How do we differentiate the signal from the noise in data? If a company decided to venture into a new business, is that an indication of high future growth or is it a sign of management complacency? Silver looks into the nature of weather, earthquake, economics, and disease to understand what makes them unpredictable. In part, they are dynamic systems that can create butterfly effect; a small changes can lead to large effects. And there’s 2 levels of complexity. Weather is complex but we can improve our forecast as our tools get better. That is level 1. The stock market falls under level 2. Similarly, it has many variables but unlike the weather, which doesn’t care about our predictions, market learns and adapts. The act of forecasting it changes the outcome. But there’s hope. Silver offers Bayesian thinking as a way to get closer to the truth by constantly updating our view. Apart from learning how to avoid common mistakes in making a prediction, you’ll come away from this book with an appreciation on uncertainty and the advantage of thinking in systems, which, to me, are essential in investing.
The fundamental of competitive advantage is “a company can make money only if it is able to do something that the market wants and that its competitors cannot imitate; or if it is able to do the same things its competitors do, but more cheaply; or both.” How do we know if, when, and how such conditions exist? That is where strategic logic comes in. Strategic logic is more than analyzing different types of moats, but to understand how a company’s strategy and decisions such as whether to move into an adjacent market, integrate vertically, build or buy, and expand internationally, etc impact future profitability. Just as a simple decision like outsourcing an activity can spell success for a firm but trouble to another firm in a different industry, it is essential to understand the context, or logic, which these decisions are carried out.
Joan Magretta’s book distills the essence of Michael Porter’s work on how to analyze competition and understand strategy. Two reasons why this book is important. We have a misconception about what strategy truly means. Some would think automation is a strategy but that is just operational efficiency. A business has to do it to survive. In contrast, a strategy is a choice; a tradeoff between what to do and what not to do. Another reason is overconfidence. We tend to overestimate the success of a company when we fail to take into account what the competitors are doing. You will learn about the 5 forces of competition, what creates competitive advantage, how business creates value, and how activities within a value chain form a company’s strategy.
A typical capital cycle looks like this: A company decides to reinvest all its earnings for aggressive expansion in order to meet strong demand growth. Fast-forward 5 years, the price has collapsed due to excess supply in the market, competitions from entrants, and little prospect of demand recovery due to a slow economy.
Instead of analyzing future demand growth which is inherently challenging, capital returns analyze the ebb and flow of capital to understand how changes in the amount of capital employed within an industry are likely to impact future returns. High demand growth tends to encourage excessive capital investment which eventually lead to oversupply situation and lower return. How does this apply to companies with moats? Moat companies have the ability to prevent supply overcapacity through barriers. Therefore, ensuring a consistently high return.
Companies that can create long-term wealth are often ones that can generate above-average profits. But most companies fail to do that consistently in the long run because above-average profits attract competition. Competition erodes profitability. However, some companies have managed to fend-off competition by building a barrier around their business. Commonly referred to as “moats”, these barriers are structural characteristics of a business that makes it hard for competitors to replicate. In this little book, Pat Dorsey uses real company examples to show how these moats deter competitors, as well as some common pitfalls investors should avoid such as overpaying for a stock. If you’re interested in finding and owning quality companies, this is a book for you.
Strategies are more than just increasing profit margin and make more money, but “plans that specifically focus on the actions and responses of competitors.” Growth and profitability are not enough because competition always acts as a balancing feedback loop to counter that. The core of strategies is about “creating, protecting, and exploiting competitive advantages.” Bruce Greenwald cuts through the chest to answer the question of how companies can manage competitions and fend off potential entrants by creating strategies that allow them to capture most of the profit.
Hamilton Helmer identifies 7 types of powers a business can acquire to earn above average return. These powers are like moats, they create a powerful barrier that prevents competitors from competing effectively while allowing the business to earn an abnormal return. Unlike the usual book that describe the characteristics of each power, Helmer dive into how each power arises along the life cycle of a company, the benefit, and barrier created by these powers, as well as the determinant of power intensity.
