Book Reviews – Page 12 – The Aleph Blog

Book Review: Then There Were None

Posted on 22 April 2012 by David Merkel

The topic of resources running out is perennial.? Go back to the ?60s and ?70s, you have the Club of Rome and other doom-mongers.? ?There are also the bets placed by Julian Simon on commodity prices in the ?80s and ?90s, betting the commodity prices would fall, and they did.? Much of the effect stemmed from increasing efficiency in using scarce commodities.

But in the ?90s and 2000s, large parts of the world came into the capitalist system.? In relative terms, labor, particularly low-end labor was no longer scarce, and resources were the least scarce of the triad of labor, capital and resources.

Then There Were None takes a middling view of resource scarcity.? Commodity prices have risen significantly. Many low-cost resource deposits have been mined out.? Demand for commodities has risen dramatically because of new demand from China and other emerging markets.

There are 21 chapters in the book:

two deal with a classes of minerals: rare earths and fertilizers
18 deal with individual minerals, and
the last tries to tie the book together.

Each chapter explains why there is demand for the resource in question, shows the change in demand, who produces it, and companies that benefit from the changes.

It also describes what the minerals are used for, so that you can get a better sense of what might drive the pricing of the minerals/metals, and of the products that derive from them.

There has been a shift in the world, and there is more demand on resources than there used to be.? This book fleshes out the effect of the change in demand, and tries to explain, mineral by mineral, the effects on the global economy.

Quibbles

The book focuses too much on China.? It also occasionally makes it sound like China could use up all of the resources of the world, which is ridiculous.

Who would benefit from this book: For investors, and ordinary folks, if you want a good view of what is happening globally with critical minerals, you can read it here.? If you want to, you can buy it here: Then There Were None: Chinese Demand for Critical Materials in the Coming Decades.

Full disclosure: The publisher offered me the book.? I said ?yes? 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.

Book Review: The Most Important Thing Illuminated

Posted on 13 April 201213 April 2012 by David Merkel

I previously reviewed The Most Important Thing.? Great book, but can a great book be made better?? Yes, but only by a little bit.

The illumination of this book comes from comments from Christopher Davis, Joel Greenblatt, Paul Johnson and Seth Klarman, an estimable bunch of investors and investment thinkers.? Howard Marks offers a few more comments as well.

None of the comments are bad, but also, none of them disagree with Howard Marks.? Then again, I didn’t find anything to disagree with in the original book, so maybe that’s not a negative.

Many of the comments are brief, and most of them serve to intensify what Howard Marks wrote, e.g:

This is a really important point.
This is an excellent summary of the idea.

Relatively few of the comments really expand the discussion, so here is my advice for you: if you already own The Most Important Thing, you don’t need this.? Borrow it at your library if you must.? If you don’t own it, you will get a slightly richer experience with this book than the original.

I recommend this book to all who aspire after value investing.

Quibbles

Again none.

Who would benefit from this book: All value investors, and those who want to be value investors can benefit from this book.? Those that want to understand how the economy really works will benefit as well.? If you want to, you can buy it here: The Most Important Thing Illuminated.

Full disclosure: The publisher asked if I wanted to read the book electronically.? I said ?yes? and I downloaded it and read it.

Book Review: Strategic Intuition

Posted on 12 April 2012 by David Merkel

We all know how to be logical; at least most of us do.? But logic only takes us so far.? Real progress comes through those who are willing to take old ideas, combine them, and use them to solve an unrelated existing problem.

Breakthroughs do not come from ordinary activity, but from those that are willing to look beyond, and consider new possibilities.? They take what is known from the past, and generalize it to a new situation.

Even in writing the closing, the author writes, “My opportunity to write this book arose from when I saw a gap in the field of strategy at the same time that I saw the existing elements that might combine to fill that gap. In all these chapters, not a single idea, not a single example, is my own.? I borrowed them all.? But the combination is new, and I am grateful for the opportunity to present it here to you.”

