 
    5. People worry about shadow banking systems which lend to wealthy citizens outside the direct view of the government in order to seek higher returns but this has existed in one form or another in every developing country. Whenever government policy favors agriculture and industry over finance, shadow finances will pop up
    6. China’s financial policies are not as loose as many think if taken into context of Japan and Korea in similar stages, the size of their economy and the make up of their assets, and the fact that little money is owed externally. They are making great technological progress with the money they’ve borrowed but the best days of industrial-led policy development have passed so they will need to be more efficient moving forward. It is China’s size and not necessarily their innovative policies which have shaken the world. It does not yet have any world renowned firms and, if it is to take the next step developmentally, must improve its institutional policies 
  5. Other
  1. One of the key lessons when analyzing failed states is that they are isolated, closed off, and do not trade or interact with external countries. It has shown to be very hard, if not impossible to thrive if you are not open and trade with other countries 
  2. There is a weaker than expected correlation between education and rise in GDP. Most education occurs on the job and within firms rather than in school settings making industrial focus extremely important. If there is no industry to serve as a vehicle for learning, formal education may go to waste 
  3. Demographics, political pluralism / democracy are very important but is not touched on at length in this book 
  4. Rule of law is not one of the pillars for economic development but it is for overall development 
  5. Broadly, there are two types of economics. The first is akin to an education for developing countries in which the people require the skills needed to compete with their global peers. It requires nurture, protection, and competition. The second is more focused on efficiency and is applicable for more developed countries which needs less state intervention, more deregulation, freer markets and a larger focus on profits. The question is not if there are two but when they meet and how to best transition between the two. Where certain economically developed countries have fallen flat is that they fail to continue to evolve and develop. No policy is good forever and things must change. In addition, economic development is only one leg of the stool. Freedom, rule of law, environmental health, and individual autonomy are equally important and are needed for any country to prosper
  6. There is no significant economy who has evolved successfully out of policies of free trade and deregulation from the get go. They require proactive interventions – namely in agriculture and industry that foster early accumulation of capital and skill 

What I got out of it

  1. For developing countries, the best way to prosper is to first redistribute land so the people can use gardening style agriculture to feed themselves and save some money, then government’s must create subsidies and protective policies so that internal industry can grow and flourish with the goal of increasing skill and technological know-how so that future innovation can happen, then finance comes into the picture and must be used to further direct these two areas effectively and sustainably

Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham

Summary
  1. An organized compilation of Warren Buffett’s annual letters, broken down by concept. “By arranging these writings as thematic essays, this collection presents a synthesis of the overall business and investment philosophy intended for dissemination to a wide general audience.”
Key Takeaways
  1. Focus on the business with outstanding economic characteristics (favorable and durable moats) and management
  2. People are everything – partner with CEOs who will act well even if they could cheat, who act as if they’re the sole owner, as if it’s the only asset they hold, as if they can’t sell or merge for 100 years
  3. Performance should be the basis for executive pay decisions, as measured by profitability, after profits are reduced by a charge for the capital employed in the relevant business or earnings retained by. If stock options are used, it should be related to individual rather than corporate performance, and priced based on business value
  4. True risk is not volatility but permanent loss of capital
  5. Rather be approximately right than precisely wrong
  6. Put eggs in one basket and watch that basket
  7. Price is what you pay, value is what you get
  8. The 3 legs of the investing stool – Mr. Market, margin of safety, circle of competence
  9. Value investing is a redundancy – aim for focused or intelligent investing
  10. Deploying cash requires evaluating 4 commonsense questions based on information rather than rumor
    1. the probability of the event occurring
    2. The time the funds will be tied up
    3. The opportunity cost
    4. The downside if the event does not occur
  11. Guard against the institutional imperative – CEOs herd-like behavior, producing resistance to change, inertia, and blindness
  12. If you aren’t happy owning business when exchange is closed, you aren’t happy owning it when open
  13. Create the business and environment that attracts the people, management, shareholders that you want
  14. Useful financial statements must enable a user to answer 3 basic questions about a business
    1. Approximately how much a company is worth
    2. Its likely ability to meet its future obligations
    3. How good a job its managers are doing in operating the business
  15. Owner earnings –> cash flow = operating earnings + depreciation expense and other non-cash charges – required reinvestment in the business (average amount of capitalized expenditures for PPE that the business requires to fully maintain its long-term competitive position and its unit volume)
  16. Intrinsic value = the discounted value of the cash that can be taken out of a business during its remaining life
  17. Don’t risk what you have and need for what you don’t have and don’t need
  18. Beware weak accounting (EBITDA), unintelligible foot notes, those who trumpet projections
  19. Directors must be independent, business savvy, shareholder oriented, have a genuine interest in the business
  20. Really only 2 jobs – capital allocation, attract and keep outside management
  21. Choose a cold sink (weaker competition) than best management
  22. Conventionality often overpowers rationality
  23. Risk – we continually search for large business with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements
    1. The certainty with which the long-term economic characteristics of the business can be evaluated
    2. The certainty with which management can be evaluated, both as to its ability to realize the full potential of the business and to wisely employ its cash flows
    3. The certainty with which management can be counted on to channel the reward from the business to the shareholders rather than to itself
    4. The purchase price of the business
    5. The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing-power return is reduced from his gross return
  24. When dumb money acknowledges its limitations, it ceases to be dumb
  25. Need to do very few things right if you avoid big mistakes
  26. Changing styles often is a recipe for disaster
  27. Worry most about management losing focus
  28. If you won’t own a business for 10 years, don’t own it for 10 minutes – materially higher earnings in 5-10 years is what you’re looking for
  29. Time is the friend of the wonderful business, the enemy of the mediocre
  30. Have not learned how to solve difficult business problems, but have learned to avoid them
  31. Never in a hurry – enjoy the process more than the proceeds
  32. “Expert error” – falling in love and acting on theory, not reality
  33. You don’t have to make it back the way you lost it
  34. In commodity-type businesses, it’s almost impossible to be a lot smarter than your dumbest competitor
  35. 4th Law of Motion – for investors as a whole, returns decrease as motion increases. a hyperactive market is the pickpocket of enterprise
  36. Attract proper inventors through clear, consistent communications of business philosophy
  37. It pays to be active, interested, and open-minded, never in a hurry
  38. Avoid small commitments – if something is not worth doing at all, it’s not worth doing well
  39. Deals often fail in practice but never in projections
  40. In a trade, what you give is as important as what you get
  41. The goal of each investor should be to create a portfolio (in effect, a “company”) that will deliver him other the highest possible look-through earnings a decade or so from now. An approach of this kind will force the investor to think about long-term business prospects rather than short-term market prospects, a perspective likely to improve results. It’s true, of course, that, in the long run, the scoreboard for investment decisions is market price. But prices will be determined by future earnings. In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard
  42. The primary test of managerial economic performance is the achievement of a high ROE employed and not the achievement of consistent gains in earnings per share
  43. The difficulty lies not in the new ideas but in escaping the old ones.
  44. Ultimately, business experience, direct and vicarious, produced my present strong preference of businesses that possess large amounts of enduring Goodwill and that utilize a minimum of tangible assets.
  45. Nothing sedates rationality like large doses of effortless money
  46. Speculation most dangerous when it looks easiest
  47. Fear is the foe of the faddist but the friend of the fundamentalist
  48. Take into account exposure, not experience
  49. Noah Rule – predicting rain doesn’t count, building arks does
  50. Tolerance for huge losses is a major competitive advantage
  51. Berkshire’s next CEO – temperament is important, independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investing success.
What I got out of it
  1. An amazing collection of investing, finance, accounting, and management ideas

