Moazed, Alex & Johnson, Nick - Modern Monopolies

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St. Martin's Publishing Group, 2016 [Business] Grade 5

Companies loved by their customers, with exponential growth, low capital needs and strong barriers to entry. A mouth-watering combo for investors. Enter the world of the modern monopolies! Apple, Amazon, Alphabet, Microsoft and Facebook have been crushing it. All of them have created and bought platforms where they take a cut of the proceeds when producers and consumers interact and exchange value. A few examples: The Apple Appstore where 3rd party developers create apps to users, Amazon’s 3rd party Marketplace where businesses sell goods to customers within the network. In Modern Monopolies Alex Moazed and Nicholas Johnson bring light to this special business model.

Moazed (CEO) and Johnson (Head of Platforms) co-founded the company Applico in 2009. Their business initially focused on building apps at Blackberry, AppStore and Android but they are now adapting companies to the platform model. There is time for incumbents to evolve but they are running out of it according to the authors. Applico has licensed its data model “Platform Insights” to WisdomTree who have launched an ETF “PLAT” based on it.

The book is structured in two main parts. Chapters 1-4 describe the evolution of the linear business model, where a company creates a service or product and sell it to customers - to platform businesses. These chapters bring a historical and theoretical background to how businesses have evolved and how they have been measured. The “Modern Monopolies” are not as the traditional monopolies who squeezed out as much profits as they could, instead these natural monopolies are loved by the customers as they offer a lot of value. At scale, every new customer adds value to others in the network which creates a virtuous cycle. In chapters 5-8, and the conclusion, the authors go more into depth into how to create and measure the viability of platform businesses. These are essential chapters for entrepreneurs as they describe how to use the insights. The authors have even created their own framework called “The Network Effects Ladder” to guide entrepreneurs through their platform journeys.

The key theme of the book is that platform businesses who enable producers and consumers to connect are the best businesses today. Scale economics and value chain analysis backed by Henderson and Porter were the holy grail during the 20th century, but it has been dethroned by “the strongest moat of all” (according to Bill Gurley) - network effects. Why are not all launching platform businesses then? It’s very difficult to reach critical mass, measured by when the value to onboard the platform is greater than the cost, and there is only place for one or two in a niche. This explains why these types of companies raise huge amounts of cash in the early days as it normally takes up to 10 years to reach that stage. They disrupt whole industries and the incumbents lobby the regulators to stop them. It’s what you can expect when you try to take a bone from a dog’s mouth (spoiler alert: you will get bitten). So far the incumbents have failed because of the strong communities in companies such as Uber and Airbnb who rally behind the businesses cause.

If you as an investor haven’t grasped why Shopify, Airbnb and Uber etc. have become such successful businesses, you lack a mental model for how to judge platform businesses. After reading this book it will be clearer. Maybe you will still think many of these businesses are too expensive now (and possibly they are), but platform businesses are here to stay and if you don’t learn about them now you will wake up one day having missed a lot of opportunities.

Niklas Sävås, April 17, 2021

Freiberg, Jackie & Freiberg, Kevin - Nuts!

Broadway Books, 1996 [Business] Grade 3

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Warren Buffett’s and Tom Gayner’s advice for investors is to avoid airlines. Buffett jokes about being an “airoholic” as he has invested in airlines with dismal results. Gayner says investors can beat the index simply by investing in all companies except the airlines. After a few recent good years, 2020 has proven to be one of the worst for the industry. Southwest Airlines is the exception to all this. The curious person wonders why. In “Nuts!”, the authors and management consultants Kevin and Jackie Freiberg (assigned at Southwest at the time) explain the success of the company.

Why the name “Nuts!”? One reason is that the company only serves nuts to passengers during short flights, but the deeper and more explanatory reason is that their employees breaks all kinds of norms in the industry. The pilots joke with passengers, the CEO travels in coach with the rest and flight attendants use funny costumes. More importantly, the staff do everything they can to satisfy their customers. Pilots offload luggage when needed, customer service representatives let customers stay over in their own homes having missed a flight and employees work extra time without getting paid. In short, they do everything to stand up for the strategy of Southwest Airlines: low costs and great customer service – and they do it out of free will. 

Herb Kelleher, the founder and long-time CEO, who is also depicted in the book Intelligent Fanatics for his outstanding management skills and value creation, has created a cult more than a traditional company.  Kelleher’s take on company culture: “Culture is not about magic formulas and secret plans; it is a combination of thousand things”. 

There are four parts to the book - the first tells the story about the beginnings of the airline when they struggled for years in court due to the bullying tactics of larger airlines. The second part covers six main pillars of the culture at Southwest and should be read by anyone interested in organizational aspects of businesses, especially those who want to learn about the agile way of working widely adapted across companies today. The third part deals with the all the unique quirks of Southwest such as having a relentless employee focus, unconventional advertising and celebration of milestones. The last part summarizes what the authors have learned from Southwest with specific focus on leadership.

24 years later, the main points are still relevant as the lessons from are widely adopted in companies today. It’s about building an organization which is lean and able to tackle new challenges as quickly as possible. Many large companies use the terms associated with agility but don’t put them into practice. Southwest does. Other airlines have used the Southwest way as a blueprint, but few have succeeded. Some have successfully adopted the low-cost strategy using less dense airports and manage to limit the airplanes’ time on the ground, but few have achieved a similar culture and results. Myself, I wonder if it’s possible for a bureaucratic company to become entrepreneurial or if it’s more like seasoning a meal, too much salt and you have to start from scratch? The key point made by the authors is that Southwest is an example of an employer who motivates the employees which are proud and feel a sense of meaning working there. I think that point is more important than ever today where many employees don’t identify themselves with the company they work for. 

The book had been better with less repetition and it lacks the genuine feeling of a biography as when written by the founder himself. It’s best read “textbook style” by those wanting to understand the agile project development method or by a founder who wants to get things right from the start. If you want a good story, books such as Phil Knight’s Shoe Dog or Brad Stone’s, The Everything Store are better but Nuts! is still worth the effort for some readers.

Niklas Sävås, October 4, 2020

Robichaux, Mark - Cable Cowboys

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John Malone, depicted in The Outsiders by William Thorndike, is renowned for shaping the cable industry and for the enormous wealth creation he amassed as CEO of Tele Communications Incorporated (TCI) and several spin-offs such as Liberty Media and Liberty Global. His early vision was that scale and possessing own content was hugely important in order to achieve bargaining power against content producers. Not only was his aim to build the largest cable company in the US but also to unite the cable industry leading to less competitiveness and more riches for TCI and himself. In some industries, like airlines, companies fight tooth and nail to the detriment of all, Malone was eager not to let that happen to cable.

The author of Cable Cowboys, Mark Robichaux, started to cover the cable industry as a reporter for the Wall Street Journal in 1991. Six years later it was evident that one man had had more impact on the industry than others. John Malone. Robichaux wrote the book with Malone’s consent but it’s not an authorized biography. He met Malone and many of his colleagues during the project. 