The author looked at many different areas of human endeavor, looking for commonalities for when leaps of progress were made.? The areas were science, war, entrepreneurship, the arts, and social work.

It’s not enough to be knowledgeable about the past, and to know the theories of the present.? Can you take them to come up with a solution to a current problem, by using ideas from one area of knowledge, and apply them to an area where they have not been previously applied?

What is ordinary is when you know a goal, and create a plan to achieve that goal.? If you have enough resources, and your plan is adequate you will succeed at an ordinary goal.

What is extraordinary is trying to achieve something that is totally new.? Those that do so achieve it by using what is already known (by some) in a totally new way.

Thus, rather than looking at the goal, consider that the goal might not be achievable, but something close to it might be.? Look at many goals and see whether there isn’t one that has greater impact that you could achieve.?? (I wish I could have revised my dissertation topic in mid-stream.)

I have experienced this in my own life.? My biggest successes came through using ideas from other fields and applying them to the insurance industry, which is a very stodgy place.

When you finish with the book, you will have a lot of new ideas for how to creatively attack hard problems.? That’s what makes this book compelling.? But it’s methods are not a panacea; they won’t solve every problem.

Quibbles

The trouble with a book like this is that it picks and chooses.? Much progress does come from the ordinary application of logic.? But many of the jumps of progress do not come from applying ideas from other fields, but by pure accident.? Something anomalous occurs, and no one has a good explanation for it.? At such a point, new theories are proposed and tested.? This is more like ordinary science, and less like what the author proposes.

Also, few of us have the luxury of being able to be flexible about what targets we aim for, or have knowledge of fields far from the target that have some influence on it.

Who would benefit from this book:?? If you have to solve a hard problem, and you don’t see a way to solve it, this book may help you do it.? If you want to, you can buy it here: Strategic Intuition: The Creative Spark in Human Achievement.

Full disclosure: The publisher asked me if I would like the book.? I said yes, and they sent me a copy.

On Book Reviewing

Posted on 7 April 20128 April 2012 by David Merkel

Piles of books.? Many piles of books.? If you begin to do a lot of book reviews, you get a lot of books.

Let me describe the piles:

One foot to the left of me is a pile of 13 unread books.? After I finish reading a book, and put it into the “Write about,” or “Maybe write about” piles, I choose a book from the pile to read.? Whatever seems most interesting I read next.
Two feet to my right is the “Write about” pile.? You will see those written up here.? There are six books there.
Three feet to my left are two piles of about 25 books each of books that I have reviewed, or rejected.? Mostly, they have been reviewed.
Five feet to my left are 23 books that I have fully read but will not review.? I hand out unfavorable reviews rarely.? Roughly half of the books are okay, but they are nothing great.? The rest are harmful, boring, etc.
30 feet behind me, in my bedroom, I have a whole bookcase holding books that I have reviewed.

When I started writing at Aleph Blog, I had no intention of doing a lot of book reviews.? It has worked out to be 9% of all of my posts, which is pretty significant.? I never dreamed that I would be a highly-ranked reviewer at Amazon.com — I’m in the top 2000, and I appreciate what votes my readers give me.

I get books four ways:

They come unsolicited.
The publisher contacts me, and asks me if I want a given book.
I ask the publisher for a book, and they send it to me.
I add books to my Amazon wish list, and buy them when my kids have a small order, in order to get free shipping.

Which brings up pile six, two feet to the left of me, books that I have purchased, but I have not read.? This competes with pile one.? I try to read the most interesting book at my disposal so that I can write the most useful stuff for my readers.

If I think of more, I will write a second part to this post, but that is all for now.

Book Review: Currency Wars

Posted on 7 April 2012 by David Merkel

I sometimes call it “the race to the bottom.”? During a time where most nations are feeling economically weak, some decide to weaken their currency, so that their exporters can do better, which supposedly preserves jobs in export industries.

