Book Reviews – Page 8 – The Aleph Blog

Book Review: Value Investing: From Graham to Buffett and Beyond

Posted on 14 June 2013 by David Merkel

Several months ago, I was walking in my bedroom, and in a stack of books that we frequently give as gifts, I saw the book Value Investing: From Graham to Buffett and Beyond.? I said to myself, where did this come from?? I looked at it, and realized that hadn’t read it.? I looked at the copyright date, and realized that 2001 is a relatively old book.

So I read the first chapter, decided it was good stuff, and added it to the reading pile.? As some might know, I am a value investor, and recently I wrote an article called ?Value Investing Flavors.?? In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don?t me post links, but if you Google ?Aleph From Graham to Buffett and Beyond? you will find it.]

The book begins with unified principles of value investing: margin of safety, buy ing an asset cheap, etc., but moves on to different ways to implement value investing, depending on the types of companiesthe investor wants to analyze.

There are three ways to do the analysis for value investing:

Re-estimate the fair value of the assets and liabilities on the balance sheet.? This applies best to companies where converting resources to a better use would be compelling.
Estimate the normalized earnings power of a slow growing company.
For a company with a moat, a sustainable competitive advantage, conservatively estimate the path of growing earnings.

I listed the three of them in the order of increasing aggressiveness of analysis, and the amount of work that would need to be done to be assured that there is an opportunity.

After this, the book writes about eight notable value investors, who come from the various camps inside value investing, and puts more flesh on the bones as to the implementation of each method.? I immediately recognized the names of 6 of the 8 value investors.

But what I found most useful were the insights of the investors that would buy small companies.? You can buy ugly situations that are misunderstood, and wait for management to turn the ship around.

This book was a good balance between theory and practice.? I enjoyed this book.? I think most amateurs wanting to learn about value investing would benefit from it.

Quibbles

None.

Who would benefit from this book: Amateur value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.? If you want to, you can buy it here: Value Investing: From Graham to Buffett and Beyond (Wiley Finance).

Full disclosure: I have no idea where I got this book.

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: Pound Foolish

Posted on 13 June 2013 by David Merkel

To my readers: if you like this review, please vote it up here at Amazon.? Thanks a lot.

Personal finance has issues.? This is because there are many things that are true on average that will not always prove true in the short run.? Here are some examples:

Those that save more and spend less for personal needs will usually do better in the long run than those that spend a higher proportion of their income.
Those that take moderate risks in investing tend to beat both those that take low risks, and those that take high risks.? But over short periods of time, who can tell?
Over the long run “buy and hold” tends to work.? In the short run, who can tell?
Good investing is boring.? It is not entertaining.? An average person looking at the portfolio that I own for my clients would only recognize 10 of the 36 companies that I hold.? The best stocks are those of neglected companies that do their boring business and make money quietly.
In general, it is wise to have as little debt as possible.? When you do have debt, pay it off rapidly, or make sure that the debt is non-recourse (the asset purchased collateralizes the loan in full.
In general, it is honorable to pay your debts in full.? Occasionally, some life event happens that makes it impossible.? That is what the bankruptcy code is for.? When bad providence is overwhelming, take the hit, declare bankruptcy, and battle back from there.? In the Bible, debt-slavery was limited to seven years — why should the loan sharks get more of your life than that?
Financial education, as well as education in general, is no panacea.? As one of my brighter friends at RealMoney, Howard Simons,? used to say (something like), “On Wall Street, to those that are expert, we give them super-advanced tools that they can use to destroy themselves.”? There is almost never a level playing field in investing, unless you do all of the work yourself.
Risk control is the key to investing, and women do better at that than most men.? I liken it to chefs.? Most of the best chefs are men, but women beat men on average in cooking.? (An aside: cooking is my hobby.? My wife likes my cooking.)
There is no way to get rich quick.? Ignore seminars that tell you that it is possible, like “Rich Dad.”
Peter Lynch popularized “buy what you know,” but he was far brighter than that and a real detail person.? Many people moved to residential real estate post-2002, but did not realize that if prices get high relative to rents, that prices can fall.? They bought what they thought they knew, and lost.
After the market declines of 2000-2003 and 2008-2009, many people swore off the stock market at the wrong time.? The uneducated buy and sell in response to fear and greed.? Buy and hold is better than that, always, and that is one reason to employ a professional that does not get shaken by market moves, good or bad.? (It took 5-10 years to develop ice-water in my veins.)
It is always good to be skeptical of those that talk to you about finance, even me.? Particularly be skeptical of those that will buy you a nice meal with the aim of getting your business.? There are many strategies to get you to say “yes.”? If you dare, read marketing books, they will help you develop sales resistance.
Defined benefit pension plans are better for workers than defined contribution plans like the 401(k), but they cost a lot, lot, lot more.? That’s why they don’t exist today.
Most people, if left to themselves, will not plan for the future.? That is why there are commissioned salesmen (brokers/insurance) to sell them products inferior to what they would get if they planned for themselves.

