Literature

Money is an important part of society, so it’s not surprising that many literary classics that mirror society have offered insights on money matters, including Kafka’s Metamorphosis (1915), Fitzgerald’s The Great Gatsby (1925), Melville’s Moby Dick (1851), Poe’s The Gold-Bug (1843), Rand’s Atlas Shrugged (1957), and Aesop’s Fables (4^th Century BCE).

One of my favorite lessons comes from Franz Kafka’s The Metamorphosis, where a travelling salesman, who lives with his parents, morphs into a disgusting bug. His family treats him well early in the story, but eventually they turn on him and starve the bug until it dies of hunger.  There have been many diverse interpretations of Kafka’s famous novella over the past century, but my take is fairly simple and investment related: The bug represents a stock in the portfolio which morphs into a value trap.  At first the investors buy more of the stock because they loved it when it traded at higher prices, so why not buy it at a discount? But eventually they are relieved to blow it out, even though they loved it all along.

Photography

One of our analysts, Robert Vámos, is an avid photographer (link), and I know other avid investors who are photographers. While I don’t do much photography these days, it was my favorite activity in high school, where I was the photography editor of the yearbook, took my camera to school pretty much every day, and spent untold hours in the darkroom.  I’d say my greatest learning from this experience and how I appreciate photographic art is the importance of angle, depth, and perception.  Two people photographing the same subject at the same time can come up with completely different photographs.

One of the investment insights I take from Robert’s photographs, which in some ways resemble that of Ansel Adams and Sebastião Salgado, is that many of nature’s most beautiful features get ignored by purposeless eyes. Tolstoy had the same thesis regarding what makes history.  Whereas most historians tend to focus on the big events, Tolstoy argued that history is made in the trenches. Likewise, every stock has superficial features that most can see and analyze, but the most precious information comes from studying how a few converging factors evolve over long stretches of time.

Digital

I have also learned about investing from a high school friend who is a contemporary artist.  Mark Engel produces amazing digital art (link), where he typically distorts real images into colorful schemes. In his latest exhibition I attended in Manhattan, he previewed a small sample of pieces that he will be showing in Portugal this June. It is called The Death of (tomorrow).  This series consists of 40 thousand variations of a recurring theme.  As with any art, the interpretation is up to the viewer, and one of the ways I interpreted it as a practicing investor is that stories that seem similar on the surface may in fact be completely different, depending on how one looks at them. People who put too much weight on peer analysis for determining the earnings multiple that a stock should trade at, for example, do not seem to appreciate this idea, for they focus only on one interpretation of the available information.

Cinema

The history of the movie industry teaches the importance of reputation, experience, talent and quality, but also the downside of what one of my early mentors called “analysis paralysis.”  Stanley Kubrick was a great filmmaker, yet many claim that his greatest work was one he never actually realized: Napoleon. He researched this film for two years, working with dozens of historians and advisors, but MGM and United Artists turned it down because his vision for the project was simply too big.

Another example is Quentin Tarantino’s Double V Vega, where the filmmaker devised the movie’s premise and picked the actors (John Travolta and Michael Madson), but never took it any further.  Yet another example is Sylvester Stallone’s Edgar Allen Poe movie.  After spending two decades trying to bring the movie together, writing the script and hiring Robert Downey Jr. as the lead actor, Stallone never made the movie.

The analogy to investing is clear. Some people dig deeper than others, but it is impossible to know everything about a company.  Eventually, and on incomplete information, one is well advised to make the decision either way, or she will end up never buying or selling anything.

Painting

In one of our blog posts titled Stocks and Nudes Descending Staircases (link), I wrote that one should want to own companies that have gotten stronger than competitors – but you need to make sure they will continue to get even better as they get bigger. Compounding is largely about sustaining such motion through time. To illustrate this concept I prefer a painting analogy, as uniquely expressed by Marcel Duchamp’s oil on canvas, Nude Descending a Staircase, No. 2 (1912).  Duchamp’s painting captures the notion of movement through successive, superimposed images, similar to stroboscopic motion photography. The effect is a stunning representation of motion in static form.

