inside-the-investments-of-warren-buffett

Writing books about Warren Buffett is a bit of a cottage industry, and one that is getting scarce for new ideas.  This book takes a new approach because the author takes 20 companies that Buffett bought, and analyzes them himself using principles derived from things Buffett has written.

That brings me to my first critique of the book.  You are getting the author’s point of view for analysis, which is somewhat similar to Buffett’s, but is usually not Buffett’s view.  In a minority of cases he references something Buffett wrote at the time.  He did not interview Buffett for this book, which is normal for most books about Buffett.

Buffett didn’t typically do simple analyses, though by the end, he could simplify them to make it understandable to average people.  I’m not saying Buffett’s math wasn’t simple; I am saying that he took great account of qualitative aspects of a business — honest & competent management, owner earnings (free cash flow), moats (sustainable competitive advantages), ability to reinvest excess earnings profitably, etc.  The author takes account of many of these things much of the time, but my view is that Buffett did more still.  Also, Buffett spent more time on margin of safety issues than the author did.

My second critique is that the book is a lot shorter than it looks.  Many of the pages are filled with the financials of the companies being analyzed, and only a tiny portion of the data there is referenced by any analysis in the book.  The book of 260 pages is more like 200 in total length.  For some readers that will be a plus, for others a minus.

The book does well in picking a range of investments by Buffett in terms of success.  Some of his less successful decisions are here — Berkshire Hathaway itself, US Air, Salomon Brothers, Gen Re, and IBM.  It also looks at investments where Buffett bought it all, and where Buffett bought part of a company.  Additionally, it covers investments initiated over a long time, ranging from the partnership years to the present.

My third critique is that in addition to the financial data, there is occasionally more padding in the book than needed — an interview of Buffett by Matt Rose of BNSF stands out, though many of the descriptions of the businesses involved could have been tighter.

On the whole, it is a good book, giving the opinions of another value investor on twenty asset purchase decisions by Buffett.  Those familiar with Buffett will probably want to pass by the book; better to read Buffett himself.  Never investors could benefit from the author’s viewpoint, as it gives a consistent way to build a value investing philosophy in a single book.

Quibbles

Already mentioned.

Summary / Who Would Benefit from this Book

Those more experienced with Buffett’s own writings could ignore this book.  Those who are newer to value investing could benefit.  If you want to buy it, you can buy it here: Inside the Investments of Warren Buffett: Twenty Cases.

Full disclosure: The publisher asked me if I wanted a free copy and I assented.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Fuller disclosure: long BRK/B for myself and clients

Wiped Out

Before I start this evening, thanks to Dividend Growth Investor for telling me about this book.

This is an obscure little book published in 1966.  The title is direct, simple, and descriptive.  A more flowery title could have been, “Losing Money in the Stock Market as an Art Form.”  Why?  Because he made every mistake possible in an era that favored stock investment, and managed to lose a nice-sized lump sum that could have been a real support to his family.  Instead, he tried to recoup it by anonymously publishing  this short book which goes from tragedy to tragedy with just enough successes to keep him hooked.

Whom God Would Destroy

There is a saying, “”Whom the gods would destroy, they first make mad.”  My modification of it is, “Whom God would destroy, he first makes proud.”  In this book, the author knows little about investing, but wishing to make more money in the midst of a boom, he entrusts a sizable nest egg for a young middle-class family to a broker, and lo and behold, the broker makes money in a rising market with a series of short-term investments, with very few losses.

Rather than be grateful, the author got greedy.  Spurred by success, he became somewhat compulsive, and began reading everything he could on investing.  To brokers, he became “the impossible client,” (my words, not those of the book) because now he could never be satisfied.  Instead of being happy with a long-run impossible goal of 15%/year (double your money every five years), he wanted to double his money every 2-3 years. (26-41%/year)

As such, he moved his money from the broker that later he admitted he should have been satisfied with, and sought out brokers that would try to hit home runs.  The baseball analogy is useful here, because home run hitters tend to strike out a lot.  The analogy breaks down here: a home run hitter can be useful to a team even if he has a .250 average and strikes out three times for every home run.  Baseball is mostly a game of team compounding, where usually a number of batters have to do well in order to score.  Investment is a game of individual compounding, where strikeouts matter a great deal, because losses of capital are very difficult to make up.  Three 25% losses followed by a 100% gain is a 15% loss.