That took more words than I expected. Before I go on, I want to say that I liked that book a lot with some reservations.

Let me now go to the book, and tell you what I liked and what I did not.

What I Liked

The book is honest, it flags all of the problems in personal finance.? Some of those problems are unavoidable, because returns in the market are lumpy, as opposed to the smooth projections of the financial planner.
It explains why defined benefit plans are better for average people, because they are not investors, they are budgeters at best, and need to receive a steady income in retirement.
She explains the ways that salesmen try to make you buy what you shouldn’t.
She understands that most investment advice is shallow, and wrong.
Expense and debt control aren’t everything.? That said, they are good things.
She recognized that women are better risk managers than men.? (Men are too certain of themselves; I have rules for myself that tie my hands so that I do not act on fear or greed.)
She gets that real estate is an expense, and not an investment.
Financial celebrities are often wrong.
She understands that the financial industry has many tendrils into academia & politics, to spread a message favorable to itself.

What I Did Not Like

It may be that most people in financial trouble have had notable accidents happen to them, but that does not invalidate the idea that being careful with your spending and sparing on debt are wise ideas.? Aside from that, people need to insure themselves properly, and be prepared for layoffs — have transferable skills that can work in multiple industries; be a continual learner.? Also, be aware of the finances of your company.? If you think it is in trouble, look for work before you are laid off.
She doesn’t get how expensive it would be to create defined benefit plans in place of defined contribution plans.? The costs are what led corporations to terminate the plans.
She doesn’t get that there are many people who will not take prudent actions for the future.? That is what commissioned salesmen are for.? They get the imprudent to do something good for them selves that they would not ordinarily do.
Talking about money is not enough.? With most people it is a mere sharing of ignorance, and not much better than what you get from other sources.? You *can* get educated about money, but it takes time, effort, and diligence.? Who is willing to do that?

Summary

She is long on critique, and short on real ideas to improve the situation.? The critique will help you know what to avoid.? But when you are done with this book, you will have no positive plan for what you should do.? If you want to, you can buy it here: Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.

Full disclosure: I borrowed the book from my local library.

Book Review: It’s All About Who You Hire, How They Lead…

Posted on 8 June 20138 June 2013 by David Merkel

When it comes to business books, I occasionally get skittish.? It’s just the same old stuff over and over, so I often refuse to review such books.? This book was a rare gem for me; it even made me wish that I had worked for the author.

There are two classic models for maximizing value in enterprises: 1) low cost, high volume, and 2) high quality, reasonable cost.? My Dad ran a business that was the latter, and on a far larger level, so did Morton Mandel.

Customer service was what he focused on, and listened to customers in order to see what problems they might have that his firm might solve.? More, he created a culture that would focus on the customer.? That required hiring good businessmen — men who could run almost any business, once they understood the industry.

Such men could do people management, project management, financial management, and have a strong ethical slant.? You are managing for the long-run, not the short run.? You do not want management that cuts corners.

When I was 17-18 years old, I was the student representative to the School Board from my high school for two years.? In the meeting room,? there was a prominent painting by some student that had the bold title “What’s best for the Kids?”? So it was for managers in Mandel’s company — “What’s best for our Customers?”? Such an attitude, inculcated through the organization created extreme customer loyalty, employee loyalty, and significant profits.

From my own work in the insurance industry, I have experienced many cultures.? I can smell a bad management team and culture a mile away.? I invest in the best cultures that I can find in the insurance industry.? In any industry, when I find companies that I think do it right, treating all stakeholders well, I am quick to buy the stock, and slow to let it go.

