2019 Book Reviews
The following briefly outlines our investment team’s reading over the year.
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.
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.
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.
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.
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 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.
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.
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.
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.
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.
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.”
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