Book Reviews – Page 3 – The Aleph Blog

Book Review: Bad Paper

Posted on 11 November 2014 by David Merkel

This book has two significant types of insights: on people and on market failure.? It does well with both of them, but spends most of its time on the former, because it is more interesting.? That said, the second set is more important, and is buried in a few places in the second half of the book.

With people, this book answers the following questions:

Why does this book largely take place in Buffalo, NY? Because entrepreneurs got started there, and found it easy to acquire talent there.
Why does the industry employ a lot of ex-convicts? There are some crossover benefits to having been through the rough-and-tumble of street life that gives an edge in dealing with desperate people who have bad debts.
Is there an ethical code for debt collectors? Well, yes, sort of.? Kind of like ?the code? from the movie Repo Man ? don?t tell debtors they are in legal trouble, don?t threaten, treat them with kindness, don?t buy debt where you don?t have a clear chain of title, don?t sell lists of debts to collect where the debtors have already been verbally flogged.
Do all debt collectors follow the code? Well, no, and that is one place where the book gets interesting, as various debt collectors look for edges so that they can make money off of debts that creditors have given up on.? There *is* honor among thieves, and be careful if you cross anyone powerful or desperate enough.
Can?t you use the legal system to try to recover money on the debts? Well, only at the end, and even then it is difficult, because if the debtor asks for evidence on the debt that is being collected, the debt collector usually doesn?t have it, and the case will be dismissed.? It is best for collectors to come to settlements out of court.

The book follows around debt collectors and those associated with them, a colorful bunch, who see their see their opportunities flow and ebb as the financial crisis first produces a lot of bad debts to work on, and they mine that ore until the yields get poor.? Some of these people you will gain sympathy for, as they are trying to make a buck ethically.? Others will turn you off with their conduct.

As for market failure issues, you might wonder why the credit card companies and other creditors don?t pursue the debtors themselves.? Why do they sell the right to collect on unsecured debts at such deep discounts to the face value of the debts? [Pennies on the dollar, or less?]

The creditors don?t want to make the effort to dig up the necessary data to make the case in court a slam-dunk.? It would not pay for them to do so in most cases given the large number of cases to pursue, and the relatively small amounts that would be recovered.? That?s why the debts are sold at a discount.

Some debts don?t get removed from databases when payments are made to close them out, and as such some debt collectors try to collect on debts that were once in default, but paid off in a compromise.? This could be remedied if there were a comprehensive database of all debts, but the costs of creating and updating such a database would likely be prohibitive.

Finally, you might ask where the regulators are in all of this.? Between the States and the Feds, they try to clip the worst aspects of debt collection, but they are stretched thin.? This means that for many people, the optimal strategy is not to pay on defaulted unsecured debts, and challenge them if they take you to court.

Quibbles

Lots of foul language, but you?re dealing with the lowest rungs of society, so what do you expect?

Summary / Who Would Benefit from this Book

This is a good book if you want to understand the unsecured debt collection business. ?If you have friends who are troubled by debt collectors, it might be worth a purchase, and lend the book to them. ?If you still want to buy it, you can buy it here:?Bad Paper: Chasing Debt from Wall Street to the Underworld.

Full disclosure:?I?received a?copy from the author?s PR flack.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

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

Book Review: Berkshire Beyond Buffett

Posted on 29 October 2014 by David Merkel

It’s time to change what Warren Buffett supposedly said about his mentors:

“I’m 85% Ben Graham, and 15% Phil Fisher.”

For those who don’t know, Ben Graham is regarded to be the father of value investing, and Phil Fisher the father of growth investing. ?Trouble is, Warren Buffett changed in his career such that this is no longer accurate. ?Most of Buffett’s economic activity does not stem from buying and selling?portions of public companies, but by buying and managing whole companies. ?Buffett is the manager of a conglomerate that uses insurance reserves as a funding vehicle.

As a result, this would be more accurate about the modern Buffett:

Buffett is?70% Henry Singleton,?15% Ben Graham, and 15% Phil Fisher.

Henry Singleton was the CEO of Teledyne, a very successful conglomerate, and one of the few to do well over a long period of time. ?It is very difficult to manage a conglomerate, but Teledyne survived for around 40 years, and was very profitable. ?Buffett thought highly of Singleton as a allocator?of capital, though the conglomerate that Buffett created is very different than Teledyne.