The book is structured in chronological order following Malone’s personal life and how he got in to the cable business in the first place. He started out in the telephone company Bell Labs but hated its bureaucracy. He moved on to McKinsey, where he learned that the key to a good management consultant was to be a good listener. Later, he joined TCI, despite having better offers elsewhere. He thought the potential long-term upside was better. TCI was owned and operated by Bob Magness (who wanted the “smartest sonofabitch he could find” to turn the company around) and the two struck up a lifelong friendship. When Malone came to TCI the business was flooded with debt and he had to fight from day one in order for the firm to survive. 

After five tough years which is best summarized by Malone himself “I’m the head of a little pip squeak company in debt up to its ass, a couple of million dollars in revenue, and not creditworthy to borrow from a bank – we’re barely making it”, he started to roll-up local cable businesses buying 500 companies over 10 years to build the largest cable operator in the US. During these years he never showed a profit as he wrote down cable assets aggressively. He thought it best for shareholders to minimize earnings, and by so taxes and instead focus on cash flows: “Tax-sheltered cash flow could be leveraged to land more loans to create more tax-sheltered cash flow”. Malone was unconventional and right and produced 900x returns for his shareholders over a 30-year period.

Malone realized early on that he was a great capital allocator and deal-maker but he didn’t like the operating side of running a huge business. Therefore, he ended up selling TCI to AT&T for USD 48 billion. Unfortunately, the cultures of the firms didn’t match, and the merger became a disaster. As Malone had kept his shares in AT&T he lost USD 3.5 billion and one of his major regrets became that he didn’t sell his shares at the time of the merger. AT&T later decided to spin-off Liberty Media which was operated by Malone and he continued his buying spree and financial engineering with Liberty.

One thing which I think could have been stressed more in the story is how Malone thought about mergers. As an investor you are trained to believe that mergers destroy value, which is questionable judging by the recent century. It surely wasn’t the case when it came to Malone as his merger strategy realized very straightforward synergies. TCI was formed by buying smaller cable companies and used the larger size to its advantage by getting better deals from the programmers. The company also cut administrative costs to the minimum.

By reading this book you will not only learn about one of the most successful business leaders of the twentieth century but also how television and the internet has evolved. That is the main difference with the portrait in The Outsiders which is more condensed and focused on Malone.

Niklas Sävås, January 19, 2020

Schroeder, Alice - The Snowball

Bloomsbury, 2008 [Business] Grade 5

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Albert Einstein once said “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn't … pays it”. The man behind this biography, Warren Buffett, grasped that at an early age and became the world’s greatest investor. The Snowball is a fitting title for the ultimate biography about Buffett. There are so many angles one could take to a review of this wide-covering book as it portrays the most intricate details of Buffett as an investor and businessman but also his personal life. A large part deals with his relations with family and friends. His main lessons for investors may be known for most:

1.      When you have figured out the qualitative aspects of a business the numbers should hit you in the head

2.      The importance of pricing power

3.      Bet big when the odds are in your favor

4.      Concentrate on the best ideas

5.      Clone others’ ideas

6.      Be patient

7.      Don’t use leverage

But there are also a lot of personal lessons:

1.      Remember that your body needs to last a lifetime

2.      Adopt an inner scorecard

3.      Always act with integrity

The author Alice Schroeder was a renowned security analyst who covered Berkshire Hathaway and whom Buffett took a liking to. In 2001, Buffett suggested that Schroeder should convert to writing full-time which eventually resulted in this book.

To summarize the main theme of the book; Buffett was born in 1930 and wanted to be rich from a young age. He was a successful entrepreneur who ran multiple businesses before turning eighteen. When he learned about investing and how one could make more money with less effort that was where he turned all of his focus. He went to Columbia since his hero Benjamin Graham was teaching there and Buffett embraced Graham’s deep value investing strategy. When he started his partnership as a 26-year old, described in chapters 22 and 24, this was his main method even though he also invested in a few quality businesses. During these years, surprisingly, he sporadically also used leverage and short-selling, reasoning: ”When investors changed their minds, stocks often dropped like thwacked full of bird shot in midflight”. Eventually, he changed his focus to a long-only strategy investing in quality businesses at the right price, which was partly due to some costly lessons, partly due to the influence of his partner Charlie Munger - but also as it worked better for his larger portfolio size. This transformation is integral to the enormous success. The preeminent businesses are those that are best adapted to change. That is certainly also true for investors of which the learning-machine Buffett is a telling example.

Another major theme of the biography deals with the challenges Buffett has met throughout his career. The near failure of Salomon Brothers, the TMT bubble when many thought Buffett’s prime had passed, his biggest acquisition General RE which was a major flop during the first years, Coca-Cola which was a fantastic investment that became mediocre, 9/11, the death of his dear friend Kay Graham who contributed to bringing Buffett to the top of the social ladder - and the most important loss of all, his wife Susie. Nothing managed to stop the snowball from growing and Buffett has always managed to get out stronger from the hardship. This may be the most important lesson from the book; everybody will be put to difficult tests during a long life, it’s the way you respond to hardship that decides if you will be successful or not.

For those that are not so interested in Buffett’s personal life, the annual letters are enough.  If you want to read about his actions on the Salomon debacle then I would recommend the Lowenstein biography. This is however the ultimate book of Buffett covering business, investments and his life. It’s long but all the 830 pages are a joy.

Niklas Sävås, November 17, 2019

Carreyou, John - Bad Blood

Alfred A. Knopf, 2018 [Business] Grade 4

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Bad Blood is a masterpiece in dissecting how bad the suffering can become when there is no room, either inside an organization or outside, for those with diverging views. This is a story of how a multi-billion company turned to nickels within a few years with devastating consequences to patients, employees and investors. By only acknowledging the supporting evidence for a specific view without questioning, one will both get a worse understanding of how the world works and risk being fooled by people understanding human psychology. This book will teach you many valuable lessons in that respect.

The author, John Carreyrou, is an experienced investigative journalist at the Wall Street Journal. Having worked for the firm since 1999 he has won multiple awards for his articles. His stories have typically, but not solely, been about company-scandals. Bad Blood got raving reviews and was awarded as business book of the year in 2018 by both McKinsey and Financial Times.

The story is covering Silicon Valley company Theranos and its founder Elizabeth Holmes. The company’s mission was to revolutionize the health care business by enabling blood tests at home. By drawing some drops of blood from the finger instead of a large dose from the arm in a typical venipuncture, the procedure promised to be both cheaper and simpler. Saving billions for the taxpayers, who did not want the company to succeed? The problem was a lot of great promises but not a lot of delivering. The technology the company built was not ready while CEO Elisabeth Holmes and the COO Sunny Balwany tried everything in their hands to hide the truth from the outer world. By using horrendous business ethics as well as lawyers with questionable tactics the company managed to keep the lies from destroying the company for an impressive stretch of time (well learned from any oppressive regime), especially considering the renowned investor base and a very experienced board. In the end, the investigative journalism of the author Carreyrou contributed to stop the madness from continuing - and with it saved investors from plunging even more funds into the company. Most importantly it saved patients from getting the wrong results on their blood tests, potentially saving lives.

