I was pleasantly surprised to be invited to contribute a chapter to this book.  I am going to encourage you to buy this book, but let me give some of the reasons not to buy this book:

  • Don’t buy it to give me something.  I don’t get anything from sales of this book.  Neither does Mebane Faber, who is giving all of the profits to charity.
  • Don’t buy it to read my article.  You can read it for free here.  Better, you can read the updated version of the article, which I publish quarterly, here.  (Those reading this at Amazon, there are links at my blog.  Google “Alephblog The Best Investment Writing” to find them.)
  • Don’t buy it to get current ideas.  There are none here.  The weakness of the book is that the articles are dated by 9-21 months or so, BUT… that doesn’t keep the book from being relevant.
  • Don’t buy it if you want one consistent theme.  It’s like reading RealMoney.com, except with a broader array of authors.  There is no “house view.”
  • Don’t buy it for the graphics in the book.  The grayscale images in the book are good for black & white, but some are hard to read.  The graphs for my article are far better at my blog.

The book is a good one because there is something for everyone here.  Do you want quantitative finance?  There is a good selection here. Do you want good basic articles about how to think about investing?  There are a good number of those as well, particularly from well-known financial journalists, and some of the most well-regarded bloggers.  Do you want a few unusual articles that might cause you consider some asset sub-classes or techniques that you haven’t considered before?  They are here too.

The writers fall into four buckets — journalists, asset managers, pundits/authors, and those who sell information at their websites.  I will tell you that my personal favorites from this volume are Tom Tresidder, Mebane Faber, Chris Meredith, Ben Carlson (how was he the only one with two articles in the book?), Jason Hsu & John West, and Cullen Roche.

Don’t get me wrong, I like almost all of the authors in this volume, and am proud to be featured among them.  For a number of them, though, I would have picked other things they have written in 2016 that had more punch, and offered more of a difference in perspective.

Why buy this?  After you read this, you will be a smarter, more well-rounded investor.  In my calculations, that’s  pretty good — 32 articles that will take you 4 hours to read.  Got seven minutes?  Read an article; it just might help you a great deal.

Quibbles

Already stated, though if you don’t like statistics, one-third of the articles may not appeal to you.  Also, a few articles veer into political commentary (not that I would ever do that 😉 ).

Summary / Who Would Benefit from this Book

Though almost anyone could benefit from this book, it is geared toward investors with intermediate-to-higher levels of knowledge and experience.  If you want to buy it, you can buy it here: The Best Investment Writing: Selected writing from leading investors and authors.

Full disclosure: I received two free copies of the book for contributing the article.  That’s all, unless someone buys the book through the link above.

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 feel like the skunk at the party here. I have no argument with the authors, per se. They came up with their concept and executed it adequately. No one else that I know of has done a book of their notes from Berkshire Hathaway annual meetings, in this case extending over 30 years.

But the bar for writing Buffett books is low, because they sell so well.  Many marginal concepts get written about that aren’t as good as simply reading the writings of Buffett and Munger themselves.  This is true of this volume in two ways. 1) It is notes, not a transcript.  Notes aren’t as good; if I want Buffett, I want him unfiltered, unless the person has a significant interpretation of an aspect of Buffett that is consistent with what Buffett has said, but brings a lot more to the table.  This doesn’t bring much more to the table.

2) Buffett and Munger are at their best when they are prepared.  What I found interesting going through the book was how many things Buffett and Munger got wrong hazarding guesses on the future.  Some were in areas of expertise, most weren’t.  The annual meeting is a lot less valuable than the things that Buffett and Munger have prepared for people to read or hear.

So, I got partway through the book, found it tedious, and scanned the rest to see if it was similar.  It was, so I set the book aside.

Thus, I fault the publisher for this book.  You are much better off reading Buffett and Munger directly, and you can do it for free.

Quibbles

Already stated.  Again, I don’t fault the authors.

Summary / Who Would Benefit from this Book

You are much better off reading Buffett and Munger directly, and you can do it for free.  If you want a feel for the annual Berkshire Hathaway meetings over time, it might be worth purchasing, but I don’t think that is a desirable goal.  If you still want to buy it, you can buy it here: University of Berkshire Hathaway.

Full disclosure: The publisher kind of pushed a free copy on me, after I commented that there are too many marginal Buffett books out there.

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.

Full disclosure: long BRK-B

Joel Tillinghast, one of the best mutual fund managers, runs the money in Fidelity’s Low-Priced Stock Fund.  It has one of the best long-term records among stock funds over the 28 years that he has managed it.

The author gives you a recipe for how to pick good stocks, but he doesn’t give you a machine that produces them.  In a style that is clever and discursive, he summarizes his main ideas at the beginning and end of the book, and explains the ideas in the middle of the book.  The ideas are simple, but learning to apply them will take a lifetime.

Here are the five ideas as written in the beginning (page 3):

  1. Make decisions rationally

  2. Invest in what we know (did I mention Peter Lynch wrote the foreword to the book?)

  3. Worth with honest and trustworthy managers

  4. Avoid businesses prone to obsolescence and financial ruin, and 

  5. Value stocks properly

At this point, some will say “You haven’t really given us anything!  These ideas are too big to be useful!”  I was surprised, though, to see that the same five points at the end of the book said more (page 276).  Ready?

