Sun Zhang, Daniel – An Investment Thinking Toolbox

Ekerlids, 2021 [Equities] Grade 4

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Within fundamental equity investing there is a body of different best practices and a canon of literature with important insights – what this site has labeled financial wisdom. Ever so often a person who has assimilated this wisdom writes a book about how he or she uses this in their investment management. This is such a book and as many of these books it is interesting to follow the personal exploration journey of the person and to see how the practical results look. Daniel Sun Zhang has written an easy to read user’s guide to his toolbox of investment thinking – similar to what Charlie Munger would call mental models. According to the author who according to the sleeve is the CXO of Teqnion the book was his own attempt to structure his investment thinking and we are all invited to join to everybody’s benefit.

The structure of the book is simple. It contains a number of chapters each dedicated to one investment thinking tool, say Warren Buffett’s circle of competence, fist principle, Munger’s inversion practice, anchoring, survivorship bias, unknown unknowns etc. Each chapter follows roughly the same format with some kind of background story related to the topic, a definition, linked personal investment experiences and finally “practical advice to myself” in bullet form.

Then there are two appendices covering the types of companies he likes (he has over time moved from deep value to compounders that are worth more than they cost) and the investment process he uses. This includes a somewhat eclectic idea generation, a learning process aiming to understand what the key issues are, a research process that combines a will to learn about all factors that has bearing on future cash flows with an insight of the declining marginal utility of investigating too many things. Then the author constructs an investment narrative that is also made quantitative to make sure it makes sense. This is thrown into a DCF using Monte Carlo analysis to account for varying scenarios. He sells when a stock has become overvalued, when there are better alternatives, when he doesn’t feel that he understands the investment case anymore or when he needs money for other things. It might not fit everybody but I would call that quite a decent investment process.

The book is in a way somewhat lightweight and it is a quick read for its 200 pages. In one or two of the linked personal investment experiences the link feels a bit loose. On the other hand this is easy to forgive as the author has digested some very useful tools and I particularly like the practical nature of his advice and the amount of self-awareness that is shown. A person that has read some amount of the books, blogs etc. of the value community the last decade or two will not find anything new but for those who haven’t they get a good dose of financial wisdom presented in an accessible way. I especially liked the linking done between William Ockham’s razor and Buffett-Munger’s notion of focusing on what is both important and knowable – see, I did find something new.

The author displays a good combination of the art of reaching an investment story and the science of looking at investment using statistical tools. Not everybody can synchronize qualitative and quantitative thinking. I think this combination could be even more important as everybody and their mum are compound investors today and stringent price discipline will be crucial for long-term success.

Above all this is a book to be used. Anyone who learns the mental models Sun Zhang presents will be a better investor than before. 

Mats Larsson, January 31, 2022

Reinert, Erik S. – How Rich Countries Got Rich and Why Poor Countries Stay Poor

Constable, 2007 [Economics] Grade 2

Link to Amazon… Read as pdf…

The governments in developing countries should actively nurture and protect a number of value adding industries and only allow them to be subject to full international trade competition when they have grown to their full strength. This is a highly acclaimed book in development economics and it is partly written to help developing countries. The author, the Norwegian Eric Reinert, is Professor of Technology Governance and Development Strategies at the Tallinn University of Technology in Estonia and has been advising a number of developing countries through the years, mainly in Latin America. Although, the author has several useful insights this is a frustrating book to read.

Broadly two thirds of the content of the book relate to how the author view the world with regards to the efforts of helping poorer counrties to develop economically and then the rest describes how it should be according to Reinert. In the author’s view the actions of UN institutions like the World Bank and IMF matters hugely, since the end of the 1980’s these institutions employ the wrong economic tools and due to this the “poor countries stay poor”. Some of those tools are deregulations, legal property rights, functioning societal institutions etc. that Reinert doesn’t object to but often downplays. The most important culprit is instead instant free trade and the use of David Ricardo’s trade theories that forces countries to specialize where they have their comparative advantage. Through this poor countries often specialize in low value adding, commodity based industries with scale diseconomies while rich countries do the opposite and over time this expands the inequalities. On top of this the rich countries’ international aid is of a type that further passivizes the developing countries and hinders them from taking self-sustaining actions.

Instead of setting up a structure for free markets with perfect competition in the economist’s sense, Reinert advocates an industry politic that under temporary protectionism tries to copy developed world companies, by this creating synergetic clusters of value adding, knowledge and innovation based companies soon strong enough to face the world competition. This will allow for increasing real wages and a growing middle class. With the growing wealth the societal institutions will develop over time.

The first objection to the book is that the “poor didn’t stay poor”. The last few decades have seen the largest wealth increase in human history. The mindset of the book is grounded in the period of the 1970s to the 1990s. The first paragraph states that half of the world’s population lives on less than $2 a day and the situation is getting worse. This wasn’t true at publication in 2007 and it’s not true today. According to UN statistics 6,6 percent of the world population lived in so-called extreme poverty (below 1,9$ a day) in 2019 – after a massive and steady decline over time. This is not to say that the situation is not often awful for a lot of people in the world, but still. Much of the wealth increase in Asia has in fact partly utilized the industry politics that Reinert advocates in combination with the active institutional development of the mentioned UN institutions (who since at least 10 to 15 years mostly focus on sustainability instead of “neoliberalism”).

The second objection to the book is its structure and tone. The author is highly polemical and borderline conspiracy theoretical with regards to how the rich keep the poor impoverished - Reinert seams undetermined if this is driven by malicious intent or stupidity. The book is insanely repetitive and wordy with the same few obsessive main points stated throughout all chapters without any obvious progress in the narrative.

This book feels extremely dated. It’s stuck in-between the 1970s North-South debate and the anti-globalist movement of the 1990s. This is a shame since it contains some valuable thoughts.

Mats Larsson, January 25, 2022

Seides, Ted - Capital Allocators

I recently read Ted Seides, Capital Allocators, and consumed an unhealthy amount of podcasts, with Ted as host and Ted as a guest. First read his book, see this review, and then watch the zoom interview I did. (to be published shortly). Read as PDF…

Gilder, George – Gaming AI

Discovery Institute Press, 2020 [Business] Grade 4

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The author and technology deep-thinker George Gilder has packed a huge topic into a small book. Gaming AI is a refutation of the idea that the artificial intelligence technology in the end will create a mind in a human sense, never alone an all-powerful transcendental mind. AI is one useful tool in a long line of such instruments, but not more than that. The topics covered are not easy to grasp for a layman but I sure hope Gilder is right.

According to the author AI is the defining technological, philosophical and even religious issue of our time. The Silicon Valley in-crowd with high priests like Ray Kurzweil view humans as a second rate data processor with poor physical durability. With big data, deep learning and with the huge parallel processing capabilities of quantum computers we are rapidly approaching the singularity where the machine mind will surpass the human mind in all aspects. This so-called Turning-machine will be the all-purpose problem solver, the general-purpose machine to end all issues, the transcendental intelligence.

