Book Review: The Lessons Of History By Will & Ariel Durant

lessons_of_history_durantI found The Lessons of History, by Will and Ariel Durant, courtesy of Ray Dalio. (Okay, actually a Reddit ask-me-anything chat featuring Ray Dalio) The Durants are best known for their epic eleven volume history, The Story of Civilization, for which they received a Pulitzer Prize in 1968 and a Presidential Medal of Freedom in 1977.

The Lessons of History is a distillation of the key themes of the longer work. It’s the cliffs notes for The Story of Civilization.

Summary

As you read, a couple of key premises emerge: 1) history is a competitive evolutionary process, and 2) that process is cyclical.

A key driver of these cycles is the tendency for market systems to create wealth inequality over time. There isn’t anything nefarious about that. I don’t read it as a pejorative, either. It’s just the way things work. Mostly because wealth, when managed properly, compounds over time. It’s not just compound interest I’m talking about here. It’s economic opportunity more generally.

The Durants sum this up in a single, beautiful little paragraph (my favorite in the whole book):

We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive recirculation.

An entire chapter on socialism follows. “[H]istory so resounds with with protests and revolts against the abuses of industrial mastery, price manipulation, business chicanery, and irresponsible wealth,” the Durants observe. “These abuses must be hoary with age, for there have been socialistic experiments in a dozen countries and centuries.”

One example, from China:

Wang Mang (r. A.D. 9-23) was an accomplished scholar, a patron of literature, a millionaire who scattered his riches among his friends and the poor. Having seized the throne, he surrounded himself with men trained in letters, science, and philosophy. He nationalized the land, divided it into equal tracts among the peasants, and put an end to slavery. Like Wu Ti, he tried to control prices by the accumulation or release of stockpiles. He made loans at low interest to private enterprise. The groups whose profits had been clipped by his legislation united to plot his fall; they were helped by drought and flood and foreign invasion. The rich Liu family put itself at the head of a general rebellion, slew Wang Mang, and repealed his legislation. Everything was as before.

“Skin in the game,” Taleb might comment.

The relationship between free market capitalism and socialism is cyclical. It’s a yin and yang type of deal. When inequality under capitalism causes enough friction, and social cohesion decays enough, people gravitate toward the utopian promises of socialism. Then, as the socialist system ossifies under the dual pressures of complexity and inefficiency, it becomes vulnerable to unexpected shocks. Eventually, people overturn the socialist system and return to free market capitalism. The cycle begins again.

The last bit of the book is devoted to the idea of “progress.” If all history is cyclical, does progress actually exist? If so, how do we measure it? I won’t spoil it for you, since this last chapter does a nice job of tying everything together.

Who Should Read This Book?

Literally everyone should read this book. It is a short read, easy to follow and relevant to every human being on the planet. This is the type of “Big Idea” book that helps you see the world as it is, rather than how you want to see it.

Book Review: Every Shot Must Have A Purpose

every_shot_must_have_a_purposeGolf is a weird game. Playing well is actually fairly demanding physically (assuming you are walking). It requires core strength and good hand-eye coordination. But what makes golf truly weird is the mental dimension. Sure, all sports have a mental dimension. But golf is especially mental. If your head is not right, you will play terribly.

Every Shot Must Have A Purpose, by Pia Nilsson and Lynn Marriott, is described early on as “a life philosophy, not merely a golf instruction book.” It is therefore relevant for anyone engaged in any complex and mentally demanding endeavor (read: investing). Given the nature of this blog, I’m going to focus on the broader relevance of the ideas in the book.

Summary

There are a handful  of Big Ideas in this book:

  • Focus on process, not outcome
  • Learn to bring yourself from heightened emotional states back to neutral
  • Trust your swing. It is your signature.

All of this is relevant for investors. Even the part about trusting your swing. I’ll take them in reverse order.