Producers have concentrated interests, and lobby well.? The interests of consumers are diffuse, and don’t gain favor from governments kowtowing to producers, who also find more effective ways of rewarding political friends.

If we were intelligent, we would know this is a loser of a battle, and we would realize that this simply leads to inflation globally.? Better to sit it out, ignore the debasement, and realize it will eventually burn out.? Unlike the current Federal Reserve, don’t add to the debasement, it just adds fuel to the global inflationary fire.

This book starts with a currency war-gaming scenario.? In the game, the author pursues a course where on one of the non-US teams decides to link their currency to gold.? Initially derided, they end up as one of the victors at the end of the game, even though no one else follows them.

The book continues with an examination of three eras where currencies were at war: 1) prior to the Great Depression until we leave the internal gold standard, 2) the inflationary guns and butter late ’60s to mid ’80s, encompassing the period where the US goes off the gold standard entirely, and global currencies float.? We go through a period of high inflation after that, followed by an extreme rise in interest rates. 3) The book examines the present time, where every nation wants to devalue, so that it exporters are not harmed.

If we left the gold standard to get stability, we did not get it.? If we left the gold standard to benefit the global or US economies, the benefit has not appeared.

But, from chapters 7 through 10, the book muddles.? It talks about a wide variety of ideas loosely related to the main thesis, but proving little one way or another.? The book does not build toward its conclusion in chapter 11, where it suggests a return to a gold standard.

A gold standard exists to preserve purchasing power, and takes power out of the hands of governments that want to favor one set of parties over another, whether favoring savers or investors, producers or consumers.? It takes many questions out of the hands of the government, and reduces the need for an expensive central bank filled with PhDs in Economics who really have no idea how economies work, because they are mathematicians, and don’t get the broader societal ramifications of what their policies encourage.

I enjoyed this book, and would recommend it. The book isn’t linear to its goal, but you will learn a lot along the way, even if it is circuitous.

Quibbles

Already given.

Who would benefit from this book:?? This book is for those frustrated with the way that our government are handling monetary affairs, and are looking for a better way.? If you want to, you can buy it here: Currency Wars: The Making of the Next Global Crisis (Portfolio).

Full disclosure: The publisher asked me if I would like the book.? I said yes, and they sent me a copy.

Book Review: The Indomitable Investor

Posted on 3 April 20123 April 2012 by David Merkel

Most books that I don’t ask for are lousy.? This one isn’t, and I love the title, because it indicates the long hard slog that it is to persevere in investing. IT IS A BUSINESS!!? Without hard work it will not yield good results.? Indomitable means persistence, and a lack of persistence will give a bad result.

Steven Sears has been a columnist for Barron’s for many years.? He has read a lot of analyses, and written a lot of columns.? In this book he attempts to explain why many investors are the dumb money that clever investors profit from.? Or, why many investors get sucked dry by brokers, funds with high loads, other illiquid investments, etc.

There is a constant in investing and it frustrates me, because I try to educate retail investors.? People panic as a crisis unfolds, and they sell near the bottom.? Conversely, people buy as a trend nears its peak, because they conclude that they have missed out.

What would it take to educate these people, which are many among us?? Losses for one.? Second, a willingness to read historical finance, which few will do, because it doesn’t seem relevant.? If you will not learn from history, you will not learn.

As is sometimes said, “Wise men learn from the errors of others.? Average men learn from their own errors.? Dumb men never learn.”

Financial markets have more than their share of average and dumb men.? They get fleeced, and rapidly.? That dichotomy is key to investment markets.? Think about it — if you were going into a war, would you spend more to make sure you had the best armaments?? I think you would.? If so, why do you go virtually undefended in contention against Wall Street?

There are two ways to do this.? First, go passive and index.? Safe, reasonable, good.? Second, do a lot of research and find managers that eat their own cooking (like me), and invest with those that have a good long-term track record.? They should be managers with fixed principles regardless of the environment.

