As you might know, I reviewed Howard Marks’ excellent book The Most Important Thing, and its enhanced version, The Most Important Thing Illuminated.? Some PR flacks are more tenacious, and some less so.? Some come to me prior to publication, and some after.? Some represent an amazing author and book, others less so.
Even though the PR flack came to me after publication, she was tenacious, and offered me an interview with Howard Marks, Chairman of Oaktree Capital.? How could I refuse?
Now, I need to offer one apology before providing the link to the half hour audio interview.? If you read Howard Marks’ newsletters you know that he runs a shop that focuses on bonds, particularly high yield, convertible, and distressed debt.? But almost all of the principles that he puts forth apply to equity value investing as well, and so I assumed that he did some of that as well.? I should have looked at Oaktree’s strategies, and seen that they do little in vanilla asset classes like domestic US equities.
That invalidated a number of questions that I asked Mr. Marks via e-mail, but I had enough good questions to fill out a good half hour.? One final note: during the interview, he needed to take phone calls twice, and I edited those out of the audio file.? They took place near minutes eight and twenty-one.
With no further ado, here is my interview with Howard Marks:
I enjoyed reading this book, but I have some issues with it.? First, let me say what I liked:
1) The author chose? a number of different investors to make his point.? They weren’t all outside passive minority investors like most of us are.? There were many that invested in whole companies, or, they were the company, and invested in incredible ventures.
2) He points out a number of significant successes and how they occurred, for seven investors.
3) He points out commonalities in? the processes in the first two chapters and the epilogue.
4) He is a sharp observer of investment processes.? He knows the game, as I do.
What I did not like:
1) Big successes are like snowflakes — no two are alike.? There was little to unify the successes of the book.?? Readers deserve a more unified theory of what leads to success.
2) The Chapter on Jimmy Rogers was weak.? Aside from what he did with Soros, there is no indication that he has made significant money since then.? No “Big Win” was recorded in the book.
3) With a few of the “Big Win” investors, it was difficult to tell whether they really had a “big win” or a moderate win.? Some of the stories had nothing dramatic behind them.
4) There was little to integrate the disparate investors, despite the chapters that attempted it.
Though I liked the book, I found nothing compelling to make me love the book.? I have read better books in this area.
Full disclosure: The PR flack asked me if I wanted the book, and was kind enough to send me the prior book also, which I thought wouldbe the better of the two.
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.
I have not read this book.? I read almost all books that I review, so I disclose when I have merely scanned a book such as this.
Why scan?? First, I didn’t ask for the book.? Second, it is 800+ pages long.? Third, it is a series of academic articles defending and attacking the Kelly Criterion — it will have a very specific audience that cares about the academic side of the debate.? The popular side is covered by the book, “Fortune’s Formula,” which I have favorably reviewed here.
The simple way to phrase the argument for the Kelly Criterion is this: you have an advantage versus the markets for whatever reason.? You have an edge on average, and the odds are tilted in your favor.? You size your bets as a ratio of edge over odds.? If your edge is durable, and the odds are calculated right, the optimal decision leads to the best compound growth of capital on average.
Samuelson sits in his ivory tower, where only efficient markets exist.? Those of us that are practitioners know that the markets are hard, but not efficient.
To me, the Kelly Criterion is intuitive, whereas the ideas of Modern Portfolio Theory are a stretch.? They don’t fit the way the market operates.
Full disclosure: This book came out of the blue; did not ask for it.
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.
Note to readers: I appreciate votes at Amazon.com if you like my reviews, and you can vote here.
We learn more from failures than successes.? With failures, it is easy to observe the cause in hindsight and realize that we neglected a key principle in investing.? With successes, the reasons vary, and it is much harder to generalize.
In the book, most of the failures stem from failing to consider implicit or explicit debt on investments.? I am a sympathetic critic here, because most of my own failures in investing stem from the same flaw.
The two exceptions are the Leon Cooperman and the Madoff investors, where the problem was fraud.? Fraud is tough, and there are ways to reduce the odds of being snared by it — I have written about that at my blog.? It is impossible to eliminate.