  1. Be clear about your motives, and don’t allow emotions to guide your financial decisions

  2. Recognize that some things can’t be understood and that you don’t understand others.  Focus on those that you understand best.

  3. Invest with people who are honest and trustworthy, and are doing something unique and valuable.

  4. Favor businesses that will not be destroyed by changing times, commoditization, or excessive debt.

  5. Above all, always look for investments that are worth a great deal more than you are paying for them.

That says more, and I think the reason they are different is that when you read through the five sections of the book, he unpacks his initial statements and becomes more definite.

Much of the book can be summarized under the idea of “margin of safety.”  This is a type of value investing.  When he analyzes value, it is like a simplified version of reverse discounted cash flows.  He tries to figure out in a broad way what an investment might return in terms price paid for the investment and what “owner earnings,” that is, free cash flow, it will generate on a conservative basis.

One aspect of the conservatism that I found insightful is that he assumes that the terminal value of an investment is zero. (page 150)  In my opinion, that is very smart, because that is the area where most discounted cash flow analyses go wrong.  When the difference between the weighted average growth rate of free cash flow and the discount rate is small, the terminal value gets really big relative to the value of the cash lows prior to the terminal value.  In short, assumptions like that say that the distant future is all that matters.  That’s a tough assumption in a world where companies and industries can become obsolete.

Even though I described aspects of a mathematical calculation here, what I did was very much like the book.  There are no equations; everything is described verbally, even the math.  Note: that is a good exercise to see whether you understand what the math really means.  (If more people on Wall Street did that, we might not have had the financial crisis.  Just sayin’.)

One more fun thing about the book is that he goes trough his own experiences with a wide variety of controversial stocks from the past and his experiences with them.  His conservatism kept him a great number of errors that tripped up other celebrated managers.

I learned a lot from this book, and I enjoyed the writing style as well.  He clearly put a lot of effort into it; many people will benefit from his insights.

Quibbles

His methods are a lot like mine, and he clearly put a lot of thought into this book.  That said, he doesn’t understand insurance companies as well as he thinks (I’m an actuary by training).  There are a number of small errors there, but not enough to ruin a really good book.

Summary / Who Would Benefit from this Book

I highly recommend this book.  This is a book that will benefit investors with moderate to high experience most. For those with less experience, it may help you, but some of the concepts require background knowledge.  If you want to buy it, you can buy it here: Big Money Thinks Small: Biases, Blind Spots, and Smarter Investing.

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.

In general, I don’t like books on personnel management.  That’s mostly because good management techniques are mostly obvious, and there are typically a lot of good strategies that are somewhat different, and most of them will work, if applied with a little common sense.  Pick one.  Apply it.  Be consistent.  Get feedback.  Adjust.  Repeat.

No one has the “holy grail.”  That is true of this book also.  What I appreciate about “The Difference” is its emphasis on creating a good culture.  I’ve worked in companies with good cultures, bad cultures and mixed cultures.  What Subir Chowdhury gets right is the key difference is attitude, and it flows from the top.

Some firms fail because employees are afraid to tell the truth.  That was true within areas of AIG when I worked for it.  Do you want a culture based on truth?  Be honest, ask for it from your bosses, and expect it from your subordinates.  Don’t punish anyone for telling the truth; instead reward it.

Some firms fail because of a lack of emphasis on quality.  The need for short-term profits outweighs quality products and services.  Low quality is a cancer — it can spread from employee relationships to products, services, accounting, vendor relations, marketing, etc.  Cultural change is needed, starting at the top.  If management doesn’t put quality ahead of short term profits, quality will not characterize a company.  Management has to lead efforts on quality by example, instructions, and rewards.  Employees won’t care about quality if management doesn’t care about them, and reward them for stopping bad quality even if it slows production.

The book takes an approach like this, only much better than I can.  It provides a cutesy acronym to summarize the approach for creating a great corporate culture, which to me trivializes ideas, but aids memory for others.

The author peppers the book with his experiences in his life  and work, from youth to the present.  I found those to be a mixed bag.  Like most people, a lot of it sounds like he is tooting his own horn repeatedly.  Many of them are quite instructive, a few aren’t.  I particularly found his example of giving to beggars to be weak.  Yes, the poorest need money, but what they need more is relationships.  The poorest lose relationships due to disease, accidents, substance abuse, selfishness on the part of their family and their own selfishness, an attitude of blaming the world around rather than look at their own failures, and more.

Giving them money does not break the problem; it often feeds the problem.  Creating relationships for them can allow them to reboot their lives, if they want to live a new life.  Don’t get me wrong; I’m no great shakes here.  I just know that the poorest need radical personal change if they ever want to escape their poverty.  Money won’t make the difference necessary most of the time.

That last rant aside, I liked the book and would recommend it.  It’s kind of expensive for its size, but maybe you want a short book that you can read in 1-2 hours.  You’ll get enough to make you think, and maybe make a difference.  It’s “good enough” to help you, but not outstanding.

Quibbles

Already mentioned.

Summary / Who Would Benefit from this Book

You may not need another management book.  If you need something short to motivate a need for corporate and personal change, this could be the book for you.  If you want to buy it, you can buy it here: The Difference: When Good Enough Isn’t Enough.

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.

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.

71WwKT7VGsL

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.