Tonight, I am reviewing a book that describes Buffett as a manager of a special conglomerate called Berkshire Hathaway [BRK] — Berkshire Beyond Buffett. ?This Buffett book is different, because it deals with the guts of how Buffett created BRK the company, and not the typical and misleading Buffett as a value investor.

Before I go on, here are three articles that could prove useful for background:

Buffett?s Career in Less Than 1000 Words, and
The Forever Fund?– deals with the Burlington Northern Acquisition, and Buffett’s efforts to create a firm that will thrive long after he is gone.
On the Structure of Berkshire Hathaway?– describes how the insurance enterprises, particularly National Indemnity, own and fund many of the industrial subsidiaries.

The main point of Berkshire Beyond Buffett is that Buffett has created a company that operates without his detailed oversight. ?As a result, when Buffett dies, BRK should be able to continue on without him and do well. ?The author attributes that to the ethical values that Buffett has?selected for when acquiring companies. ?He manages to cram those values into an acronym BERKSHIRE.

I won’t spoil the acronym, but it boils down to a few key ideas:

Do you have subsidiary managers who are competent, ethical, and love nothing better than running the business? ?Do they act as if they are the sole proprietors?of the business, and act only to maximize its long-term value consistent with its corporate culture? ?These are the ideal managers of BRK subsidiaries.
Acquiring such companies often comes about because a founder or significant builder of the company is getting old, and there are family, succession, taxation, funding or other issues that being a part of BRK would solve, allowing the management team to focus on running the business.
Do the businesses have sustainable competitive advantages in markets that are likely to be relevant several generations from now?

The beauty of a company coming under the Berkshire umbrella is that Buffett leaves the culture alone, and so long as the company is producing its profits well, he continues to leave them alone. ?Thus, the one selling a company to Buffett gets the benefit of knowing that the people and culture of the company will not change. ?In exchange, Buffett does not pay top dollar, but gets deals done faster than almost anyone else.

This is a very good book, and its greatest strength is that it talks about Berkshire Hathaway the company as built by Buffett to endure. ?If you want to understand?Buffett’s corporate strategy, it is described ably here.

Quibbles

Now, my three ideas above?*might* have been a better way to organize the book, rather than the hokey BERKSHIRE. ?Also, a lot more could have been done with the insurance enterprises of BRK, which are a critical aspect of how the company owns and finances many of the other subsidiaries.

But will BRK do so well without Buffett? ?Yes, his loyal son Howard will guard the culture. ?The Board is loyal to the ethos that Buffett has created. ?Ted Weschler and Todd Combs will continue to invest the public money. ?The all-star subsidiary managers will soldier on, at least in the short-run.

But will the new CEO be the person that “you don’t want to disappoint,” as some subsidiary managers think of Buffett? ?As a result, how will BRK deal with underperformers? ?What new structures will they set up? ?Tracy Britt Cool is smart, but will BRK need many like her, and how will they be organized?

Will he be a great capital allocator? ?Will he maintain the “hands off” policy toward the culture of subsidiaries, or will the day come when some centralization takes place to save money?

Will Buffett’s replacement be equally intuitive with respect to acquisition prices, and sustainable competitive advantage?

Buffett’s not perfect — he has had his share of errors with textiles, shoe companies, airlines, Energy Future, and a variety of other investments, but his record will be tough to match, even if replaced by a team of clever people. ?Say what you will, but teams are not as decisive as a single manager, and that may be a future liability of BRK.

Summary / Who Would Benefit from this Book

Most people will not benefit from this book if they are looking for a way to make more money in their life. ?There are no magic ways to apply the insights of the book for quick gains. ?Also, readers are unlikely to use Buffett’s “hands off” methods in building their own conglomerate. ?But readers will benefit because they will get to consider the building of the BRK enterprise from the basic principles involved. ?There will be?indirect benefits as they analyze other business situations, perhaps using BRK as a counterexample — a different way to acquire and run a large enterprise.

But as for getting any direct benefit from the book? There’s probably not much, but you will understand business better at the end. ?If you still want to buy it, you can buy it here:?Berkshire Beyond Buffett: The Enduring Value of Values.