We will then face the question if this superior mind is kindly disposed to his creators? If it is, creating the mind will be the last mankind will have to accomplish as we will be supported by our guardian and can spend our days in pleasant but inconsequential contentedness. If not, it will be the last mankind does – period. Whatever the outcome turns out to be, the deterministic road to this crossroad for the fate of man is set in stone - we cannot not develop AI. We live in the last of times.

Gilder sees the above as quasi-religious nonsense. The vision is technically not feasible and he lines up a number separate of reasons coming from different sources. One key reason builds on Kurt Gödel’s incompleteness theorem that shows that full knowledge is impossible and building on this Alan Turing showed that the axioms of a system couldn’t be provided within that same system. All systems need an external programmer that Turing called an oracle. Computer logic cannot escape the self-referring loops in its own code. Claude Shannon further showed that information comes from unexpected data bits - it consists of surprises. A deterministic machine lacks surprises. The only theoretical way to escape this would require infinite space-time, memory and processing power. In reality digital computing is instead hugely sub-standard to the human mind in terms of operations per watt.

The philosopher Charles Sanders has shown that mental activity consists of three factors where objects are connected to symbols through an interpreter. The symbols cannot by themselves form a reliable representation of their objects. The digital map is not the territory. Hence, AI cannot form a reliable representation of the mind. The AI priesthood equals the map with the territory. While man is also fallible we live in this knowledge and in the managing of an incomplete map. Our mind is the source to our creativity and free will. The deterministic copycat has a hard time handling a world where the same inputs often give different outputs, where people act irrationally and where reflexivity is a key feature of the complex adaptive system that is our society.

In order to further develop a technology a creative outside force will have to transcend the logic that sustains the existing technology. Creativity cannot be deterministic in itself as it then lacks the surprises that constitute new data. Silicon Valley will have to alter its prevailing theory of philosophy of mind and instead engage with the task of putting AI to its many worthwhile uses.

This less than 50 pages short book that builds on Gilders previous Live After Google is an important contribution to the debate on our future on this planet. Some will see the rejection of the creative machine mind as backward looking while others will let out a sigh of relief. The main question is rather whether the author is right or not.

Mats Larsson, 13 July, 2021

Gilder, George – Life After Google

Regnery Gateway, 2018 [Business] Grade 4

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The reader of Life After Google gets two stories for the price of one. The first is the tale of David vs. Goliath, or rather Cryptocosm vs. Google. The other covers the mistaken views of the AI-priesthood, at least as the author sees it. The stories are connected as AI and the inevitability of the coming singularity is a cornerstone of Google’s worldview. The second topic has also been broken out into a separate book by the author called Gaming AI, published in 2020, which I will review later on. This text will focus on the first theme. The polymath author George Gilder who published his first book in 1966 is also an investor, economist and technology visionary. Several of his about 20 books have over the years had profound influence on the leading persons of Silicon Valley. Gilder is also very much an advocate for the book’s underdog David who works in the form of peer-to-peer technologies such as blockchain.

There has always existed several worldviews among the people in Silicon Valley. Up until the last 15 years one dominating view was libertarian, sprawling, sometimes idealistic but more often capitalistic and often both anti-state and anti-big business. When Silicon Valley got their own corporate giants and industry tycoons, views gravitated towards a more orderly and centralized system well suited for Big Tech. Gilder even claims that Google is the first corporation with a full philosophical belief system. Apart from the deterministic and materialistic theory of mind focusing on AI there are several important parts.

Google views the world as a large database. There are always more data to collect and to analyze. The focus is on big data and cloud computing where a central ‘logic machine’ combines algorithms with data to know what people wants better than they know themselves. The normatively good is to search the one truth as the logic machine defines it and this can only happen if the machine can collect all data. Data privacy becomes immoral or “information wants to be free” as the saying goes. To maximize its reach the services are free for the users. The cost for search is instead paid through the add-on of advertising costs to other companies’ products. As indicated by Tim Cook’s quote “If the service is ‘free’, you are not the customer but the product” the users give up their user data. Gilder points to something even more serious; for advertising models it is vital to maximize the time that people are exposed to the chance to see adds, i.e. that users pay with their time, parts of their life.

Enters the savior Cryptocosm that will bring the centralized model to its knees, solve our security problems and revitalize the other decentralized and libertarian Internet. In some sense Gilder portrays a Hegelian dialectic view of historic development where focus on core and edge respectively replace each other. Through blockchain technology communication, commercial transactions and money itself will be decentralized and encrypted - even democratized - which will then make data unreadable for the logic machine. User generated personal data will only be available to the persons who hold the keys to it and it will neither be the state, nor Google. Top down control will give way to human uniqueness and creativity.

From chapter 10 onwards the book is with some exceptions a long parade of heroes. One genius after the other from the Cryptocosm-team is presented and I must admit that my attention starts to wane somewhat. Unfortunately this section is really loooong, more than half the book. This and the fact that the author’s two topics get too intermingled hurt the overall impression of the book. The depth, width and originality of thought are what save it. Few would be able to discuss Silicon Valley-epistemology, the functionality of money and the details of various blockchain solutions and get away with it. Gilder pulls it off.

Time will tell if he is proven correct in his views but as so often before Gilder looks far ahead into the technology future, making us all wiser.

Mats Larsson, March 26, 2021

Newport, Cal – Digital Minimalism

Portfolio Penguin, 2019 [Surrounding Knowledge] Grade 4

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The average US person is checking his smart phone 85 times a day, he’s using social media two hours a day and the average teenager is consuming various types of media 9 of the 24 hours. After writing three books on how to succeed as a student Cal Newport had his break through with So Good They Can’t Ignore You, giving somewhat unusual career advice. This book was soon followed by the even larger best seller Deep Work that focused on how to be able to do high quality work in today’s hugely distracting work environment and by this keeping yourself relevant in a continually changing employment market. The common theme of all these books has been a rational focus on the really important and by this a disciplined usage of time. Time is a hugely precious asset in our short lives so we should try to treat it as such.

The topic of this book wasn’t something Newport had planned. Instead the idea came out of comments from his readers on how they apparently felt an even larger need to fend of distractions outside work than in it. People were telling him stories of exhaustion, of discontent with their life, even feelings of addiction, and linking all this to their use of digital media. At the same time as social media got its mobile break through the psychical illness statistics in the Western world shot through the roof. People interacting with Newport seamed to have lost control of their own lives and their usage of time and with this loss of autonomy also their sense of purpose.

True to his proven formula the author is in this book advising us to focus our usage of digital tools to the few chosen ones that best support what we truly value and then knowingly miss out on everything else. It has to be said that Newport hardly is a tech-misanthrope as he’s an associate professor of computer science at Georgetown. In a way he’s joining the long line of Silicon Valley luminaries that will not let their own families use the products their companies produce. The book is split in two parts where the first presents the author’s solution to the alarming situation, a “digital decluttering” and the second discusses various tools and methods that will help the reader to use digital media in a productive healthy way.

