Book Review

A list of some of my favourite books:

Common Stocks and Uncommon Profits by Phillip Fisher

Warren Buffett describes himself as 15% Fisher. Phillip Fisher adds a number of interesting points which Buffett himself has adopted including thoughts around management and scuttlebutt. It adds the quality aspect of Buffett’s investment style into market leaders with above average sales and a comparative advantage.

Key takeouts:

• Focus on growth companies with high profit margins and return on capital with a comparative advantage
• Ask “what are you doing that your competitors aren’t doing yet?”, this adds a quality aspect to the company in consideration.
• The important concept of “scuttlebutt”, Phillip suggested that one of the better sources of information are the competition as they can talk freely about their competitor and aren’t bound by insider trading laws while understanding the industry well. Some contacts have countered this with an argument that competitors will argue that they are better.
• A comparative advantage is important and needs to be maintained, how much research and development is being conducted? Is there a worthwhile profit margin.
• The importance of management in business, the depth of management, track record and the relationships between management and key stakeholders.

The Intelligent Investor by Benjamin Graham

Described by Warren Buffett as “by far the best book on investing ever written”, Benjamin Graham creates the foundation of value investing. Benjamin Graham also highlights a number of basic money management tips for the lay person.

Key takeouts:

• The margin of safety which reiterates that for every company there is a price at which it is valuable
• The search for dividend yield, unlike Graham, Buffett never minded the dividends paid by the company, Buffett is happy if the earnings of the company are reinvested at a higher rate than he can invest.
• Look for substantial asset backing, while this is still relevant there are a number of businesses that can produce substantial cash from intangible assets and so there is little correlation between asset backing and cashflow.

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves by Andre Ross Sorkin

A superb recount of the events of the 2008 global financial crisis and the collapse of Lehman Brothers, it is the closest thing to a nightmare for any market participant.

Key takeouts:

• How close the world came to a deep and drawn out depression can never be appreciated until this book has been read
• An unflattering view of the egocentric managers of some of the largest financial firms on the planet and the increased power of those that survive provides fear for the next crisis to come.

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

Alice Schroeder outdoes herself in this exceptional read on one of the greatest investors of all time. A former insurance analyst and analyst of Berkshire Hathaway, Alice is well equipped to provide a comprehensive insight into the world of Warren Buffett.

Key takeouts:

• Buffetted: the ability of Warren Buffett to negotiate deals has been a trade mark feature of his throughout his investment career, the ability to walk away from a deal at the wrong price
• The simplicity of the Oracle of Omaha in his investment decisions and his daily life
• The transition of Warren Buffett, from a “cigar butt” investor to a deal maker in quality companies to which he was introduced by Charlie Mungar

Quiet: The Power of Introverts in a World That Can't Stop Talking by Susan Cain

Written by a former legal advisor to some of the top investment banks such as JP Morgan and Merryl Lynch, Susan Cain highlights the power of introverts and the focus of the modern corporate world on extroversion.

Key takeouts:

• The domination of extroverts may lead to a larger degree of egoism and stubbornness, this could have interesting investment potential in the corporate setting
• An introvert can harness their power by focusing on their advantages, that is, preparing more than the peers to handle the situations and ready with the facts

A Random Walk Down Wall Street by Burton Malkiel
Written by a Princeton economist, this book argues that asset prices typically resembles a random walk and one cannot outperform the market averages over the long run.

Key takeouts:

• Wise to have a least a portion of assets in the index, particularly if the "active" managers are really only being active relative to a benchmark and not benchmark unaware
• Despite the name and the common interpretation that prices are random, I am of the view that the multiple is the random component. If an investment produces $1.00 of earnings, whether someone will pay 10 times or 20 times for that investment is the random component. Obviously one would expect a higher multiple investment would have higher growth prospects but what is to say it shouldn't be 21 times rather than 20?

The Little Book that Beats the Market by Joel Greenblatt
This book is a simple to understand reading of the investment philosophy of Joel Greenblatt, an American academic, hedge fund manager and investor. He started Gotham Capital in 1985.

Key takeouts:

• Two key metrics are earnings yield and return on capital. Interesting to note that he defines earnings yield as EBIT/EV and return on capital as EBIT/(net fixed assets + working capital). He believes these give a better measure than is typically the case.
• Uses a ranking measure of the above financial metrics to obtain the best possible group of investments which he claims will always beat the market for the patient investor.