Full disclosure:?I?received a?copy from the author?s PR flack.

Full Disclosure: long BRK/B for clients and myself

Book Review: The Little Book of Market Wizards

Posted on 9 September 20149 September 2014 by David Merkel

Over time, I have reviewed a decent number of “Little Books.” ?I have a theory as to why I like some of them, and not others. ?I like the ones that take a relatively narrow concept and summarize it. ?An example of that would be Mark Mobius’ book on emerging markets, or Vitaliy Katsenelson’s book on sideways markets.

But when a concept is broad and not friendly to summary, a “little book” is not so useful. ?As examples, John Mauldin’s book on Bulls?Eye ?Investing went too many directions, and Scaramucci on Hedge Funds could not adequately summarize or describe a large topic.

There are other “Little Books” that I have read that did not even get a review… probably about 10% of the books I read in entire never get the review written because they were so bad, or just hard to decide what the book was. ?(What do you want to be if you grow up dear? 😉 )

Sorry, too much intro. ?For those at Amazon, there are useful links at my blog.

Jack Schwager is generally a good writer, and expert at talking with clever investors in order to break down the main points of how they invest (without giving away the store). ?In this “Little Book” he goes a different direction, and looks for commonalities among various clever investors, with each chapter covering a different?topic.

My view is that most clever investors fall into one of a bunch of categories, much of which boils down to time horizon for the preferred investment. ?Going down the continuum: day trader, swing trader, longer-term trader, momentum-oriented growth investor, growth investor, growth-at-a-reasonable-price investor, and value investor. ?After that, you might differentiate between those that go for relative vs absolute returns.

As such, the book posits a bunch of topics that apply to different groups of clever investors. ?I think it would have been better to have segmented the book by classes of investors, because then you could have a coherent set of commonalities for each main investor type.

As it is, the book relies heavily on anecdotes, which isn’t entirely a bad thing; nothing motivates a topic like a story. ?But if you were reading this to try to develop your own philosophy of managing money in order to fit your own personality, you might have a hard time doing it with this book. ?I think you would be better off reading one of Schwager’s longer books, and reading about each clever investor separately. ?At least then you get to see the full package for an investor, and how the different aspects of investing in a given style work together.

Quibbles

Already expressed.

Summary

If you just want a taste of what a wide variety of different investors do to be effective, this could be the book for you. ?For most other people, get one of Schwager’s longer books, and read about the different investors as individual chapters. ?If you still want to buy it, you can buy it here:?The Little Book of Market Wizards: Lessons from the Greatest Traders.

Full disclosure:?I?received a?copy from the author’s PR flack.

Book Review: The Education of a Value Investor

Posted on 5 September 20149 September 2014 by David Merkel

Before I start, I would like to remind readers of a Q&A that I did with the author, which is available here. [For readers at Amazon: Google “Aleph?Education of a Value Investor”. There are other useful links in the version at my blog. ?Wish Amazon allowed for links…]

This is a good book if you know what you are getting and want that. ?If you want a book to compare it to, I would class it with?Benjamin Graham: The Memoirs of the Dean of Wall Street. ?The reason for this comparison is that the book focuses on character development, and spends relatively little time on detailed value investing methods. ?It spends a lot of time on the good parts of the lifestyle?of?a value investor, and this is where the book has its highest value.

Is it possible to “get rich quick?” ?I don’t think so, but it is possible to become rich if you focus, make few decisions, but they are the right actions to take.

This book describes the transformation of the author, who went from someone trying to get rich quick in the short-run, and failing, to being an investor who could wait until he had a good idea to invest in, and then concentrate his capital in the best ideas that he had, and succeed.

But getting there was not a linear matter. ?First, he had to figure out he was miserable. ?Then, he had to find a new way to support himself, handicapped because the last firm he worked for had a bad reputation.

He picked up an interest in value investing, particularly the style that Buffett follows, which led him to a clutch of contacts in the value investing world who would help to shape his view of the world.

Without spoiling the book, some events happened that enabled him to set up his own investment shop where he does value investing for clients and himself. ?And as such, he lived happily ever after?

