Review – Free Capital

Free Capital: How 12 Private Investors Made Millions In The Stock Market

by Guy Thomas, published 2011

A methodical review of investors and their strategies

The greatest strength of “Free Capital” is its organization and layout– it’s truly like visiting an expertly-designed website in that the author has organized his investor interviews by four major descriptive categories:

  • geographers; top-down investors who begin with a macro thesis then look for companies and financial instruments which will benefit from that trend
  • surveyors; bottoms-up investors who start looking at individual companies and then sometimes check to see what kind of macro conditions might affect them
  • activists; investors who tend to get personally involved with their investments, taking large stakes and developing a close relationship with management
  • eclectics; people who don’t really fit any mold, but might be day-traders, value investors, sometimes activists, etc.

Within each categorical section are profiles of 12 (in total) investors that Guy Thomas spoke with, many of whom are anonymous, most of whom he came into contact with via investor message boards he participates on, and all of whom are UK-based and have managed to grow their capital into millions even over the last decade or less.

Though many were once employed by others and some came from financial backgrounds, all are now independent, full-time investors who live off of their investment returns and it is this kind of self-directed lifestyle and the resources which are needed to finance it that primarily lend themselves to the book’s title.

What’s really great is that in each chapter, Guy Thomas begins with a quick “tearsheet” profile of the investor’s strategy, key phrases, holding period, etc., then neatly organizes the interview material into background on the investor’s life and development as a financial person, outlines their strategy, experiences and any particularly demonstrative coups or failures they’ve enjoyed (or suffered) and finally and extremely helpfully, summarizes all the material again in a table at the end with the major themes or ideas explored for quick reference.

As if this weren’t enough, Guy Thomas has written a lengthy (and for once, interesting) introduction to the book that serves as a combination summary of the main themes of the book as well as a how-to manual for those looking to get the most out of their reading. Thomas is correct in suggesting that the book can be read all the way through as a complete work, or explored at random based on what, if anything, sounds interesting to the reader.

It’s touches like this that show a thoughtfulness on the part of the author that leave the reader painfully aware of their absence in comparison to many other books in the genre. Frankly, it’d be nice if authors and publishers took Thomas’s lead on this point!

My favorite part: inspiration

I was excited to dig into the book in part because a friend had mentioned it to me and had commented favorably on it. He said a lot of the material covered wouldn’t be original but that I might find it inspirational to read other people’s stories of how they got where they are.

Maybe it’s where I am in my life right now, maybe it’s the subtle suggestion my friend made planted in my mind, or maybe it’s the shining spot for the book but the inspiration was one of the most important things I took away from the book. Some of the profiles were admittedly unhelpful (such as the day-trader, an investment style I can’t see any point in) or just not interesting to me (a few of the investors followed research processes I don’t have the time or motivation to emulate), but there were a couple I identified with, which made me feel empowered and hopeful about myself as I read them.

I particularly liked the two named investors, John Lee (who is a dividend-oriented value investor of sorts) and Peter Gyllenhammar (who bankrupted himself twice before hitting his stride and amassing his current fortune). I believe all of the investors lives and experiences illustrated this point well, but these two in particular were examples of the phrase “Patience is a virtue.” If a man can dust himself off after two bankruptcies and still make something of himself he can probably do just about anything given the time and the patience. Seeing as how I haven’t suffered personal bankruptcy (yet) I felt greatly advantaged to learn from this example of perseverance and triumph over failure.

Wise aphorisms

Another theme oft explored in “Free Capital” is the role simplicity plays in good investing. To that effect, I found a lot of great investing ideas captured in brief, simple aphorisms that made them both easily digestible and sufficiently memorable to make use of them myself in my own deliberations. Some examples include:

  • Good investing “requires only a few good decisions” (a helpful reminder given the way many seem to imply that a true investor is marked by the numerousness and hyperactivity of his ideas)
  • An activist is an investor who goes looking for trouble
  • “Quiet freedom is itself exotic” (in this way, independent investors lead quite adventuresome and even exciting lives!)
  • Exposure to some chances can only arise through deliberate and possibly unpopular and eccentric choices
  • Investment skill consists in not knowing everything, but in judicious neglect: making wise choices about what to overlook
  • Freedom is like income that cannot be taxed
  • To make good decisions, you need to look actively for reasons not to buy a company. And then invest only in those where you can live with the reasons
  • Time is a limited resource with strongly diminishing returns. The first hour you spend researching a company is much more important than the tenth hour
  • If an investment decision requires detailed calculations, you should pass, because it’s probably too close
  • The sun shines even on the poor man

Also of note is the author’s book-companion blog, which goes into a bit more detail on some of the investment themes captured in the book and which I’ve found to be a good supplement to the reading seeing that I was still interested to learn more even after I put it down.