But there are some defenses, look for free cash flow, and check the normalized operating accruals.? Scams tend to increase accruals, and no have free cash flow.
High levels of debt are always dangerous; best for amateur and most professional investors to avoid the situations.? If you can do this, you will eliminate most large portfolio failures.
Strengths of the Book
The book considers a wide range of investors.? It has Wealthy Dudes, Hedge Fund Managers, Private Equity Managers, Mutual Fund Managers, Corporations, Individual Investors, and CEOs.? The book considers both passive and active investors, and that is a real strength.? The author aimed for generality in investing when he wrote this.? He could have focused on a single area, but he didn’t.
Quibbles
In dealing with Geoff Grant, the author shows that he does not understand asset-backed securities that well.? What happened there was that they did not understand portfolio margining, and that they could be forced to sell under tough conditions, which is a potential asset-liability mismatch.
With respect to Chris Davis and AIG, it is clear that Davis was relying on historical performance which would no longer prospectively be true.? Complexity in accounting is almost always punished.? Ask Mr. Buffett as to why he keeps his reserves conservative.
Full disclosure: I asked the PR flack for the book when she asked me to review his latest book, which I am still reading.
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.
This book has just been released.? I got an early copy.? The book is interesting enough that I would like to do a Q&A with the author, and I have contacted the PR flack to do so.
To the review:
Would you like to understand the mindsets of a variety of successful hedge fund managers?? This book will give that to you, but there is a catch: you will also learn how these managers developed, and this is a big plus.
Most of the managers went through rigorous experiences that made them far more effective at evaluating risk and return potentials.?? Have you been through anything similar to that?? If not, you might read this very interesting set of accounts, but then realize that you don’t have the personality/skills necessary to replicate what they have done.? Don’t feel bad, most people don’t have that.
A large part of what makes hedge fund managers successful is their willingness to limit their activity to areas where they have genuine expertise.? They gain insight beyond most into areas where they are experts in discerning value.
This book does not give you a formula for how to make money; instead, it gives you lessons in the characters of those that have made a lot of money for themselves and their clients.? What are they like?
Among their many attributes, they are:
Driven/competitive — though I have known my share of failures in investing that have that attribute.
Lifelong learners, like Buffett and Munger — though I have known some really bright people who know a lot about investing/finance who add little to an investment process.
Opportunistic — they recognize what their best opportunities are, and pursue them to the exclusion of others.
Focused — they develop an edge, and try to be “best in class,” whether in mathematics of the markets, understanding the legal rights of different types of securities, understanding industry dynamics, accounting nuances, etc.
Patient — if opportunities are not promising, don’t do much.? It’s like being an intelligent underwriter — when your competitors are giving away the store, don’t write business, spend time sharpening your skills.? Study what could go wrong, and see if there is a way to take advantage of the situation.
Team-builders — They develop talented teams/cultures and motivate them to excellence.
Sensible — They know when to be doggedly persistent, and know when to admit defeat.
Now, no hedge fund manager has all of these, but the best have most of them.
Contents
The book covers nine managers/firms:
Ray Dalio — Bridgewater
Pierre LaGrange & Tim Wong — MAN Group / AHL
John Paulson — Paulson & Co.
Marc Lasry and Sonia Gardner — Avenue Capital Group
David Tepper — Appaloosa Management
William A. Ackman — Pershing Square Capital Management
Daniel Loeb — Third Point
James Chanos — Kynikos Associates LP
Boaz Weinstein, Saba Capital Management
About the Author
Her name is Maneet Ahuja, and is a producer for CNBC, specializing in covering hedge funds.? That’s how she gained the contacts in order to write the book.? Business Insider did a profile on her, and you can find it here.
Quibbles
The book needs something to tie it together and give it depth, otherwise the book is only “Meet these nine nifty hedge fund managers that I have gotten to know.”? That’s a serious deficiency; even a single chapter at the front or back would have enriched the book, making it more general and cohesive.