In the process of trying to win big, he ended up losing more and more.  He concentrated his holdings.  He bought speculative stocks, and not “blue chips.”  He borrowed money to buy more stock (used margin).  He bought “story stocks” that did not possess a margin of safety, which would maybe deliver high gains  if the story unfolded as illustrated.  He did not do homework, but listened to “hot tips” and invested off them.  He let his judgment be clouded by his slight relationships with corporate insiders at the end.  HE TRIED TO MAKE BIG MONEY QUICKLY, AND CUT EVERY CORNER TO DO SO.  His expectations were desperately unrealistic, and as a result, he lost it all.

As he lost more and more, he fell into the psychological trap of wanting to get back what he lost, and being willing to lose it all in order to do so.  I.e., if he lost so much already, it was worth losing what was left if there was a chance to prove he wasn’t a fool from his “investing.”  As such, he lost it all… but there are three good things to say about the author:

  1. He had the humility to write the book, baring it all, and he writes well.
  2. He didn’t leave himself in debt at the end, but that was good providence for him, because if he had waited one more day, the margin clerk would have sold him out at a decided loss, and he would have owed the brokerage money.
  3. In the end, he knew why he had gone wrong, and he tells his readers that they need to: a) invest in quality companies, b) diversify, and c) limit speculation to no more than 20% of the portfolio.

His advice could have been better, but at least he got the aforementioned ideas right.  Margin of safety is the key.  Doing significant due diligence if you are going to buy individual stocks is required.

Quibbles

This book will not teach you what to do; it teaches what not to do.  It is best as a type of macabre financial entertainment.

Also, though you can still buy used copies of the book, if enough of you try to buy the used books out there, the price will rise pretty quickly.  If you can, borrow it from interlibrary loan.  It is an interesting historical curiosity of a book, and a cautionary tale for those who are tempted to greed.  As the author closes the book:

“Cupidity is seldom circumspect.”

And thus, much as the greedy need to hear this advice, it is unlikely they will listen.  Greed is compulsive.

Summary / Who Would Benefit from this Book

A good book, subject to the above limitations.  It is best for entertainment, because it will teach you what not to do, rather than what to do.

Borrow it through interlibrary loan.  If you feel you have to buy it, you can buy it here: WIPED OUT. How I Lost a Fortune in the Stock Market While the Averages Were Making New Highs.

Full disclosure: I bought it with my own money for three bucks.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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This book is not what I expected; it’s still very good. Let me explain, and it will give you a better flavor of the book.

The author, Jason Zweig, is one of the top columnists writing about the markets for The Wall Street Journal.  He is very knowledgeable, properly cautious, and wise.  The title of the book Ambrose Bierce’s book that is commonly called The Devil’s Dictionary.

There are three differences in style between Zweig and Bierce:

  • Bierce is more cynical and satiric.
  • Bierce is usually shorter in his definitions, but occasionally threw in whole poems.
  • Zweig spends more time explaining the history of concepts and practices, and how words evolved to mean what they do today in financial matters.

If you read this book, will you learn a lot about the markets?  Yes.  Will it be fun?  Also yes.  Is it enough to read this and be well-educated?  No, and truly, you need some knowledge of the markets to appreciate the book.  It’s not a book for novices, but someone of intermediate or higher levels of knowledge will get some chuckles out of it, and will nod as he agrees along with the author that the markets are a treacherous place disguised as an easy place to make money.

As one person once said, “Whoever called them securities had a wicked sense of humor.”  Enjoy the book; it doesn’t take long to read, and it can be put down and picked up with no loss of continuity.

Quibbles

None

Summary / Who Would Benefit from this Book

If you have some knowledge of the markets, and you want to have a good time seeing the wholesome image of the markets skewered, you will enjoy this book.  if you want to buy it, you can buy it here: The Devil’s Financial Dictionary.