Less is more. Similar to Blink, Gerd Gigerenzer explains why a simple rule of thumb beats complex algorithm when making a decision in an environment that is highly uncertain where information is limited. Gigerenzer then shows us how using a rule of thumb and gut feeling can help us make a better decision in investing, finance, health, and even relationship.
Why is that our gut feeling can be so accurate sometimes while leading us astray other times? Malcolm Gladwell explore the power of rapid recognition, how thin slice can help us make better decisions, and the dark side of putting too much blind faith in it. Intuition is not the opposite of deliberation, but the two sides of a coin. Good decision making comes from intuition is the result of training and following a set of rules.
Jordan Ellsberg examines the simple yet profound mathematical tools for solving problems. Mathematical thinking is more than just numbers or precision, but as a hidden structure to good thinking. You’ll learn how to avoid common sense mistakes such as linear thinking (more is better), jumping to conclusion (seeing pattern out of randomness), and start thinking in expected payoff, what could have happen instead of what happened, and be more like the fox (knows many things) than the hedgehog (know one big thing).
Laurence Gonzales explores the question of why someone survives while others die in a disaster. This book is far relevant to investing than most people thought. Gonzales looks into the psychology on what makes people take risk, the role of hubris, the unpredictability of complex systems, and the importance of self-control. The ingredients of staying alive in a disaster are not that different from survival in the stock market: a good dose of humility, have a prepared mind, know what you don’t know, and an open-mindedness (beginner’s mind).
Life, or investing, is not that different from a game of poker, we are trying to choose the best course of action (out of many) to improve our future payoff, which, of course, is fraught with risk, uncertainty, and luck. Annie Duke shows how we can make a smarter decision by thinking in bets, why relying on the outcome is dangerous, and tools that can help us think in a more rational way.
A memoir from the creator of Nike on the company’s 18 years journey as a private company. Phil Knight captures the chaos in the early days and many of its trying moments that will leave you on the edge of your chair. Shoe Dog is more than just a story about Nike and Phil Knight, but a meditation on life, passion, and the obsession of one crazy idea.
Theranos was a tech unicorn valued at $9 billion in 2014. Its visionary founder, Elizabeth Holmes—touted as the next Steve Jobs—promise her technology will revolutionize the health industry, change how a blood test is done, and save countless lives. Except it didn’t. John Carreyrou detailed the secrecy and lies inside Theranos and everyone else that got pulled into the vortex. If there’s one lesson to take away, that is never let what you want to believe is true blindside you from seeing the truth.
Systems are like Russian nesting dolls—a system that has its own subsystems is also part of a larger system which is part of another larger system. As an example, a supply chain consists of many different industries where within each industry, sit hundreds of companies. Each of these companies is further made up of multiple business units, which every single unit is again composed of several divisions and so on.
System thinking is about seeing things as a dynamic whole. Instead of studying the events generated by a system i.e raw material cost increase, lower selling volume etc, focusing on the system structure and the behavior it generates will make you a better thinker. You’ll understand why systems work so well (i.e a 100 years old company), why it surprises us (i.e market crash), and how each part of a system interact with one another to create nonlinear behavior.
In investing, we can be right for the wrong reason. Our return, or the outcome of an investment, is heavily influenced by the role of luck. Therefore, using it as the basis of judgment whether you have made the right decision can lead to wrong feedback and more mistakes down the road. A better way is to focus on the thought process – how you come to a conclusion by evaluating the logic and reasoning behind it. Drawing from studies in political, social sciences and clinical settings, this book looks into the psychological aspects of how we make decisions. The limitation of the mind, cognitive bias, and tools for better thinking. It then introduces a systematic framework to develop hypotheses, examines evidence and draws tentative conclusions. While most of the examples are associated with intelligence analysis in the political landscape, they are practical for any work concerning the analysis of information. If this is good enough to be the manual guide for CIA, it is certainly good enough for investors.