Well, not yet. ?He meets one key person, Mohnish Pabrai, who helps him think through the key aspects of his business. ?He makes a number of additional friends who are value investors, and he figures out what he is good at analyzing and acting on, and where he is less capable. ?Armed with that data, he acts to make his entire life more effective for himself, his family, and his clients.

He moved so that he could be out of the “New York Vortex,” where groupthink can carry you along. ?He moved to a quiet?area, and set up an office where he could think, and the odds of being disturbed would be low. ?He set up an action area and a contemplation area. ?He limited electronics to the action area and made it uncomfortable?to stay in the?action area. ?This enabled him to think longer-term, and avoid taking actions because others were doing so. ?He also had to learn how to get advice from other intelligent investors, without letting their views short-circuit his thinking processes.

He enjoyed life a lot more. ?He also realized he had enough assets to manage, and so he didn’t need to market much, which allowed for a focus on serving current clients well. ?About the only thing he needs to do is develop a sell discipline, and that is not an uncommon problem with most asset managers. ?[Two of my articles on the topic: one, two.]

Near?the end of the book, he shares eight?pointers that will improve the investing of most people, if they are willing to think long-term. ?I endorse the principles there, though there may be other ways to achieve the same disciplined attitude. ?He also gives four case studies that affects the checklist that he uses for making investments.

Now, I have purposely left out the most colorful part of the book, the lunch with Warren Buffett, to the end of this review. ?He and Mohnish bid together for the lunch and win. ?The main thing he takes away from the affair was how much Buffett focused on his guests, and not on himself. ?Indeed, at the end of the book, he credits his relationship with Mohnish in?helping him to become more selfless in many of his attitudes. ?To him, that is the real prize, much as he has done well as an investor and a businessman.

Quibbles

Can all of ethics be summed up as being farsighted and unselfish? ?No. ?Those are good things, but the Bible has many more things to teach than that.

Summary

This book will help you understand the internal attitudes of some value investors. ?It may help you invest to some degree, but that is not the main point of the book. ?After all, what is it worth to be a great investor if you aren’t happy? ?Being happy as an investment manager is the main point of the book. ?If you still want to buy it, you can buy it here:?The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment.

Full disclosure:?I?received two copies from the author’s PR flack. ?Good thing too, because someone swiped one of them before I finished reading it.

Book Review: Business Adventures

Posted on 3 September 20143 September 2014 by David Merkel

Do you like economic history? ?I do. ?I often think that we spend too much time on the numbers in business, and not enough time on the qualitative reasoning that goes?into making good business decisions.

This particular book gained some notoriety of late when both Bill Gates and Warren Buffett said they were fans of the book. ?Could a book get a more powerful set of recommenders? Unlikely, and as a result, the book was pulled back into print. [Those reading this review at Amazon, there are links at Aleph Blog to flesh this point, and other points out.]

The stories are taken from articles written in The New Yorker from the 1960s by John Brooks, who wrote what was one of the best summaries of the markets in the ’60s, “The Go-Go Years.”

If you don’t like economic history, this will not be the book for you, because the old stories will not resonate, and say to you, “We never learn.”

Consider the wealth of situations covered in the book:

1) There was a surprising fall in the market in 1962. ?We have experienced much the same with “flash crashes” recently. ?They had a hard time figuring it out as well.

2) There was much work put into testing the Edsel, but it was a flop. ?Does that never happen today? ?What of New Coke? Various Microsoft products?

3) Even in the ’50s and ’60s there were people looking to convert wage income into less-taxed capital gains income. ?The tax code was filled with loopholes. ?After a brief tax code cleanup in the mid-’80s, we are back to the same problem today. ?Is it any surprise corporations do not manage their businesses for pre-tax economic outcomes?

4) Insider trading scandals are nothing new; we just dress them up in new clothes each decade. ?Watch the fun as an oil company delays the release of what a gusher they have drilled, while employees/friends take positions. ?And, to no surprise, there are different legal results as different parties knew differing amounts on how certain the information was.

5) New technology? ?Something so big that the name of the company becomes the generic name for the product? ?Where they set up a center for research in areas not directly related to their main business? ?Google! ?Okay, Xerox… ?(At least Google is trying to profit from their innovations.) ?How does a company manage to avoid becoming trapped in one area of technology? ?Well, it didn’t work for Xerox, but maybe modern companies can avoid the same problem.