To give an example, in 1994, I did a deep study of the trucking industry, and I came away with one firm that did it all right — a strong focus on safety, good incentives for drivers and terminals.? I bought, the stock doubled in a year, and was bought out by a private equity group.? Ethics in business pay off.? Good service to others will receive its reward.? And so it was for Morton Mandel.? Superior customer service led to loyalty of customers and good margins.

Mandel was also smart about acquisitions.? He would buy small companies with desirable characteristics, and then improve their management team and grow them organically.? He never bet the company.

Did he ever make mistakes?? Yes, and he made a big one when he mis-estimated a guy to whom he sold his firm.? He thought the guy would preserve the culture of the firm, and it was anything but that.? Within a year, the combined firm was suffering, there was a boardroom coup, and Morton Mandel, far from retiring, was back as CEO repairing the damaged firm.

He was big on standardizing best practices, so that everyone in the firm would know the best way to serve customers.? Also, he was big with charitable enterprises, and realized that most of the principles that applied to for-profit companies applied to non-profits.

The main idea is this: if you focus on doing quality work for your customers, and charging an appropriate price for it, you will prosper.? Would that more companies would do it.

Quibbles

None

Postscript

I forgot one thing — his close relationship with Peter Drucker, my favorite expert on management.? The two were close to a degree where Drucker would give Mandel advice he would not give others, but only because Mandel was capable of receiving it.? Drucker thought Mandel was one of the top managers in America.? That in its own right should recommend this book to you.

Who would benefit from this book:? Anyone would benefit from this book, it is that good.? If you want to, you can buy it here: It’s All About Who You Hire, How They Lead…and Other Essential Advice from a Self-Made Leader.

Full disclosure: I received a free copy from the publisher.

Book Review: The Physics of Wall Street

Posted on 6 June 2013 by David Merkel

Let me admit my bias at the start.? Physics is the wrong model for financial markets and economics.? The better models are ecological or biological, because people adapt to conditions that change.? Perhaps we are predictable on average, but there is a wide variation in specific behaviors.

Economics and ecology deal with scarcity and plenty.? Physics does not.? Physics is exact, aside from the quantum and universal scales.? Economics and ecology are never exact, and prediction is fraught with error.

But what of financial instruments where the math of physics might have application?? Perhaps physics has some application there?

Okay, sort of.? Even something as pervasive as option modeling does not truly have a simple model, but implied volatility has to be re-estimated regularly for the Black-Scholes Model.? A true model does not require re-estimation of a parameter, particularly when it varies by time and strike price.

What I liked? about the book

I liked reading about the mathematicians who applied analogies from physics to economics. Even though the models had their flaws, they improved the explanatory power.

I also appreciated how the author kept explanations simple.? He could have gone into a lot more detail, and a lot more math, and he would have lost most of his audience.

He also explained the life circumstances of the men he wrote about.? That adds depth, because science does not occur in a vacuum.? It is a social activity.?? Few men think purely abstractly, and those that do ride the edge of genius/insanity.

There are two motives for understanding? how men approach markets — to explain, and to make money.? The book has both sorts, and it is a strength to see one validate another.

Quibbles

Already given

Who would benefit from this book: If you want to learn about men who shaped the market by their knowledge of math, you will like this book.? If you want a book that explains the markets, this is not it. ?If you want to, you can buy it here: The Physics of Wall Street: A Brief History of Predicting the Unpredictable.

Full disclosure: I received a free copy from the publisher.

Book Review: The Art of Value Investing

Posted on 6 June 2013 by David Merkel

Note to readers: I plan on doing a series of book reviews over the next few weeks.? I may do more than a dozen.? I hope you enjoy them.

I am a value investor.? That’s what I do for a living, and I do it well.? One month ago. I wrote a piece called “Value Investing Flavors.”? In it, I took a broad view of value investing, because there are many common principles to value investing employed by all, but many variations on implementation. [Note to those reading at Amazon; they don’t me post links, but if you Google “Aleph Art of Value Investing” you will find it.