Conclusion

“Free Capital” is a unique offering. It has a styling and organization that many books in its genre lack and I hope this effort is continued in any future titles from the author. And it treads original ground in profiling anonymous, “everyman” successful investors that no one has heard of yet who have interesting stories, experiences and lessons to share all their own. We can all learn from more than just Warren Buffett, after all.

It’s not without its flaws, of course. As the author himself states, the book doesn’t cover losing investors, people who took some of the risks investors profiled took, and failed, or who took other risks that didn’t turn out right, and then explores what lessons can be learned from their shortcomings. This probably could be a worthwhile book in itself, as there is a growing literature on “failure studies” and as the first lesson every investor must learn is “don’t lose what you’ve got”, learning of common mistakes to avoid could be helpful. Additionally, as an avid deep value (Benjamin Graham) guy myself, I could’ve done without the day trader and some of the other guys who seem like GARPy, momentum-based swing traders with short time horizons and questionable “value” metrics.

But those are minor quibbles and things that Guy Thomas could easily rectify by simply writing us more great books to read! Overall, “Free Capital” was entertaining, at times enlightening and best of all, extremely gracious with my free time as I read the entire thing in just three or four hours. Given the focus on the value of time in the book, I appreciated the fact that I could digest the meat of the book and walk away with some great insights to help my own investing… and still have time left in the day to get other things done!

Recession Risk, The Ultimate Risk Paradigm Of Modern Business Operations

The business cycle rotates periodically between boom and bust. This is one of the inevitable consequences of centrally planning the economy’s interest rates and forcing them below their market equilibrium levels. Because it is inevitable, it is “predictable” and thus every business person must conduct their affairs in light of the fact that at some point in the future they will be faced with a recession. The key measure of risk for a business person operating in a central bank-managed economy, then, is “How will I feel when the recession comes?”

If a recession poses no risk to the financial structure of his holdings and he is positioned in his operations to weather a storm, he may be termed “low risk.” If instead a recession represents an existential threat and/or the potential for severe hardship for his operations, he may be termed “high risk.”

As an ideal, a sufficiently low risk operator should eagerly anticipate a recession as it will represent a cheap buying opportunity during which he will consolidate the failing enterprises of his competitors, scooping up their assets at bargain prices and thereby leap ahead of them without the use of leverage or cheap competitive tactics. Conversely, a sufficiently high risk operator will find the economic Sword of Damocles plunging through his neck in a recession, permanently severing the connection between himself and his former assets. How then to manage financial and operational risk so that continued growth can occur in a manner that is sustainable in all possible economic environments?

In terms of financial risk, we could sort our assets in two ways, by asset quality and by financing quality. The asset with the highest asset quality is the one which has the largest earnings yield relative to its current value. The asset with the highest financing quality is the one which is cheapest to own (ie, annual interest cost).

Practically speaking, sorting assets by asset quality and financing quality and then selling low quality assets and paying down outstanding debt would move an organization toward a more favorable balance between asset quality and finance quality, with an emphasis on equity in the balance sheet. The capital that is freed up in the process is now available to purchase a higher quality asset in the future.

In a recession, the cash flows from low quality assets dwindle while the finance charges on debt remain fixed; not only does such a mixture create a problem in a recession but it falsifies the true “free cash” position of the company in a boom because, to operate prudently, extra cash must be maintained on the balance sheet to offset the risk this low quality asset and debt represent should a recession appear.