The digital declutter is a combination of a rather abrupt 30 day digital detox period combined with suggestions for a range of meaningful and creative substituting activities. To me this is perhaps the most important realization in the book; that you have to replace the value in the addictive activities with something else that brings satisfaction - or the chock therapy will fail. After the digital declutter-period is over one is allowed to reintroduce digital tools, starting from a blank slate and only adding the few that truly adds value and at the same time deciding on how to use them. Newport strikes you as a constantly rational and disciplined person that seams to like an optimized life. To his credit the method he proposes and advice he gives is flexible enough to fit more personality types than his own and to take account of the digital tools that a person cannot avoid to use if he wants to earn his living. The author understands the difficulties of what he is suggesting.

To me the first part of Digital Minimalism feels like the more important part of the book. The many pieces of advice in the later part are good and in many cases thought provoking but if the chock therapy from the first part works they really shouldn’t be needed as I see it.

This is a book and an author that don’t beat about the bush. If we want to be in command of our own lives we have to make some efforts to accomplish this. Here is some help.

Mats Larsson, May 5, 2020

Lencioni, Patrick – The Five Dysfunctions of a Team

Jossey-Bass, 2002 [Business] Grade 3

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According to the management consultant Patrick Lencioni successful teamwork, rather than strategy, technology and other factors, is the ultimate competitive advantage simply because it is both so powerful and so rare to achieve among businesses. Lencioni is the founder of The Table group, a lecturer and an author of a host of books of which for example the title Death by Meeting sounds like a quite tempting purchase. The Five Dysfunctions of a Team is his best seller as it explores how to turn around a failing executive management team to finally get the entire group to work together towards shared goals.

The first three quarters of the book is a fictional story of how Kathryn Petersen is appointed CEO of the somewhat waning former tech star company DecisionTech Inc and how she manages to restore its former strong business momentum by leading the management team from dysfunction and conflict to a tight knit and business focused unit. The last quarter is Lencioni’s theoretical repetition of the model that Petersen is using to pull this off plus some practical advice on how to implement group changes. In all this sums up to about 220 easy to read pages that is possible to conveniently finish in a relatively short space of time.

Hardly meant to be a high quality novel the plot is easy and the characters are flat (your first guess of which of the persons that will not stay in the group by the story’s end will probably be correct). However, the business fable still serves its purpose well as a tool to bring the methods to life for the reader and the team members exemplify personality types that we all face now and then. We mainly get to know the management team through a number of offsite sessions where Petersen - more or less like the consummate management consultant – with few hiccups works her magic and changes the group dynamics by using the model of five connected team dysfunctions. Relatively little attention in the fable is spent on how the team dynamics would be connected to and dependent on the overall culture of the organization.

The model consists of a pyramid of five dysfunctions or segments where each prior dysfunction has to be remedied to function as a base for the next segment. In combination they will lead to successful teamwork. The dysfunctions are: 1) an absence of trust characterized by team members’ unwillingness to show vulnerability in the group, 2) a fear of conflict that leads to an artificial harmony rather than important discussions, 3) a lack of commitment since the shortage of frank dialogue gives people the option to refrain from buying into the decisions taken, 4) an avoidance of accountability since team members themselves didn’t mentally commit to the decisions they are very reluctant to give feedback to other’s in the group on how to improve and 5) an inattention to the results of the team since those in the group, due to ego or career motives, put their individual needs first. Hence, in a successful team people trust each other, engage in constructive conflict around ideas, commit to plans of action, hold each other accountable for delivering against the plans and they focus on the collective results.

To get everybody in a team to work in the same direction is clearly the key aspect of succeeding with a team. Still there are other somewhat more technical success factors that could have been mentioned as well such as the competence of the team members, the cognitive diversity of the persons so that they bring different viewpoints to the table and the group’s size, incentives, working methods etc. Intuitively the advice Lencioni gives makes sense and the topics discussed remind me of the similar work Focus Consulting Group has done in the financial sector. However, the fact that the author was about 36 when he wrote the book makes me slightly hesitant on how much real life backup he’s got for the efficiency of the model.

This is an easy read that will give clear inputs on how to tackle many key success factors of teamwork – the “ultimate competitive advantage”.

Mats Larsson, February 23, 2020

Crosby, Daniel – The Behavioral Investor

Harriman House, 2018 [Finance] Grade 4

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This is a book with great ambitions. In the first sentence Daniel Crosby says that the aim for The Behavioral Investor is to be the most comprehensive guide to the psychology of asset management ever written. Dr. Crosby, a psychologist by training, is the Chief Behavioral Officer at Brinker Capital and a leading blogger and podcaster on the subject of behavioral finance – this is his forth book on different topics in this discipline.

Some fifteen years ago I fell in love with behavioral finance as it so obviously described aspects of investing and financial markets that traditional finance and economics didn’t. Over time the interest has however started to wane since the academics in the area devoted their energy towards adding yet another insult towards the previously dominant efficient market hypothesis creating an ever growing list of interesting and quirky behavioral biases but no real practical applications for investors. According to the author “[…] all this ends today, as we will take [these biases] and speak to the particulars of what they mean in the context of making money.” I would argue that the aim of being the most comprehensive guide is reasonably well met for a book of “only” about 250 pages. With regards to fulfilling my wish of an applied behavioral finance investment method The Behavioral Investor unfortunately only gives fairly broad guidelines.

The author is well read in both academic literature and more practical investing books. Despite the author’s learnedness the language is very readable and clear as Crosby’s writing comes with a humorous and personal touch. This is a finance book without most of the technical finance jargon – although at times it instead contains some psychology terminology. Nevertheless, it’s undoubtedly a very readable book.

The book is structured in four parts with the first outlining the sociological, neurological and physiological foundations to the biases investors exhibit. Then the author summarizes the many documented psychotically based follies of investors into four primary tendencies regarding ego, conservatism, attention and emotion. Part three tries to list practical measures to overcome the previously described problems and finally the book ends with the author’s “third way” of investing (as opposed to passive investing and active investing) called rules-based behavioral investing (RBI). Hence, the first half gives a background and the second half tries to apply the learnings in real life. Throughout The Behavioral Investor Crosby discusses most of all the psychological experiments and subsequent findings that a frequent reader of behavioral finance literature will ever have heard of but without it ever getting tedious.

RBI is as the name suggests rules based with a high base allocation to equities implemented through a combination of value and momentum quant based equity portfolios and with an overlay of valuation (Tobin’s Q, CAPE etc.) and momentum (200-day or 10 month moving averages etc.) based rules for when to very occasionally lower the allocation of equities. The focus is to find a rational and evidence based methodology where the room for behavioral biases is kept to a minimum. Although this is only one of several good ways to manage money I personally think this is a great setup, but regrettably Cosby only gives a very fleeting description of what his RBI actually looks like. Further, the Achilles heal of the rational quantitative strategy is that it needs permanent money or else it will suffer redemptions at the exact wrong moment from its less than rational human investors.