As Pulak Prassad states in his fantastic book, excessive focus on robustness by a company can compromise its growth. If a company or economy does not grow over the long term, they are unlikely to be great investments.  In painting, rigidity tends to compromise creativity.

Such tradeoff applies not only to painting and investing, but also to aerospace engineering, where strength compromises weight; to electronics, where power compromises temperature; and to parenting, where strictness compromises self-esteem.  Similarly, investing is an art of tradeoffs between quality and price, long term versus short term, knowledge versus intuition, and risk versus reward.

Music

There are several lessons from music, but one of my favorites relates to how social influence determines which songs become hits.  The Music Lab experiment, which Mauboussin discusses in Think Twice (2009), provides a good example of this phenomenon.  Researcher Duncan Watts, of Columbia University, created a website called Music Lab with 48 unrated songs by unknown bands.  He first asked thousands of participants to download their favorite songs without knowledge of how many downloads each song had already received. Then he used ten large groups of separate participants which were asked to do the same, but this time with knowledge of how many downloads each song had received.

Anyone who knows about search engine optimization or the music industry would not be surprised to learn that the groups in the Music Lab experiment with information on the number of downloads tended to like the songs that others in the first group had also liked. The same thing can be observed in the stock market, when people chase stocks that famous investors have picked, while lesser known stocks are often the ones that provide the best returns.

In closing, there is much that can be learned from multiple forms of art, and I would even take it a step further and claim that an eye for art makes one a better investor. Looking at art forces us to slow down and separate from the current moment. We also end up developing the skills of closer observation, thinking differently, asking questions and embracing new ideas.

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But my retort is that the stock market is actually an upside-down casino. In a normal casino, the odds are always against you. Sure, you can get lucky and guess the winning number in any single roulette game, but if you play long enough you will for sure come out losing. Historically, though, in the stock market the odds favor you. Sure, you can lose money on a specific stock or in a given period, but if you keep at it long enough, you can turn a dollar into one hundred by just waiting.

In the U.S. at least, the stock market has given a higher return than any other form of investment, like bonds, real estate, commodities, or precious metals. And this makes sense. When you invest in stocks, you invest in production and productivity. Companies produce things and provide services.  They not only grow, but some get better at it with the passing of time. Real estate, precious metals, commodities and even bonds are things that just sit there. They don’t grow. At most they earn rent. But a house doesn’t double in size by itself. Neither does a bond, which basically just pays rent on your money.

According to a chart published by the NYU’s Stern School of Business (link), $100 invested at the start of 1928 (i.e. before the Great Depression) would be worth $8,867 at year end 2022, if you had put it all in gold. Had you invested it in real estate, it would be worth only $5,121. What about bonds? An investment in U.S. T. Bonds would have transformed the $100 into $7,007, while an investment in grade Baa corporate bonds would have given a much better result: $46,380.  But if you had invested your $100 in the S&P 500 index, you would have today a whopping $624,535! That’s more than 13 times the next best alternative!

Sure, there are down years – and sometimes they can be quite extreme. But just like in an upside-down casino where the odds are in your favor, you will win more than you lose (on average). It’s not a straight line, but if you just keep playing, you will come out on top.

The chart above shows the S&P 500 index over the past 150 years in log scale. Note the general trend line, especially after 1945 (end of WWII and the beginning of the modern economic era of integrated world markets and global trade). The two key takeaways are that a) if you just wait long enough, your investments will multiply, and b) there will be zig zags along the way.

Now, there is one caveat: you have to know what you’re doing. You have to understand that the stock market is not a casino and you can’t start blindly choosing which companies to invest in. You also can’t jump from stock to stock on a whim, like jumping from one roulette table to the next in a casino just because you lost money at the first one.  And you need to stay cool and rational when everyone around you is either panicking or irrationally exuberant.