Most would be familiar with Howard Marks. Read his memos if you have the time. Otherwise, this book is a good place to start. It encapsulates all the key concepts that are critical to become a successful investor. You probably heard of Pareto Law or the 80/20 rule. In short, the rule shows that a few things tend to determine the bulk of the outcome. So, it can be a few stocks that explain the return of a portfolio or a few activities that determine the success of an investor. In investing, you have to get the big things right. Or in Mark’s words, the most important thing. The 20% that drive 80% of the result. Trying to find the next profitable stock matters the least if you don’t get the big things right. From a total of 20 chapters, Howard Marks spent 5 chapters on market fundamentals; 6 on risk and not losing money; and another 5 on psychology. That tells you a lot what are the big things in investing and where you should put your time into. Ironically, they are also things that not many talks about.
Joan Magretta’s book distills the essence of Michael Porter’s work on competition and strategy. It gives you an overview of how to analyze competitions and understand what is strategy. Two reasons why this book is important. We have a misconception about what strategy truly means. Some would think investment in machinery for automation or streamline operation are strategies but they are operational efficiency. A business has to do it regardless to survive. In contrast, strategy is a choice; a tradeoff between what to do and what not to do. Another reason is overconfidence. We tend to overestimate the success of a company when we fail to take into account what the competitors are doing. You will learn about the 5 forces of competition, what create competitive advantage, how business create value, and how activities within a value chain form a company’s strategy.
Most investors are concerned when the next crisis is going to hit. This is understandable given the magnitude of losses one can potentially suffer should such an event occur. But it’s not as important as you’d like to think. The main reason why most investors lose money isn’t that of some unpredictable global crisis. But rather silly, preventable mistakes that we make every day. Atul Gawande looks into why simple mistakes can happen under different complex situations from surgical, construction to aviation and investing. And how having a checklist can reduce or prevent most of them. You won’t get an exact way on how to build a checklist in this book. But you’ll appreciate the importance of checklist, why it isn’t only for amateurs and how slowing down your decision making process can make a huge difference.
My past 10 predictions are all correct with an average gain of 78%. What does that tell you? It is intuitive for us to think causally and find patterns in everyday lives. We do that all the time. We create stories from our memory to explain why a person is successful; what causes the market to drop yesterday; or why the train is delayed. The news is just as ready to fill us up with vivid details on how things happened. However, this cognitive advantage comes with a warning sign: the past always looks more predictable than it actually is. Mlodinow walks us through the psychological aspect of thinking and why it is hard to think about randomness. He uses probability and statistics to explain the role of chance and how to use it as a thinking tool to make good decisions under uncertainty. You’ll understand the fallacy of small numbers and how hindsight bias creates an illusion of certainty. This is a sobering book, a reminder that many things can happen more often than we expected. A required reading to tame our overconfidence.
While The Drunkard’s Walk approach randomness through maths and science (Leonard Mlodinow is a mathematical physicist), Nassim Taleb looks at it from the eyes of a trader and philosopher. You’ll learn how randomness can fool us; why we’re not wired to think probabilistically; and why the things that didn’t happen, alternate histories, are just as important as what happened. You’ll also understand how news is like french fries; it keeps us satiated while slowly killing us from the inside (but we don’t see it). A required reading for those that say “If I had listened to you, I would have lost money”. This is the same group that believes everything you say when you tell them your past 10 predictions are correct. Fooled by Randomness is a hard book, but packed full of wisdom. Drawing examples from the stock market, medicine to philosophy and biology to explain what we think we know can be dangerous. It will change your perspective as an investor.
The Black Swan is the continuation of Taleb’s work on randomness. The book dives deep into the fat tails of randomness to understand why it is hard to predict rare events that carry extreme impacts. While a black swan is normally associated with rare, global events such as 1997 Asian crisis or Black Monday of 1987, it is just as applicable to unseen risks that happen on a smaller scale. As an example, an overly concentrated portfolio or leveraged position can both result in large magnitude of losses. Narrative fallacy, confirmation bias, and silent evidence can all blind us to such risks. This book is more about ‘how not to’ than ‘how to’. While the book can be technical on a few chapters, it is nonetheless filled with interesting and widely applicable ideas that improve thinking.