6) Can financial companies rescue a fellow company to protect the good reputation of the industry? ?In this case they did, but did Wall Street retain the knowledge for the future? ?LTCM was saved, though Bear Stearns didn’t do its part. ?Wonder if that eventually cost them? ?How many companies were rescued by fellow companies during the recent financial crisis? ?A bunch, and some that should not have been rescued. ?And some like Lehman Brothers, that were too big to be privately rescued…

7) Price fixing? ?Collusion? ?Management teams that neglect oversight of employees until they are caught doing something wrong, and then cut the employees free [fire them] while management survives with nary a bruise? ?This never happens today, right? ?If nothing else, companies should have seen that bigness causes its own set of problems — how do you create an ethical culture across a large organization?

8 ) Or consider the story of Piggly-Wiggly, where the founder squeezed the shorts trying to manipulate his company’s stock, only to take on so much debt in the rescue that eventually he had to declare bankruptcy. ?Though the occasions are different, think of many companies that took on too much debt to go private over the last 30 years.

9) What does a man do after a long time in public service? ?Many go into business, and for a timely example, think of Eric Cantor joining Moelis. ?Does it have to corrupt the former politician or bureaucrat? ?No, but it will change you at minimum.

10) There were many angling for corporate governance reform in the ’60s. ?This is still a live issue today with “say on pay,” voting rules on directors, shareholder proposals, splitting the role of CEO and Chairman, etc. ?Corporate power is undiminished. ?Do shareholders own the company, or does management? ?Who do the directors care about more?

11) A clever knowledge worker knows a great deal about how a given product is made. ?Can he take work at a competing firm? ?There are many today who fight back against employment agreements, alleging “restraint of trade.” ?This is not a new problem.

12) How do central banks preserve the value of the currency? ?Do they work together or separately? ?They work together if the cost isn’t high, and separately when the cost is high? ?It seems not that much changes over time, aside from the fact that our currency doesn’t have gold backing, or any other kind of anchor for value. ?Okay, I guess some things *do* change.

All that said, in short, every chapter of the twelve in the book has relevance to the modern era. ?The real question to the reader is whether you want to think about how these stories relate to the present day. ?I think the effort is worthwhile, and the engaged reader will benefit from the effort.

Quibbles

None.

Summary

This book is?good for those who like economic history, and want to learn from the lessons of the past. ?If you require immediate and obvious relevance, look elsewhere. ?If you still want to buy it, you can buy it here:?Business Adventures: Twelve Classic Tales from the World of Wall Street.

Full disclosure:?I looked to get a copy via interlibrary loan. ?That failed. ?Then I noticed that it was digitally available on a preview website for book reviewers. ?That’s where I found it.

Q&A with Guy Spier of Aquamarine Capital

Posted on 2 September 20142 September 2014 by David Merkel

In the near future, I will be writing a a review of Guy Spier’s The Education of a Value Investor, which will be released next week. ?Until then, to whet your appetite, here is an 11 question Q&A that I did with Guy, for which I give him thanks, because his time is valuable.

What company have you owned the past that was the most surprising to you? (In prospect or in retrospect)

I think that many have surprised me in one direction or another, but one of the more memorable was Duff and Phelps Credit rating ? which I purchased in the mid-1990?s at a 7 Price to Earnings ratio. The company proceeded to increase in value by seven times over 2-3 years before being purchased by Fimalac, the owner of Fitch. I had expected the stock to double, but I did not understand that I had purchased a super high quality business with a manager who was committed to devoting every cent of free cash, which?was in excess?of reported earnings, to repurchasing shares.

Which rule(s) of your checklist would surprise average investors the most, if any?

I actually think that none of them would. They are common sense items that anyone would look over and say, ?yes ? that makes obvious sense?. What is key is not that they are surprising, but that in the wrong state of mind, I might easily skip over a particular factor in evaluating an investment.

Would you advise young people to get a CFA charter or an MBA or is there a better way to become an investor?

I don?t think that either is necessary in order to become a good investor. Attending the Berkshire Hathaway meetings, studying Warren Buffett and reading the Berkshire Annual Reports, along with Poor Charlie?s Almanack are an absolute necessity, in my view.