The Art of Value Investing takes a similarly broad view, quoting well over 100 value investors (I lost count) on topics where professional value investors agree & disagree.? The authors have interviewed the grand majority of those cited, and have useful historical quotes from well-known figures familiar with the subject.? Better known and more accomplished value investors tend to get more play in the book — I think the authors chose well.

The book is organized by topic.? It covers these questions:

The importance of a margin of safety
Buy high margin quality businesses, or cheap low margin businesses?
What attention should be paid to growth opportunities? (Controversial)
What is your circle of competence? (I.e. what opportunities do you rule out because you don’t get how to value them?)
How small of a company would you consider buying?
How much do you incorporate top-down macroeconomic considerations?
What countries would you not consider buying a company within?
The advantage of being able to buy and hold for years.
How careful research often conquers uncertainty.
Do you buy turnarounds or not? (Controversial)
How do you generate good buy ideas?
How do you create a firm that ignores the conventional perspective, and generates correct ideas that few know?
How do you analyze what could go wrong with a company?
Do you look for catalysts to unlock value or not? (Controversial)
Do you analyze value through one framework or many?? Cheap going concern or transformation of underused assets? Both?
Do you manage for absolute value or relative value?? I.e., what is the value of safe assets, or even gold?
When do you establish an position?? How do you size it?
How diversified do you want to be?? How do you weight positions?
How much do you care about stocks being correlated within the portfolio?
How long are you willing to wait to see if an idea works?? When do you admit that you are wrong?
Are you willing to advise management?? Are you willing to fight management?? When does it make sense?
Do you short bad stocks or not?
When do you sell?? Do you do it never, gradually or rapidly?
How do you maintain a sound mind and humility amid all of the clamor of the markets?
How do you admit mistakes, so as to avoid them in the future, and show humility to your clients?

If you want to understand the nuances of how a firm doing value investing works, I can’t think of a better book, because this book implicitly goes over all of the choices that a value investor has to make.? What factors will I focus on, and what will I ignore?? How detailed will my analysis be?? How much will I diversify?? How will I make choices among so many stocks vying for my attention amid all of the news noise?

I have strong views on value investing myself, but I questioned my own ideas as I read the replies of those more successful than me.

Quibbles

Initially, as I read the book, I wondered if a better book could be made by organizing by each firm, rather than topic.? By the end of the book, I realized I was wrong.? Not all firms have opinions on many questions, and doing the book by topic highlights the variation in opinions across a wide spectrum of organizations.

Who would benefit from this book: Amateur and professional value investors will benefit from this book; if the reader does not want to put the effort into learning value investing, this book will be of no use to him.? If you want to, you can buy it here: The Art of Value Investing: How the World’s Best Investors Beat the Market.

Full disclosure: I received a free copy from the publisher.? I personally know a few of the value investors cited.? I would like to meet more of them.

Book Review: The Great Rebalancing

Posted on 22 February 2013 by David Merkel

I’ve been waiting for this book for over 10 years.? When Michael Pettis wrote The Volatility Machine, he explained how emerging market countries imported the monetary policies of the developed countries.

Now, in the present mess of economic policies put forth by most governments in our world, he explains how the debt and trade imbalances will eventually have to balance.

We’ve had other economic eras where trade did not balance.? In the era of mercantilism, trade did not balance, because? the mercantilistic countries sought gold, and adopted policies that favored exports, so that their nation would receive gold.? Smart, huh?

Well,? no.? Gold is good; I like it, and it preserves value better than anything else, but when you take actions to disproportionately get gold, you overpay for it.? Then when you realize your error, and start to sell gold for goods, the market knows that you are selling, and the value of gold falls.

That is why countries that force growth tend to lose.? Because they force growth through overinvestment, they look like stars for a time, but eventually the declining marginal productivity of capital catches up with them, as it did with Japan in the late ’80s or early ’90s, and the Soviet Union in the 1970s.

Governments are no good at directing growth.? We knew in the late ’70s that import substitution did not work.?? It took 20-30 years more to realize that export promotion does not work long-term.? Happily, my old professor Bela Belassa never lived to see his theories repudiated.? (He was a cold guy, but not totally; he had mercy on me once, and for that I am grateful.)