Full disclosure: The author sent a free copy to me via his publisher.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

s-l1000

Recently I got asked for a list of investment books that I would recommend. These aren’t all pure investment books — some of them will teach you how markets operate in general, but they do so in a clever way. I have also reviewed all of them, which limited my choices a little. Most economics, finance, investment books that I have really liked I have reviewed at Aleph Blog, so that is not a big limit.

This post was also prompted by a post by another blogger of sorts publishing at LinkedIn.  I liked his post in a broad sense, but felt that most books by or about traders are too hard for average people to implement.  The successful traders seem to have systems that go beyond the simple systems that they write about.  If that weren’t true, we’d see a lot of people prosper at trading for a time, until the trades got too crowded, and the systems failed.  That’s why the books I am mentioning are longer-term investment books.

General Books on Value Investing

Don’t get me wrong.  I like many books on value investing, but the first three are classic.  Graham is the simplest to understand, and Klarman is relatively easy as well.  Like Buffett, Klarman recognizes that we live in a new world now, and the simplistic modes of value investing would work if we could find a lot of stocks as cheap as in Graham’s era — but that is no longer so.  But even Ben Graham recognized that value investing needed to change at the end of his life.

Whitman takes more of a private equity approach, and aims for safe and cheap.  Can you find mispriced assets inside a corporation or elsewhere where the value would be higher if placed in a different context?  Whitman is a natural professor on issues like these, though in practice, the stocks he owned during the financial crisis were not safe enough.  Many business models that were seemingly bulletproof for years were no longer so when asset prices fell hard, especially those connected to housing.  This should tell us to think more broadly, and not trust rules of thumb, but instead think like Buffett, who said something like, “We’re paid to think about the things that seemingly can’t happen.”

The last book is mostly unknown, but I think it is useful.  Penman takes apart GAAP accounting to make it more useful for decision-making.  In the process, he ends up showing that very basic forms of quantitative value investing work well.

Books that will help you Understand Markets Better

The first link is two books on the life of George Soros.  Soros teaches you about the nonlinearity of markets — why they overshoot and undershoot.  Why is there momentum?  Why is the tendency for price to converge to value weak?  What do markets look and feel like as they are peaking, troughing, etc?  Expectations are a huge part of the game, and they affect the behavior of your fellow market participants.  Market movements as a result become self-reinforcing, until the cash flows can by no means support valuations, or are so rich that businessmen buy and hold.

Consider what things are like now as people justify high equity valuations.  At every turning point, you find people defending vociferously why the trend will go further.  Who is willing to think differently at the opportune time?

Triumph of the Optimists is another classic which should teach us to be slightly biased toward risk-taking, because it tends to win over time.  They pile up data from around 20 nations over the 20th century, and show that stock markets have done very well through a wide number of environments, beating bonds by a little and cash by a lot.

For those of us that tend to be bearish, it is a useful reminder to invest most of the time, because you will ordinarily make good money over the long haul.

Books on Managing Risk

After the financial crisis, we need to understand better what risk is.  Risk is the likelihood and severity of loss, which is not constant, and cannot be easily compressed into simple figure.  We need to think about risk ecologically — how is an asset priced relative to its future prospects, and is there any possibility that it is significantly misfinanced either internally or by its holders.  For the latter, think of the Chinese using too much margin to carry stocks.  For the former, think of Fannie Mae and Freddie Mac.  They took risks that forced them into insolvency, even though over the long run they would have been solvent institutions.  (You can drown in a river with an average depth of six inches.  Averages reveal; they also conceal.)

Hot money has a short attention span.  It needs to make money NOW, or it will leave.  When an asset is owned primarily by hot money, it is an unstable situation, where the trade is “crowded.”  So it was with housing-related assets and a variety of arbitrage trades in the decade of the mid-2000s.  Momentum blinded people to the economic reality, and made them justify and buy into absurdly priced assets.

As for the last book, hedge funds as a group are a dominant form of hot money.  They have grown too large for the pool that they fish in, and as a result, their returns are poor as a group.  With any individual hedge fund, your mileage may vary, there are some good ones.