If this is one of the first books you read on behavioral finance you are to be congratulated as it will surely be mind-blowing. If you have followed the area during its development, The Behavioral Investor is a very good inventory of current knowledge but it adds relatively little new. And perhaps it’s a good thing that a best selling book cannot deliver a detailed best practice behavioral finance investing method as it is then up to me to develop it myself.

Mats Larsson, December 31, 2018

Pettis, Michael – The Great Rebalancing

Princeton University Press, 2013 [Economics] Grade 4

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World trade doesn’t work as most pundits think it does. At least the author argues that the effects on national current account balances, savings ratios, investments etc. are too often poorly understood. The author Michael Pettis - formerly a banker at Bear Stearns and a trader at today’s JP Morgan - is a professor of finance at the Peking University and a well-read, prolific blogger, discussing topics like global trade and the Chinese economy. In this book Pettis tries to set the record straight and explain why trade policies, in a broad sense, was one of the major factors behind the 2009 financial crisis and what this says about the future for the Chinese economic growth model etc.

Apart from an introductory chapter and a concluding one (including some predictions about the future) the book is structured to try to explain three “confusions” in the trade debate. The first confusion has to do with the causes of trade imbalances and how these generally are the result of distorted economic policies in one or more countries (chapters 2 to 4), the second is related to the relationship between trade, the savings rate and international capital flows (chapters 5 to 7) and the final confusion is that the role of the USD as the global reserve currency is an advantage for the US (chapter 8). As I read the 2014 printing of the book it also contains an appendix with an explanation to why the imbalances discussed in the book emerged to start with. If your copy of the book contains this appendix I would advice you to start your reading with this as it provides background and further details the macro economic accounting identities that are frequently used in the book. Although several countries and regions are discussed, the symbiotic relationship between the US and China is really the key topic of the book.

You get the feel that The Great Rebalancing is written out of frustration that so few understand global trade economics. The big advantage of the book is that it looks at the economic causes and effects of trade as an interconnected international system where every country is affected by every other one through the capital and current accounts. Hence, where many economics textbooks look at theoretical examples containing only two countries Pettis discusses the real-world, complex web of relationships. Still, the book also very much feels like sitting in on a slightly repetitive academic economics course in trade theory, but instead of equations and arrows that point to chains of events everything is described in text only. It would have been more enlightening if the author had added some occasional pictures with the described equations. Hence, the best advice for getting the full benefit of this book and making reading it a valuable learning experience is to write down the equations that Pettis uses on a piece of paper and have it handy while reading the book.

Pettis views imbalances between production and consumption – or rather “underconsumption” as once discussed by Karl Marx – to be the primary source of economic instabilities and from this argues that the economic growth model of China has actually been tried several times before and as it is imbalanced it will have to reverse. In the case of Japan it reversed through a crisis while in Brazil it did so by a lost growth decade. It is this later fate the author sees for China in the end. The growth model builds on financial repression (in China’s case through low regulated interest rates), currency manipulation and a wage growth that is slower than the productivity growth. The author claims that there are only three ways that China realistically can rebalance and this is through higher unemployment, increasing debt or through wealth transfers. The best way would be to shift the economic model in a way that shifts means from the state and the corporate sector to consumers. Although this would be relatively painless the GDP-growth will have to slow substantially and it is also a policy that threatens many vested economic interests.

I’m not a good enough economist to know if Pettis is right but despite the somewhat dry writing this is an important book to have read.

Mats Larsson, December 26, 2018

Ang, Rusmin & Chng, Victor – Value Investing In Growth Companies

Wiley, 2013 [Equity Investing] Grade 3

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To succeed in the equity market it is important not to succumb to the psychology of the market. Vital to this resilience is then to have - or cultivate - the right mindset but also to follow sound investment philosophies and stringent processes. Rusmin Ang and Victor Chng, two Singapore based chief investment analysts at 8 Investment, the largest value-investing network in Asia, offer to guide readers of their book Value Investing In Growth Companies to just this.

The preface and the first chapter gives an account of the journeys that the authors have made – both personally and with regards to becoming devoted value investors ingrained in the teachings of Warren Buffett, Peter Lynch, Philip Fisher, Ben Graham, Charlie Munger, Anthony Bolton and the like. After a chapter on how to understand investment psychology the main part of the book is then dedicated to the duo’s research method called the Jigsaw Puzzle, focusing on the business of the company, the management, the financial results it produces and the valuation of the shares. Lastly, they finish off with some thoughts on practical implementation and portfolio management (including screens to filter out good prospect stocks) plus how to avoid common mistakes.

I appreciate that the authors start by laying the groundwork discussing investment psychology and they also correctly caution readers from using their method if they don’t have the constitution for it. There are many ways to invest; you should chose one that fits your personality. Further, the method in itself requires the investor to take certain steps and to make sure firm objective criteria are met before investing in a stock, which in itself gives some protection from being psychologically swept off ones feet by the latest glamour stock.

Although useful for professional investors, I would argue that this is primarily a book for private investors interested in investing in small-cap, GARP-type of stocks – or GAUP as the authors’ calls it; Growth at Undervalued Prices. The prospect companies are those with simple understandable business models but the method still requires the investor to do a fair amount of “scuttle-butting” à la Fisher and store visiting à la Lynch so there is some fair amount of labor required. I must admit that I find the method and the book a bit commonplace – robust, correct and well crafted but not something out of the ordinary. The amount of detail and depth in the book isn’t huge. This doesn’t prevent it from potentially being incredibly operational for the private investor if well used. It is often more important to find a good practice – which this is – stick with it and perfect it, rather than to constantly chase after an illusive perfect method. Depth and detail can be added by the investor himself from real world experiences.

As a Western European, one main take from the book is that investing is pretty much the same wherever you practice your craft. There are some culturally distinctly Asian features such as the authors’ unabashed declarations to become rich which is more socially accepted in a part of the world where such large parts of the populations have managed to do so in a relatively short period of time and there are obviously references made to the quite speculative stock markets in south east Asia. Also, companies and specific persons differ from what a westerner is used to. Still, there is nothing specifically Asian about the philosophy or the research process – instead it should be universally valid for all.

This is an able book on investing in smaller growth companies that could serve its reader well but it offers no real revelations.

Mats Larsson, December 20, 2018

Marks, Howard - Mastering the Market Cycle

Houghton Mifflin Harcourt, 2018 [Finance] Grade 4

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The holy grail of investing is market timing and its realization is about as elusive. This is a guide on how to master the financial market cycle, which is something in a way related to market timing, but still very, very, very different. The master (that word again…) corporate bond investor and investment writer Howard Marks at Oaktree Capital Management is among those whom I admire most in financial markets and his first book The Most Important Thing ranks among my top five all time investment books. In a way this is a slight problem when it comes to Mastering the Market Cycle. A classical advice to companies reporting their financials is to “under-promise and over-deliver” – the thing is that Marks’ first book drives up expectations for this one to a level it cannot fully live up to. But it’s still a really inspiring book on an important and under-discussed area that I will put to good use immediately.