Trust Your Swing

On trusting your swing, Nilsson and Marriott write:

If you can hit the shots you want under pressure, your swing is working. What is important is to make up your mind what swing you believe in, and to have the discipline not to abandon that belief because of a bad round or two. To be in “search-and-scan” mode never works over time. Find your swing, trust it, and stay committed to it.

For the investor, your “swing” is your investing discipline. It is the value creation mechanism(s) that will compound the value of your capital over time.

Classical Ben Graham value investing is a swing form. Munger and Buffett-style value investing is a swing form. Momentum investing is a swing form. All of these swing forms “work” because they are fundamentally sound in terms of economic principles and investor behavior. Just like the golf swing “works” because it is grounded in the laws of physics.

What does not work very well is trying to time different styles to chase “what’s working” at a given point in time. This is the equivalent of trying to rebuild your golf swing from scratch after every round where you score poorly. Both are a recipe for poor future performance.

Bring Yourself Back To Neutral

It is fun to take a pitching wedge from 90 yards out and land a perfect strike six feet from the pin. When you hit a shot like that, you literally get high. But when you chunk a five iron thirty-five yards from a perfect lie in the middle of the fairway, you crash.

Experiencing wild emotional swings is not a recipe for consistent golf.

Likewise in investing, you get high when a stock doubles in three months. You crash when a name halves on some seemingly random exogenous event.

How many times have you hit your tee shot into the trees and then, in a fit of anger, tried to do too much with your second shot and ended up making a triple bogey? The disappointment with the drive leads you to attempt to erase the poor shot with one swing. And we all know how that works out. More often than not, a gamble is greeted with a ball clunking off a tree or remaining in the rough.

The frustrating thing is that on many of those occasions, when you looked back at the round you wondered why you didn’t just pitch back to the fairway and settle for a bogey–or maybe a one-putt par. Anger opens the door to a variety of mistakes: bad decisions, hesitant swings, rushed tempo, and even not seeing the line to the target clearly.

Consistent performance starts internally, with how you regulate your emotions. The goal isn’t to become a robot impervious to emotion. I don’t think such a thing is possible. And even if it is, it’s certainly not healthy. The goal is that whether you hit a good shot or a bad shot (whether an investment is a winner or a loser) you are able to bring yourself back to a neutral state of focus, where your attention is on executing the shot in front of you.

Focus On Process, Not Outcome

One of the reasons golfers–professionals as well as recreational players–can’t take their games from the range to the course is that, in the current practice culture, they are two different experiences. Just as we try to unify the mental with the mechanical aspects of the game, we also must try to erase the line between practice and playing. We want to teach you to play when you practice and practice when you play. In the end, it all has to be about executing golf shots with total commitment when it matters most. To do this you have to learn that playing needs to be a process focus and not score focus.

It’s not that different in investing. Particularly in situations where you have to make a buy/sell/hold decision under pressure. Thinking about the score (returns) doesn’t do any good here. If anything, you’ll fall victim to the disposition effect.

Who Should Read This Book

Anyone trying to improve her golf game should read this book. Investors and other professionals who golf (regardless of skill level–I think I am a 25 handicap) can also benefit from applying these concepts to areas outside the game. I would not recommend the book to non-golfers, as it’s hard to relate if you haven’t struggled through learning the game or fought through some difficult rounds.

Book Review: Principles By Ray Dalio

dalio_principlesRay Dalio’s Principles is two books in one. It is half autobiography and half instruction manual for living a meaningful life, both at home and at work. This book is more about philosophy, personal values and self-improvement than financial markets. Supposedly Dalio is working on a second book about investment principles, however.

For those who may be unfamiliar with Ray Dalio, he is the founder of Bridgewater Associates, one of the most successful investment firms of all time. Bridgewater more or less invented risk parity strategies with its All Weather Fund.

What I did not realize until reading this book was that Dalio went through an extremely difficult period in the early 1980s, where he was on the edge of bankruptcy in the wake of a bad macro bet. This experience informed much of his personal development, and it shows in the book.