As often regarding business and investing Buffett has already said it in the best possible way. The following quote is described as who to hire but is fitting for founders as well and especially for Holmes: “Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”

This is a reminder for investors of the importance to understand that even though the management signals smartness and ambition - together with a great story to back it up - it may all be built on lies. Having the circle of competence through own knowledge or contacts in order to question what a company signals can’t be underestimated. By studying all the successful people who fell for the tricks of Theranos one can be sure of one thing though. We are all susceptible to be fooled. This is why it’s so important to read this book and other similar books focusing on business scandals - such as Enron. I can’t promise that it will make you avoid investing in the next fraud but hopefully the odds will be tweaked slightly in your favor. Possibly. Maybe…

If not, you still have a few hours of exhilarating reading in front of you. This business thriller will keep you wide-awake and I wouldn’t be surprised if you read it in one sitting.

Niklas Sävås, August 15, 2019

Ries, Eric - The Lean Startup

Crown Publishing Group, 2011 [Business] Grade 4

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Waste and inefficiency must be avoided in order to build a successful business. But how could it be achieved in practice? This is the problem that the author Eric Ries sets out to tackle with his book The Lean Startup. The Japanese businessmen Taiichi Ohno and Shigeo Shingo invented lean production in the 1980s. The aim was to avoid waste in Toyota’s manufacturing. The methods have been copied by many companies since. Another term frequently used in the book is “agile”, i.e. working with short production cycles using adequate tools to measure success and learn continuously.

Ries is a Silicon Valley entrepreneur. With ten years of practical experience from starting and running successful businesses he had seen what worked and what did not. Convinced that his success was due to his methods he started to blog about them in order to spread the word of his formula that he calls the lean startup methodology. That blog led to this book from 2011, with the subsequent follow up The Startup Way in 2017. Today he is an author, a venture capital adviser and deemed a thought-leader on innovation and strategy.

The Lean Startup is a practical guide mainly written for entrepreneurs and startup managers. It is structured in three parts: Vision, Steer and Accelerate. In the first part Ries presents the basics of lean and agile and his concept of validated learning. In the second part, Steer, he describes the cycle of build-measure-learn. “That didn’t work, next!” By focusing on small meaningful deliveries - minimum viable products - and working with short feedback loops, waste can be avoided. This is the main idea of Ries’ methodology, as long feedback cycles demand good forecasts and humans are terrible forecasters. If the time from start to end is too long it’s also hard to learn from mistakes and correct them in time. The last part, Accelerate, deals with how to avoid bureaucracy when growing and how a company can gain a competitive advantage and invest in order to improve it.

Chapter seven and eight are the most interesting ones for the investor. By using traditional valuation techniques based on figures from the financial statements, it’s very difficult to understand if a startup, or any company, is viable or not. The CFO of a startup needs to track metrics at a customer group, cohort, level in order to know if the incremental development creates value for the company. For the public investor - unlike the venture capitalist - these metrics are seldom available. The next best is arguably to look for developments across the customer base and to track KPIs such as the cost of acquiring a customer, customer retention and revenue per customer.

The things Ries writes about are not new. His main sources are experiences by him and other entrepreneurs as well as by thought-leaders in business, innovation and strategy such as Ohno, W. Edwards Deming, Clayton Christensen and Peter Drucker. The main feat of the author is that he has taken principles that have worked in manufacturing to the technology space and refined them to work efficiently there.

If one were to be critical, as one should always be, Ries doesn’t give the reader much proof of the success of his method. It all makes intuitive sense and having worked with both traditional and agile principles myself I agree with most of what the author says. But as no base rates for startup success is presented and compared with data for businesses employing these principles, there is room for improvement. I hope the author supplies hard facts in a later edition.

The biggest insight for me as an investor is the reminder that the most important corporate metrics to analyze are either unavailable or difficult to find for the outsider. Studying financial statements is a start but far from the end. Being an investor is like being a detective, the search for clues never ends.

This is an enjoyable read which should interest both the investor as well as anyone involved in business.

Niklas Sävås, April 22, 2019

Stone, Brad - The Everything Store

Corgi Books, 2013 [Business] Grade 4

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When Brad Stone asked Jeff Bezos about the idea of writing a book on Amazon, Bezos found it premature as a lot of history was still to be created. Observing the events after the publication in 2013 one can understand why. The company and its founder are one of the biggest success stories of the 21st century and many books are yet to be written about them. The title says a lot about the ambition of Amazon and Bezos, to become The Store for everyday purchases. They are certainly on the way.

Brad Stone is a journalist and author who focuses his writing on the technology area and frequently the major technology companies. He has written three books of which The Everything Store was his second. Stone had followed Amazon and Bezos for a long time as a reporter before deciding to write the award-winning book.

As is common with biographies the book is structured chronologically, starting with the early life of Bezos, his first jobs and the decisions that ultimately led to the formation of Amazon. Bezos had a well-paid job at a hedge fund on Wall Street and he took a leap of faith by - opposite to the advice and wishes of most of his friends and relatives – leaving the comforts to start his own business called Cadaver (later changed to Amazon). The book is as much a biography of Amazon as of Bezos, which is not strange due to his influence.

The book conveys the story that many of you will be familiar with at this time. Starting with selling books online, Amazon has moved into many new areas over the years. Some of the chapters describe the most important innovations of the company as the notion of the Everything Store, Amazon Web Services and the Kindle e-book. It also explains many of the failures, mostly related to early acquisitions (which are minor compared to the successes). Bezos’ idea is to fixate on the customers and to use the savings that Amazon realizes with increased scale to lower prices. The declining prices entice customers to buy more leading to larger scale and even lower costs in a virtuous cycle. The company has been ill seen by the financial community during large parts of its history due to the lack of (apparent) profits. With a true long-term perspective Bezos has the idea that what’s best for its customers is best for Amazon. Other stakeholders are not treated as friendly. Vendors, employees and the Government have a hard time dealing with it. In my opinion, that may be one of the tougher challenges for Amazon in the future as the best business should be the one that treats all stakeholders well.

The author pictures Bezos as a genius who sets the highest standards on himself and his employees. If the standards are not met, the stay at Amazon will be short. Considering how many leaders that have come and gone as well as the success of the company, it’s hard to argue against those points. Bezos was afraid that the book would become another one of those biographies trapped in the narrative fallacy of too much simplification and storytelling. The road to success is always bumpy and even though it’s now clear that e-commerce is a success, that was far from evident early in Amazon’s history. One could think of an alternative scenario where the development of e-commerce would have taken much longer to the detriment of Amazon. I would have appreciated such a discussion. Stone makes a few points about what is certain to happen in the future which I think could profit from a more nuanced view.

As an investor it’s great to be able to study successes and failures of businesses without having to make a judgment if the stock is interesting or not. Amazon is such a case for me. I think it’s an act of grave omission not trying to understand one of the most important companies in the world and possibly more crucially its fascinating founder. This book is a joy to read due to the simplicity of the language and the timely subject. I surely understand why it became a best seller.

Niklas Sävås, January 28, 2019

Saraogi, Rahul – Investing in India

Wiley, 2014 [Equity Investing] Grade 4

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India is a country of interest to investors as it offers many of the characteristics that made the West such a fertile place for business and investing during the 20th century: young demographics, a rapid rate of urbanization and improving education. The best investors have often prospered from using a bottom-up approach, investing in stable countries with a clear rule of law, a strong financial infrastructure and with capitalism and not socialism as the ruling principle. The question is if the opportunities in India outweigh the risks for investors. Judging by the title of this book from Rahul Saraogi, Investing in India: A Value Investor's Guide to the Biggest Untapped Opportunity in the World, the answer is a clear yes!