What does a science book has to do with investing? Plenty. Carl Sagan puts it better than me:
“Science is more than a body of knowledge; it is a way of thinking. The scientific way of thinking is at once imaginative and disciplined. It invites us to let the facts in, even when they don’t conform to our preconceptions. It counsels us to carry alternative hypotheses in our heads and see which best fit the facts. It urges on us a delicate balance between no-holds-barred openness to new ideas, however heretical, and the most rigorous skeptical scrutiny of everything – new ideas and established wisdom.”
It is this kind of thinking, a balance between openness to new ideas and the most rigorous skeptical scrutiny of everything, that should be the spirit of investing. Investors often get caught up trying to validate their own hypotheses by finding supporting evidence, or worse, develop hypotheses that cannot be disproved. Having a healthy skepticism and self-criticism helps you avoid accepting things at face value, which I believe is the only solution to how investors can prevent themselves from making simple yet costly mistakes. You’ll see how Sagan uses his clear thinking to expose pseudoscience. And how that can equally apply to the stock market to detect nonsense and B.S.
If you have read Mauboussin’s research papers, you’ll be familiar with this book. More Than You Know takes a multidisciplinary approach to understand how investing works and how you can become a better investor by incorporating fundamental knowledge from other disciplines. It covers a range of topics from investment philosophy, psychology, innovation and competitive strategy, and science and complexity theory. Most of the ideas are counterintuitive. You will find some similarities here with other books such as focus on process over outcome; think probabilistically; psychological misjudgment; and inside versus outside view. Overall an easy book to read and should get you interested to start thinking in multi mental models.
A personal account on how Spier went from a Wall Street trader to a value investor. Before you dismiss this as another book that promotes value investing (value investors thrive as a minority, not a majority), give me a benefit of the doubt and read it. This is more of a psychological than an investing book. One that will show you how you can shut out all the noise and still do well, even better actually. He hasn’t used his Bloomberg terminal for years.
Well, we talked about capital allocation. This book looks at how 8 CEOs transform their businesses into the best in class through wise decisions and plenty of hard work. If you can get something out of this book, it will the character of these CEOs, how capital allocation can make or break a business, and how to think independently and never go with the flow just because everyone is doing it.
A must read for every investor. Tetlock examines some of the best minds in predicting and their thinking process. You will learn some of the great tools such as how to think probabilistically; outside view vs inside view, and be a fox, not a hedgehog.
I have not had a chance to read this but a book with great reviews. Jim Paul’s meteoric rise took him from a small town in Northern Kentucky to governor of the Chicago Mercantile Exchange and proceed to lost it all – his fortune, reputation, and his job. Something worth a read on psychological mistakes that affect all investors.
If you enjoy all the big economic news then you’ll like this. A simple book that will make you question everything. So next time when the government announces that they going to stimulate the economy by creating jobs, you’ll smell BS before everyone does.
One of the best book I’ve read this year. Covers everything from agriculture, the industrial revolution and the development of religion, language, currency etc. It will blow your mind and question everything you’ve come to believe to be the truth. How does this help? Investing is all about looking at things from a fresh perspective and through many different lenses.
A journalist’s personal account on an Everest expedition with a group of climbers that turns into one of the worst Mt. Everest disasters in history. If you can learn one thing from this book, it is to see risk in a new light – how risk can come at you from totally unexpected ways. It doesn’t appears when you’re right at the top of the mountain, but in every decision you made right before the climb. That applies to investing too. Risk doesn’t find you after you buy a stock, it’s been there all along.
Written by a renowned psychologist and winner of Nobel Prize in Economics, Kahneman explores how our mind works and why we are the easiest person to fool. And again, a book that will help you avoid many cognitive biases and improve your decisions and judgments.