A fundamental cornerstone for the author is that financial markets cannot be predicted with any practically usable precision in the short to medium term. This doesn’t mean that all market outcomes are equally probable at all times. By looking to current conditions and by this forming an opinion on where we are in the market cycle an investor, according to Marks, can tilt his portfolio to take advantage of what is more likely to happen in the years ahead. It’s both about what one thinks will happen depending on where one is and about the probability of this happening compared to other scenarios. If an investor is good at this game it should pay off in the long run and he tilts the odds for success in his favor. Prepare, don’t predict. I think he is totally spot-on in this respect.

Another key basis in mastering the cycle is to understand that things don’t just happen one thing after another in – unfortunately irregular – cyclical patterns. What happens in one stage of a market cycle is instead causing it to move on to the next stage. Cycles are chains of cause-and-effect relationships. After a pair of introductory chapters the main part of the book is devoted to describing a large set of interrelated and parallel such cycles: the economic cycle, the profit cycle, the risk attitude cycle, the credit cycle and so on. Underlying all these is the cyclical patterns in investor psychology – a topic clearly nearest to Marks’ heart. To a large extent Marks reads various psychological markers and positions himself in the cycle by these. Next comes one chapter that tries to assemble all the above cycle inputs into the full mosaic of the market cycle. The book finishes with a few concluding more practical chapters and a needlessly cut-and-paste type of summary.

It is honestly a luxury to have 50 years of hard won experience condensed in such a graspable format. Marks is a simply superb writer. Much like Warren Buffet the language can be deceptively simple, causing fairly complex issues to sound like child’s play. Make no mistake – this is investment thinking on the highest level. Still, compared to the high standards set by the author’s investment letters some passages of the book are a bit repetitive with their long and recurring chains of cause-and-effects and some newly written chapters that don’t build on previous investment letters, but are required to make an coherent story, are perhaps slightly less inspired than the others.

There are clearly others who have made contributions to the understanding of market cycles such as Hyman Minsky, various Austrian economists, the books from Marathon Asset Managed edited by Edward Chancellor plus many others. However, since Marks is so focused on reading non-fundamental and non-economic signposts I think the most complementary book might be Big Debt Crisis by the more Borg-ish Ray Dalio with his “economic machine”-concept, who obviously mostly zeros in on the central bank dominated cycle of monetary policy.

When it comes to books on market cycles this is a must read – but it could have been even better.

Mats Larsson, December 15, 2018

Wainwright, Tom – Narconomics: How to Run a Drug Cartel

Public Affairs US, 2016, [Surrounding Knowledge] Grade 3

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In the age of legalization of recreational drugs, what could be more relevant than learning about the South American cartels that completely own this market today? I know, the subject might seem a bit unorthodox for a finance book review, but bear with me.

To say that it’s impressive that this book exists is an enormous understatement. The fact that the author survived writing this makes you wonder if it’s actually true or a complete work of fiction. Tom Wainwright, the author of Narconomics: How to Run a Drug Cartel, has literally risked his life for this research. Wainwright paints a picture that the cartels are not that different from large international companies - with a little bit of torture, murder and what have you thrown into the mix.

From my experience, the world is best understood through the eyes of a textbook on economics, and Tom really proves this to be the case. Levitt and Dubner’s classic Freakonomics opened my eyes to the power of incentives and economic powers. Wainwright continues along this path and suggests that if we are to understand cartels, we must analyze them like every other structured organization. The cartels suffer the same problems as everyone else with finding recruits, keeping salaries down, keeping competition away and of course keeping prices high. Considering the hard work of finding good employees that are loyal and keep their mouths shut, it becomes increasingly important to treat your employees well. It seems somewhat unlikely that Wal-Mart would force all their employees to have facial tattoos done in order for them to never be able to change employer, but maybe the business world has a thing or two to learn about keeping employees around?

There are quite a few interesting tidbits throughout this book, many of them somewhat controversial, but nonetheless thought provoking. A specific part that stood out for me is that most of the cartels covered in the book are mono-cultural organizations with little to no diversity. According to a Dutch study on internal gang disputes, 29% of those conflicts when involving people of the same ethnicity were solved with violence, whereby the number is 53% for internal gang conflicts involving people of different ethnic background. There seems to be no studies made in “legit organizations” for this question so it’s quite hard to fact check these statements. Regardless how unpopular it would be, it tickles my curiosity to find out how an extremely homogenous organization would fare. Would they all be friends but get nothing done? Would the people eventually clash? Or would it be the most successful organization we’ve ever seen? I don’t think I will ever find the definite answer.

Academic research brought forward by Michael Mauboussin shows that there are different types of diversity; social diversity that reflects to differences in ethnicity, gender and the like, cognitive diversity that includes differences in knowledge, experience etc. and value diversity that captures differences in the perception of the group’s task or goal. To foster good decision-making you need a) relevant competences, b) high cognitive diversity to ensure that there are multiple sharp tools in the toolbox to solve problems but also c) low value diversity to make sure that people strive in the same direction. Social diversity is positively correlated to cognitive diversity and so is generally a positive. However, social diversity can also lead to some process losses as the group has more difficulties in interacting and the level of conflict therefore rises.

When peeking through the eyes of an economist, the world makes a lot of sense, and the global drug trade is no different. This might seem surprising to most people, but are we really that surprised that criminals also follow the rules of market economics? I can’t say that I am. No one is immune to the forces of the market economy. I picked up this book at the airport, and that’s kind of where it fits. It’s perfect for vacation reading. Prepare to be baffled and amused, but don’t expect to be a better person or investor.

Olle Qvarnström, November 19, 2018

Sommers, Tamler – Why Honor Matters

Basic Books, 2018 [Surrounding Knowledge] Grade 4

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In this his third book the relatively young Texan associate professor of philosophy at the University of Huston, Tamler Sommers, defines the virtue of honor, describes the pros and cons of honor cultures and claims that honor is underrated in our modern world. The author argues that the Western world has made a mistake in suppressing the concept of honor to the extent that has been done and that we need to adapt a “constrained” honor concept to live a good life. Although clearly interesting, Why Honor Matters fails to fully tie together all the loose ends.

According to the author the Western world is virtually schizophrenic when it comes to honor. The concept has little place in the discourse apart from when we horrify over the blood feuds, racism and bullying of women in honor cultures. On the other hand we admire the courageous hero of books and movies that rights the wrongs and in sports honor is still a valid concept. The first two chapters of the book define what honor is and discusses why it’s a problem that the West has abandoned the concept. Chapters three through five, drills deeper in the various aspects of honor cultures. Then “the most ambitious and […] the most important chapter” six argues for introducing so called restorable justice in the Western criminal justice system. Finally, the last chapter tries to present a picture of how the contained type of honor concept might look.

