2021 Book Reviews
The following briefly outlines our investment team’s reading over the year.
The Art of Thinking
by Ernest Dimnet
Written by a French priest and author in 1928, this book joined Dale Carnegie’s self-help books on the U.S. bestseller lists in the 1930s. Mr. Dinmet writes beautifully about the inevitable decline into conformity that most of us follow as we leave childhood and higher education. He instructs us to quit “thinking about thinking” and lays out methods to accomplish original and creative thought. With time and dedication, we can all hone the “art of thinking” and work towards becoming a better investor (and, perhaps, a better person).
The Biggest Bluff: How I Learned to Pay Attention, Master Myself, and Win
by Maria Konnikova
Like in investing, the game of poker represents a balance between skill and luck. The author, a psychologist, approached Erik Seidel, the winner of numerous World Series of Poker bracelets, with the intent of learning the game and more about herself. The book traces her fascinating journey through the poker world and adds many investing insights along the way. Seidel is a better psychologist than mathematician and his teaching leads the author to incredible success in just one year. Konnikova stresses the world has gone overboard with the quantitative and overlooked the value of intuition.
Disunited Nations: The Scramble for Power in an Ungoverned World
by Peter Zeihan
The author, a noted geopolitical strategist, makes a convincing case that the world has reached a tipping point. The emergence of the world’s first ‘Global Order’ began with the conclusion of the second World War, as the U.S. offered total protection and economic growth for any nation willing to join its fight against the Communist Soviet Union. The fall of the Soviet Union in the late 1980s brought with it the end of this Order and, in its place, an underwhelming foreign policy that had the U.S. bouncing from crisis to crisis while either abusing, ignoring, or insulting its Allies. Countries around the world, including the U.S. and the United Kingdom, have shifted their focus inward as competition takes the place of cooperation. After presenting his thesis, the author then outlines the strengths and weaknesses of the leading nations around the world and we learn why France will become the most powerful country in Europe, Saudi Arabia will be a larger threat than Iran, and China is more likely to collapse than North Korea. Certainly a provocative book, but also an enjoyable read and an excellent resource for international investors.
Fiber: The Coming Tech Revolution – and Why America Might Miss It
by Susan Crawford
The book does a nice job of explaining the importance of a wired connection for our wireless future. We run into the famous physicist Claude Shannon again in this book about the United States’ sluggish embrace of fiber and the 5G future. According to the author, the only technology capable of bursting through the ‘Shannon limit’ – the physical limit of information-carrying radio wave capacity – is fiber. We are skeptical. The book outlines those countries with advanced fiber networks (e.g. South Korea, Japan, Hong Kong, China, etc.), and their ability to offer gig access for $30 to $50 per month. We think the book is overly critical of U.S. cable companies, which offer similarly priced plans at gig speeds (with talk of 10 gigs in the near future), and their hybrid-fiber coaxial cable lines as a potential solution to future 5G limitations.
The Forgotten Man
by Amity Shlaes
As our country currently deals with the deflationary impact of the pandemic, this book explores how the country dealt with the last deflationary shock – the Great Depression. The author reviews the usual suspects, including the tariffs, the taxes, and the misguided Federal Reserve as contributors to the epic collapse, but she also investigates new ground. Many today urge the federal government to enact more forceful fiscal policies to deal with the shock and even experiment with modern monetary theory, which argues that deficits don’t matter. This book would advise caution as it was exactly these types of New Deal programs that resulted in business confusion and inaction, which prolonged the economic suffering. The original Forgotten Man was not FDR’s poor man, old man or labor group, etc., but, rather, the ‘victim of the reformer, social speculator…’
Fortune’s Children: The Fall of the House of Vanderbilt
by Arthur T. Vanderbilt II
Written by an actual descendant, the author chronicles the remarkable rise and subsequent fall of the Vanderbilt family fortune. Cornelius Vanderbilt, the ‘Commodore,’ exemplified a rags-to-riches story as this ‘Staten Island water rat’ reached railroad baron status and, at one time, the designation as the world’s richest person. As unlikely as the Commodore’s rise to prominence (side note: he could barely read yet he gave $1 MM to found Vanderbilt University and prove he valued education), so was the family’s relatively quick descent from the ranks of the wealthy. There was not a millionaire left among the 120 descendants within one hundred years of his death in 1877. Perhaps it was a sign of the times as the birth of the family fortune coincided with the Gilded Age and many of the family’s country estates still stand today (e.g. Marble House, the Breakers, Biltmore, Florham). Or perhaps it was the slow and steady family detachment from the Commodore’s magic formula – like the owner/operators we seek out for our investments – he epitomized that ‘passion bordering on obsession’ that legendary institutional investor David Swenson seeks out for his chosen managers.