Summary

The essence of Principles comes through in the following lines:

There is nothing more important than understanding how reality works and how to deal with it. The state of mind you bring to this process makes all the difference. I have found it helpful to think of my life as if it were a game in which each problem I face is a puzzle I need to solve. By solving the puzzle, I get a gem in the form of a principle that helps me avoid the same problem in the future. Collecting these gems continually improves my decision making, so I am able to ascend to higher and higher levels of play in which the games gets harder and the stakes become ever greater.

All sorts of emotions come to me while I am playing and those emotions can either help me or hurt me. If I can reconcile my emotions with my logic and only act when they are aligned, I make better decisions.

The book lays out a model for living a meaningful life, however you choose to define “meaningful.”

Who Should Read This Book

There is something here for everyone, regardless of whether you have any interest in Ray Dalio, Bridgewater Associates or financial markets. You could skip the autobiography and go straight to the principles themselves if you prefer, though I felt they were more impactful with the autobiographical details in mind.

Investment nerds will enjoy delving into he history of Bridgewater from Dalio’s point of view, as well as some high level insight into Bridgewater’s investment process and culture.

Recommended Reading

I am filing this under books, though really it is a recommended reading list. Will also probably make this a dedicated page so I can add to it over time.

 

General Business / Finance / Economics

FT Alphaville – Alphaville is the markets blog of the Financial Times. Access is free if you register. In addition to original research and reporting the team assembles very nice link lists. One of my first stops every morning.

Stratechery – Deep analysis of tech industry businesses, products and trends.

 

Investing (Mass Appeal)

These are websites and blogs with an investing focus that are likely to appeal to “normal people” as well as professionals and serious amateurs. 

 

The Ritholtz Wealth Management Crew

The Reformed Broker (Josh Brown)

A Wealth of Common Sense (Ben Carlson)

The Irrelevant Investor (Mike Batnick)

The Big Picture (Barry Ritholtz)

The Ritholtz crew (self-described as “The Wu-Tang Clan of Finance”) tackles topical issues in investing and personal finance in a way that is honest, accessible, and fun.

 

Not Affiliated With Ritholtz Wealth Management

Of Dollars And Data – Nick Maggiulli explores topics in finance and investing through the power of R and data visualization. PS – He is right on about DataCamp.

The Aleph Blog – Longtime writer and money manager David Merkel explains complex topics simply. David has been writing a long time so going back through his old posts is like a treasure hunt. He has done some fantastic series on his experiences managing money over the years. David would also fit in on the Investing (Wonkish) list.

Morningstar – Lame, I know. But there are occasionally some real gems here. Especially from Russ Kinnell, John Rekenthaler and Jeff Ptak.

 

Investing (Wonkish)

These are websites and blogs with an investing focus that are likely to appeal more to professionals or serious amateurs than “normal people.”

Bronte Capital – Commentary and the occasional investment thesis from hedge fund manager John Hempton. John runs a long/short portfolio.

Musings on Markets – Blog of NYU Professor Aswath Damodaran. I have heard Damodaran called “the father of valuation.” A must-read for DCF and modeling junkies. Professor Damodaran also puts together phenomenal data sets that are freely available to the public.

Philosophical Economics – Deep dives into issues such as capital market forecasting and Bayesian updating. If you you are the kind of person who likes to brew up coffee and settle in for an hour of meaty reading, man oh man is this the blog for you.

Alpha Architect – Wes Gray and his various contributors are all quant, all the time.

Fundoo Prof – Sanjay Bakshi will probably end up being remembered as the Ben Graham of India.

Cable Car Capital – Similar to John Hempton at Bronte Capital, Jacob Ma-Weaver provides commentary alongside investment theses. Runs a long/short portfolio.

Enterprising Investor – CFA Institute blog geared toward investment professionals.

SIRF – Investigative reporting on financial fraud and various and sundry other shenanigans by Roddy Boyd. Also, you should read Roddy’s book about AIG.

Base Hit Investing – Similar to Bronte and Cable Car, John Huber provides occasional commentary and investment write-ups. Runs a concentrated portfolio of high quality names.