Sommers distinguishes between a Western dignity framework with its roots in the enlightenment and honor cultures – and to be clear, honor cultures could be attributed to both the populations of the Appalachian mountains and the Afghan mountains as well as the Navy SEALS, Mexican drug cartels and NHL hockey teams. Dignity is in this respect a universal unbreakable value that comes with being a human being and it is as such skeptical of narrowing forms of identifications with for example nation, class, race etc. This is because too close identification risks excluding others from the moral sphere. Honor is a much more fragile value that takes the opposite view. Giving equal moral weight to outsiders and insiders of a group is seen as immoral. While others should be treated with respect and hospitality, caring for your own is absolute priority. In a dignity culture living a moral life is a pursuit and choice of the individual while in honor cultures the individual moral is a part of a group’s norms and a moral life a necessity to be accepted by, and gain status in, the group. Dignity is independent of social structures and this has huge value in breaking free from oppressive structures. The downside is a loss of stability and structure plus of the self-respect that comes from standing up for yourself. To the author the western focus on the free will and the independence from others is too abstract where an atomization is prioritized over the meaning and solidarity that exist in honor cultures. Without the, granted not always positive, group cohesion of group norms dignity societies instead come to depend on an all powerful state penetrating deep into civil society.

Although I agree that a person to his best ability should live an honorable life of integrity, I reserve this as a choice for myself. My quarrels with the book are three. The discussion around restorative justice comes up now and again in the book and not just in chapter six. I think that it could have been better flagged that a debate on procedural structures in the US court system were such a large part of the book. Further, at times the author in my view comes a bit too romanticizing of the “honorable savage” of Jean-Jacques Rousseau. The ending chapter on how to create the contained type of honor isn’t very developed. Basically Sommers says that since honor norms are not universal they are changeable. What we need to do is to have norms that prevent violent escalation and that utilize less violent methods for standing up for oneself. Examples given are the dance-offs in Hip Hop culture, NHL norms, poetry slams and the Chicago BAM-project (Becoming a Man) - a bit slim basis for the change of western culture.

An important debate worthy of a stronger finish.

Mats Larsson, November 7, 2018

Zenger, Todd – Beyond Competitive Advantage

Harvard Business Review Press, 2016 [Business] Grade 3

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In his corporate strategy book Beyond Competitive Advantage the University of Utah business professor Todd Zenger, specialized in so called organizational design, presents a framework for companies on how to create shareholder value. The thesis is that companies too often use faulty or outdated structures to guide them in this pursuit and they should instead formulate and follow something the author calls a Corporate Theory of Value Creation. Although I don’t fully agree with all the preconditions that Zenger sets up the solutions he proposes are still largely correct.

The book is structured in three parts and seven chapters. Part one spanning the first 100 pages introduces and describes the author’s Corporate Theory and why it is needed. The other parts and the remaining 80 pages are mainly concerned with how companies – with their Corporate Theory at hand – should through organizational design, strategic focus, asset allocation, investment choices, acquisitions and divestments etc. link together the assets of a company, in a broad sense, to create value. “The leader’s task in a dynamic design is to identify and select the proper sequence of programs, initiatives or structures.”

However, to take one step back, Zenger starts by claiming that companies are too stuck in an antiquated view of strategy as formulated by Michael Porter in his classic Competitive Advantage - hence, the name of this book. What we are moving beyond is not the need to have competitive advantages as such but an old formulation of what corporate strategy to use. Porter’s approach to strategy is that a company should position itself in a valuable market niche where it through some means can have a competitive advantage and then work to fortify its moats in this market segment.

Now, the purpose of a corporation is to create shareholder value and in Zenger’s view this positioning type of strategy framework is too static to be able to create the continuous growth in value that shareholders demand. Instead the company should take a more adaptive and fluid trial-and-error approach. But without a beacon to guide these trials they risk becoming a value destroying random walk. Enter the author’s Corporate Theory of Value Creation defined as “a logic that managers repeatedly use to identify from among a vast array of possible asset, activity, and resource combinations those complementary bundles that are likely to be value crating for the firm.”

The theory that must be unique for the specific company can for example relate to an advantage in solving a set of customer problems, in exploiting a set of assets, a privileged position in gaining synergies from M&A etc. The observant reader could object that this doesn’t sound much different from the means that Porter would list in gaining a competitive advantage and they would be correct in this. However, Zenger’s Corporate Theory must also give a view on future development, on synergies between corporate activities and an insight on which assets that fit the company and by all this function as a tool to take the company forward into the future. It is a type of fact-based belief on how the company can create value that over time will help the management prioritize.

I agree on the need of a beacon and the book is not bad but it is quite lightweight, a tad ivory tower academic and there is a lot I don’t agree with. First, I don’t think companies are at all as trapped in Porter’s models that Zenger portrays. Secondly, while I agree on the corporate purpose of creating shareholder value it is a fundamental mistake to equalize this with the current share price. Further, the author advocates a corporate design oscillating between centralization and decentralization to over time optimize the combination of efficiency and innovation. I think there is an obvious risk that a firm by this never gets the compounding momentum that is needed for large-scale success.

The author in my view gives the right prescription but I don’t fully agree with all of the analysis done beforehand.

Mats Larsson, November 4 2018

Bernstein, Peter L. - Against the Gods

Wiley, 1996 [Equity Investing] Grade 5

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The sharpest minds of ancient times had a major advantage against modern thinkers. When faced with unexpected outcomes they could answer by reverting to faith or superstition. Greeks, Romans and Arabs came far in many other aspects but failed to develop the theory of probability. Instead, it was two Frenchmen, Blaise Pascal and Pierre Fermat, who made the breakthrough in the 17th century. The impact of the discovery has been massive, not only to mathematicians but also to all those who deal with matters with uncertain outcomes. In the best-selling Against the Gods the reader is taken on a remarkable journey through human history to clarify the subject of risk - which still can't be explained fully.

The author, Peter L. Bernstein was both an investor, a financial historian and prominent within academia. Having been an active investor and an economist is a feat he shares with John Maynard Keynes, an oft-cited character in Against the Gods. Bernstein published ten books and countless articles during his long career and is renowned for his supreme writing skills.

The main difficulty with investing originates from the notion that all the answers are in the past and all the questions are in the future. Many are those trying to predict the future - causing them to expose themselves to risk - or according to Bernstein "the chance of losing money". The author's main idea with the book was to explore the lessons of history to judge the current methods of handling risk. He therefore portrays those who have contributed the most to form the modern theory. This includes ancient thinkers as Aristotle and Al-Khwarizmi, later intellectuals as Pascal, Thomas Bayes and Francis Galton and modern theorists as Keynes and Daniel Kahneman. It's a remarkable history lesson.

Galton's discovery of regression to the mean during the 19th century - covered in one chapter -may be the most important for investors. It can be summed up with these timeless words from the author: "When investors overreact to new information and ignore long-term trends, regression to the mean turns the average winner into a loser and the average loser into a winner." By being contrarians, value investors have used the idea successfully over the last century. Another enticing chapter covers Amos Tversky's and Kahneman's creation of Prospect Theory. They managed to disprove that humans are the rational beings as depicted by traditional economists, by showing that people occasionally make irrational decisions. Keynes was one of the few who had earlier criticized the view of the rational man, as he viewed humans as being driven by animal spirits. Benjamin Graham was definitely another - something he is not credited for in the book. Graham also emphasized diversification as a tool for managing risk, which is not mentioned either in the chapter dealing with Harry Markowitz and his mathematical model of diversification. Overall, I think Bernstein's coverage of the 20th century gives too much credit to academia and too little to practitioners.