U.K. fund manager Terry Smith has a common-sense, three-step approach to investing: 1) buy good companies, 2) don’t overpay, and 3) do nothing. It appears the approach has worked – as of 9/30/2021, the Fundsmith Equity Fund had returned +18.4% versus +12.5% for its MSCI World Index benchmark since its inception in November 2010. Smith articulates his view, through a collection of fund letters and Financial Times articles, that investing in quality companies is a more advanced version of value investing. Advantaged businesses with reinvestment opportunities should avoid dividends and only repurchase shares when they trade at a discount. The book makes his approach seem simple, though we know, through experience, that nothing in investing is easy.
Lights Out: Pride, Delusion, and the Fall of General Electric
by Thomas Gryta
In April 2000, General Electric’s (GE) market cap reached $682 B under the leadership of Jack Welch, making it the largest company in the US. By May 2020, GE’s market cap was less than $50 B. This book tells the story of how America’s most valuable company became a shadow of itself. It reveals a troubled culture, bad incentives, and poor capital allocation. GE was very adept at increasing EPS, but eventually, the lack of cash flow made it impossible to hide the issues within the company.
The New Map: Energy, Climate, and the Clash of Nations
by Daniel Yergin
Pulitzer Prize-winning author Daniel Yergin provides a deep dive into the hydrocarbon realities and the issues facing the major global energy players. Yergin brings to life the birth of horizontal drilling and hydraulic fracturing that led to the United States shale revolution. He then spends considerable time outlining the geopolitical tensions facing the United States, Russia, China, and the Middle East. The final segment of the book does a nice job of highlighting the compelling setup for energy investors over the next three to five years.
Quality Investing: Owning the Best Companies for the Long Term
by Lawrence A. Cunningham
The book is the result of an accomplished asset manager’s internal review of some of its biggest winners. The authors do an excellent job of presenting the substance of their investment approach. Most managers proclaim the importance of strong cash flows, returns, and management, but then a quick glance at their holdings and there seems to be a disconnect. The strength of this book is in the many stock examples, which bring to life their disciplined and patient approach. As value investors, we appreciated their thoughtful views on the limits of valuation and quantitative data.
7 Powers: The Foundations of Business Strategy
by Hamilton Helmer
The book has two parts. The first half is essentially an update of the concepts of Moats and Porter’s 5 Forces with the idea of Power that the author defines as a set of conditions that gives companies the ability to generate sustained differential returns. He defines the 7 Powers and separates the benefits and barriers attributed to each Power along with examples. The second half of the book focuses on the source of Power, how the Powers are attained, and when in the lifecycle of an industry/business the Power can be gained or lost. As a Stanford economist and former Bain consultant, the author presents a good balance of theory and real-world examples.
Former U.K. star fund manager Neil Woodford built his reputation and track record on three key events: his large investment in beaten-down tobacco stocks in the late 1990s, his avoidance of the dot-com crash, and the financial meltdown in 2008 and 2009. The success clearly went to his head and his Equity Income Fund strayed into illiquid, private companies that were in sectors beyond his circle of competence. The ‘Oracle of Oxford’ had up to two-thirds of his Equity Income Fund in unlisted securities and a big weight in the biotech industry (which rarely pays any sort of a dividend). There is a lesson here for all aspiring stock-pickers: stick to your knitting and remain humble and intellectually honest throughout an investing career.
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