These books as a whole will teach you about risk in a way that helps you understand the crisis in a systemic way.  Most people did not understand the situation that way before the crisis, and if you talk to most politicians and bureaucrats, they still don’t get it.  A few simple changes have been made, along with a bunch of ineffectual complex changes.  The financial system is a little better as a result, but could still go through a crisis like the last one — we would need a lot more development of explicit and implicit debts to get there though.

An aside: the book The Nature of Risk is simple, short and cute, and can probably reach just about anyone who can grasp the similarities between a forest ecology under threat of fire, and a financial system.

Summary

I chose some good books here, some of which are less well-known.  They will help understand the markets and investing, and make you a bigger-picture thinker… which makes me think, I forgot the second level thinking of The Most Important Thing, by Howard Marks.  Oops, also great, and all for now.

PS — you can probably get Klarman’s book through interlibrary loan, or via some torrent on the internet.  You can figure that out for yourselves.  Just don’t spend the $1600 necessary to buy it — you will prove you aren’t a value investor in the process.

financial tales

This financial book is different from the 250+ other financial books that I have reviewed, and the hundreds of others I have read.  It tells real life stories that the author has personally experienced, and the financial ramifications that happened as a result.  Each of the 60+ stories illustrates a significant topic in financial planning for individuals and families.  Some end happy, some end sad.  There are examples from each of the possible outcomes that can result from people interacting with financial advice (in my rough large to small probability order):

  • Followed bad advice, or ignored good advice, and lost.
  • Followed good advice, and won.
  • A mixed outcome from mixed behavior
  • Followed bad advice, or ignored good advice, and won anyway.
  • Followed good advice, and lost anyway.

The thing is, there is a “luck” component to finance.  People don’t know the future behavior of markets, and may accidentally get it right or wrong.  With good advice, the odds can be tipped in their favor, at least to the point where they aren’t as badly hurt when markets get volatile.

The stories in the book mostly stem from the author’s experience as a financial advisor/planner in Maryland.  The stories are 3-6 pages long, and can be read one at a time with little loss of flow.  The stories don’t depend on each other.  It is a book you can pick up and put down, and the value will be the same as for the person who reads it straight through.

In general, I thought the author advocated good advice for his clients, family and friends.  Most people could benefit from reading this book.  It’s pretty basic, and maybe, _maybe_, one of your friends who isn’t so good with financial matters could benefit from it as a gift if you don’t need it yourself.  The reason I say this is that some people will learn reading about the failures of others rather than being advised by well-meaning family, friends, and professionals.  They may admit to themselves that they have been wrong when they be unwilling to do it with others.

I recommend this book for readers who need motivation and knowledge to guide themselves in their financial dealings, including how to find a good advisor, and how to avoid bad advisors.

Quibbles

The book lacks generality because of its focus on telling stories.  It would have been a much better book if it had one final chapter or appendix where the author would take all of the lessons, and weave them into a coherent whole.  If nothing else, such a chapter would be an excellent review of the lessons of the book, and could even footnote back to the stories in the book for where people could read more on a given point.

I know this is a bias of mine regarding books with a lot of unrelated stories, but I think it is incumbent on the one telling the stories to flesh out the common themes, because many will miss those themes otherwise.  In all writing, specifics support generalities, and generalities support specifics.  They are always stronger together.

An Aside

I benefited from the book in one unusual way: it gave me a lot of article ideas, which you will be reading about at Aleph Blog in the near term.  I’ve never gotten so many from a single book — that is a strength of reading the ideas in story form.  It can catch your imagination.

Summary / Who Would Benefit from this Book

You don’t need this book if you are an expert or professional in finance.  You could benefit from this book if you want to improve what you do financially, improve your dealings with your financial advisor, or get a good financial advisor.  if you want to buy it, you can buy it here: Financial Tales.

Full disclosure: The author sent a free copy to me directly.  Though we must live somewhat near to one another, and we both hold CFA charters, I do not know him.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission. This is my main source of blog revenue. I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip. Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book. Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website. Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites. Whether you buy at Amazon directly or enter via my site, your prices don’t change.

