Monthly Book Reviews
River Road’s investment team members share the books they’re reading.
As the renowned epidemiologist Dr. Michael Osterholm recently noted, COVID-19 is the first pandemic to become the leading cause of death in the U.S. in just six weeks since the historic and horrific 1918 influenza. We took some time over the past month to read Dr. Osterholm’s book along with another on the 2014 Ebola outbreak and one more on the 1918 flu. Two of the authors, Dr. Osterholm and John M. Barry, teamed up with others to publish their current thinking regarding COVID-19. We came away with a deeper understanding of viruses in general and a broader appreciation of the range of potential economic outcomes in particular.
In John M. Barry’s The Great Influenza: The Story of the Deadliest Pandemic in History, the author recounts the deadliest pandemic in history with remarkable thoroughness and readability. This highly entertaining book details the history of American medicine and the tragic consequences of the common refrain… “this was influenza, only influenza.”
Richard Preston’s Crisis in the Red Zone: The Story of the Deadliest Ebola Outbreak in History, and of the Outbreaks to Come picks up on Mr. Barry’s “detective novel” nonfiction style as he expertly narrates the devastating 2014 Ebola outbreak in Western Africa.
Finally, Dr. Osterholm’s Deadliest Enemy: Our War Against Killer Germs caps off a remarkable career in public health with a book that summarizes the most notable infectious diseases facing the world. This 2017 book reaches its maximum effect as it portrays a hypothetical future pandemic that nearly matches today’s COVID-19 headlines.
With the market tumbling into a bear market at the fastest rate in history, along with the worst day (3/16/20, -12.0%) in the market since the computer glitch in 1987 (10/19/87, -20.5%) and the great crash of 1929 (10/28/29, -12.9%), we thought it was timely to re-read our favorite books surrounding the 1929 market crash and the economic fallout that followed. The distinguishing characteristic of the present economic heart attack versus those in the early 1930s is the decisive and unprecedented action of the Federal Reserve (and the Congress), which, according to Professor Galbraith, “in those times was a body of startling incompetence.”
The Great Crash 1929
by John Kenneth Galbraith
An entertaining introduction to the run-up of the 1920s stock market and the crash/depression that followed. The parallels with today are present, but almost certainly not predictive. The U.S. had enjoyed a 10-year bull market by 1929, a massive rise in leverage and share buybacks, and public support from leading academics (Professor Irving Fisher), industrialists (the first statement by John D. Rockefeller in decades), politicians and bankers. Investors then relied on “organized support” to keep stock prices elevated and their dreams alive, which first included the big operators like Durant, Raskob and Livermore and later the big banks like J.P. Morgan. The American entrepreneur and economist Roger Babson noted a crash was coming in September 1929 (the “Babson Break”), which began the wave of selling and the periodic rallies when investors (according to the New York Times) felt “secure in the knowledge that the most powerful banks in the country stood ready to prevent a recurrence of panic.” Unlike today, politicians, economists and bankers were then committed to a balanced budget, which meant higher taxes, less spending, and the gold standard limited the flexibility of the Federal Reserve’s monetary policy. A quick and easy read, this book may be perfect during this national lockdown.
The Great Depression: A Diary
by Benjamin Roth
Published first after the 2008 market rout, the book chronicles the diary of a Youngstown, OH middle-class attorney between 1931 and 1941. The leadership at River Road has recommended we keep a diary of events around this volatile time and this book sets a wonderful precedent for us to follow. Benjamin Roth recounts the margin-driven bubble and the Depression consequences from a middle-class professional’s point of view. He outlined the constant searching for signs of economic improvement and fears what the New Deal meant for a balanced budget and future inflation. It was his personal investigation into how to create, keep and grow wealth over a lifetime that was most illuminating. Maybe the original asset allocator, Mr. Roth learned the hazards of common stocks and real estate and the importance of government bonds and cash to maintain liquidity and practice value investing most effectively. This book highlights the value of personal reflection and commitment to continuous learning.
The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success
By William N. Thorndike
We try to read The Outsiders at least annually. It is our favorite, and most recommended, book on the topic of shareholder orientation. The author compares eight unique CEOs and their legendary track records with the traditional example of a successful CEO…GE’s Jack Welch. The “Outsiders” share a common philosophy the includes several similarities: a preference for cash flow over earnings, opportunistic share buybacks, decentralized operations, the thoughtful use of leverage and infrequent, but meaningful acquisitions. Despite stock performances that trounced the market and their peers, this group of extraordinary leaders were not “charismatic”, but, rather were often humble, independent, highly analytical (more engineers than MBAs) and family-oriented. We are always on the “look-out” to partner with Outsider-like CEOs.