Liar's Poker by Michael Lewis
Gives insight into one of Wall Streets large former firms, Salomon Brothers. The firm grew rapidly in 1980's from bond trading and Michael provides insight into this growth and the culture of Wall Street at the time.

Key takeouts:

• The clients are the key asset to the firm and should be respected. Liar's Poker portrays what not to do. Fiduciary duty to the client is paramount.
• The need to have the knowledge and skills to handle the changing trends in the market. Many of the initial employees of the firm were uneducated and merely benefited from the economic climate at the time.

The Wolf of Wall Street by Jordon Belfort

This is an unbelievable story of what not to do in the financial world. Jordon Belfort became well known in financial circles, particularly in the microcap area before being arrested.

Key takeouts:

• A financial participant’s best asset is their reputation
• The changes of the industry over the past 20 years, the rigorous recruitment process and the ethical standards to which many members of the finance industry are held are just two of a number of changes in the past 20 years.
• The power of talking is a key feature of the book, the ability to manipulate people with words. It reminds me of this video which is a scary visual testament to how markets sometimes react http://www.youtube.com/watch?v=XYU1a0lTTTw

The Great Crash by John Kenneth Galbraith

This book by one of the world’s best-known economists gives an in-depth account of the situation leading up to and including the 1929 stock market crash.

Key takeouts:

• Highly unlikely the extent of the 1929 crash will be seen again due to the amount of leveraged employed by the listed investment companies. While there are substantially more controls on leverage now, the increase of complex derivatives making the event possible.
• While stock ownership was not high in the 1929, John highlights the interesting thing of this crash was the impact on the general population and the economy which had no funds invested in the stock market. The general economic downturn which ensured highlights the mistakes of fiscal and monetary policies of the time.

Good to Great: Why Some Companies Make the Leap...and Others Don't by James C. Collins

An incredible read by a Stanford University academic, this book is a research summary of eleven companies and comparable companies and what makes them great.

Key takeouts:

• Great companies may revert back to being good
• A great company usually has the following characteristics:
• Level 5 leadership, generally a level 5 leader is one who is part of the team (not egocentric)
• Willing to hire exceptional talent when possible without thought to what to do with the talent
• Will confront the brutal facts of the situation presented to it, make hard decision.
• Enlists the hedgehog concept, the company will be able to do one thing better than any other company in the world.
• A culture of discipline
• Technology accelerators to enhance growth in the business.
• The Flywheel concept, that is no single moment can be pointed to in growth, it is the compounded effect of many striving for the one goal.
• While the companies portrayed haven’t performed well in general going forward, there are a number of concepts in the book that are interesting from a historical point of view and from an application perspective.

47 Greatest Mistakes Made by Property Investors and How to Avoid Them by Hellen Collier-Kogtevs
This book is an interesting read for the aspiring property investor, while there are a number of biases that are evident in this book, there are a few important pieces of information.

Key takeouts:

• Negotiating, Helen is a big fan of negotiating and it is certainly interesting what she has to say about it in the property market
• The balancing of the property portfolio with a mixture of cashflow positive and negative investments.

Buffetology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor by Mary Buffett

In this book the ex-wife of Warren Buffett’s son, Peter Buffett explains simply the understanding of the modern day methodology of the legendary investor, Warren Buffett.

Key takeouts:

• Think of what companies you would like to buy and wait for the price to come down to an attractive level rather than seek to find those companies to buy
• Mary highlights the brand power of businesses and the monopolistic characteristics of a good brand.

Think and Grow Rich by Napoleon Hill

This is a personal development and self-help book written in 1937 inspired by Andrew Carnegie. Napoleon seeks to identify factors that helped a number of people to succeed and provides some insight into the lives of business legends.

Key takeouts:

• Generally the book seemed ambiguous and uninformative
• This book reiterated the desire and persistence of ones goals, this reminds me of one of the greatest quotes of all time “Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.” Calvin Coolidge.  

Buffett: The Making of an American Capitalist by Roger Lowenstein

Written by an American Financial Journalist and director of the Sequoia Fund, this is a short book on Warren Buffett’s life and upbringing. While it is no comparison to Alice Schroeder’s book, The Snowball: Warren Buffett and the Business of Life, this book touches on some of the key features of the Oracle of Omaha.