What it gets right

More data does not mean things are better.? For most people more data confuses them.? Giving long explanations in prospectuses is a hindrance for most, not an aid.? Maybe there should be a law that says, “Prospectuses can only be 1000 words long.? If you can’t get the risks in that amount of words, you deserve to be sued.”

It takes three years for the average investor to note that the trend has changed.? Is there any surprise then about “dumb money?”? Would it get any better if we told them this?

Quibbles

Ted Benna was a benefits consultant, not a tax consultant (P.5). Maybe they were the same back then.

Regarding Diogenes, he was a skeptic, and did not believe that there were any honest men.? That’s not a bad way to view Wall Street, butthat was not the sense I got from this book.

The author makes a lot out of calender anomalies, bu most of the research I have reviewed does not support them.

He makes a lot of the ISM, but if you aggregate his numbers, they seem higher than market returns have been over the the last 80+ years.? I find the data questionable.? Maybe he didn’t correctly describe what he cited, or maybe those he cited deceived him.

If you can discern consumer spending trends in advance of the market, you will do well, but can you do it?? This is a non-insight.

At the end of the book, page 195, he asks for new relative measures of risk.? If only it were that simple.? We all wish we had those.? They change over time, and asset classes may shift in relative riskiness due to overvaluation.? Oh to have bought bonds in 1987, and in 2000. Oh, to have bought equities in 1982, 1995 and 2003.

Who would benefit from this book: If you ae willing to be patient and following long-term strategies (like me) you might benefit from this book.? It is only meant for those willing to take a long-term view, because it tends to work.? If you want to, you can buy it here: The Indomitable Investor: Why a Few Succeed in the Stock Market When Everyone Else Fails.

Full disclosure: This book was sent to me without me asking for it.

Book Review: How Markets Really Work

Posted on 23 March 2012 by David Merkel

Do you want to make money in the short run? Beat the markets? This could be the book for you.

I am a longer-term investor, but? this book looks at a lot of strategies that are commonly understood by traders, and finds that the traders are wrong.

What are we talking about?? For the most part the book indicates that momentum strategies fail in the short run.? That’s not as radical as it sounds because the academic literature documents a short term reversal effect (one month) for stocks that are moving dramatically.

But this book shows the effect in many ways, looking at:

Changes vs 5 & 10-day highs/lows
When markets make higher highs or lower lows over three days
Days up or down in a row
Market Breadth
Large move up or down
Number of 52-week highs versus lows

When these factors are strong, the market tends to be weak in the short run.

Then there are these factors:

Volume
Put/Call ratio

They have little effect on future returns in the short run.? But what does have effect in the short run?

VIX
RSI(2)
Low Vol beats High Vol

High VIX relative to trend indicates a short-term rally, as does a low RSI(2) score.? As for the low volatility, it takes a different approach, segmenting the market by historical? volatility, and no surprise, low volatility wins.

At the end the book tries to draw all of the ideas into a trading strategy, but I have no idea how good it is, because I have no idea how many strategies they tested before announcing the one that fit the past the best.

This is an audacious book, but what would be needed to make this a great book is not what happens over the next five days, but what happens over the next year.? Capital does not recycle annually, much less weekly.

Most strategies that involve a lot of trading fail; this book may fall into that bucket.

Quibbles

Graph 3-7 is blank.

This is a very short book, with many graphs and tables taking up 80% of the book.? That can be a weakness or strength, depending on your point of view.

Who would benefit from this book: Those who want to improve their trading of the markets in the very short run would benefit from this book.? If you want to, you can buy it here: How Markets Really Work: Quantitative Guide to Stock Market Behavior (Bloomberg Financial).

Full disclosure: The publisher asked me if I wanted the book, so I asked for the book and he sent it to me.

Book Review: Accounting for Value

Posted on 22 March 2012 by David Merkel

Before I start this evening’s book review, I would like to ask a favor of my readers.? If you like my reviews, maybe you can say that they are helpful at Amazon.? I rank in the 2000s at present, which was a challenge to get to, because not many reviewers of finance, investing, and economics books get to levels like that.? So, to the degree that you like my reviews, and have extra time to do this, I appreciate it.? If not, no worries — I’ve well exceeded my expectations; I appreciate that you read me.