The insistence on focusing on the management of financial risk first offers us clues as to a sound growth strategy overall. To be successful and sustainable through all potential economic conditions, growth must be purposeful and planned and should only occur when three conditions are met: there is abundant free cash on the balance sheet, the organization has people “on the bench” and ready for new opportunities and a good buying opportunity (represented by a fair or discount to fair value price) presents itself.

A debt-laden balance sheet is not cash rich because the cash which may be present is actually encumbered by the debt as an offset in a recessionary environment. When we are talking about a cash rich balance sheet, we’re by implication talking about an unlevered balance sheet. Otherwise, the cash is not “free” but rather is “phantom” cash– it will disappear the moment adverse economic conditions present themselves.

The organizational bench condition may be harder to evaluate objectively, but there is a decent rule of thumb. When people in each position in the organization are sufficiently organized to handle their own responsibilities with time to spare, there is organizational bandwidth to spend on promotions and new responsibilities, such as management of newly acquired assets. In contrast, when people in relatively higher positions within the organizational hierarchy are spending their time doing the work of people relatively lower in the organizational hierarchy, it indicates that there is a shortage of quality personnel to fill all positions and that those personnel available are necessarily being “mismanaged” with regards to how they are spending their time as a result.

Further, it implies the risk that growth in such a state might further dilute and weaken the culture and management control of both legacy assets and those newly acquired. This is a risky situation in which every incremental growth opportunity ends up weakening the organization as a whole and creating hardships to come in the next recession. If it’s hard to find good people, inside the organization or without, and there is a general attitude of complacency about what could go wrong in a recession, it is a strong indicator that underperforming assets should be sold and the balance sheet delevered to reduce organizational risk in the event of a recession.

Growth should be fun, exciting and profitable. If it’s creating headaches operationally, or nightmares financially, it should be avoided. You shouldn’t own or acquire assets you don’t love owning. Perhaps the best rule of thumb overall is to ask oneself, “Does owning this asset bring us joy?” If yes, look for opportunities to buy more. If no, sell, sell, sell!

Ultimately, there are three ways to get rich: randomly, with dumb luck and unpredictable market euphoria for the product or service offered (billion-dollar tech startups); quickly, with a lot of leverage, a lot of luck in terms of market cycles and a lot of risk that you could lose it all with poor timing (private equity roll-up); and slowly, with a lot of cash, a lot of patience and a lot less risk while taking advantage of the misery of others during inevitable downward cycles in the economy.

If you were fearful in the last economic cycle, it suggests your financial and organizational structures were not as conservative as you might have believed. It may be an ideal, but it’s one worth reaching for: a recession represents a golden buying opportunity for a cash rich organization to leap ahead of the competition and continue its story of sustainable growth and success.