Saraogi is a value investor who was born in India and moved to the US to study. It was at that time he became interested in economics and investing. He also became enthralled by Indian economic history and realized that both Indians and Westerners had problems with understanding India. He saw an edge that he decided to pursue. He moved back to India to become an investor and now manages Atyant Capital. Saraogi wrote the book in 2014 – a time when the Indian markets had suffered from a severe downturn.

Investing in India is structured in six chapters where the first four focus on giving the reader an understanding of India from a social, political and economic perspective. The fifth chapter is about value investing in India where the author presents examples of what businesses to avoid (those with bad governance and poor capital allocation) and what to look for. Throughout the book the author presents case studies to describe and strengthen the points made.

Some quirks that may be surprising for the reader is that Indians avoid buying property and machinery at certain times during the year due to spirituality and superstition. Another is that debts in Indian villages are not forgiven by death but is left with the heirs. Another central theme is that of the important roles of land, property rights and gold. It's not allowed to lend for land-buying, but prices are still high as it’s seen as a valuable consumption item. Gold has been a good store of value, as it often is in countries suffering from currency debasement and instability. The country imports gold worth $60 billion a year. Strong property rights are central to a free-market system but also act as a hindrance for building infrastructure, an area where India has huge needs of improvement.

India should not be seen as one country as the differences between the 28 states are huge - some states are likely to prosper in the near- and long-term while others have worse outlooks (the richest state has seven times the GDP per capita of the poorest). In terms of sectors, agriculture is the largest measured in people employed while services are largest in terms of GDP. On the macro side the country has a large current account deficit but at the same time a low level of external debt.

The Indian markets have often traded higher than the other “BRIC” countries. While Brazil, Russia and China have lots of cyclical and commodity companies, India has strong franchises which according to the author should command higher valuations. Saraogi is certainly bullish on the future of India, a view he shares with great investors such as Mohnish Pabrai and Prem Watsa. He thinks the groundwork has been laid and compares it with a bamboo plant that grows very slowly during the first four years while it develops its root system. In the fifth year it grows 80ft in 6 weeks! The future will tell if something similar can occur in India.

One should always invest within one’s circle of competence. The book is a comprehensive guide to one of the most important countries in the world and a great start for the investor who wants to know more about the ins-and-outs of investing in India. The reader will certainly get a better understanding of interesting sectors and might even pick up some stock-tips.

Niklas Sävås, December 04, 2018

Porter, Michael E. - Competitive Strategy

Free Press, 1980 [Business] Grade 5

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A concept that Warren Buffett has popularized in the world of investing is circle of competence. It describes what industries and businesses the investor understands well enough to be able to make an informed investment decision. It may be easy to understand the notion but its realization surely is harder than it seems. An integral part is to grasp the inner workings of an industry and the competitive situation of the specific business. A book that has stood the test of time and that will give the reader some well-needed guidance on the subject is Competitive Strategy by Michael E. Porter.

Porter is a Professor of Harvard University and Head of the Institute of Strategy and Competitive Strategy. He has written several pioneering books and papers and is possibly most renowned for Competitive Strategy and Competitive Advantage written five years later. He is a thought-leader and his material is widely used in academia worldwide and by practitioners as managers, consultants and investors. Porter has throughout his career worked as a consultant to help businesses improve their skills in making strategic decisions. He has studied hundreds of businesses in his research while teaching at Harvard Business School and has used much of that experience to produce his groundbreaking writings.

Competitive Strategy is divided into three parts. In the first part covering chapters one to eight, Porter presents a framework for how to analyze an industry and its competitors. His famous five forces, the key concept of the book, act as a base for the analysis. Chapters one, two, seven and eight are essential reading for both the investor and the manager as they present a foundation for how to think about competitive advantages on various levels while chapters three to six are more tilted towards managers and management consultants by giving hands-on information on how to device strategies. The management’s task is to develop strategies to strengthen the competitive advantage while the investor’s job is to analyze if management is doing the right things. In other words, management builds the competitive advantage and investors measure it. The second part of the book covers strategies for different industry structures as for example fragmented industries with many competitors and no dominating leader as well as emerging industries lacking stable rules. In the last part, again more interesting for managers and consultants, Porter presents several important strategic decisions that firms need to take and applies the ideas and lessons earlier described. Appendix 2 is also useful as it presents a hands-on way on how to conduct an analysis.

Investors, arguing that it’s too difficult to use his material in practice, sometimes criticize Porter. Conducting the strategic analysis is an assignment that ranges from weeks to months depending on the investor’s prior knowledge and network and it includes a lot of footwork and reading. On the other hand, investing is a full-time job and who is to say that it should be easy? Furthermore, investors who apply the five forces get criticism from Porter for being too superficial when using the model. Reading the book is tough and applying the lessons from it is even tougher which drives investors to take shortcuts. Porter also stresses that change is vital while many use the five forces in a static way. One could argue that it's understanding whether the future of the business will be better or worse than the consensus view has it, that is the key question for investors as the rest should be built into the current share price.

My recommendation to the reader is to compile a couple of case studies of businesses while reading the book as this will lead to a better understanding of the framework. Before I read the book, I had heard that it was challenging - which was confirmed. I had also heard that it would be worth the effort, which I agree on as well. Fully grasping the ideas will potentially make the investor recognize the challenges of a business before the information is public which will lead to an important analytical edge.

Niklas Sävås, October 13, 2018

Lowe, Janet - Damn Right!

Wiley, 2000 [Business] Grade 4

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There are multiple books and papers written about the vice Chairman of Berkshire Hathaway, Charles T. Munger. When Damn Right! was published however there wasn’t much. And whereas a lot is written about Munger as an investor, in this biography we get to know him on a more personal level from his birth to his 70s around the year 2000. Munger and his family always wanted to remain out of the public eye, causing very little information to be available about Munger before Damn Right!. Thus, Munger’s family was not overly excited about this book from the start. Still, the author Janet Lowe told Munger that she was going to write about him with or without his consent and after a while he agreed to be cooperative. Lowe is an investment writer and author. She specializes in books about business leaders and has among others portrayed Benjamin Graham, Warren Buffett and Bill Gates.

Damn Right! describes how Munger was born in 1924 and grew up in Omaha. His family taught him the sound morals of Thomas Jefferson and Benjamin Franklin from an early age. His father was an Omaha judge and Munger followed in his father's footsteps by pursuing law. Early in his career he suffered from both distractive events as being forced into military service, as well as sad ones with a divorce and the tragic death of his son. It took him until his thirties to start accumulating his fortune which he built out of savings from his legal practice, invested into real estate projects. Having realized that debt is a vital ingredient to be successful in real estate investing together with it being a full-time job, he soon moved on to other interests. This involved starting an investment partnership and resigning from being a lawyer after having co-founded the law firm Munger, Tolles and Olsen - which is used by Berkshire to this day.