Back to Pettis: his main argument is that the surplus countries must take losses over loans to deficit countries.? The loans were made in bullish times, and from any reasonable standpoint, they were bad loans.? Therefore the lenders should compromise with the borrowers, and both sides take losses.

This applies to China versus America.? China will not get repaid in the same purchasing power as they lent.? If China wants to thrive, it will need to take steps it has been unwilling to take politically, and free much more of the economy from government and Party control.? Only that can boost domestic consumption as a fraction of GDP.

This applies to Germany versus the rest of the Eurozone.? They won’t get paid back in the same terms; either there will be discounts in Euro terms, or some nations will leave the Eurozone.? The alternative is Federal Europe, where losses are shared across the nation, much as California subsidizes Maryland.

One way or another, just as the mercantilists lost, so will the surplus nations lose today.? It’s just a question of when and how.

Quibbles

I can’t get into? SDRs [Strategic Drawing Rights] of the IMF as a currency.? Currencies either need gold or taxation authority behind them.? Further, taxation authority requires police power to enforce taxation, which is not the case.? SDRs are a cute idea that some academics fall for, but are not a real world solution.

For those who read his e-mails regularly, 25% of the book will be “old hat.”

Who would benefit from this book: Anyone who wants to understand international economics better will benefit from this book.? I cannot recommend it more highly.? If you want to, you can buy it here: The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.

Full disclosure: I received a free copy from the publisher.? Though I have never met him, I have conversed with the author via e-mail.

Book Review: Time Out For Happiness

Posted on 19 February 2013 by David Merkel

This is a different book for me to review, but as my wife once said to me, “Only you could see the economic angles of ‘Little House on the Prairie.'”? Guilty as charged.

Many people have read “Cheaper by the Dozen,” and “Belles on Their Toes.”? Indeed, I read them as a child, and to my children as an adult.? That era in America had huge families as families moved from the country to the cities, and primitive methods of birth control were temporarily forgotten, often amid economic success.? Many people wanted large families if they could afford them.? Affording them was the problem.? My grandparents were kids in large families.? Seemed to be the rule back then.

What makes “Time Out For Happiness” special is that it traces the lives of Frank & Lillian Gilbreth, the parents, and explains why they were so special, not as parents, but as intellectuals that changed our world.

Frank Gilbreth was an ambitious young man who was always looking for a better way to do things.? In learning bricklaying, as an amateur, he analyzed what experts did, looking for the best way to do it.? The experts were annoyed at the neophyte who wouldn’t simply imitate, but had to think it through.? The neophyte was markedly worse initially, but then discovered an idea: if you set up the work to minimize unnecessary motion, a worker can work faster, and with less effort.? Frank devised a way of putting all that a bricklayer would need within easy reach, and he became the fastest bricklayer around.? He then made money selling his system, but then he went on to do the same for many building tasks, raising productivity dramatically, without demanding that workers work harder.

This contrasts with the ideas of Frederick Winslow Taylor, whose disciples measured employees with stopwatches, and urged that all work faster.? Gilbreth assumed that most workers wanted to do a good job; how could he make doing a good job easier.

Politically, Gilbreth was a centrist; he wanted the growth in productivity to be shared by all; he worked mostly with those that would deliver part of the increase in profits back to workers. As such, Gilbreth’s ideas were often supported by unions, and Gilbreth himself supported unions, so long as they limited themselves to the welfare of workers, and did not create onerous work rules that unnecessarily harmed productivity.

Phrasing it differently, the Gilbreths wanted the increase in productivity to result in greater happiness for all.? After all, if we are saving time by being more productive, what will we do with all the extra time or goods produced?? We should use them to be happy, owners and workers alike.

One key thing that Frank Gilbreth did was do time & motion studies.? With film being a new thing, and expensive, he measured the way people moved at work an analyzed it closely.? He did this with the interests of owners and workers at heart.? This enabled them to come up with process improvements that other experts could not.

As his ideas gain more respect, and as his corporate profits grew, he and Lillian wrestled with the question, “Run a company, or teach ideas?”? They both concluded that being consultants for improving productivity was the most desirable goal, though it took some struggle to give up the immediate profitability of the construction business.? The early days weren’t easy, and its took a while before they got any business, because the disciples of Taylor did not respect him.