 

Personal Finance

These are websites and blogs that primarily deal with the accumulation and management of personal wealth, rather than security selection and portfolio management.

Mr. Money Mustache – In MMM’s own words: “Early Retirement Through Badassity.”

Gen Y Finance Guy – In Dom’s own words: “My big hairy audacious goal is to build a net worth of $10M by the time I am 48 (you can keep track here).”

Book Review: The Tao of Wu

Tao_of_Wu
The Tao of Wu by The RZA

If you haven’t picked up on it in other posts, I have a moderate interest in eastern philosophy and religion (Taoism, Buddhism, etc.). I also enjoy listening to Wu-Tang Clan. So when my girlfriend bought me The Tao of Wu by the RZA for Christmas I read it in about two hours.

The RZA’s life journey has been truly extraordinary, taking him from the projects of Staten Island to Manhattan sound studios and even Hollywood (among his producer credits is the soundtrack for Kill Bill: Vol. 1). The Tao of Wu describes his spiritual journey.

Summary

The Tao of Wu is structured as an autobiography, with occasional digressions into areas as diverse as the theology of the Nation of Islam and its various derivatives, the interpretation of Buddhist koans and chess strategy. To the casual observer this might seem like a gimmick, but I found many of the anecdotes to be thought provoking and evocative of the cyclicality emphasized in Buddhism and Taoism.

Early on there is an anecdote about how, when RZA was young, his family moved into a new home and was almost immediately robbed. The robbery was devastating. However, there was some consolation in that the move allowed RZA to make a great friend–an older neighbor boy. After a couple of years of friendship came a surprising revelation:

‘When y’all first moved in, I robbed your house maaan. I never knew you was going to be a cool family.’ When he told me, there wasn’t much I could do about it, and by then he was my best friend–or as they say in the hood nowadays, my big homie–so in a way it was cool.

That’s just one lesson: Your allies can arrive as enemies, blessings as a curse.

Each chapter of the memoir is devoted to a particular “pillar of wisdom.” These are followed by brief meditations or words of wisdom. At the end of the first chapter, for example, comes a passage discussing the importance of solitude.

“I advise everyone to find an island in this life,” RZA writes. “Find a place where this culture can’t take energy from you, sap your will and originality.”

Who Should Read This Book

Literally everyone. Obviously Wu-Tang fans should read it, and it’s worth a look by anyone interested in eastern philosophy and religion. But beyond those obvious audiences the subject matter is accessible to everyone. If you read fast, you can take a first pass through the book in two or three hours. Given its meditative tone, The Tao of Wu is also worth keeping on the shelf to revisit from time to time.

Book Review: HBR Guide to Buying a Small Business

HBR_Buying_Small_BusinessI read the HBR Guide to Buying A Small Business after listening to the authors, Richard Ruback and Royce Yudkoff, interviewed on the Invest Like The Best podcast. The firm I work for does some private equity investing in exactly the types of companies discussed in this book.

Summary

Ruback and Yudkoff teach a course at Harvard called “Entrepreneurship Through Acquisition.” This book draws on many of their students’ experiences. Rather than go out and start up a brand new company from scratch, one can go out and buy an existing business to become an owner/operator. This is less risky than launching a startup.

Many of the entrepreneurs who go this path are highly skilled and motivated, but for whatever reason do not want to work in a large corporate environment. Maybe it’s a desire for control and flexibility. Maybe it’s a dislike of institutional politics.

This book is a guide to the process, from deciding whether to become an entrepreneur through acquisition up through raising capital and closing a deal. In fact, it works pretty well as a private equity primer. Ruback and Yudkoff are basically walking you through a leveraged buyout, though I don’t think they ever explicitly call it that.