Notes – Success & Happiness with Vance Caeser

From a talk given by Vance Caeser
  • “To create abundance in life, you must give more than you expect to receive”
  • “How Will You Measure Your Life?” book by Clayton Christiansen
  • Your only job is to make your boss happy without losing your integrity; you are your own boss
  • High achiever definitions
    • relative position in peer group versus peers
    • quantitative measures
    • typically, top 3% of any group
    • but you can be your own judge of high achievement
  • Synonyms for success:
    • peace
    • freedom
    • helping others
    • for some it is a #
    • it’s always inside of a person; individual, diverse answers for each person
  • Leadership is based on emotional intelligence, which is built on self-awareness
  • Families based on gratitude (thankfulness, acknowledging successes, etc.) help children to grow up w/ a mindset of exploring internal happiness
  • Emotions create the drugs in our bodies; belief systems strongly conditions the kind of emotions we have, therefore beliefs lead to the drugs that are in our bodies
  • On an annual basis, review “What are the beliefs we’ve operated on in this past year?”
  • Purpose creates abundance
  • Purpose, beliefs, who we associate with, are the three keys to development of our lives and happiness
  • When life decisions aren’t working, that is the time to sit down, listen to yourself, take inventory of your beliefs, examine which ones are creating anxiety for you
  • “Some day I’m going to be happy when…” means you’ve given up on being happy today
  • “I get to do this today” vs. “I have to do this this today”, demonstrates responsibility versus victimhood mentality
  • Viktor Frankl, use your vision, see success, let it guide you through the daily clutter which will seemingly take care of itself as you focus on envisioning your success
  • Balanced life involves managing energy, not time (see HBR article)
  • Brands: distinctive, relevant, consistent
  • Relationship-building, not networking; connection, not contacts
    • knowing a name
    • knowing their story
    • earning their trust so they want to be around you, too
  • It’s really important to know what your story is, what your values are, what your role in the world is; develop your signature story, can deliver it in 10 seconds or talk about it for 2-3 hours
  • Sharing stories and looking for overlap builds trust with others
  • You can’t trust what a person does, only who they are
  • Leaders are distinguished by the fact that they have followers; leaders are followed for:
    • technical skills
    • authority, title
    • respect, reverent power
  • Cheryl Sandberg, lean-in circles, Nat Geo “blue zone” longevity studies, people with long lives join authentic communities and give to them
  • How do you deal with “poison”?
    • fear and love are our basic emotions
    • hire for character 1st, energy 2nd, competency 3rd
    • you are the CEO of your life, stay away from people committed to living in fear
    • you “hire” your boss, your friends, etc., you can pick different ones
  • It’s important to feel like you’re in charge, cultivate a free agent mentality
  • Nordstrom once encouraged its managers to seek an outside position and get a job offer once a year to give themselves options and work in that free agent spirit
  • It’s important to learn how you learn, and then only work and learn in that way
  • Great leaders are always great educators, they focus on listening to people to use their own brilliance to help them grow faster
  • You have all the answers already, the answer isn’t out there, it’s inside of you
  • Be clear on why you’re here, know why first, then how, then what
  • Have clarity about your vision so you know what you need to do to get there; you vision will serve you if it’s inspiring
  • Live a conscious life, be aware of what you do, use your heart as a scorecard, listen to your feelings
  • Do what you love, with people you love ~Steve Jobs
  • You choose your consequences, choose wisely; Stoic philosophy
  • Toltec, 4 beliefs:
    • Be impeccable with your word
    • Don’t take anything personally
    • Don’t make assumptions
    • Do your best, learn from your efforts
  • Simon Sinek, TED talks
  • Human connection is invaluable
  • Don’t bet the farm on your vision, you can have multiple visions and you can update them over time; life is the journey of moving from vision to vision, you can always have more
  • Impediments to integrating these lessons:
    • fear
    • ego-centrism
    • relying on others for answers
  • Purpose can be updated, continual growth of self, embracing one’s flaws along the way
  • For kids
    • get really clear about the life you want to live
    • talk about values
    • talk about roles you want to play
    • structure your life around these things
    • make decisions based on these criteria
  • Discover your purpose, we all have one but we have to find it
  • The questions I ask myself define my life by virtue of the answers I give
  • Examine periodically the questions you spend your time thinking about and make sure they’re the right questions to be asking

Profiles in Heroism: Ayrton Senna

Ayrton Senna was a Brazilian F1 driver, three time world champion and former go-kart racer who died in a crash during a race at the San Marino GP (May 1st, 1994). Tragically, he was the second driver to die at the track that weekend, the first being Roland Ratzenberger during qualifying earlier in the weekend.

Senna was a devoutly religious individual who attributed much of his success to the influence and providence of god. This may have been an irrational flaw of his, but it seemed balanced by his rational characteristics– humility, honesty, discipline, perseverance and determination to continually improve himself both as a driver and as an individual.

Senna was fiercely competitive and hated the politics of the F1 world, which put many drivers like him at risk all in the name of making the sport more entertaining and sensational. His original relationship with teammate and former world champion French driver Alain Proust quickly turned from a seasoned pro mentoring the young upstart rookie into a battle for survival and supremacy that ultimately resulted in a nasty and dishonest move by Proust in an attempt to deny Senna a chance at the championship title. Secure in his points leadership so long as Senna did not finish the race, Proust forced a collision that disabled his car and nearly eliminated Senna from the race several laps before the finish, pushing both cars off a chicane and into a safety tire barricade.

Undeterred, Senna restarted his vehicle from a standstill, navigated around the tire barrier and back onto the track and ultimately won the race. Still, he was denied the championship by inside F1 politics revolving around technical interpretations of the governing regulations whose interpretation had no prior precedent.