I love books.  I read a lot of them, especially those on investing, finance, and economics.  I could argue that the genre is tired, but there are a lot of people trying to jazz it up, sometimes with more success, and sometimes with less.  Those who do it different have a strong probability of bombing it, but occasionally a new approach is brilliant.

If you’re new to Aleph Blog, you might not know that about one in ten posts is a book review.  That wasn’t what I intended when I started this project 8.6 years ago.  Actually, I’m not sure what I intended, this has ended up bigger and more involved than I ever imagined.

If you have read my book reviews, you might note several things that are different:

  • I read in full almost all of the books that I review.  When I don’t, I disclose it.
  • I don’t just review new books.  I review older books when it makes sense to me.
  • I don’t just review books that I like, but those that I don’t like also.
  • I also try to identify who might be the right sort of person for a given book — some people don’t like math, some books are too simple, some are too hard, etc.

I usually cross-post my reviews at Amazon.com.  For the types of the books that I review, I think I have a pretty good reviewer ranking at Amazon.  That said, I know it would be a lot higher if I did four things.

  • Stop mixing in my own experiences or knowledge on a given topic, which sometimes is equal to that of the author, and occasionally, exceeds the knowledge of the author.  Book reviews aren’t supposed to be about me.  I get it, and I am trying to reduce that.
  • Review only new books, and get them done as close as possible to the release date of the book.  There are many book reviews that are in my opinion lousy, but they got done first, and people voted them up, giving a review that is the equivalent of a “smiley face” button a parasitic life off of the book.
  • Write shorter reviews.
  • Stop doing critical reviews.  Only post happy stuff — these authors hail from Lake Wobegon, and are all above average.

I want to amplify that last point.  Books have natural defenders — certainly the author and his friends, but also if it is a book on a cultic topic, such as gold, Bitcoin, various schools of economic prejudice thought, doomsday economics, THE ONE WAY TO INVEST, etc., etc., etc., you get the mindless zombies partisans defending the cult.  They will vote you down, and it doesn’t take many reviews where you have 20% helpful votes, even if it is the best critical review, before your rating sinks dramatically.

I’m not going to stop writing critical reviews.  I’d rather be less popular and known, than sacrifice credibility, even if I look like a fool at times.   (Yes, that is somewhat contradictory.)  That’s just a price of cross-posting at Amazon, and I will keep doing it to benefit readers generally, whether they like it or not.

And Now For Something Completely Different

On an unrelated note, one interesting thing that has developed over time are all of the independent authors and small publishers sending me books in the mail.  Some are preceded by an email for permission, others show up like lost puppies.

They are interesting books, and I don’t review all of them, because many of them don’t work — they are just too quirky, and probably needed a better editor, or, a publisher who would do the author a favor and tell him, “No.”

Second unrelated note: the hardest books for me are those where I know the author, and I end up not being crazy about the book.  Usually, I quietly spike those reviews, and send a note to my friend/acquaintance as to why he won’t see a review out of me.  I do have a heart, after all, and value my relationships more than “telling it like it is,” unless it is egregious.

All for now, as always thanks for reading.

100 to 1 in the Stock Market

100 to 1 in the Stock Market

 

How can a book be largely true, but not be a good book?  By offering people a way to make a lot of money that is hard to do, but portraying it as easy.  It can be done, and a tiny number succeed at it, but most of the rest lose money or don’t make much in the process.  This is such a book.

Let me illustrate my point with an example.  Toward the end of every real estate bull market, books come out on how easy it is to make money flipping homes.  The books must sell to some degree or the publishers wouldn’t publish them.  Few actually succeed at it because:

  • It’s a lot of work
  • It’s competitive
  • It only works well when you have a bunch of people who are uneducated about the value of their homes and are willing to sell them to you cheap, and/or offer you cheap financing while you reposition it.
  • Transaction costs are significant, and improvements don’t always pay back what you put in.