The main takeaway from the book is that the lessons of history support today’s preferred method of how to tackle problems involving both skill and luck. Using objective data from the past as the base rate and adjusting the probability by critical reasoning should lead to better decisions - and therefore lower risk. This is highlighted by current thought-leaders as Michael Mauboussin and Howard Marks. The best investors have a tendency to think probabilistically and relate declining prices (without impairments to the intrinsic value of the business) to improved odds. It should be a good way to approach investing for all.

The book is certainly no walk in the park as it takes a lot of effort to grasp the ideas.  It is nonetheless a great start for those who want to join Mauboussin and Marks in making better decisions. Most of all it's a very interesting book - not only for investors but for all interested in acquiring timeless wisdom. The odds are favorable that you will enjoy it.

Niklas Sävås, October 25, 2018

Scruton, Roger - Fools, Frauds and Firebrands

Bloomsbury, 2015 [Surrounding Knowledge] Grade 4

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This is a deconstruction of the ideas of most of the leading socialist thinkers during the last 70 years including for example Jean-Paul Sartre, Michael Foucault, Jürgen Habermas and Antonio Gramsci. The author Sir Roger Scruton, who is a Cambridge philosopher, describes the theories of the thinkers, dissects what they really mean and by this exposes emptiness and charlatanism as well as intellectual vanity and the pursuit of power.

My big take from this exposé of over 20 post-world war socialist-Marxist thinkers is that they are largely all the same. The socialist intellectual movement is a purely academic discipline advanced by well-situated university professors who criticize the society that supports them. They all share a conspiracy theory type of framework where a secret force governs a system and by this is able to exercise power over a mentally sedated people. The culprit thus extracts the spoils of power. The tranquilized and deceived people on the other hand miss out on living in the paradise-like utopia that would materialize if they weren’t - unknowingly to themselves - ruled by this secret force. The academic is the only one who sees through the fog of domesticizing norms of power and must as part of a self-elected elite - a true philosopher king of Socrates’ - lead the people’s rebellion and by this liberate the enslaved noble savage of Rousseau so that he can live a life in spiritual harmony.

The secret force varies between thinkers. It can be the bourgeois, the western world/the US, the rational scientist, the corporation, capitalism, neo-liberalism, universal truths and rights, the consumer society, the society of the enlightenment and - later on - the man, the white man, the heterosexual (man) etc. etc. It is a rejection of the very society and context of the academic – making it an exercise in theatrical cultural self-loading (“their revulsion is a kind of holiness” as Scruton puts it). The arena of the coming revolution also conveniently varies with the academic discipline of the thinker and could be language/literature, the historic narrative, philosophy, sociology, art, architecture etc. It is always very unclear what the utopia really looks like. The important thing is instead the struggle and the solidarity of the select elite who leads it. “The contradictory nature of the socialist utopias is one explanation of the violence involved in the attempt to impose them: it takes infinite force to make people do what is impossible.” All thinkers are obliged to add their contribution to the ever-growing terminology swamp of academic socialism to mask that they all say pretty much the same thing.

Thus, the structure of the framework is the same as the one initially constructed by Karl Marx and Friedrich Engels but the arena is now almost always cultural rather than a “materialistic”-economic one as in old-school Marxism - the exception perhaps being Gramsci, staging his revolution from below through the infiltration of all of society’s most important institutions (with regards to their power to influence the mind of the masses). Obviously, the “worker” still has to be paid tribute by all thinkers and generally functions as a lazy type of alibi in their theories, but in reality he is immaterial to these culture wars of the learned class. The worker is simply there to be governed by someone. The existential struggle is by whom – the progressive learned intellectual or the fascist Other.

It is indeed interesting to learn the historic origins of many of the expressions and phenomena that one is exposed to when reading the culture pages of daily newspapers. The reader for example learns the history of critical theory (Max Horkheimer’s “systematic critique of capitalist culture”), concepts like late-capitalism (Habermas’ spätkapitalismus) and “the gaze” and why communist thinkers’ texts seemingly confuse subject and object in the most peculiar way. The one large drawdown of the book is the language which is that of an elderly British philosophy professor. The book is no picnic to get trough but it’s totally worth it in the end.

Frightening but brutally vital knowledge.

Mats Larsson, October 8, 2018

Gunter, Max - The Zurich Axioms

Harriman House Ltd, 1972 [Finance] Grade 4

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At its core this is a book containing 12 rules – or axioms - for speculation in financial markets in the same vein as previous learning’s about risk, reward and human behavior that have been passed on by the likes of Jesse Livermore, Gerald Loeb and Bernard Baruch, i.e. the notorious financial speculators of the early part of the twentieth century. It is the investment philosophy of a former group of Swiss bankers.

The Zurich Axioms also comes with a quite fascinating background story. Max Gunter is a journalist, an author and the son of Franz Heinrich – in the US called Frank Henry. The author’s father was during a long period the US head of what is today UBS and also a core member of an unofficial network of Swiss expats on Wall Street that met irregularly at the bars around where they worked, starting in the mid 1940s all the way until the early 1970s. The topic for discussion was always the currently available investment opportunities – or speculative opportunities, as they would have put it themselves. Thus, the author grew up with a father that socialized with Jesse Livermore, Gerald Loeb etc. and that often invested in stocks or commodities side by side with them. The book came about when Max Gunter one time, when being advised by his father to make an investment, asked him what the basis was for the advice, what Frank Henry and his Swiss acquaintances actually based their decisions on. The thought process that followed in the Swiss network in trying to formulate their rules for speculation resulted in this book, first published in 1972.

The axioms advocate taking large stakes in a few meaningful opportunities at the time, to set targets for when to take profit and to immediately get out if a position is turning sour – and never try to average down or get in again on a loosing position. Positions are based on the judgment of the speculator regarding what is happening now and not on forecasts or other people’s opinions. The time horizon is short to medium term (months, rarely years) and even if the author never uses the old saying “let your profits run and cut losses short” the thinking is very much aligned with this. Overall, the philosophy of Frank Henry and his fellow Swiss bankers is based on trading psychology that much later formed parts of what is today know as behavioral finance. Much, like the advice to disregard the consensus as it probably is wrong or the distrust in forecasts, should resonate well with more long-term fundamental investors. Other advice will not and the last “minor axiom” from Max Gunter reads, “Shun long-term investments”. We will post the full list of axioms of the website separately.

The odd axiom out is number eight, On Religion and the Occult, that is not only a plea to keep superstitions out of one’s speculations (but not necessarily ones life) but also discussions on why it is inadvisable to base positions on the statements of fortune tellers and the use of tarot cards – but if you do, don’t bet too much on the positions advocated. It might just be me, but I surely hope this axiom is a bit dated.