Senna got his revenge the following season when the roles were reversed. Secure in the points lead himself so long as Proust did not finish, and having won pole position in qualifying but having been relegated to the outside of the track at the start of the race because of insider politics, Senna took matters into his own hands by forcing a collision between he and team mate Alain Proust moments after the start. Proust was finished and Senna claimed his title at the end of the day, though he would’ve preferred to win in an honest fashion.

A proud Brazilian, Senna finally won the Brazilian GP in 1993 despite a failed gearbox which locked his car into 6th gear for the final few laps of the race. Luckily, his lead was so great that even with the inability to utilize any other gears, Senna was able to achieve victory. He was so excited upon finishing that he first passed out, then suffered debilitating shoulder weakness that caused him to be almost unable to raise the trophy above his head in the winner’s circle. The lesson to be learned? Never take the lead for granted, push for every marginal advantage you can find because you never know when you’ll be incapacitated and have to rely on coasting to the finish for victory.

Senna was not perfect. He attributed part of his success to a faith in a make believe entity in the sky. He was not above playing dirty if that was what it took to get revenge against those who had done the same to him.

But he was still a hero. He followed his passion in life– to be a championship racer. He refused to give up. He spoke his mind about the realities of F1 politics and the dangers of his profession and was not afraid to defend his understanding of justice. He was committed to personal excellence because he realized that even if his career would be short, his life might be long, and self-improvement was a journey he could carry on with for his entire life no matter his circumstances.

Review – What Makes Sammy Run?

What Makes Sammy Run?

by Budd Schulberg, published 1941

What Makes Sammy Run? (WMSR) is a work of fiction and judging by the title, you’d think the book is about Sammy Glick, the eponymous antagonist. Certainly that is what many reviewers, readers and critics seem to focus on. But WMSR isn’t about Sammy– it’s about the people around him, who tolerate and even tacitly support him, who enable his antics in various ways and thereby lower themselves in the process. WMSR isn’t a study in lite social tyranny, as some think, but rather it is a study in the Stockholm Syndrome. The real villain in this novel is the narrator, the despicable Al Manheim.

It’s easy to be fooled. Sammy isn’t a “nice person” and he clearly isn’t a “happy person.” He’s a wildly imbalanced person with a humongous ambition and not much else of note. He isn’t necessarily handsome or well-spoken. He isn’t an intellectual. He certainly doesn’t have any charm, or empathy for others. It’s easy to dislike him and it’s easy to watch him tread over other people on his way up and make the mistake of thinking he’s the bad guy.

But the question we must always ask ourselves in a tale of moral depravity is, “Where’s the hero, and what is he up to?” Who is keeping this guy in check? Who is going to stop him. In WMSR, the answer is “There isn’t one.” So the people who bear the responsibility for Sammy’s reign are all those who could be the hero and stop him, but don’t, or worse, those who claim to find him distasteful but end up worshipping him.

The best example of worshipping the supposed bad guy in the book is the way Al Manheim falls in love with Kit, a woman who admits to a one-time sexual relationship with Sammy Glick because of her burning curiosity to know what it’d be like to have all of his ambition and energy inside of her. She’s supposed to be the strong, principled and competent femme of the novel yet she couldn’t resist her own base sexual craving for a man she knew was no good. And rather than keep her at arm’s distance, Manheim becomes a soppy wet romantic for her. This is what you call “selling out.”

Sammy’s rise to the top in Hollywood despite having no talent, no money, no experience and no real value to anyone for anything is supposed to serve as a condemnation of the industry and maybe tangentially of the voluntary, for-profit capitalist economy itself. We’re supposed to read WMSR and look around us at all the entitled pricks like him who are our bosses, our owners or are actively in the process of clawing their way to such heights and smirk or despise them. “You’re just another Sammy Glick!” But why then do people secretly admire and envy them and their achievement-less achievement?

The answer is that the Al Manheim’s of the world have no self-esteem. They don’t love themselves enough to say “This is wrong!” on the many occasions they have to say such things. They don’t admire themselves enough to ignore the nuisance Sammy’s, to resist their endless persistence, to insist in return that they go ply their filth somewhere, anywhere but here. Instead, they open the city gates, invite them in and grab them a footstool so they can be comfortable as they bark out their orders. Then, like Al, they drink or smoke or ingest their minds into oblivion when the pressure of thinking about what they’ve done gets too great.