Renewable Energy: A Primer for the Twenty-First Century
By Bruce Usher
This book provides a great framework for understanding the current transition from fossil fuels to renewable energy by examining past energy transitions such as wood to coal and animal power to oil. The basic thesis is that energy transitions are about cost, they are slow, and they have profound effects on society. The transition to renewables for electricity generation has accelerated in recent years as wind and solar power have become considerably less expensive than fossil fuels, even without tax credits. However, renewables are still held back by the cost of battery storage, which is required to address wind and solar’s intermittency issue. Electric vehicles are approaching cost parity with internal combustion engines enabling a transition away from fossil fuels for transportation. The speed of the renewable energy transition is hard to predict, but this book is well researched and provides wonderful insight into why the transition is occurring and how it is likely to develop.
A nice complement to last month’s review, The Man Who Solved the Market, this book traces the remarkable life of the original “quant” Ed Thorp. The first part of the book describes his childhood and his love for math and science, which eventually earned him a Ph.D. in math and an MIT post. He spent the 1960s literally writing the book on how to take on the casinos (Beat the Dealer) and the market (Beat the Market). It is particularly entertaining to read about Thorp and fellow MIT professor / “father of information theory” Claude Shannon tinkering with roulette equipment in Shannon’s basement and then the game of bridge with Warren Buffett in 1968. Thorp spent the next several decades developing option pricing theory and mastering hedged strategies, including convertible and statistical arbitrage, for his Princeton Newport and Ridgeline hedged funds. The book is highly recommended for those interested in the beginnings of the quant investing revolution.
The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution
By Gregory Zuckerman
The Man Who Solved the Market, holiday reading for River Road associates, tells the remarkable story of former math professor Jim Simons and the secretive investment firm he built, Renaissance Technologies. With an annualized return of +39% (after fees) over the past 30 years, and not a single year of negative returns, Renaissance’s Medallion Fund is arguably the most successful investment fund in history. The book describes how Simons assembled a team of brilliant, and often quirky, mathematicians and computer programmers to identify complex patterns in the market. We especially enjoyed the author’s insights about the many challenges Renaissance faced in developing its algorithms and Simon’s perseverance.
Merger Masters: Tales of Arbitrage
By Kate Welling and Mario Gabelli
This book is for true value investing junkies that perk up when something is “happening” (e.g. M&A, recapitalizations, asset sales, reorganizations, self-tenders, and liquidations). A Warren Buffett quote comes immediately to mind upon reading this book…taken from his 1988 shareholder letter, “Give a man a fish and you feed him for a day. Teach him how to arbitrage and you feed him forever.” Through conversations with 17 risk arbitrageurs / value investors ranging from John Paulson to Paul Singer and Michael Price, the authors trace the natural evolution many of these investors have taken from pure risk arbitrage (providing liquidity for those not interested in waiting for a deal to close) to activist investing (use influence to close the “value gap”) and finally distressed investing (the natural end to the investing cycle). Several common themes among the investors include the importance of thoughtful valuations, robust risk controls, and portfolio construction.
The Ride of a Lifetime
By Robert Iger
It seems unlikely that a weatherman from a tiny cable TV station in Ithaca, NY would someday lead one of the largest media companies in the world. Once the reader learns, however, that Bob Iger was groomed for his leading role from the “greatest two-person combination in management that the world has ever seen or maybe ever will see” (at least according to Warren Buffet) – Tom Murphy and Dan Burke, his eventual success makes more sense. As Iger was promoted through the ranks of ABC / Capital Cities, the Outsiders duo of Murphy / Burke certainly rubbed off on him. Upon assuming the Disney CEO role in 2005, Iger followed the Capital Cities playbook of decentralization and making infrequent, but meaningful, investments. Iger quickly dismantled the Strategic Planning Group (~65 Ivy-educated MBAs) and made three large studio investments in Pixar, Marvel, and Lucasfilms. Iger re-focused and re-energized the firm over the past 14 years and the stock price has followed his lead, returning almost 15% per annum over that time period and beating the market by ~600 basis per annum. Disney shareholders should sleep well at night with Iger leading the firm into its next direct-to-consumer chapter.