Munger ran a concentrated investment portfolio with huge success but also wild fluctuations. He frequently discussed his investment ideas with Warren Buffett who he later famously went into business with, taking the subordinate position as vice Chairman of Berkshire Hathaway. Munger is famously known for teaching Buffett that it pays off to pay up for quality. What is not so known but explained in the book is that he himself also learnt that lesson fairly late. The company that in this regard made the strongest impression on him and Buffett was See’s Candies, a high quality, premium chocolate company located in San Francisco which has been a home run for Berkshire.

Aside from getting to know some of his and Berkshire's investments in See’s Candies, The Buffalo Evening News and Salomon Brothers the reader is introduced to Munger’s moral compass, which is strongly influenced by Franklin - his biggest hero. Munger is of the view that honesty and hard work will take a person a long way. Morals aside, a trait he is famous for which isn’t as positive though, is his manners. People who don’t know him well may think he is arrogant and rude. One thing that defines Munger is that he didn’t set out to become superrich but rather financially independent enough to pursue interests within education, medicine and philanthropy and also his hobbies of architecture, travelling and fishing.

Although the book is filled with timeless quotes from both Munger and Buffett I still feel that some quotes are a bit misplaced where one subject is discussed and then followed by a quote or writing which is not really connected with the prior text disrupting the flow of the reading. However, this is more of a minor observation than a large negative. For me, a book about Munger could never be boring. I like Poor Charlie’s Almanack more, which is a book I often go back to, but I still rate Damn Right! highly and it’s a must for all Buffett & Munger fans. The part I enjoyed the most was to get more insight into Charlie Munger the person and not only his sharp quotes and wisdom, even if the book gives the reader plenty of that too.

The only thing I would ask for now is for someone to fill in the gaps of the last 20 years of the fascinating life of Charlie Munger.

Niklas Sävås, September 23, 2018

Ford, Henry - My Life and Work

Garden City, N.Y., Doubleday, Page & Co., 1922 [Business] Grade 4

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When considering the most successful and influential businessmen of the 20th century, Henry Ford certainly comes to mind. Many entrepreneurs and businessmen of later times have arguably been influenced by how Ford ran his business and how he created the world's most prosperous automobile company. In Ford's autobiography "My Life and Work" the reader gets thrown into the early beginnings of the Ford Motor Company and its evolution. Asked the question if it was tough to build his company Ford answered: “I cannot say it was hard work. No work with interest is ever hard.”

In chapters one to three Ford describes how he at an early age became interested in machines and how he started to work as a mechanic. During that time, he managed to build his first car and resigned from his job to start his first company and later on his legacy, the Ford Motor Company. Already from the outset he aimed to take the automobile from a luxury good to a public good. In chapters four and five Ford presents his efforts to produce the perfect car, called the T-model, which could be made so cheap that practically everyone with a decent salary could afford it. In chapter six until the end of the book the author drifts away from the Ford Motor Company to discuss his more general and ideological views on business and things in general. He presents his views on the rise of the machines, wages, profits, money, banking, charity, education among else. Always with passion and a very firm view on what is right and wrong.

It wouldn't be wrong to characterize Henry Ford as a "moat-creator". He believed in the low-cost model which is often described as the strongest type of moat or competitive advantage. By always increasing efficiency and constantly improving it's possible to keep competitors at bay. He had a similar view to Jeff Bezos’ in that all the time spent watching competitors is time lost on improving the own operations - and thereby opening up to competition. Many of the factors modern businesses pinpoint today as decentralization and constant improvement were methods employed by Ford. He tried to reduce the costs as much as possible in order to sell more cars and reduced prices constantly to increase the market for his cars. One example is how he paid back 50 dollars per car to the consumers one year as he thought the profit was too high. Talk about goodwill!

Some other characteristics of how Henry Ford ran his business give signs of a great corporate culture. Instead of using the word profit he says service. He believed that the function of the producer is to deliver as much value as possible to the consumer. He also used the word partners instead of employees. “It is not usual to speak of an employee as a partner, and yet what else is he?” On incentivizing his employees, he thought that high wages were key. Ford describes that it pays to create a situation where the employees are strapped from financial worries.

During the evolution of Ford Motor Company Henry Ford often got seething criticism publically for the choices he made as they were often against the general view of the market. As a true contrarian Ford had the view that everyone with a decent salary should be able to afford a car and worked tirelessly with this objective in mind. When the public opinion thought Ford was crazy with regards to the number of cars he was to produce he simply didn’t care. Another side of Ford was his ideological views. Some chapters, as for example one about money, are more a discussion about what Ford thinks is right without really getting to the point on how he wants things to be. Even if the book at parts is filled with too much ideology for my taste it's also packed with essential wisdom on business.

This is an important book for the investor who wants to understand the power of having a low-cost advantage built by a fanatic CEO. Hopefully the investor can benefit from improved pattern recognition by learning about the success story of Ford to find tomorrows Ford Motor Company, Wal-Mart or Amazon.

Niklas Sävås, September 8, 2018

Robbins, Tony - Awaken the Giant Within

Simon & Schuster Paperbacks, 1991 [Surrounding Knowledge] Grade 4

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To know yourself and how you act is often described as essential attributes for the investor. Having patience and a long-term perspective are two examples of such traits. Certainly, you also need to master the craft of investing and finance but in order to stick out from the crowd it is necessary to master your own emotions. Most of the literature on psychology is theoretical where the guidance on how to avoid negative reactions is slim. Awaken the Giant Within turns this upside down and is purely written for the practical person who wants to understand how to use the theories in real world situations.

Tony Robbins is one of the leading self-help influencers in the world. He is widely known as a speaker, advisor and author and is also a very successful entrepreneur. He wrote Awaken the Giant Within as a 31-year-old having studied the subject of psychology voraciously from a very young age. Robbins calls himself a coach and wants to create a way of life for others where negatives are turned into positives and where they become able to master their emotions, physiology, relationships and financial situations. He has advised numerous influencial people as Bill Clinton, Wayne Gretzky, Margaret Thatcher and Nelson Mandela. One example of a successful investor who Robbins has been able to transform is Guy Spier who talks warmly of Robbins in his book The Education of a Value Investor.

The book is organized in four sections. All sections consist of various practical challenges which forces the reader to be active. The first part presents most of the theoretical background on why we feel and act as we do and what measures can be taken to improve. Part one is more than half of the text. The second part confronts and challenges the reader to figure out which values and rules his life is based on and how they should be changed and re-arranged in order to lead to improvements. The whole third part is a seven-day challenge consisting of a step-to-step guidance on how to improve emotionally, physically, relationship-wise and financially. The last part is all about philanthropy and how it's possible to become a better person and at the same time help people in need by giving.

This is a book that can help investors and others to break out of negative thought patterns. The author describes easy methods as how the usage of less negative words to describe a situation will improve the actual temperament of the reader. If you are saying that you are stressed out, exhausted or angry the negative emotion will become even stronger. As humans, we are trying to avoid pain and instead experience pleasure. An example in how that can distort rationality is in situations when the proof tells us that we are wrong and we disregard it due to the truth being too hard to bear, a concept named cognitive dissonance. This is not a recipe of good thinking for the rational investor. Some simple, but hugely important, wisdom from the book is to prioritize the long-term versus the short-term, to avoid distortive substances and to be aware of the shortcomings of oneself and how to tackle them in order to improve.