Would you ever consider setting up your own holding company like Buffett did? (Permanent capital has its attractions?)

Yes. It?s a no brainer to do it if you have the skills.?I hope that?I have the skills, but I don?t think that the time has been ripe for me. Mohnish Pabrai has recently launched Dhandho Holdings which?I think will be an?extraordinarily successful enterprise over?the years. It?s one to watch.

What would you say is the most common mistake that value investors make? Does this matter if the value investor is amateur or professional?

I think that all-too-often, we feel like we are forced to take a decision. Warren Buffett has often said that, unlike baseball, there are no ?called strikes? in investing. That is a truism, but the point is that too many of use act like it is not true. Amateur investors, investing their own money, have a huge advantage in this over the professionals. When you are a professional, there is a whole system of oversight that is constantly saying, ?What have you done for me lately!? or in baseball terminology, ?Swing you fool!?

?Amateur investors who are investing?unlevered?funds that they don?t need any?time soon have no such pressures.

Financial companies are usually a big part of the portfolio of value investors, because they seem cheap to industrials and utilities. But every now and then financials wipe out in a credit crisis. Why don’t many value investors pay attention to credit conditions?

Yes, that?s absolutely true. Many value investors love the financial industry: Probably because, in a certain way, we are in it ourselves. And yes, value investors probably pay far too little attention to the credit cycle. In my case, I think that I was utterly convinced that my?stocks were sufficiently cheap, such that I could invest without regard to financial cycles. But I learned my lesson big time in 2008 when I was down a lot.?I now subscribe to Grant?s Interest Rate Observer so as?to help me track the credit cycle.

Are your wife and children happier as a result of the changes to your life since becoming a value investor in the style of Warren Buffett?

Absolutely. I spend more time with them. I am simply around more,?although that can come with its own irritations. You might have to ask them.

I appreciate your “investing tools,” and I do things mostly like that, but isn’t the main goal of them to be reasoned, dispassionate, independent-minded, etc.? The actual form of the rules is less important than the effect it has on our personalities in making decisions rationally, yes?

Yes ? I 100% agree and thus a different personality might have a very different set of rules to guide them. That?s why the book is about my education as a value investor. It?s personal and idiosyncratic.?I would fully expect someone?else to come up with different rules of behavior. ?I do hope though that it will allow people to see that getting to a reasoned, dispassionate, independent minded state is a struggle for this investor, at least and that thinking about our meta environment and making good decisions about that is just as, if not more important than the actual investment decisions.

How do you balance keeping an independent view versus interacting with respected professional friends who have their views?

I try to switch off, or distance myself from people who I think communicate in a way that is not productive for me. The key is to have the kind of discourse that allows other people to come to their own conclusion. Asking open ended questions and not telling someone what to do are important aspects of that. When I come across people who do that, I try to build closer relationships with them. If they don?t I might still keep them in my circle, but I would not allow myself to interact with them too often ? because I don?t want to be swayed.

How do you feel about those who use 13F filings to generate ideas?

Mohnish Pabrai taught me to be a cloner. In the academic world, plagiarism is a sin. In business, copying other people?s best ideas is a virtue, and it is no different in investing. I would go further. In the same way that if I wanted to improve my chess, I would study the moves of the grandmasters, if I want to improve my investing, I need to study the moves of the great investors. 13F?s are a great way to do that.

How do you feel about quantitative value investors?

I am not sure that I understand the way that you are using the term. If you mean to use statistical methods to uncover value, Ben Graham style, then I?m all for it. That is what I did when I created my Japan basket. That said, I found it hard and monotonous work. Monotonous because, in the case of Japan it did not lead to greater knowledge or wisdom about the world, because there was a limit on the degree to which I could drill down. But that said, I do run screens for value on S&P CapitalIQ from time to time, and then drill down on some of what comes up.

Again, thanks to Guy Spier for taking time to answer some questions for us… his book is being released on September 9th. ?Look for it.

Full disclosure: The Author and some PR flack?asked me if I would like a copy and I said ?yes.?