I also think there would have been better choices for those that wrote the foreword (Mohamed El-Erian) and the afterword (Myron Scholes).? The former is an accomplished investor, but is not an expert on hedge funds.? Myron Scholes is an accomplished academic, has worked for hedge funds, but is still not an expert on them.
Who would benefit from this book: If you want to learn about what type of people these nine hedge fund managers are, and read anecdotes about some of their best and worst trades, this would be a book you would enjoy.? If you want to, you can buy the book here: The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds.
Full disclosure: The book was sent to me out of the blue; did not ask for it.
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.
This book is written by one of the foremost stock investors in emerging markets, Mark Mobius.? This is a short book that has little to no math in it, and few graphs.? It can be read in 2-3 hours.
The edge that this book will give you is understanding the limitations of emerging market investing.? What are those limitations?
1) Emerging markets are volatile, and dependent on the overall health of the developed economies.? Companies in emerging markets often export to the developed nations.? Emerging market governments often gear their monetary policy to aid their exporters, which forces them to absorb the loose or tight monetary policy of the developed nations.
2) Emerging markets often lack legal safeguards on property rights that developed markets take for granted.? Remember that there is a difference between “rule of law” (governments are subject to a constitution), and “rule by law.” (governments make laws to enforce their will on everyone else)
3) Accounting methods may be less well-developed.? Typically this leads to valuation discounts, until the accounting is deemed as trustworthy as in the developed nations.
4) Corporate governance can be weak, with insiders getting significantly more benefits than shareholders.? Getting to know whether the board & management are honest, and acting for the good of all is critical.
5) Frontier emerging markets offer a lot of potential for profit, but they have all of the above problems, and much larger.? When there are few foreign investors in a market, safeguards are few.? Ask who registers the shares, and you may find that no one does, or the company does, so how can you prove you are the owner.
6) As a result, one must insist on a large margin of safety when investing in emerging markets.? That involves a good balance sheet, cheap valuation, and growth potential.
7) Emerging market investing is a hybrid — look at the country, the industry, and the company itself.? To buy, you have to have some confidence in most/all of them.
8) Opportunities are often best after a large pullback in the nation’s stock index.? Buy the strongest most liquid names after a crisis.? They will come back.
9) Privatizations are often good opportunities to buy; the company will do much better once there is a profit motive.
10) Banks are mirrors of the local economy; they lead the market down and up.? Anything affecting the economy in specific affects the banks, because usually bond markets are not active.
11) To be long emerging market stocks, you have to be an optimist.? It is similar to being a high-yield bond manager.? Investment grade bond managers are paid to be pessimists; there is little to no upside.? High yield managers have some upside that they play for; they are always more optimistic.? So it is for emerging market stock managers — there is a lot of upside to play for , so they have to be optimists.
12) As such, investing in emerging markets takes a lot of work to do it well.? And if you read the book, you might think by the end that you don’t have enough information to do it on your own, and I think you would be right.
Think for a moment about all of the scandals over Chinese reverse mergers with US shell companies — and these are listed in the US!? What hope does a US investor have of investing in emerging markets at a distance?? Accounting differences, disclosure differences, legal rights can be different… it could be a full time job.
This is why you need a manager of an open-end or closed-end mutual fund, or at least an exchange-traded fund [ETF] to invest in.? Mark Mobius explains how difficult it is to do it yourself, without saying that bluntly to you as I am doing.? Personally, I would encourage investing in a broad fund that can go anywhere, and not a country-specific fund, unless you have a very strong view of why a particular market will do well.
I recommend this book so that you can learn, but I think at the end, you won’t do much with it, except buy a mutual fund or an ETF.
Full disclosure: This book was sent to me without my asking for it.
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.
Before I start this evening, if you like my reviews generally, please go to Amazon and tell them that my reviews are helpful.? From this link, it does not take long to do so.? Thanks.