In other words, they’re weak.

Sometimes, they’re so weak, like Al Manheim, that they become accomplices to the madness. Like Nick Carraway, they’re happy to stand silently on the sidelines and observe and oogle as long as they can have the feeling that they’re in on the big adventure, as horrible as they think it may be.

And like Jay Gatsby, the Sammy Glick’s all have a pitiable background. They come from a world without love and so they can’t imagine a world with it. They’re not human, choosing, conscious entities. That experience of life was stripped from them at birth when they entered their perceived loveless world. All they can do is march to their idiot tune and destroy a bit of the world along the way to their doom.

Only they wouldn’t get very far, if it weren’t for the Al Manheims and the Nick Carraways.

The answer to the question What Makes Sammy Run? is less interesting than you hope. It’s so simple, it’s almost stupid– he has no love. It’s also somewhat pathetic because it can’t be helped. Sammy is damaged goods and no amount of therapy or intervention can get him back. The great irony of the novel, of any Sammy Glick, is that someone, somewhere served as the Great Enabler by bringing them into the world and nurturing them long enough to develop their skewed sense of possibility. From there, they’re working on auto-pilot.

A far more interesting question is What Makes Al Go Along With It?, especially when He Says He Hates Him.

Or, something I was thinking about last week, What Makes Davey Crawl? “Davey” is a small business owner, responsible for a few dozen people, who has managed to slowly run into the ground over a period of decades what could be a valuable little enterprise. There are the Sammy’s out there, deterministically trying to skitter to the top without adding anything of value, and then there are the Davey’s just trying to hold on and desperately, desperately disinterested in doing any better.

Why? Why is Davey happy without his ambition (is he happy?) when Sammy is miserable (to himself and others) with his? Sammy wants to wrap his whole mouth around the hose so there isn’t any for anyone else, but Davey just doesn’t want to turn it on all the way when there could be plenty more.

The answer is probably similarly simple, stupid and hopeless to fix. We may just have to suffer these Sammys, these Daveys and these Als as best we can.

Review – The Art of Execution

The Art of Execution: How the world’s best investors get it wrong and still make millions

by Lee Freeman-Shor, published 2015

Note: I received a promotional copy of this book from the publisher in exchange for sharing my thoughts AFTER reading it.

Professor Failure

What can we learn from failure? Aside from the fact that there’s an entire industry of business literature fetishizing the idea that it has much to teach us (as a kind of doppelgänger to the decades of success literature that took a person or business’s success as given and tried to look backward for an unmistakeable pattern that could’ve predicted it) I’m personally skeptical of what failure might teach. Life is complex and there is often little to separate the failure and the success but timing and luck in certain endeavors.

So, I approached Freeman-Shors book with some trepidation as the subtitle of the book suggests this is a study of failure. Au contraire, what we have here is actually a psychological or behavioral study, somewhat in the vein of Benjamin “you are your own worst enemy in investing” Graham, which studies not failure per se, but rather how investors respond differently to failure and thereby either seal their fate or redeem themselves.

A Behavioral Typology

The book recounts the investment results of several different groups of portfolio managers who were categorized, ex post facto, into various groups based upon how they reacted to adverse market conditions for stocks they invested in. The Rabbits rode most of their failed investments down to near-zero before bailing out and taking the loss. The Assassins had a prescribed set of rules for terminating a losing position (either a % stop-loss, or a maximum time duration spent in the investment such as a year or a quarter). The Hunters kept powder dry and determined ahead of time to buy more shares on a pullback (ie, planned dollar-cost averaging).

While I am suspicious of backward-looking rule fitting, I do think the author’s logic makes sense. What it boils down to is having a plan ahead of time for how you’d react to failure. The Rabbits biggest mistake is they had none whatsoever, while the Assassins managed to protect themselves from total drawdowns but perhaps missed opportunities to profit on volatility rebounds. The author seems most impressed with the Hunters, who habitually started at a less than 100% commitment of funds to a planned position and then added to their investment at lower prices when the market gave them an opportunity to do so.