When WWI arose, Frank volunteered to help make the military more efficient, and as a Major did so for four months before he became very sick, and Lillian dropped everything in order to save him.? She succeeded, and Frank lived for six more years, building the business, and benefiting their home.? He died while talking to her on a pay phone, traveling to give a talk.

This left her in a financial lurch.? She survived by getting advances on Frank’s inheritance, and building the business Frank left behind, including starting a school for efficiency.? There was no inheritance from here side, because they concluded she needed none, being married to the prosperous Frank.

But as she continued to speak, write and teach, she gained enough? to support the family and send her kids through college.? She received many awards where she was the first woman to receive them.? Lillian was different from Frank because though she knew most of what he knew, and vice-versa, her strength was the employer/employee relationship.? How do you create good relationships that create productivity, and good companies?

Both Frank and Lillian were driven; they worked hard, and focused on the public good.? Frank died working.? Lillian worked into her mid-80s, with her children protesting her demanding schedule.? She gave her last talk at age 90, to honor the work of Frank at his Centennial.? She lived four years beyond that.

She had many famous friends, including many US Presidents, on whose committees she served, from Hoover to LBJ.? Much of it dealt with disability, which both she and Frank had worked on, because they had an interest in helping those who had it bad.? Frank devised ways to aid the disabled to dress, and more.? Lillian improved on that.

Do you want to get to know two quirky humanitarian people who changed our society?? They created the coffee break (rest helps productivity) and anticipated many later improvements in the workplace.

Don’t Buy This Book

This book is too scarce.? Don’t buy it.? Use interlibrary loan to borrow it.? But it is a very good book, and I haven’t told you the half of it.

Book Review: Benjamin Graham: The Memoirs of the Dean of Wall Street

Posted on 19 January 201320 January 2013 by David Merkel

I enjoyed this book, but it is not a book on investing.? Here is my rough breakdown of the book:

40% Ben Graham’s childhood
30% Early work experience up until the Great Depression
10% His personal life with family and others.
10% His late-Depression successes in investing up to 1940.
10% His efforts as a playwright and as an amateur economist.

So, here’s my biggest gripe about the book: in many ways, Ben Graham’s biggest days as an investor — his greatest times of success in the 1940s & 1950s don’t get mentioned at all.? I learned more of what he was like in that era from reading Alice Schroeder’s The Snowball.

Should this surprise us?? No.? Ben Graham wanted to live the good life in modern terms.? From his time as a youth, he was hard-working, growing up amid poverty, and he never wanted to be poor as an adult.

He was a very bright guy on many topics.? He was not only studied in the humanities (which he loved more), he was exceptionally good at math.? The book does not describe him in these words, but he was the first hedge fund manager, and the first quantitative investor.

What made Graham a lot of money was realizing that convertible bonds and preferred stocks carried a valuable option that was often undervalued, and so he would buy the convertible security and short common against it.? Strategies like this, plus activist investing, where he uncovered information advantages on undervalued stocks allowed him to become wealthy.

And that was enough for him.? Unlike his more focused protege, Warren Buffett, once the game got too tough, and a pleasant retirement was attractive, he trotted into the sunset, with modest contact with his former friends in investing.

The book does not describe his time teaching at Columbia, nor any of the great investors that he influenced.? Ben Graham was interested in investing, but he was more interested in the humanities, and generally having a happy time.? Thus, if you read this book, realize that it is about a slice of the life of Ben Graham.? The first half of his life comes in great detail.? The last half of his life comes almost not at all.

But this is not an autobiography, it is a memoir.? As such, Graham tells us what he wants to tell us, and leaves the rest unsaid.? He tells us a little about his thoughts on marital infidelity, but does not tell us how his ending companion ended up being his deceased son’s wife.

All that said, we get what Graham wanted to reveal to us.? Janet Lowe’s book on his life is more comprehensive on his later days… even Alice Schroeder gives us more on his later life by accident of covering Buffett.

In summary: this isn’t primarily a book on investing.? It is a book on the thinking of one very bright man who invested and did well, and used the freedom that money brought for his own ends, both for good and for bad.

Quibbles

Already expressed.

Who would benefit from this book:? If you want to know the early life of Ben Graham, this is a great book.? Beyond that, you will be disappointed.? If you want to, you can buy it here: Benjamin Graham: The Memoirs of the Dean of Wall Street.