I was positively surprised by how much of Robbin’s work is built on the latest theories in human psychology. For me that created trust in the tools presented in the book. Awaken the Giant Within is for the active reader and needs to be read with a pen in hand. The commitment to read the book is therefore greater than the mere 500 pages. To get the full benefit of the book the reader needs to be open for change and take on the challenges the author presents. This is therefore a commitment stretching from weeks to years. The end result is likely to be a game changer for your life and who you want to be as a person.

If you are not willing to put in the substantial effort of reading it now I suggest you read something else and pick up this book when you are ready and motivated to transform yourself and people around you. But why wait?

Niklas Sävås, July 31, 2018

Walton, Sam & Huey, John - Sam Walton: Made in America

Bantam Books, 1992 [Surrounding Knowledge] Grade 4

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Sam Walton: Made in America pushes the reader to become a better and more honest person by presenting the standards that Sam Walton set on himself and others. "I'd hate to see any descendants of mine fall into the category of what I'd call "idle rich" - a group I've never had much use for." There are dozens of similar quotes in the book which summarizes Walton's worldview. The book is a biography filled with wisdom and real life lessons on business and management.

Sam Walton was the founder of one of the most successful businesses of the 20th century, Wal-Mart. What started with one store in the small town of Bentonville, Arkansas, developed into a store network covering the whole US. Walton who in building Wal-Mart became the richest man in America, co-authored the book together with John Huey in the end of his life while struggling with cancer. Huey, an author and journalist, has, among else, served as the editor-in-chief of Time Inc.

The structure of the book follows the life of Sam Walton in chronological order. The reader is set on a journey from Walton's early days working in a retail store, to when he started his own shop and thereafter the development of his huge legacy. Every chapter is filled with viewpoints from family members and Wal-Mart employees which gives the reader a more objective view of how things where.

Customer obsession and constant improvement are core themes when describing Wal-Mart’s strategy. Similar to the founder of Amazon, Jeff Bezos, Walton had the idea that if you always try to do a bit more for the customer then you will stay ahead of the competition. Bezos has mentioned that Sam Walton and Wal-Mart was a big inspiration for him when building Amazon. Walton was studying the competitors deeply and was in the words of the super-investor Mohnish Pabrai ”a shameless cloner” as he applied the good concepts that he learned from his competitors. A quote from the book reads: "most everything I have done I've copied from somebody else". Another quote is about the learning’s from Sol Price, another highly successful manager within retail: "I guess I've stolen - I actually prefer the word "borrowed" - as many ideas from Sol Price as from anybody else in the business". By studying others, Walton created a great corporate culture driven by incentives to his partners which led to better customer treatment. He constantly adjusted the business to what he thought was for the best. These constant adjustments were probably one of the keys for Wal-Mart to stand out from the competition in one of the most competitive industries around.

A further lesson to learn from Wal-Mart is the growth strategy the company used. The business grew in smaller towns in areas close to its distribution centers in order to benefit from economies of scale in the specific area. A less well-known and riskier aspect of the growth strategy was that it was built on debt financing. From the start of Wal-Mart until the listing in 1971 the company and its owners were saddled with debt. Since Walton used debt in order to grow the business he was relieved when he got rid of the burden when going public.

There are a lot of interesting facts in the book that are important from an investment standpoint. The reader will get a better idea of the retail industry and what it takes to become successful but especially what to look for in a manager. Walton mentions that the investors who profited most from Wal-Mart were the ones that had a long-term view and that studied the company and got familiar with the strengths and the management approach.

Even though the book is written at the very end of Sam Walton's life I don't think it shines through. Possibly, this is due to the skill of the co-author John Huey. I think all managers, investors and people in general would become better in their professions and in life by learning from Sam Walton. This book is a great place to start.

Niklas Sävås, June 30, 2018

Graham, Benjamin & Meredith, Spencer B. - The Interpretation of Financial Statements

Harper & Brothers Publishers, 1937 (2 ed.) [Equity Investing] Grade 4

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A typical way of valuing a business is with the discounted cash flow (DCF) method. Some value investors don't agree with the use of the method due to the need for forecasting uncertain future corporate prospects. Small changes in input values often result in huge swings in the estimated corporate value. Forecasting is deemed futile by investors such as Warren Buffett, Charlie Munger, Bruce Greenwald and James Montier among others. In today's world of competitive disruption there may be alternatives or complements to the DCF method with less dependency on the future that can be used. By studying the current state and the development of the balance sheet and income statement it's possible to understand the health of the business which, in turn, is essential for the firm’s future prospects.

Benjamin Graham, the father of value investing, needs no further introduction. His co-author Spencer B. Meredith was an instructor in security analysis at the New York Stock Exchange Institute together with Graham. In this book written before Graham's more influential books, Security Analysis and The Intelligent Investor, the authors describe how to understand a business and its health by studying the financial statements.

A quote from The Interpretation of Financial Statements concludes the authors’ view on forecasting: "Of course, the success of an investment depends ultimately upon future developments, and the future may never be forecast with accuracy. But if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of security analysis."

The Interpretation of Financial Statements is written for those who want to understand the language of business that consists of the financial statements. In the book, the authors describe the most important constituents of balance sheets and income statements one-by-one. The text is structured in three parts. The first part introduces the reader to balance sheets and income statements. Each chapter covers one piece of a financial statement. The authors explain the item and its significance which is essential to know for the security analyst. They also describe different key ratios that are of practical use in order to distinguish if the business is in a favorable condition or in bad shape. In the second part the authors present different financial ratios while the third part is a description of financial terms and phrases.

This is a book for those who would like to understand concepts such as earnings power and book value, which is of essence in the fundamental analysis of a company. By only considering the qualitative aspects of a business the investor is at risk of missing important details that are necessary in order to set a reasonable intrinsic value range. In order to get further guidance on how to use the knowledge in practice, Graham’s Security Analysis is a great place for further study.

If I were to mention anything negative about the book it would be that the examples drawn are from a different time, meaning that they are typically limited to industrials, railroads and utilities. This is of course no criticism of the authors as the mix of listed companies was truly different in 1937. However, it's important to convert the reasoning and language to a broader set of modern businesses. Even more importantly, the financial statements were arguably more easily structured and read in the first half of the 20th century compared to today's often complex reports. This is also commented upon in the introduction.

I would like to conclude with a timeless statement from the book that summarizes the difficult challenge all investors face: "Common stock selection is a difficult art - naturally, since it offers large rewards for success. It requires a skillful mental balance between the facts of the past and the possibilities of the future."

Niklas Sävås, June 07, 2018

Bevelin, Peter - Seeking Wisdom: From Darwin to Munger

Post Scriptum AB, 2007 (3rd ed.), [Surrounding Knowledge] Grade 5

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Seeking Wisdom is about the gathering of wisdom by studying the finest of what others have already figured out. The book is filled with quotes from some of the greatest thinkers in history from fields such as physics, mathematics, psychology, biology, chemistry, economics, business and investing. Charles Munger of Berkshire Hathaway is in the investing world often quoted as coming up with the concept of multidisciplinary thinking. By internalizing a range of mental models on how to think and behave, the theory is that you will make better decisions and stay out of trouble both in life and as an investor. In Seeking Wisdom Bevelin describes many of these models.