Freeman-Shor’s point is that when the price falls on your investment you need to decide that something material has changed in the story or facts and you sell, or else you need to be ready to buy more (because if it was a good buy at $10, it’s a great buy at $5, etc.) but you can not just hang tight. That isn’t an investment strategy. This is why I put this book in the Benjamin Graham fold, the message is all about being rational ahead of time about how you’d react to the volatility of the market which is for all intents and purposes a given of the investing landscape.

Learning From Success, Too

The author goes over a couple other behavioral typologies, Raiders and Connoisseurs. I won’t spoil the whole book, it suffices to say that this section is worth studying as well because it can be just as nerve-wracking to try to figure out whether to take some profit or let a winner ride when you have one. Freeman-Shor gives some more thoughts based on his empirical observations of other money managers who have worked for him on when it’s best to do one or the other.

More helpfully, he summarizes the book with a winner’s and loser’s checklist.

The Winner’s Checklist includes:

  1. Best ideas only
  2. Position size matters
  3. Be greedy when winning
  4. Materially adapt when losing
  5. Only invest in liquid stocks

The last bit is probably most vital for a fund manager with redeemable capital.

The Loser’s Checklist includes:

  1. Invest in lots of ideas
  2. Invest a small amount in each idea
  3. Take small profits
  4. Stay in an investment idea and refuse to adapt when wrong
  5. Do not consider liquidity

Free e-Book With Purchase!

It is hard for me to decide in my own mind if this book is a 3.5 or a 4 on a 5-point scale. I think of a 5 as a classic, to be read over and over again, gleaning something new each time. This would be a book like Security Analysis or The Intelligent Investor. A 4 is a good book with a lot of value and a high likelihood of being referenced in the future, but not something I expect to get a new appreciation for each and every time I read it. A 3 is a book that may have been enjoyable overall and provided some new ideas but was overall not as interesting or recommendable.

While I enjoyed this book and did gain some insight from it, and I think the editorial choices in the book were bold, it’s closer to a 3 in my mind than a 4 just in terms of the writing and the ideas. I’ve found a lot of the content in other venues and might’ve rated it higher on my epiphany scale if this was one of the first investment books I ever read. But something that really blew me away is that the publisher, Harriman House, seems to have figured out that people who buy paper books definitely appreciate having an e-Book copy for various reasons and decided to include a copy for free download (DRM-free!!) in the jacket of the book. This is huge. I read my copy on a recent cross-country flight and was really agonizing about which books from my reading stack wouldn’t make the trip for carry-on space reasons and then realized I could take this one with me on my iPad and preserve the space for something else. So in terms of value, this book is a 4.

 

This Just Blew My Mind: The Moneyball Secret & Warren Buffett

I read Michael Lewis’s Moneyball a few months ago after having seen the film. I would’ve preferred to do it in the other order (if I had ended up seeing the film at all) but I hadn’t gotten to the book yet on my reading list and an opportunity to see the movie presented itself that I decided not to turn down.

As I understood the story, the basic premise was the principles of Grahamite value investing in baseball– buy cheap things rather quality things and wait for reversion to the mean to kick in. These cheap things may not be worth much, but you can buy them at such a discount it doesn’t matter as they’d have to be truly worthless for you to have made a mistake in the aggregate.

Specifically, Billy Bean, the GM of the Oakland Athletics at the time, was recruiting players with no star power and no salary-negotiation power that could fill his roster with an above-average on base percentage. In contrast, all the big teams with the big budgets were buying the massive stars who were known for their RBIs and home run percentages. Billy Bean’s motto was “don’t make mistakes”, like a value investor who looks for a margin of safety. The other big teams with their massive budgets were operating with the motto “Aim for the stands, hit it out of the park”, like the huge mutual funds with their marketing machines and their reliance on investor expectations to add super fuel to the market.

That’s the story I thought I read, anyway, and it made a lot of sense. Inspiring stuff for a little value investor guy like me.