Book Review: Deep Value

Posted on 2 September 2014 by David Merkel

This is a book that starts with a simple premise: buy stocks at a fraction of the per share intrinsic value of the company, conservatively calculated. ?Neat idea, huh, and it is called value investing.

The author starts by giving a preview of where he will end — with Carl Icahn when he was much younger, where he was buying closed-end funds at large discounts, and pressuring managers to liquidate the fund. ?Eventually he started doing the same with overcapitalized companies trading a discount to the net worth of the company.

Then the author takes us on a trip through history, starting with Ben Graham buying the shares of companies at?prices lower than the net liquid assets of the company, net of the debt. ?It was easy money while it lasted, but eventually many of those companies were bought up and liquidated, and many of the rest had the stock price bid up until the value was no longer compelling.

Then we get to travel along with Warren Buffett and Charlie Munger, who note that the easy pickings are gone, and begin investing in companies that are inexpensive relative to their growth prospects. ?This is more complicated, because these companies must have an advantage that will sustain their effort versus their competition.

Then we visit Joel Greenblatt, where he analyzes buying good companies at cheap prices, analyzing them the way an acquirer might do, but also looking for high returns on invested capital. ?Lo, but it works, and furthers the efforts of those trying to obtain excess returns.

Then the book gets gritty, and looks at mean reversion of companies that have done poorly over the last four years. ?Surprise! The worst tend to do quite well on average. ?Also, raw application of simple valuation ratios tend to work on average in stock selection. ?People undervalue the boring crud of the market, and overvalue the glamorous stocks, leaving an investment opportunity.

Then it tells a story that is personal to me, that of Litton Industries. ?Litton Industries was one of two stocks I owned as a boy — gifts from relatives. ?Litton Industries was a company that in the ’50s and ’60s used its highly valued stock to buy up companies that were not highly valued, and made Litton look like its earnings were growing rapidly, which propelled the value of Litton stock still higher. ?So long as Litton could keep acquiring cheap-ish companies, the idea kept working, but eventually that ended, and the stock price crashed. ?When did my relatives buy me shares of Litton? ?Near the end, natch, when everyone know how wonderful it was.

Quite a lesson for an eight year old to see the stock price down by 80% in a year. ?The other stock, Magnavox, did that also, so it is a testimony to my mother’s own clever investing that I ended up in this business… my story aside, the point of the Litton chapter was to point out that not all earnings growth is real, and that it is far better to focus on boring companies than what seems glamorous and successful. ?Untempered optimism tends not to be rewarded.

The book then moves onto investors large enough to effect change outright, buying enough of a company to force change in a management team that is lazy, incompetent, or overly conservative. ?The book goes through the experiences of Ronald Brierly, T. Boone Pickens, and Carl Icahn. ?The art of spotting an undervalued company, and gaining enough influence to buy the company and fix it, or see the company sold to another company that will?fix it, can lead to great gains.

Here the trail ends. ?It started with Ben Graham buying companies that would be good investments regardless, moves to companies that will be good investments if you analyze them more closely, and ends with companies that good be good investments if you could influence a change in corporate behavior. ?The same principles are being applied, but with much more analysis and potentially threat of a takeover.

In closing, the book talks about what can be a way of measuring moats, which is gross profits as percentage of assets. ?It also reviews what factors activist investors look for when they invest, which may give the clever a guide into what stocks to pursue.

Quibbles

I liked the book, and I?recommend it, but in one sense the book is a ?statement of how tough the value investing game has become. ?Ben Graham could sit back and do simple analyses, pursuing artistic endeavors and the good life in his spare time. ?We have to analyze far more closely, and be aware of whether what companies larger activist players may consider. ?Value investing still has punch for amateurs, but there is a lot more work and analysis to do.

Summary

This book?would be good for investors looking to understand value investing better, and how it has changed over the years. ?It would not likely be good for novices. ?If you still want to buy it, you can buy it here:?Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations (Wiley Finance).

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?

Book Review: Investor Behavior

Posted on 21 August 2014 by David Merkel

Ordinarily, I read all of the books that I review, but when I don’t, I tell my readers. This book I started to read, but I found it so dry that I started skimming it. It’s not that I don’t know the material; it is that I do know it.

The book covers most areas of behavioral finance, however, it does it in an academic way. ?The book would be ideal for academics and those that appreciate an academic approach to finance, that want to have a taste of many different areas of behavioral finance.