This was one of those books that grew on me.? The author, the well-known John Mauldin, strings together a bunch of ideas originated by others.? That’s not much different than what Tadas Viskanta does at Abnormal Returns.? He brings us the best ideas that he has culled from others.? That is a significant piece of work that should not be denigrated by others.
The beginning of the the book is consumed with 12-20 year market cycles.? There are times when investing in risky assets where you face headwinds and tailwinds. The headwinds and tailwinds are driven by valuation, often expressed through Q-ratio, CAPE, or Michael Alexander’s Price-to-Resources ratio, out of which the book makes a lot (link here for an example).? It’s a Price-to-Adjusted Book value ratio as I see it.
Regardless of the method, if you buy in at high valuations, the wind is in your face, and you are not likely to earn much.? The opposite is true for low valuations, but at the valuation trough, everyone is disgusted, and few are willing to buy.
So it takes a strong stomach and mind to follow a method like this.? Strong stomach, because when it is time to buy one will fear that the money will be lost.? Strong mind, because near valuation peaks people will tell you that you are nuts to leave the party — it’s just getting started.
But what if a decent sized portion of institutional money did this?? The cycles would go away, or be muted.? That’s not likely to happen in my opinion: some men may change, but you can’t change mankind.? Emotions of fear and greed dominate over clear thinking.
The book touches on many other topics:
Why strategies go in and out of favor
Why to be skeptical of those who give investment advice (including Mauldin & me)
That the growth rate of the economy eventually limits the growth rate of any company.
The effect of demographics on the markets
Why chasing performance doesn’t work.
Why most newsletter writers strategies could never be as good as they state, or they manage money in tiny niches.
How to detect value in stocks.
How to use bonds and commodities in asset allocation.
I say “touches on” because in line with its title, it is a “little book.”? You are only getting a taste of what an intelligent investor who hires other managers to manage money for clients thinks.? This is especially true as you go through the section on value investing, which does not get much beyond dividend yield, dividend growth, and price-to-book (common equity).
As such, this book will not be a complete answer to any investor wanting to learn about the markets.? It introduces basic concepts in ways that most ordinary people could learn.? Reading time should be less than two hours.? One more thing, the book has very little in the way of math.
I appreciated the short summaries at the end of each chapter.? If someone wanted to get the gist of the book, they could read all of the short summaries in about 10 minutes, and then they would have the skeletal ideas of the book, allowing them to read all or part of the book with greater understanding.
Full disclosure: This book was sent to me without my asking for it.
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.
I consider Tadas Viskanta to be a friend of mine.? I write my eclectic blog, and Tadas occasionally features me on his daily curation of the economics/finance/investment blogosphere.
But it is not friendship that leads me to write the following: this is a really good book.? Why?? Every day, Tadas curates the best thoughts in finance.? He finds them, he motivates them, and links to them.? If I had just one site to visit everyday, it would be his, not mine.? He’s really good at finding the best content in finance.
But it goes a step further than that.? Tadas is a very good blogger in his own right.? It’s not that he comes up with new insights, but he is very good at taking the insights of others and weaves them into a greater insight than the separate thoughts of the individuals.? He finds themes, and he finds disagreements.? Each provides good food for thought.
Now, if Tadas can do this on a daily basis, let’s call him the Chief Synthesizer of the economics/finance/investment blogosphere — then, what happens if he decides to take several steps back, and synthesize the grand themes he has seen in six years of writing his blog.
It’s been a violent period, after all.? Tadas has been blogging from the peak of residential real estate (October 2005), through the tail of the boom (October 2007), to the bust (March 2009), to the present.? He keeps it relevant, and he doesn’t take sides, which allows him to source the best content better.
So as he synthesizes the themes of the last six or seven years, he comes down to really basic ideas for each chapter: Risk, Return, Stocks, Bonds, Portfolio Management, Does Active Investing Work, ETFs, Global Investing, Alternative Assets, Behavioral Finance, Using Media, and the Lost Decade.? He handles them deftly, highlighting differences, but giving a consensus opinion.