Peter Bevelin is the Swedish author and investor who wrote Seeking Wisdom in order to remember what he had learned and to transfer some of the knowledge to his children. The author has been greatly influenced by his friend Charles Munger who read and commented on the book before publication. Another friend of his, Nassim Taleb, has been quoted saying that "Peter Bevelin is one of the smartest people around". Bevelin has written three other books on related topics.

The book is structured in four parts. Part one introduces the reader to why humans make certain decisions by describing how the brain works and why it works as it does. Most of it is explained as survival instincts from having been hunter-gatherers for most of the existence. Humans are wired to seek pleasure and avoid pain. Part two describes the 28 most common psychological misjudgments that humans suffer from due to this ancient hardware of the brain. There is some overlap to Charles Munger's speech on Psychology of Human Misjudgment but the material is presented differently in the book and goes even further into detail. In part three the author presents other situations where humans suffer from misjudgments, by taking examples from physics and mathematics and linking them to subjects as investing and business. The last part gives the reader some well-needed guidelines on how to improve his or her thinking habits. You could argue that the author doesn’t add much to the content himself, but as this probably wasn’t the intention the criticism would be a bit unfair.

Apart from presenting explanations to why we think the way we do, the author describes ways to act in order to make sure that we learn. For example, by always asking the question "why?" we force ourselves to understand the meaning and not just the name. By designing checklists for our investment procedure, we may reduce the probability of making silly mistakes. By writing post mortems we can learn from our mistakes and prevent them from happening again. In order for the post mortem to be effective we need to write down our decisions from the outset and how we felt emotionally at that point. Otherwise there is a risk that we will fool ourselves and according to Richard Feynman: "the first principle is that you must not fool yourself and you are the easiest person to fool".

This book has influenced me a lot and has taken me on the path of becoming a multidisciplinary thinker. Reading it once will hopefully get you on your path of learning but this is a book to be re-read on a frequent basis as it's difficult to take in all of the condensed wisdom the first couple of times. Seeking Wisdom is possibly an even greater source for further reading due to its vast bibliography.

Peter Bevelin's aim is to put the reader on the path to multidisciplinary thinking and for me he greatly succeeds.

Niklas Sävås, May 1, 2018

Kindleberger, Charles P. - Manias, Panics and Crashes

Palgrave Macmillan, 2015 (7th ed), [Economics] Grade 4

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There are countless opinions about whether it's preferable to have a top-down or a bottom-up approach to investing. Typical value investors embrace the bottom-up approach where they mainly look at company fundamentals while others have a more open approach of considering factors as the business cycle and various macro factors. The top-down investor risks falling into the trap of predicting the unpredictable and the bottom-up approach got criticism after the financial crisis which hurt many value investors badly. Many have recovered well since then though. It is in my view useful for all investors to study financial history in order to learn from events of the past as it often repeats itself. In the words of George Santayana "Those who don't remember the past are condemned to repeat it".

Charles P. Kindleberger's Manias, Panics and Crashes is an oft-cited book in the realm of financial history and used in MBA programs across the world. Kindleberger was an economic historian and author of over thirty books and he originally published Manias, Panics and Crashes in 1978. During his career, he held senior roles within the US Treasury, the Federal Reserve and Bank for International Settlements. He finished his career as Professor of International Economics at MIT where he worked for more than thirty years. Robert Z. Aliber, who has updated the last three editions of the book, is a professor emeritus of International Economics and Finance at the University of Chicago.

The first couple of chapters presents a background of historical financial manias and typical patterns of how a mania evolves and how it turns to a panic and eventually a crash. Fraudulent behavior that is a typical theme towards the end of a mania is described with the examples of Charles Ponzi and Bernie Madoff as well as with instances of corporate frauds including Enron. The author summarizes some of the worst financial panics from the tulip mania in the 17th century, through the Great Depression in 1929 to the latest financial crisis in 2008 among others. The last couple of chapters of the book are primarily written for policy makers, advising on how to understand financial calamities in order to decide on the right policy from a fiscal and monetary perspective.

To sum up the main thesis of the book there are some typical factors that usually leads to a forthcoming mania and crash. The two most important factors have been increases of cross-border investment inflows as well as credit. The increases have typically led to rising stock- and real estate prices which have led to further increases in cross-border investment inflows and credit and in turn further increases in asset prices in a positive feedback cycle supported by behavioral phenomena. To cite from the book: "Asset bubbles - most asset bubbles - are a monetary phenomenon and result from the rapid growth of the supply of credit". The party has typically stopped when the creditors have got worried that debtors won't be able to pay back the loans and have in turn stopped issuing new loans. The debtors have relied on new loans to cover the interest payments and when the flow stops bankruptcies erupt.

As there are regularities in the financial crises the reading gets a bit monotonous at times. Also, I felt it was difficult to get a flow in the reading but that can probably be explained by it being a book written by academics for academics. It is not a must to read this book from cover to cover. The book is still a great source for investors who want to learn history in order to be able to be on alert for future occurrences. It's also a great start for those who want to dig into a specific event.

This is a book that is beneficial for both bottom-up and top-down investors. Just as individual companies, the stock market and currencies follow the investment market’s pendulum swings of euphoria to depression and overpricing to underpricing to use some of the terms often used by the legendary value investor Howard Marks.

Niklas Sävås, April 11, 2018

Ridley, Matt - The Rational Optimist

Forth Estate, 2010, [Surrounding Knowledge] Grade 4

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The most successful investors in the past and present are often optimists. The investor who best showcases this is of course Warren Buffett. Buffett often mentions how future generations will enjoy even higher standards of living than those of today. With this he doesn't say that there won’t be periods where pessimists will be thriving financially but that in the long run the optimists are likely to win. The most important thing is of course to be rational and see the world as it is in order to prosper. In The Rational Optimist Matt Ridley explains why it's likely that optimists will continue to be the winners in the centuries to come.

Ridley who is a British journalist, businessman and science writer has written books such as: The Red Queen, Genome and The Evolution of Everything, as well as The Rational Optimist. He is an advocate of free markets. As such, Ridley wrote the Rational Optimist in order to satisfy his own curiosity of why people think that they would be better off being more self-sufficient; that technology has not improved living standards or that the exchange of things and ideas are not needed. When he wrote the book, the world had been through the financial crisis of 2008 and pessimism was thriving.

Ridley presents the reader with an historical background to how humans have evolved. He brings up examples of situations where the future has looked gloomy and where we humans have always come out stronger. Every chapter describes a period in history and brings up events of certain significance. The common thread is that humans have been able to tackle problems by working together. Through human exchanges people – for the good of all - are able to utilize the skills of others and not only their own. Ridley calls this the collective brain. Due to technologies as the Internet, people can easier than ever share ideas and skills, which is the key to prosperity. This is one of the main reasons to why Ridley is so optimistic of the future.