You could make a lot of money at it, but it is unlikely.  Now with this book, “100 to 1 in the Stock Market,” the value proposition is a little different:

  • Find one company that will experience stunning compound growth over 20-30+ years.
  • Invest heavily in it, and don’t diversify into a lot of other stocks, because that will dilute your returns.
  • Hold onto it, and don’t sell any ever, ever, ever!  (Forget Lord Rothschild, who said the secret to his wealth was that he always sold too soon.)
  • Learn to mention the company name idly in passing, and happily live off of the dividends, should there be any. 😉

Here are the problems.  First, identifying the stock will be tough.  Less than 1% of all stocks do that.  Are you feeling lucky?  How lucky?  That lucky?  Wow.

Second, most people will pick a dog of a stock, and lose a lot of money.  If you aren’t aware, more than half of all stocks lose money if held for a long time.  Most of the rest perform meh.  Even if you pick a stock you think has a lot of growth potential, there is often a lot of competition.  Will this be the one to survive?  Will some new technology obsolete this?  Will financing be adequate to let the plan get to fruition without a lot of dilution of value to stockholders.

Third, most people can’t buy and hold a single stock, even if it is doing really well.  Most succumb to the temptation to take profits, especially when the company hits a rough patch, and all companies hit rough patches, non excepted.

Fourth, when you do tell friends about how smart you are, they will try to dissuade you from your position.  So will the financial media, even me sometimes.  As Cramer says, “the bear case always sounds more intelligent.”  Beyond that, never underestimate envy. 🙁

But suppose even after reading this, you still want to be a home run hitter, and will settle for nothing less.  Is this the book for you?  Yes.  it will tell you what sorts of stocks appreciate by 100 times or more, even if finding them will still be rough.

This book was written in 1972, so it did not have the benefit of Charlie Munger’s insights into the “Lollapalooza” effect.  What does it take for a stock to compound so much?

  • It needs a sustainable competitive advantage.  The company has to have something critical that would be almost impossible for another firm to replicate or obsolete.
  • It needs a very competent management team that is honest, and shareholder oriented, not self-oriented.
  • They have to have a balance sheet capable of funding growth, and avoiding crashing in downturns, while rarely issuing additional shares.
  • It has to earn a high return on capital deployed.
  • It has to be able to reinvest earnings such that they earn a high return in the business over a long period of time.
  • That means the opportunity has to be big, and can spread like wildfire.
  • Finally, it implies that not a lot of cash flow needs to be used to maintain the investments that the company makes, leaving more money to invest in new assets.

You would need most if not all of these in order to compound capital 100 times.  That’s hard.  Very hard.

Now if you want a lighter version of this, a reasonable alternative, look at some of the books that Peter Lynch wrote, where he looked to compound investments 10 times or more.  Ten-baggers, he called them.  Same principles apply, but he did it in the context of a diversified portfolio.  That is still very tough to do, but something that mere mortals could try, and even if you don’t succeed, you won’t lose a ton in the process.

Quibbles

Already given.

Summary / Who Would Benefit from this Book

You can buy this book to enjoy the good writing, and learn about past investments that did incredibly well.  You can buy it to try to hit a home run against a major league pitcher, and you only get one trip to the plate.  (Good luck, you will need it.)

But otherwise don’t buy the book, it is not realistic for the average person to apply in investing.  if you still want to buy it, you can buy it here: 100 to 1 in the Stock Market.

Full disclosure: I bought it with my own money.  May all my losses be so small.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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Some books are better in concept than they are in execution.  Ironically, that is true of “The Art of Execution.”

The core idea of the book is that most great investors get more stocks wrong than they get right, but they make money because they let their winners run, and either cut their losses short or reinvest in their losers at much lower prices than their initial purchase price.  From that, the author gets the idea that the buy and sell disciplines of the investors are the main key to their success.

I know this is a book review, and book reviews are not supposed to be about me.  I include the next two paragraphs to explain why I think the author is wrong, at least in the eyes of most investment managers that I know.