Full disclosure: I borrowed it from the local library.

Book Review: The Snowball, Epilogue

Posted on 25 December 201225 December 2012 by David Merkel

After I finished last night, I realized I had a few more things to say.? First I need to correct what I wrote in part two regarding the separation of Buffett and Susie.? Here’s some help from one of my readers:

I do have a bone to pick with your review of the Snowball, part two: in describing the Buffett’s separation and arrival of Astrid Menks, you have substituted your own judgment for that of Schroeder and Buffett, without making it clear that it is your own viewpoint.? I certainly understand your assessment of the marriage and perhaps your desire to defend Buffett, as he is someone you clearly respect (as do I).? But Buffett’s own view, expressed in the book that Susie’s leaving was “99% [his] fault”.? Schroeder also indicates that Buffett was quite difficult, and of course, he was totally driven, and in any case, not terribly emotionally supportive.

The ethical judgments that I made in parts two & four were mine.? They were not those of Alice Schroeder, Buffett, or anyone in Buffett’s family.? That said, because of the role I play in my church, I have had to counsel some people on marriage.? My results have been good, bad, and indifferent.? Usually I think that I have been called in on the late side, when hope is almost non-existent.? Better to call in a counselor on the early side.

I have known many men, and some women who I would call “pieces of work,” where they are very difficult to get along with.? I’ve seen cases where the spouses of such people succeed, and more where they failed.? In marriage, it takes two to make a failure, leaving aside adultery and desertion.

My opinion is this: if Susie could bear with it for 20 years, she could bear with it for 40 or more.? Buffett was maturing emotionally, and was better able to interact with others.? Susie missed the best years of Warren.

As it is, children are affected even if adults when parents separate; they become more prone to divorce.? Buffett’s children had their own marital problems.? It also doesn’t help when you didn’t get a lot of attention from your father when young.

On the Patience of Buffett

Buffett does not have to deploy capital; he does not have to grow.? He can live with a lot of cash on hand, earning zero.? He knows human nature.? As a group, we tend to panic every five years or so.? Buffett picks up a lot of bargains, whether by sector, or across the market as a whole.? He finds good companies that are out-of-favor, and he gives them a good home.? This is very different than how most people invest.

Buffett waits until he sees a return on book capital with reasonable certainty that exceeds his threshold, and then he buys aggressively.? He can do that because he has a balance sheet, and he has simple goals for return on capital.?? So long as he continues to be careful he never has to worry about insolvency — his balance sheet is conservative.

Final note on Religion

Because of who I am, I was interested in how Buffett’s and Susie’s parents viewed religion.? Buffett and Susie were a lot like my in-laws: raised in the church, but turned against God.? There was something in the era, as people sought bad interpretations of the Bible so that they could live their own way, and not God’s way.

Quibbles

Already expressed.? This is a great book if you are looking to read about the life of Buffett, rather than the aspects of Buffett’s investing that you can’t imitate.

Who would benefit from this book:? This book will not help you invest like Buffett, unless you are bright, and know all of the details that lay behind Buffett’s strategies.? This book is the best to help you know Buffett the man.? It is a great book.? If you want to, you can buy it here:The Snowball: Warren Buffett and the Business of Life.

Full disclosure: I borrowed it from the local library.

Book Review: The Snowball, Part Four

Posted on 22 December 201223 December 2012 by David Merkel

One thing I did not leave clear from my prior writing: Buffett does not think in terms of market value. He thinks in terms of book value, and how to compound it. That is how I think the markets as well. I think of the markets like a businessman does, and so does Buffett.

Why should being a businessman, and being an investor be so different? Answer: they should not be thought of differently. This is why value investors look at the returns relative to the price they paid.

Buffett as an Investor

Buffett had a strong grounding in probability. Whether it was with stocks, or at the racetrack, he was smart enough to find an edge.

He was also wise enough to understand the concept of discounting. Discounting is the cousin of accumulation. One looks forward, the other looks backward.? Buffett understood when it was smart to receive cash and distribute cash. He knew what a dollar was worth. He knew when the dollar was worth in the future. This grounded his sense of investing.