There are more engaging books for practitioners and average investors to read — you would even do better reading articles like this from a leading blogger. ?(Those at Amazon, please come to Aleph Blog if you want the links.)

Summary

?When I review books, I try to say who it would be good for — in this case, it is academics. ?Let average market participants seek elsewhere for more engaging content. ?If you still want to buy it, you can buy it here:?Investor Behavior: The Psychology of Financial Planning and Investing.

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?

Book Review: Surveillance Nation

Posted on 30 July 2014 by David Merkel

After I married my wife, I met her cousin and his wife, who was a Marxist. ?Oddly, I found we had a lot of areas of agreement, because we both distrusted the powers that be. ?In the same manner, what does a libertarian like me have to do with liberals like those who write for “The Nation?”

The answer is a lot. ?There is a tendency for the political middle of the US to simply trust the politicians, assuming they are doing good. It is more accurate to assume that they are pursuing the goals of the ek=lite in the US. ? The Wealthy will do well; the rest of us, meh.

We ?need to be concerned about what data the government gathers on us, because it may infringe upon our constitutional rights. ?Personally, I would end the CIA, NSA, and FBI. ?Let chaos pursue us, and after that, let’s figure out what security we need.

I do not trust our government. ?There is too much power, and too little transparency.

As for this book, it was prescient with respect to the US government collecting data on average citizens. ?We live in an era when our actions are no longer private, unless we are rich enough and clever enough to conceal it.

I highly recommend this book. ?It points out the errors of the US government as it aims toward secrecy, when it should disclose the information.

Quibbles

As time goes on the arguments verge from arguing for the common man, to arguing for the different man.

Summary

Many people would benefit from this book. ?It will teach you about how we are all losing our freedom of speech bit-by-bit. ?If you want to, you can buy it here:?Surveillance Nation.

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?

Book Review: Panic, Prosperity, and Progress

Posted on 25 July 2014 by David Merkel

I love economic history books, and I believe that most investors should read economic history. ?History offers a broader paradigm for analyzing investment situations than mathematical models do.

Mark Twain is overquoted on this, but only because he deserves to be quoted:
?History doesn’t repeat itself, but it does rhyme.?

You can get a lot of insights into the present by reading this book. ?So many disasters occurred because people presumed that the future would be much like the past, and they ended up being the ones that took the large losses.

Further, this book will point out that how an asset is held will make a difference in its future performance. ?When there is not a lot of debt behind an asset, there may be good prospects. ?But when there is a lot of debt behind an asset, prospects are not so good because those that own the asset are relying on the asset to perform. ?Those who own an asset free and clear may get hurt if the price falls, but they won’t be ruined like the guy who has borrowed to own it.

This book takes on every major systemic crisis from the Tulip Bubble to the recent Housing/Banking crisis. ?This is my bread & butter, but I learned things in many of the chapters regarding things I thought I knew well. ?Truly, a great book.

What Could Have Made the Book Better

Financial crises don’t appear out of nowhere. ?Leaving aside war on your home soil, plague, famine, communism, etc., there is usually a boom that gives way to a bust. ?In some of his chapters, he could have spent more time describing the boom that led to the bust. ?This is important, because readers need to learn intuitively that the boom-bust cycle is normal. NORMAL!

Ignore the economists who think they can control the economy. ?They can’t do it, and this book helps to say that. ?Economists are always behind the curve. ?Politicians are even further behind the curve. ?Regulators are still further behind the curve, and usually do the wrong thing during crises as a result.

The author could have done more to suggest how individuals and policymakers should respond to financial crises. ?Better to have a book that advises us, than one that just reports.

Quibbles

On pages 421-422, he shows that he doesn’t get securitization, and blames the rating agencies, who were forced to rate novel debt for which they did not have a good model because the regulators outsourced credit risk measurement to them.

Summary

Most people would benefit from this book. ?It will teach you about financial crises and their aftermath. ?If you want to, you can buy it here:?Panic, Prosperity, and Progress: Five Centuries of History and the Markets (Wiley Trading) (Hardback) – Common.

Full disclosure: The PR flack?asked me if I would like a copy and I said ?yes.?