The book is modest, in that it does not promise you greater profits if you follow his advice.? It is a realistic book, because most of us know that the basic principles of investing are straightforward, but they get clouded by academics and hucksters.? After you read this book, you may or may not earn more, but you will probably be safer.
Also, the book is an easy read; I glided through it in less than three hours.
Quibbles
The editor could have done more work to make the index complete; I was surprised to find myself mentioned in the book more times than the index noted.
Who would benefit from this book: Most amateur investors would benefit from the book, and many, though not all professionals would benefit from the book’s basic approach. Think of it this way — what if you could explain basic concepts to the uninstructed more clearly? Wouldn’t it help you in your business?? If you want to, you can buy the book here: Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.
Full disclosure: I asked the publisher for the book and he sent it to me.
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.
This book is highly optimistic that we will restore a gold standard to our world.? Much as I would like it, because it restrains the power of governments that increasingly behave like thugs, I don’t think a gold standard is likely to replace the status quo.
The book has many good areas to commend it, where it deals with history, explaining the problems of the past.? It trashes the concept of the SDR of the IMF, it is the Euro on an even weaker footing.
But the book is weak, because it does not recognize that the standard for money and the regulation of banks are separate issues.? Merely instituting a gold standard will not bring stability.? One must regulate heavily the degree that banks borrow short and lend long.? We had many crises during the gold standard in the 19th century, none as bad as the Great Depression, but they all stemmed from a lack of bank regulation.? I have no sympathy for the concept of “free banking.”? Anyone that is making a large number of promises needs to be regulated; he is a systemic risk.
Chapter seven is the critical chapter of the book, and it fails because it doesn’t go far enough.? In the chapter, Russia adopts a gold standard, and requires payment in gold for exports.? Fair enough, but as other nations attempt to adopt a gold standard, they would find their exporters objecting, leading to no adoption of a gold standard.
Chapter seven is the only thing that makes this book unique, and it is why I requested it from the publisher.? That makes this book a “fail.”
On the bright side, I now know that a gold standard would be difficult to appear, unless hyperinflation drove people to a commodity standard.? (And the odds of that are better than 20% over the next 20 years.
Full disclosure: I asked the publisher for the book and he sent it to me.
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.
There is more money to be lost than made in most controversial IPOs, on average. Don’t get me wrong, this is a good book, and the author knows what she is talking about, but whether one should buy Facebook in its IPO next month is a huge open question, and I would encourage you to read this book to think through the problem.
If you read the book, you will get a healthy dose of skepticism, mixed with the idea that many large IPOs in tech have been successful, like Google.? The main idea is that you have to do due diligence.? All snowflakes have six corners, but they are all different.
The book gives you five different ways to value Facebook, and those methods are all over the map, as they should be for a company where the economics are yet to be determined.? At least it is profitable.
The range of valuation gives everyone something to hang onto, but the thought process should force everyone to think about how Facebook will monetize all of their users.? Will the users behave in a way that allows Facebook to make money off them?? So far, yes, but the future is far more volatile than I can imagine.
In general, I would advise readers to avoid IPOs.? Most people lose money in buying them on the secondary markets.? Better you should buy stock in less flashy businesses like utilities, insurance, and energy stocks.? You will make more money there — businesses with a high earnings yield tend to do better than other stocks, and Facebook does not make it there, for now.? Buying Facebook implies a company that will grow far more rapidly than most, and far a long time, which is not common.
If you are thinking about buying shares of Facebook, spend five bucks or so, and get this book.? It’s less than a brokerage commission, and worth more than most in educating you about the value of Facebook.
Quibbles
None; this is a good book.? What matters most is how you think about it.
Who would benefit from this book: If you want to buy the Facebook IPO, buy this book and learn something.? Be aware before you buy, or be dissuaded before you do nothing.? If you want to, you can buy the book here: The Facebook IPO Primer.
Full disclosure: The publisher asked if I wanted to read the book electronically.? I said ?yes? and I downloaded it and read it.
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.