From my practical experience as an investment manager, I can tell you that your strategy for buying and selling is a part of the investment process, but it is not the main one.  Like the author, I also have hired managers to run a billion-plus dollars of money for a series of multiple manager funds.  I did it for the pension division of mutual life insurer that no longer exists back in the 1990s.  It was an interesting time in my career, and I never got the opportunity again.  In the process, I interviewed a large number of the top long-only money managers in the US.  Idea generation was the core concept for almost all of the managers.  Many talked about their buy disciplines at length, but not as a concept separate from the hardest part of being a manager — finding the right assets to buy.

Sell disciplines received far less emphasis, and for most managers, were kind of an afterthought.  If you have good ideas, selling assets is an easy thing — if your ideas aren’t good, it’s hard.  But then you wouldn’t be getting a lot of assets to manage, so it wouldn’t matter much.

Much of the analysis of the author stems from the way he had managers run money for him — he asked them to invest on in their ten best ideas.  That’s a concentrated portfolio indeed, and makes sense if you are almost certain in your analysis of the stocks that you invest in.  As such, the book spends a lot of time on how the managers traded single ideas as separate from the management of the portfolio as a whole.  As such, a number of examples that he brought out as bad management by one set of managers sound really bad, until you realize one thing: they were all part of a broader portfolio.  As managers, they might not have made significant adjustments to a losing position because they were occupied with other more consequential positions that were doing better.  After all, losses on a stock are capped at 100%, while gains are theoretically infinite.  As a stock falls in price, if you don’t add to the position, the risk to the portfolio as a whole gets less and less.

Thus, as you read through the book, you get a collection of anecdotes to illustrate good and bad position and money management.  Any one of these might sound bright or dumb, but they don’t mean a lot if the rest of the portfolio is doing something different.

This is a short book.  The pages are small, and white space is liberally interspersed.  If this had been a regular-sized book, with white space reduced, it might have taken up 80-90 pages.  There’s not a lot here, and given the anecdotal nature of what was written, it is not much more than the author’s opinions.  (There are three pages citing an academic paper, but they exist as an afterthought in a chapter on one class of investors. It has the unsurprising result that positions that managers weight heavily do better than those with lower weights.)   As such, I don’t recommend the book, and I can’t think of a subset of people that could benefit from it, aside from managers that want to be employed by this guy, in order to butter him up.

Quibbles

The end of the book mentions liquidity as a positive factor in asset selection, but most research on the topic gives a premium return to illiquid stocks.  Also, if the manager has concentrated positions in the stocks that he owns, his positions will prove to be less liquid than less concentrated positions in stocks with similar tradable float.

Summary / Who Would Benefit from this Book

 

Don’t buy this book.  To reinforce this point, I am not leaving a link to the book at Amazon, which I ordinarily do.

Full disclosure: I received a copy from a PR flack.

If you enter Amazon through my site, and you buy anything, including books, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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I am generally not a fan of formulaic books on investing, and this is particularly true of books that take unusual approaches to investing. This book is an exception because it does nothing unusual, and follows what all good quantitative investors know have worked in the past.  The past is not a guarantee of the future, but if the theories derived from past data make sense from what we know about human nature, that’s about as good as we can get.

The book begins with a critique of the abilities of financial advisors — their fees, asset allocation, and security selection.  It then shows how models of financial markets outperform most financial advisors.

Then, to live up to its title , the book gives simple versions of models that can be applied by individuals that would have outperformed the markets in the past.  You can beat the markets, lower risk, and “Do It Yourself [DIY].”  It provides models for asset allocation, stock selection, and risk control, simple enough that a motivated person with math skills equal to the first half of Algebra 1 could apply them in a moderate amount of time per month.  It also provides a simpler version of the full model that omits the security selection for stocks.

The book closes by offering three reasons why people won’t follow the book and do it themselves: fear of failure, inertia, and not wanting to give up an advisor who is a friend.  It also offers three risks for the DIY investor — overconfidence, the desire to be a hero (seems to overlap with overconfidence), and that the theories may be insufficient for future market behavior.

This is where I have the greatest disagreement with the book.  I interact with a lot of people.  Most of them have no interest in learning the slightest bit about investing.  Some have some inclination to learn about investing, but even the simple models of the book would make their heads spin, or they just wouldn’t want to take the time to do it.  Some of it is similar to seeing a Youtube video on draining and refilling your automatic transmission fluid.  You might watch it, and say “I think I get it,” but the costs of making a mistake are sufficiently severe that you might not want to do it without an expert by your side.  Most will take it to the repair garage and pay up.