Hunter Harrison’s tenacity, common sense, creativity, and willingness to not be loved allowed him to change an entire industry that is critical to life in North America. While viewed by many inside and outside the companies he ran as the enemy, Mr. Harrison’s results at the four railroads he ran were nothing short of amazing and have stood the test of time. At the core of Hunter Harrison’s success is his own brand of railroading, “Precision Scheduled Railroading” (PSR). Many of Harrison’s ideas are counter-intuitive, such as the notion that the customer isn’t always right or that by reducing the number of locomotives you could increase the volume transported or that an asset unused can actually be a liability. The key to PSR is that it results in better service for customers through faster and more reliable service while providing the railroad with better economics.
Sol Price: Retail Revolutionary & Social Innovator
By Robert E. Price
It is rare for an individual to succeed with a new retailing format let alone two different models. However, Sol Price changed the way people shop and the way retailers operate by creating the discount retail model with FedMart, in the 1950s, and the warehouse club model with Price Club, in the 1970s. His ideas influenced many of the most successful retailers in history including Sam Walton (Walmart), Bernard Marcus (Home Depot), and Jim Sinegal (Costco). At the core of his success was the notion that his companies maintained a professional fiduciary relationship with their customers. He felt that he was representing the customers and that he had a duty to be very honest and fair with them. This idea along with many other Sol Price ideas can be most directly observed at Costco today, which acquired Price Club in 1993.
by Matthew W. Sherwood and Julia Pollard
The authors provide a comprehensive review of the history, motivations, and academic support for ESG investing and its many iterations (e.g. impact, sustainable, socially responsible, and mission-related investing). Despite a lack of universally accepted standards, the industry has grown to account for more than a quarter of professionally managed assets around the world. The growth seems likely to continue as an increasing number of corporations disclose ESG information, active managers and independent third-party providers like Sustainalytics incorporate the new information, and both active and passive investment providers offer an increasing number of ESG investment options. Active asset managers have a unique opportunity to customize their investment process through optimization and/or other qualitative/quantitative methods to accommodate the growing demand.
WTF?! (Willing to Fail): How Failure Can Be Your Key to Success
by Brian Scudamore
Brian Scudamore, the author and founder of 1-800-Got-Junk, tells an inspiring story of growing his $1 MM per year junk-hauling business in 1996 to a $1 MM per day juggernaut today. Throughout this quick and easy read, Scudamore stresses the importance of passion and enthusiasm, embracing failure (he once fired his entire staff and started over), and promoting company culture to create lasting success. He turned down an offer to sell out for up to $100 MM in 2007 and instead continues to grow his empire to include one-day house painting, moving services, and house detailing. As investors, we are always on the lookout to partner with owner-operators like Scudamore that clearly, as Buffett remarks, like to “tap dance to work.”
Big Money Thinks Small: Biases, Blind Spots and Smarter Investing
by Joel Tillinghast
The author has beaten the market by ~400 basis points per annum over the past three decades running the Fidelity Low-Priced Stock Fund. The book is directed toward investment practitioners with a focus on investment versus speculation. The author’s patient and common-sense approach to investing zeroes in on “what a stock is worth” rather than “what happens next.” The book highlights the benefits of sticking within your circle of competence and investing alongside capable management teams with appropriate levels of financial leverage. He sprinkles in enjoyable and humorous anecdotes to stress the importance of avoiding accounting shenanigans, bypassing commoditized industries or undemocratic countries (e.g. Russia) and the “garbage-in, garbage-out” realities of discounted cash flow valuations. A must-read for serious value investors.
The Myth of Capitalism: Monopolies and the Death of Competition
by Jonathan Tepper and Denise Hearn
This very readable and well-researched book suggests that U.S. industry has become increasingly concentrated over the past several decades. Since the Chicago School convincingly argued in the 1970s that oppressive antitrust regulation prevented economies of scale for corporations and lower prices for consumers, the U.S. government has consistently allowed historic industry consolidation. The authors cite convincing academic evidence and clear examples (e.g. two companies control 90% of the U.S. beer market and four airlines dominate air traffic) of growing monopolistic behavior weighing on the U.S. economy and income inequality. The authors’ solution is a return to authentic capitalism. As an increasing percentage of profits flow to the most dominant companies, the takeaway for investors is clear. Find and invest in those companies that are insulated from extreme competition.