He invested in many industries: Newspapers, Utilities, Insurance, Furniture, Jewelry, Pipelines, Railroads, Manufactured Housing, Coke, Shoes, Textiles, and Airlines.

He also sought a margin of safety. What would be the maximum bad outcome if he invested in a company? If you can limit the downside, you have the capability of making money on the upside.

Buffett also like to play Bridge. Bridge is a complex game; you do the best if you bid to take the amount of tricks that you will actually take. Bridge favors people who can estimate well, and Buffett is one of those people.

Buffett is a very bright guy. Very, very bright.

Buffett and Business Ethics

Buffett is an ethical businessman. Probably one the most difficult parts of his life was when he was chairman of Salomon Brothers. In that situation, he had to play a delicate game trying to satisfy the regulators in Washington, DC, and satisfy investors who held the stocks and bonds of Salomon Brothers. This was a very difficult task, but Buffett performed extremely well. In some ways, I think this is the highlight of his career. I think this, because the regulators were stacked against him, and he succeeded in a large measure. Without Buffett, Salomon Brothers would have been bankrupt. Buffett triumphed against both economic and political forces.

And at the time he did that, he made Salomon Brothers a far better place. He stressed ethics above economics. Bravo! That is what needs to happen in almost all corporations United States now.

Now, when his son Howie had troubles ADM, Buffett had considerable advice for his son but he did not demand that Howie do it he said. But Howie listened to his dad and left ADM before the crisis erupted. As a result, Howie’s reputation stayed clean.

In general, Buffett was a Boy Scout when you consider business ethics. But when you consider other aspects of ethics, he was not so.

Politics

Buffett’s father was one of the most conservative Republicans in the House of Representatives. As a boy, he campaigned for his father. He switched his political views after he married Susie. After he married Susie, the first thing was opposing racism. That was a really good thing, and both he and Susie did many good things in integrating our society.

This is hard to impress on the black children that I have adopted. With no large amount of racism, it is hard to explain to them what others went through 50-150 years ago.

But I disagree with Buffett who bought the concept of the population bomb from Paul Ehrlich. People are born with a mouth and brain. The brain is far more important than the mouth. No matter how much the population grows, we will find ways to make our resources stretch further. The largest scarcity on earth is good ideas.

Munger and Buffett led the way in California on the issue of abortion. To me, this is the worst thing about them. Life begins at conception. Every embryo has unique DNA. Embryos begin most of their adult human actions between two and three months after conception. It is cruel to abort them. Much as people mourn the deaths of six and seven-year-olds in Connecticut, we kill far more children when prior to birth, by a factor of 10,000.

Buffett also favored taxing the wealthy. But most of his tax proposals would not tax him. This is the most hypocritical part of Buffett. He could pay extra tax to the government off of his embedded gains in the stock that he holds of Berkshire Hathaway. Berkshire Hathaway itself could just pay off their deferred tax liabilities. But he doesn’t do that. Instead, he asks others to pay what he will not.

Food

Though I like all kinds of food, I find it amusing that Buffett does not want to eat anything that a three-year-old does not eat. I also find it amazing that he is still alive following such a diet.

That’s one of the cute parts of the book ? watching when Buffett turns away food, and the efforts that they make to provide hamburgers and steaks to him in areas where that is harder to achieve.

Summary

I’ve tried to give you all the main themes of the book The Snowball. The biggest theme of the book revolves around Buffett’s first wife Susie. For more than 20 years, Susie was the core of Buffett’s life. She gave him a life after the harsh treatment his mother gave. But after many years of marital neglect, she left him, and that is to her discredit. (Of course, Buffett could have solved this by spending less time on business and more time on his marriage.)

Then when Susie died, that was the next largest theme of the book. She did not care for herself well, but Susie was beloved by almost everyone mentioned in the book.? I wonder at an alternative history where Susie stayed at Warren?s side, and sang without leaving him.? Warren might have done better, far better.

Warren Buffett is an amazing man, and I look up to him, leaving aside his ethical lapses.? This book is the best book that describes him of all the books that have been written about him.? Alice Schroeder did an excellent job on this book.? Warren Buffett should be grateful to Alice Schroeder for this book.? It gives a fair but believable representation of his life.