I put a knife to my own throat as I write this, as I am an investment advisor, but there is more specialized knowledge in the hands of an auto mechanic than in an investment advisor, and the risk of loss is lower to manage your own money than to fix your own brakes.  That said, enough people after reading the book will say to themselves, “This is just one author, and I barely understand the performance tables in the book — if right, am I capable of doing this?  Or, could it be wrong?  I can’t verify it myself.”

The book isn’t wrong.  If you are willing to put in the time to follow the instructions of the authors, I think you will do better than most.  My sense is that the grand majority people are not willing to do that.  They don’t have the time or inclination.

 

Quibbles

The book could have been clearer on the ROBUST method for risk control.  It took me a bit of effort to figure out that the two submodels share half of the weight, so that when submodels A & B flash green — 100% weight, one green and one red — 50% weight, both red — 0% weight.

Also, the book is enhanced by the security selection model for stocks, but how many people would have the assets to assemble and maintain a portfolio with sufficient diversification?  The book might have been cleaner and simpler to leave that out.  The last models of the book don’t use it anyway.

Summary / Who Would Benefit from this Book

I liked this book, and I recommend it for those who are willing to put in the time to implement its ideas.  This is not a book for beginners, and you have to be comfortable with the small amount of math and the tables of financial statistics, unless you are willing to trust them blindly.  (Or trust me when I say that they are likely accurate.)

But with the caveats listed above, it is a good book for people who are motivated to do better with their investments.  If you want to buy it, you can buy it here: DIY Financial Advisor.

Full disclosure: I received a copy from one of the authors, a guy for whom I have respect.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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Can you explain to a non-technical reader how software works?  It depends on what you mean by “software” and “explain.”

With respect to software, this particular book focuses on a few areas that are hot today, and not computing in general. Take a look at the following list.  What would it be like to not have the following technologies?

  • Graphic display, both for pictures and video
  • Security — whether in the form of passwords, encryption, including public key cryptography
  • Data compression techniques to reduce the amount of data sent, whether for text, pictures, or video
  • Web Search
  • Maps that help us find the most efficient driving route
  • Concurrency — allowing multiple parties to use the same application at the same time

The web and the internet generally would be a dramatically different place, and much smaller, as it was in 1990 slightly after Tim Berners-Lee created HTTP (Hypertext Transfer Protocol).

The topics here are important and affect our daily lives.  The author of “How Software Works” makes a significant effort to explain programming in a way that teenagers and adults could understand, using pictures, tables, flowcharts, simplified numerical examples, and more.

Now, reading this book will give you a top-level view of how these technologies work, but not much more.  It will help you understand some of the tradeoffs that go on in computing.  How do you balance:

  • Richness of data delivered versus resource use and speed of display.
  • Security versus ease of use
  • Reduction of size of data versus loss of fidelity in an image or video
  • And more, there are a lot of tradeoffs in programming.

The ideal audience for this book is bright adults who aren’t programmers, but want some appreciation of the hidden complexity behind much of what goes on on the internet.  The second ideal audience would be teenagers and young adults who might want a career in computer science, who might benefit from exposure to these varied areas of software.  Who knows?  One area might catch their fancy, and then they can study it for real, and put it into practice.  (I’m giving this book to my second daughter who is interested in programming.)

Quibbles

On page 39, the author suggests that there is no way to do square roots, that it is just a guesswork procedure.  There are algorithms to do square roots — whether those are used in computing, I don’t know, but it wouldn’t be hard to implement.  I was doing it when I was 10.  (I’m not much of a programmer presently, but I am good at math.)

Summary / Who Would Benefit from this Book

I liked this book.  Give it to friends who want to learn about how much of the web is designed.  Give it to interested teenagers to expand their horizons in computing.  If you want to buy it, you can buy it here: How Software Works.

Full disclosure: I received a copy from a friendly PR flack.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.