Concentrated Investing: Strategies of the World’s Greatest Concentrated Value Investors
by Allen C. Benello, Michael van Biema, Tobias E. Carlisle
The authors profile eight diverse investors with concentrated styles and amazing track records. These Hall-of-Fame investors range from professional money managers to math geniuses and industrial executives. The group shares one compelling attribute: an ability to think independently and focus on their 10 to 15 best ideas at any given time.
Famed short seller Jim Chanos remarked that China’s economy was on a “treadmill to hell” back in 2010. Celebrated hedge fund investor George Soros warned that “a hard landing is practically unavoidable” two years later. China has kicked the can down the road since then and added $12 trillion worth of debt to its economy since 2008 (roughly the same size as the U.S. banking system), but the day of reckoning has not yet come. The author explains how one-party rule has led to insolvent banks, zombie companies, and ghost cities. Foreign investors in China should proceed with caution as the Chinese economic miracle must eventually contend with its mountain of debt.
Astroball: The New Way to Win It All
by Ben Reiter
Human judgment and big data combine to transform the Houston Astros from the worst baseball team in a half century to World Series champs in just three years. There are lessons for the investment industry. The combination of statistical analysis AND human judgment can deliver superior performance versus relying solely on big data (quants) or human judgment alone. Commitment to an evidence-based process in the face of adversity is required to achieve the long-term objectives of an investment management firm or a Major League Baseball team.
One Buck at a Time: An Insider’s Account of How Dollar Tree Remade American Retail
by Macon Brock and Earl Swift
Ever wondered how Dollar Tree sells everything for just a dollar? So did the three founders when they opened their first dollar store in 1986. Like a great value investor, co-founder and author Macon Brock searched around the world for ‘off-the-beaten-path’ quality merchandise at incredible prices that would surprise and delight Dollar Tree shoppers. The company has maintained the same $1 price point and the best margins in all of retail more than three decades later.
My Father’s Business: The Small-Town Values That Built Dollar General into a Billion-Dollar Company
by Cal Turner Jr., Rob Simbeck
Written by Cal Turner Jr., the former CEO of Dollar General and the son of its founder, the book tells the amazing story of how the Turner family of Scottsville, KY grew Dollar General from its rural Kentucky roots into a national retailer with a $30 B market value. The experiences of Cal Turner Jr., his father, and grandfather provide many useful lessons in business management as they navigated the company through decades of change in the retail industry.
Mastering the Market Cycle: Getting the Odds on Your Side
by Howard Marks
Noted distressed debt investor and author Howard Marks’ investment track record suggests an ability to put the “odds in his favor.” While some on staff hoped for a deeper dive into cycle analysis, Marks chose to keep the material at a high level. Successful investors must recognize how the odds shift as cycles unfold and position portfolios appropriately. Marks urges investors to consider the role of the credit cycle and current valuation levels when determining the “aggressiveness” or “defensiveness” of a portfolio.
Bad Blood: Secrets and Lies in a Silicon Valley Startup
by John Carreyrou
The author is the WSJ journalist that exposed the Theranos fraud through unrelenting investigative journalism. Much like Einhorn’s Fooling Some of the People All of the Time regarding Allied Capital, Theranos relied on misleading statements, wildly optimistic projections, and outright fraud to deceive large companies and otherwise smart individuals (e.g. Safeway, Walgreens, Theranos board members and investors). Carreyrou’s investigative work is a testament to the value of thorough research.
An enjoyable book in which Wachenheim shares his take on how investors can improve their investment practices.
Shoe Dog: A Memoir by the Creator of Nike
by Phil Knight
A popular read among River Road’s investment team, Shoe Dog is a memoir by Nike founder Phil Knight about his earliest days at the company. The book highlights values we emphasize at River Road, including entrepreneurship, building passionate teams with complementary skill sets, and embracing innovation. The book also highlights the role luck plays in any fledgling venture.
River Road is not responsible for the content or availability of linked sites. This does not constitute investment advice offered by River Road. This is provided for information purposes only and does not constitute an offer to buy or sell a security. River Road does not warrant this information to be correct or accurate and expressly disclaims any such warranty. River Road is not responsible for any trading decisions, losses, or other damages that may result from or relate to the information, data, and opinions contained herein or the use thereof. This information may become inaccurate before it is updated.