The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks

Summary
  1. Not a how to guide for investing but Howard’s investing philosophy, his guideposts
Key Takeaways
  1. Focus on risk over returns
  2. Goal is to have people say, “huh, I never thought of it like that before”
  3. Experience is what you got when you didn’t get what you wanted. The most powerful lessons come in tough times
  4. No idea can be any better than the action taken on it
  5. Some influencers and mentors: Galbraith, Buffett, Taleb, Munger, Greenblatt, Rothschild
  6. Getting average results is easy, simply invest in an index fund. But, to be successful and best the market and other investors, it takes a deep commitment. To understand business models, psychology, history and a whole host of other disciplines
  7. Second level thinking requires you to see past the short term, see how other are thinking and see the effects of that, takes into account second order consequences, it is deep, complex, convoluted, uses probabilities to see future outcomes, takes many things into account, knows the consensus opinion
  8. Do you have the confidence to be above average? Can you use second order thinking? In order to be successful, you have to hold on consensus views and be correct
  9. Second most important thing is understanding market efficiency and its limitations. Howard’s take us that markets are efficient in that they quickly incorporate new information but they are not necessarily right
  10. Everything moves in cycles, including accepted wisdom
  11. When you have a great idea or thesis on an investment, ask “and who doesn’t know that?”
  12. The starting point and foundation for all investing is an accurate calculation of intrinsic value. Easier said than done
  13. Understanding risk is key. Risk is not volatility but the fact that more things can happen than will happen. He three steps are understanding it, knowing when its high and then controlling it. Risk is different for every investor so creating a broad stroke for it is not possible but the Sharpe ratio may be the best alternative
  14. The greatest investors are subject to some of the greatest periods of underperformance because of their unconsensus views and methods
  15. Improbable things happen and probably things don’t happen all the time
  16. People expect the future to resemble the past which sometimes it does but it leads to be people expecting change to be less impactful than it often is
  17. The most dire and negative situations can in fact be the most riskless as all optimism has been drive out of the price. Quality is not tied to risk. A high quality company can be very risky above a certain price
  18. “This time is different” should cause you to pay extreme attention
  19. Combative negative influences such as desire for more, desire for a sure thing, biases, fear of missing out, greed, fear, comparing self to others, ego and poor psychology is vital. This may be one of the greatest sources of advantage one can achieve
  20. It is essential to find bargains by being willing to invest in what others are seemingly over pessimistic about. Boil it all down in order to find bargains perception house sitter of work in reality for whatever number of
  21. Investing is the discipline of relative selection
  22. Should not go out and try to find out investments – let them find you
  23. Most people, although they have many holdings, are not truly diversified. Own is only diversified if you can expect the holdings to perform differently in changing environments. It is the rare investor who understands these correlations
What I got out of it
  1. One of my favorite investing books – focus on risk rather than return, understand how difficult the game is if you decide to play, must be a second/third level thinker…