If asked early in the 20th century if the world would be better or worse off a hundred years from then, what would you have answered if you had been informed that the world would suffer from two world wars, the outbreak of HIV, as well as many other crises? Most likely your answer would have been worse. How wrong you would have been and how many opportunities you would have lost out on. The opportunity cost for staying out of the markets due to coming crises and macro factors would have been devastatingly high. Obviously, during shorter time intervals macro factors can have huge impacts but by being an optimist and by having a long-term investment horizon it’s quite rational to dismiss this.

I find it fascinating how Ridley presents facts that go against the common view of things. Some examples are that the growth of the world population is decelerating, meaning that the world population is likely to peak during the next century. Another is how important fossil fuels are likely to be in the next century. By reading the news it sometimes feels that fossil fuels will be obsolete within the next couple of years, which would be fantastic, but unfortunately far from the truth according to Ridley. What's important from an investment standpoint is to think about what facts like these will lead to for the future.

I chose to read the book after hearing that Tom Gayner, the CIO of Markel, recommended it. I thank him for it. What I think the book gives the reader is some well-needed filters against the pessimism coming from sources like news stories or from people around you. The pessimism will create biases that will lead to irrational decisions. The book will help you to separate signal from noise by taking a more positive long-term view.

Niklas Sävås, February 25, 2018

Zweig, Jason - Your Money & Your Brain

Simon & Schuster Paperbacks, 2007, [Behavioral Finance] Grade 5

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“The investor's chief problem – and even his worst enemy – is likely to be himself.” Many of the readers are probably familiar with this profound quote from Benjamin Graham in the Intelligent Investor. In Your Money & Your Brain, Jason Zweig presents many of the reasons to why the sentence by Benjamin Graham is true. The book is aimed at helping the reader to profit for the long term both in terms of wealth and also living a more meaningful life by understanding the psychological reasons for our actions.

Zweig has been working as a financial journalist for more than 30 years. More than the last 20 years have been spent with the Wall Street Journal where he has been writing weekly columns. His columns are most often focused on subjects such as financial history, behavioral finance and neuroeconomics. Zweig is passionate about helping people to avoid bad investment decisions which includes criticizing bad practices in the financial market.

For value investors Zweig is probably most known for having updated the latest edition of the Intelligent Investor. The author describes how his interest for neuroeconomics started in 1998 when he picked up a newspaper at an airport which included an article about neuroscience. The subject led Zweig to insights he couldn't have dreamed of acquiring simply by reading typical investment material highlighting the importance of learning from multiple disciplines.

Your Money & Your Brain can be used as a source to gain understanding about why humans react as they do and why. The human brain is ancient and is still optimized for the hunter gatherer society where humans have spent most of their existence. Many readers may be aware of some of the concepts in the book, having already read books such as Daniel Kahneman's Thinking Fast and Slow.

The book starts with an introduction to neuroeconomics and how the brain works. The reader is then presented with areas and feelings that have huge impact on investors and other decision makers. Some of these are fear, greed, confidence and regret. In every chapter, Zweig describes the neurological background to the feelings and also presents recommendations on how to live and act as an investor in order to avoid them. He presents which part of the brain is causing which feeling and introduces the reader to further studies about the brain. He backs up all the material with references to scientific studies.

Both this book and Zweig's The little book about safe markets, published in 2010, is directed to a broad mass of people and to personal finance readers, making some of the material a bit basic for the experienced investor. The benefit of this is that the language is really easy to grasp. Zweig is a terrific writer in how he is making a difficult topic feel simple.

Having read a lot of books about behavioral economics and neuroeconomics I have gotten the impression that the most important thing is to set up habits and routines to avoid ending up in certain situations, instead of trying to overcome them. That impression only got stronger having read this book. Zweig steer his readers in a very clever way as he is ending every chapter with suggestions of habits that could help the reader avoid getting tricked.

Myself, I have already started to introduce some of the habits in my daily life which I see as a great compliment to the author. As many other investors, I have felt the pain of having fooled myself and am working hard to avoid it. Your Money & Your Brain is of great aid in that regard.  

Niklas Sävås, January 31, 2018

Gladwell, Malcolm - The Tipping Point

Little, Brown and Company, 2000, [Surrounding knowledge] Grade 4

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At an early stage, it's often hard to know if a new idea or product will transform into something big or not. This is why value investors typically stay away from businesses without a track record. They are well aware that some of these ventures will turn into great successes but argue wisely that they are too hard to evaluate and prosper from. Still, some upstart businesses do reach a point of accelerating growth, why it would be great to be able to recognize patterns and signals for when it's about to happen. The author of this book describes a tipping point as an event when something reaches critical mass and begins to accelerate at a much higher rate.

The Tipping Point was the first book by the now famous author Malcolm Gladwell. He has today written five bestsellers - all with a focus on sociology and psychology. He became interested in the subject of tipping points and critical mass after having witnessed the sudden drop in crime rates in New York in the 1990s. After having analyzed the reasons for the escalation of crimes in the 1980s and the subsequent drop, he then shifted focus to other situations that showed similar characteristics. One of these is the story about the Airwalk shoes that had an exponential increase in demand - which then quickly disappeared. Indeed, retail and especially fashion is a sector that value investors often shun due to its unstable characteristics.

Gladwell starts with introducing the reader to how something can turn into an epidemic by describing situations covering the spread of viruses, trends and criminal acts. He describes the ingredients that he finds have led to tipping points with three features. A few special individuals are needed, the power of the few. It needs to be difficult to switch from, stickiness, and the environment or situation needs to be right, power of the context. Thereafter he presents in-depth case studies of different kind of epidemics where he uses the concepts earlier introduced to the reader.

As an example of the power of the context, it has been found that the number of 150 is a “magic number”. The company Gore along with the Hutterites and various military organizations have experienced first-hand that the efficiency suddenly drops drastically when groups surpass a size of 150 persons. The rule of 150 is explained by the fact that in a smaller group the members know each other’s strengths and weaknesses and this increases efficiency. It's vital to know who the best person is for a specific task but when the group becomes larger than 150 people a tipping point is reached and beyond that size this becomes exponentially harder. Gore has solved this by opening a new plant when an old plant reaches 150 workers and it has worked fantastically well for them.

Many of the author’s ideas are very easy to grasp and therefore it's important to stay critical. Gladwell has been critiqued for over-emphasizing the broken window theory when explaining the change in NY crime rates. The theory explains how a broken window or graffiti in the subway leads to more criminal acts if it's not removed. Gladwell has since admitted that he overstated its importance. The concept of tipping points is however an essential mental model with parallels to other powerful concepts. Gladwell for example mentions that it's difficult to grasp how a paper folded over 50 times could reach the sun and that it doesn't make intuitive sense that a 15% compounded return leads to more than 16 times the money after 20 years. But it does and this is also one of the most important insights for an investor.

I chose to read The Tipping Point to try to understand why ideas and businesses take off in order to be able to look for patterns as to when this is in the process of happening. After reading it, I don't think the book gave all the answers but it definitely delivered some. In the end, the greatest takeaway for me is the reinforcement that it's possible to create change with small means. The small details that differentiate one business from another may well be why one survives and thrives while the other goes away which is important to think about when evaluating moats. The book will hopefully also help the reader be even more conscious of the limitations in being a human as well as an investor.

Niklas Sävås, January 18, 2018