Worth mentioning are the key characteristics entrepreneurs should look for in a business:

  • “Enduringly profitable” businesses with EBITDA margins of 15-20%
  • “Boring” businesses with modest growth prospects
  • Businesses with sustainable competitive advantages (a.k.a “moats”), such as high customer switching costs or market dominance in a local or regional niche

The idea is to buy the business for 3-5x EBITDA and structure the transaction so you are targeting an annual return of about 25% to the equity investors. Structurally, this is a very attractive area of the private markets for smaller institutions and high net worth individuals to invest. Big piles of money can’t flood into the space and drive up prices because the deals are too small, in the $2 million to $5 million range for the most part. Imagine SoftBank’s $100bn Vision fund trying to move the needle on performance investing in deals like these!

Who Should Read This Book

Anyone seriously interested in owning, running, or selling a small business would benefit from reading this book. Even if not going the acquisition route it is useful for understanding business models, competitive advantage and strategic financing decisions, as well as the basic principles of financial modeling and valuation. The book is written for a broad audience and is accessible to readers without a finance background.

This book would also be useful for fundamental investors interested in backing an entrepreneur operating a small business, or investing in small public market companies. It is especially helpful in exploring how a small firm can build and maintain competitive advantages over time (a common misconception is that only large cap companies can possess competitive advantages).

Book Review: Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond

Cryptoassets_CoverI pre-ordered this book on Amazon after seeing it mentioned on Josh Brown’s blog, The Reformed Broker. I was intrigued because it purported to be a rigorous treatment of cryptocurrency and cryptoassets written from the perspective of a relatively sophisticated investor.

Burniske and Tatar state their goal was to produce a book that is the equivalent of Benjamin Graham’s Intelligent Investor for cryptoassets. That is kind of like Dennis Rodman saying he wanted to do for rebounds what Michael Jordan did for dunks. To the authors’ credit I think they have done an admirable job of approaching a fast-evolving space in a balanced and rigorous way.

Summary

The book is well-organized. It is segmented into three parts: What, Why and How.

What: Discusses the theoretical underpinnings of cryptoassets and provides background information on the history and evolution of several major cryptocurrencies: Bitcoin, Ethereum, Ripple, Monero, Zcash and Dash (I may have omitted a couple). Burniske and Tatar take pains to distinguish between cryptocurrencies, cryptocommodities and cryptotokens.

Why: This section provides an overview of Modern Portfolio Theory (MPT) and the use of mean-variance optimization in constructing an investment portfolio. The authors argue for the inclusion of cryptoassets in an investor portfolio based on their potential to improve overall portfolio efficiency, similar to more “traditional” alternative investments such as hedge funds, private real estate and commodities. I skipped most of this section as I am very familiar with MPT.

How: This section was really what attracted me to the book as it lays out a framework for performing due diligence on a prospective cryptocurrency investment. The authors address issues of custody, valuation and trading, as well as some of the nuances of trading in fragmented markets with the potential for wide fluctuations in trading volumes. The valuation model they float for cryptoassets is more or less the Equation of Exchange (MV = PY or in this case P = MV/Y). One issue I don’t think they adequately address is the issue of reflexivity in the “velocity” of crypto transactions (speculative trading activity drives up network activity which in my view creates a kind of feedback loop).

Who Should Read This Book

Anyone looking for a comprehensive introduction to cryptoassets would benefit from reading this book. It would be particularly useful financial advisors looking to educate themselves in order to address client questions or advisors considering cryptoassets for inclusion in client portfolios. The book is very much written in the language of the financial professional.

Who Should Not Read This Book

This book does not contain any secret sauce for getting rich quick. People who are looking for “hot tips” or “hacks” will be disappointed. While the authors are clearly bullish on the long-terms prospects for cryptoassets, they emphasize the need for investors to educate themselves, conduct thorough due diligence and develop an investment discipline. The due diligence concepts outlined in the book are applicable to any asset class or investment opportunity.

My comments on this book should in no way be taken as a recommendation to buy or sell any cryptoasset. If you are wondering whether you should own cryptoassets as part of your investment portfolio you should consult with a financial advisor who can advise you based on your unique financial circumstances.