Interestingly the axioms for speculating in financial markets also tie in to a parallel view on how to live one’s life. To make any gains in life something – money, time, love etc. - has to be placed at risk – nothing ventured, nothing gained. And even if this in the end means that now and then a person loses money, wastes his time or gets his heart crushed, this is still better than never having dared to live life to the fullest. Life should be an adventure. The Zurich Axioms are about calculated and intelligent risk taking in all straights of life.

The Zurich Axioms is a charming short and lively book with a pedigree that it is very easy to feel sympathetic about. And even if it perhaps doesn’t add that much new to trading philosophy it fits well on the shelf beside Reminiscences of a Stock Operator or The Battle for Investment Survival.

Mats Larsson, September 27 2018

Doerr, John - Measure What Matters

Portfolio Penguin, 2018 [Business] Grade 3

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What is the secret tool that has created Google’s success? It turns out to come from Intel. In Measure What Matters John Doerr, venture capitalist extraordinaire, presents the Objectives and Key Results model (OKR), where objectives define what an organization or sub-unit tries to achieve and key results detail how these objectives will be met. Hence, it is a type of execution tool that drives an organization and its employees to work in the same direction towards a joint goal. The aim of the book is simply for Doerr to present the model to a larger audience than the companies that he invests in and by this help an even larger crowd to become more industrious.

The book is partly self-biographical as Doerr looks back on the many companies he has funded. Approximately a third of the text describes the OKR-tool and the rest contains a large number of case studies and success stories from various (mostly) technology companies that with Doerr’s help have used the tool with great positive effect. It is certainly an impressing list of contributors to the book as for example Larry Page, Bill Gates, Sundar Pichai, Susan Wojcicki, Bono and loads of others contribute sections to the book. Further, Jim Collins, Sheryl Sandberg, Al Gore etc. add write-ups for the book’s cover so the author obviously has a vast network. The real hero of Doerr and of the book is however the late Andy Groove of Intel. Apart from being an early mentor to Doerr, Groove is also the intellectual father of the OKR-tool – event though much of the ideas were openly borrowed from Peter Drucker.

To work with OKRs means setting aggressive objectives - essentially goals - that are “significant, concrete, action oriented and (ideally) inspirational” and then deciding on 3 to 5 executable action items called key results that lead to the objective if fully met. These results should be specific, measurable, and verifiable and come with clear deadlines. Further, it should be crystal clear who the owner of each OKR is. The benefits of using the model, and also the structuring of the chapters in the book, are according to the author an organizational focus and commitment to the issues that really matter, a transparency and alignment to joint purposes that produces work satisfaction for employees plus a sense of community and team spirit, an accountability that brings power to the execution of initiatives (plus, by this, a flexibility to quickly change direction if so needed) and an ability to reach stretch targets by working towards them in smaller increments. The process is steered through a dynamic and continuous process of performance management the author calls CFR (Conversation, Feedback, Recognition). Doerr recommends a dual cycle with both annual and quarterly OKRs and further that the objectives are set both top-down and bottom-up. Also, one should work to connect teams through cross-functional OKRs. On the look of it, I think this is a great tool for organizational execution but also culture building.

When reading the many case studies I’m quite struck by how very similar the Silicon Valley establishment thinks and sounds. With all their “amazing”, “10x”, “fail fast” and “we are going to be the next xyz”, the attitude of the Silicon Valley contributors to the book is virtually missionizing – it’s a bit like listening to 10 Jehovah’s witnesses, one after another, although, the holy trinity of this cult is rather wealth, productivity and creative destruction – all through the power of technological change. The contributors that stand out as molded in a somewhat differentiated form are the thoughtful Bill Gates and Bono that obviously comes from a totally different environment. In my view the balance of the book could have been shifted somewhat from case studies to a more collected presentation of the OKR and CFR models. With the current structure it is important that the reader doesn’t miss the so-called resource sections of the appendix as they give more meat to the models.

In sum, I like the tool more than the book.

Mats Larsson, August 29 2018

Gray, Wesley R. & Vogel, Jack R. - Quantitative Momentum

Wiley, 2016, [Equity Investing] Grade 5

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Momentum investing works - period. I thought momentum was all about buying stocks that have gone up, and coming from a value background I found it a bit idiotic, but little did I know about the quantitative world behind all of this. This might not be as much of an epiphany for you as it was for me, but this book opened my eyes to a world that I was extremely unfamiliar with. If you, like me, find yourself reading the same old Graham-mantras over and over just reiterated by different authors, this is most probably something you should read.

The book is split in two parts where the first part is all about understanding momentum - what momentum really is, why it works and why it should continue to provide a sustainable edge going forward. The second part is all about the craft of constructing a momentum-based portfolio based on academic proof. To be fair Quantitative Momentum is a…quantitative book. It’s packed with graphs, tables, numbers and references to academic studies. Although its academic nature, the book is written by two PhD’s – go figure, the book is an unexpectedly pleasant read. I had no problem keeping up despite generally reading the book on my busy and chaotic morning commute.

The authors start off with explaining what momentum is, and more importantly, why momentum works. They argue that momentum investing and value investing both work because they are essentially just two different sides of the same behavioral bias-coin. Maybe the reason that active portfolio management actually works is that we humans are overly skeptic in nature. The authors write: “Value investing's edge is often characterized as pessimism in the presence of poor short-term fundamentals, which causes stocks to become too cheap relative to future expectations. Perhaps momentum investing's edge could be characterized as pessimism in the presence of strong short-term fundamentals, which causes stocks to remain too cheap relative to future expectations."

The authors are not trying to make people pick sides with this book, rather they are trying to convince value investors that a quantitative momentum approach would bring great balance to the overall portfolio composition.

The book is packed with “good stuff” but one of my favorite takeaways is the concept of “frog-in-the-pan-momentum” where the path a momentum stock takes makes a big difference going forward. The point is that a stock with lower volatility, but strong uptrend, can continue to have a strong trend while staying under the radar of most value investors. On the opposite side, a volatile stock which spends every other day on the scoreboard of best/worst performers will constantly be in the eye of investors and will therefore have a higher probability of having its trend interrupted by active investors trying to correctly value the asset.

Another key concept for me was that of mean reversion in different time series. That things mean revert in nature is hardly news, but shouldn’t mean reversion work against momentum to cancel out the effect? Well, yes and no. The authors find that stocks mean revert in shorter and longer time periods (under 1 month and over 1 year) but follow the momentum trend in medium-term time periods. Basically, stocks that have gone up the most the last month will tend to mean revert and go down the most in the coming month, and vice versa. On the other hand, stocks that have performed the best over the last 12 months will typically continue to perform well over the coming month or months. In the authors’ stock-selection-model they solve these contradictory concepts by looking at momentum for the past 12 months, while ignoring the last month, thereby using both the medium-term-momentum while also taking the mean-reversion-effect into account.

For those already praying to the momentum god, this is a great book filled with ideas and proofs to improve their momentum stock selection. For the community of Graham-believers, me included, this book is a definite must-read.

Olle Qvarnström, August 22, 2018