I have never taken a course in accounting.? But I have had to do accounting for most of my working life, including doing financial reporting inside life insurers, which is the most complex industry for accounting. I have even opined on 10+ financial accounting standards over time.? And Aleph Blog is a leading accounting website as a user of accounting. (Dubious distinction, I know, but when you are a blogger, you take what you can get. 😉 )

As a value investor, I have taken a skeptical view toward the accounting of the companies that I invest in.? Cash entries can be trusted; accrual entries are less trustworthy in proportion to the length of time and uncertainty to the collection of cash.

This book relates accounting principles to value investing principles, and it is uncanny as to how they overlap.? It also attempts to connect it to Modern Portfolio Theory [MPT] concepts where it makes sense, but with less success. (No surprise, because value investing has a decent theory behind it and MPT doesn’t.)

The cornerstone of this book is return on net operating assets [RNOA].? The idea is to split the company in two, and separate operating results from financing results.? Give little value to financing results, which are likely no repeatable, and give significant value to operating results.

Note: this means that there is no way of evaluating financial companies under this rubric, but that’s a common problem.? Financial companies are a bag of accruals; value is difficult to discern.? That is why I spend most of my time analyzing the management teams of financial companies to see if they are conservative or not.

The book offers two measures of accounting quality, the Q-score and the S-score.? You would have to do more digging to make these practical, but at least you get some direction in the matter.

There are two simple prizes that the book gives to readers:

1) Profit results mean-revert; don’t trust strong or weak current ROEs. (or RNOAs)

2) Stocks with low P/Es and P/Bs do well.? Each works well, but they work better together.? Maybe if Ben Graham were still alive, he would not have been dismissive of his life’s work at the end, value works.? It’s an ugly brain dead strategy, but it works.

Quibbles

None.

Who would benefit from this book: Those who want to improve their perception of investment value would benefit from this book.? If you want to, you can buy it here: Accounting for Value (Columbia Business School Publishing).

Full disclosure: The publisher asked me if I wanted the book, so I asked for the book and he sent it to me.

Book Review: The Most Important Thing

Posted on 17 March 2012 by David Merkel

How does one write a review for a book when it has been praised by Jack Bogle, Jeremy Grantham, Joel Greenblatt, Seth Klarman, and Warren Buffett?? I am a midget among giants.? I can’t write this, but I am going to try.

Being a teensy part of the investment fraternity that calls itself value investors, I do have some perspective on this book.? The joke of sorts is that there are many things that are “the most important thing.”? But I think the point of the author is that what is most important shifts, depending on the market environment.

But all of “the most important things” can be boiled down to four main concepts:

Margin of Safety
Buy it Cheap; Valuation
Contrarianism
Think beyond the initial effects to secondary effects.? Think holistically.

By margin of safety, there are many things implied — a strong balance sheet, strong cash flows, conservative accounting, and/or protected market position.? The important thing is to prevent a large loss.? If you can prevent large losses, the gains will come eventually.

Buying it cheap is also a simple concept, though hard to implement well.? What metric to use?? Price to Earnings, Cash Flow, Book, Free Cash Flow, EBITDA?? Where to look in the capital structure for value?? The equity may be too risky, but maybe the preferred stock or bonds might be interesting.

Contrarianism means looking for what others rely on that may not work, and investing against it, whether positively or negatively.? It can’t be mere opinion; the other side has to be invested, and relying on their hypothesis to succeed.? That is the situation where investing contrary to the consensus can succeed.

Thinking holistically comes from being a bright student whether in the sciences or the liberal arts.? It comes from being a life-long learner, and applying oneself to the problem until it yields at least a hint of an answer.? Where it doesn’t, cutting losses pays off.

I recommend this book to all who aspire after value investing.

Quibbles

None.

Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.

Book Review: Pandora’s Risk

Posted on 16 March 201216 March 2012 by David Merkel

This is two books in one, and very well done.? The main part of the book explains risk and uncertainty in general terms, such that most people can understand it.? But for those that can deal with complex math, the latter part of the book offers a lot of additional firepower.

Risk is a tough subject because history only vaguely informs you as to how bad things can get.? Past is not prologue.? There are two possibilities, the past contains and event that was so horrible that it can never happen again, or, the past does not tell you how bad things can be.

Market observers took the first view, that the Great Depression could not repeat.? As a result, few prepared for a situation where there was too much debt, and insufficient ability to service it.

The subtitle of the book is rightly “Uncertainty at the Core of Finance.” Not risk, but uncertainty.? The distinct is important, because risks are things that we know some things about the possible economic outcomes, and can control them to a degree.? Uncertainty is where we don’t really understand the dimensions of the outcomes, and have little if any control.

There is fundamental uncertainty to the simplest aspect of finance, money.? Money seems stable enough in the short-run, but every now and then it fails due to hyperinflation, or the slow steady failure in the store of value sense of moderate inflation over long periods.

Wealth itself is uncertain.? Even if you own it free and clear, there’s no way to tell what it will be exchangeable for next year, much less further out.? There are a lot of people who thought they knew what their homes were worth 5-7 years ago that are decidedly disappointed.

Government debt is uncertain, as governments think they can always roll it over, but political and other obstacles can lead to a refusal to pay when debt service becomes high relative to tax revenues.

Banking is uncertain, mainly because of borrowing short to lend long.? If banks limited themselves to facilitating transactions, a lot of the uncertainty would go away.? Banks would be a lot smaller, less profitable, and there would be fewer of them, and the economy would be more stable.? (Entities with longer liability structures, like pension plans, endowments, and life insurers would become the new source of lending. More would be financed through equity.)

Credit is uncertain.? During boom times, corporate bonds behave independently, and diversification evens out results.? As a result, corporate credit seems safer than it really is, and marginal ideas get to borrow.? During bust times, far more corporate debt defaults than would be expected — there’s almost no such thing as an average year.? It’s either feast or famine.

There are things that can be done to try to mitigate uncertainty: credit ratings, or any scoring system for assets, lending at a more senior level, and Value-at-Risk.? Also using more robust assumptions on possible outcomes, which would lead to smaller position sizes, less leverage, or more cash.

The book has a real strength in showing how the the assumption of normally-distributed risks fails dramatically in many cases, and offers alternatives that would work better.? Trouble is, once you realize how volatile the world really is, a lot of strategies either don’t work, or need to be scaled back.

The book praises actuaries as risk managers, with their ethic codes and stress tests, as opposed to quants with Value-at-Risk and no ethics code.? Banks and Wall Street would be better off in the long run hiring actuaries, who think about risk more holistically, and getting rid of the quants in their risk control departments.? Same for the regulators who evaluate banks.

There are other controversial ideas here: is it possible that the strong economic growth of the past is an anomaly?? Is it possible that growth for nations, and the world as a whole follows S-curves, like products and companies?

This is an ambitious book, and I like it a lot because it is willing to cross boundaries and apply the principles in one? area to another that seemingly should not receive it.? I liked it a lot, and would recommend it to many.

Quibbles

On page 17, he thinks of currency as a put option, but I think of it as 0% overnight commercial paper.? On page 37, he confuses Moses and Joseph, having Moses predict the 7 good followed by 7 bad years, when it was Joseph who did that.

Who would benefit from this book: Every financial regulator should have this book.? Every academic burdened by the lies of Modern Portfolio Theory should get this book.? Anyone who fancies himself to be a risk manager should have this book.? Finally, if you want to understand why financial markets are inherently uncertain, this book will teach you well.? If you want to, you can buy it here: Pandora’s Risk: Uncertainty at the Core of Finance (Columbia Business School Publishing).

Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.