Today, I sat in a marketing presentation from a vendor who used Moneyball as a metaphor and he threw an image up on the projector during his slide show of the Oakland A’s stadium. It is a shared stadium meaning it is not dedicated to the A’s but also serves as the Oakland Raiders football team home field. As a result, the baseball diamond has a lot of extra foul zone on the first and home base lines, which you might be able to see if you get real close to your monitor and squint.

 

I had never seen the A’s stadium before. I had no idea it had extra large foul zones. I didn’t realize that in a 160-odd game series the As would play around half, or nearly 80 games, at a stadium that had extra large foul zones.

I had no idea that a lot of players who had high on-base percentages got there because they hit balls that would normally end up in the stands at most other stadiums, but at the A’s home field it’d end up in the extra large foul zone. I had no idea that this meant those kinds of players would be extra valuable only on the Oakland A’s baseball team. I didn’t realize, as the demonstrator told us, Billy Bean was building a “pitching team”, not just a cheap on-base team (whatever that means).

This blew my mind. Maybe I just missed this in the book, and the movie. I am not a sports fan so maybe Lewis mentioned it and it wasn’t a detail that stuck out to me (which is actually another important lesson from all of this, but I digress…). Or maybe he didn’t. Maybe Lewis, the consummate story-teller, focused on the point he wanted to make from the story even though the reality, while related, was really determined by something else– the extra large foul zone at the Oakland A’s home stadium.

It reminded me of one of those situations with Warren Buffett. The first time you read Buffett’s biography and learn about his investments, you get the hokey “Just buy good businesses at fair prices!” schtick and you think, “Hey, that sounds simple, makes sense, that’s all there is to it!” Then you learn a few years later that what he was ACTUALLY doing was gaming the tax system, or creating synthetic leverage for himself, or whatever. You find the REAL angle, and it’s a bit more sophisticated and a bit harder for the average Joe to replicate by following the “invert, always invert” mantra of Charlie Munger.

What I took away from this is that people tell the stories they want to tell and you should never, ever take something at face value that involves a story of a person becoming wildly successful, wealthy, etc., just by figuring out some seemingly obvious, simple trick like buying cheap baseball stats.

There’s always an angle, like, he was buying cheap baseball stats that worked especially well in his home stadium.

That’s still genius, no doubt, but there’s less there that anyone operating outside that specific context can learn from it.

 

Review – How To Get Rich

How To Get Rich: The Distilled Wisdom of One of Britain’s Wealthiest Self-Made Entrepreneurs

by Felix Dennis, published 2009

This will likely be one of the shortest reviews on record here. One reason is because I don’t want to spoil too much of this book for anyone else who might be interested in it; I do think it has to be fully read by oneself for it’s message to be understood.

Another reason is that I am not rich myself, so I don’t know how valuable my critical impressions of Dennis’s logic and experience will be and I don’t have any real opportunity to run a controlled experiment and find out. I’m going to take his thesis into mind and live my life as I see fit and maybe I’ll end up rich, or at least quite wealthy.

When Dennis says “rich” he means “filthy” rich. As in, it’d take several generations of slouches to piss through it all. This is the kind of rich he’s talking about. He’s not talking about retiring with a pension. And this book is psychological in that Dennis spends a lot of time detailing the mindset and motivations of people who are rich, not just particular strategies or actions to achieve this level of wealth (though he discusses that, too).

Besides the survey of rich life and rich world views, the book provides numerous general lessons on business, business management and entrepreneurial practices which are all valuable in their own right even if one doesn’t want to be rich, but doesn’t feel like being poor, either.

This book’s strongest point is honesty. And now, Felix Dennis’s “Eight Secrets to Getting Rich”:

  1. Analyze your need. Desire is insufficient. Compulsion is mandatory.
  2. Cut loose from negative influences. Never give in. Stay the course.
  3. Ignore ‘great ideas’. Concentrate on great execution.
  4. Focus. Keep your eye on the ball marked ‘The Money Is Here’/
  5. Hire talent smarter than you. Delegate. Share the annual pie.
  6. Ownership is the real ‘secret’. Hold on to every percentage point you can.
  7. Sell before you need to, or when bored. Empty your mind when negotiating.
  8. Fear nothing and no one. Get rich. Remember to give it all away.