Investing requires knowledge and a certain mindset, and both require much time and study to be acquired. This is where many investors err and end up with the impression that the market is a casino: they act on a hunch, on a rumor or on a whim, instead of deeply researching the companies they invest in to gain the conviction needed to stick with them through the natural ups and downs of the market.

If you don’t have the time, will or patience to do this homework, but still wish to capture the outsized gains that the stock market can bring you over the long run, consider investing with a market professional.  But if you do have the time and the inclination, I suggest that you focus on the companies and not the markets.  It’s the companies that have the people that wake up every day to work for you.  Your investment should not be seen as a position in the stock market, but as a piece of ownership in businesses that grow and prosper.  If you do it right and stick with it, then it becomes highly likely your dreams will come true.

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With all that said, here are my Top 5 investment book recommendations for aspiring teenagers:

1. The Joys of Compounding: The Passionate Pursuit of Lifelong Learnings (2020) – 456 pages

This was an incredible book written by a young author who struggled to get through high school, but then blossomed into an admirable investor and blooming scholar.  I was inspired by this book and think that a teenager would be as well, even though it is a bit on the long side.  I liked it so much when I first read it that I wrote a review that is posted on our site (link).

2. 10 ½ Lessons from Experience: Perspectives on Fund Management (2020) – 128 pages

This is a short book that is packed with solid advice and great observations.  It is not simple and does not promote investing as such, but it is short – which earned it a spot in my top five recommendations for teenagers.  The author is Paul Marshal, who co-founded the British hedge fund Marshal Wace.  My review of this book is also posted on our site (link).

3. One Up on Wall Street: How to Use What You Already Know to Make Money in the Market (1989) – 318 pages

Peter Lynch makes it sound fun and easy, but he can get away with it, in my opinion, because of his track record in mentoring and inspiring young investors.  I include this book here because it was the first investment book I ever read and was the main reason I fell in love with the profession.  My review of this classic is also posted on our site (link).

4. Investing: The Last Liberal Art (2000) – 216 pages

This book does an excellent job in explaining the complexities of investing without turning off the reader.  It is mostly conceptual and very informative, which gives it a long shelf life. Another strong attribute is that it is not too long.  The author, Robert Hagstrom, was a portfolio manager earlier in his career, which adds credibility to the book.  He is also the author of the best seller, The Warren Buffett Way (1994), and eight other books.

5. The Most Important Thing: Uncommon Sense for the Thoughtful Investor (2011) – 196 pages

Howard Marks does not make investing sound easy (much to the contrary), but he does a fine job of inspiring inquiry. I have read this book twice and have seen Marks present live a few times in the last decade, and they were all worthwhile.  At less than 200 pages, the length of this book is also accommodating, and it helps that Marks is an excellent writer.

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I was a freshman at Stanford when the film was released and remember how the “greed is good” speech caused quite a stir on campus, with many of my colleagues commenting that Gekko had a point – after all, is not the pursuit of profit the main objective, the raison d’etre, of any company?  The other side, of course, pointed to all the evils and crimes committed in the name of greed to show that greed does indeed deserve its place amongst the seven deadly sins.

Regardless of whether you agree or disagree with Gekko’s premise, there is no denying the prominent role that greed plays in investing. Many people begin investing with greedy goals, and it’s usually because they hear about how well others are doing.  The pull of greed is so strong that even some of the most conservative people eventually succumb.  Because they resist the longest, they are often the ones who lose the most by getting greedy near the top and fearful near the bottom.

Greed and fear are in our genes, and both have helped humans evolve and survive. Without greed, a person or society may lack the motivation to do any activity of creation or innovation.  Without fear, we would all have been eaten by lions and failed as foragers.   To invest for the long run, it is critical that we keep both greed and fear in check.  While they are said to counterbalance each other in markets, that’s not exactly true of long-term investing.  Decisions inspired by one’s emotions or that of others are prone to be suboptimal.  The best decisions are those that follow an unemotional gameplan, like buying stocks of companies that have great management, are a high-quality business and whose market is experiencing secular growth. It is not easy to find such outstanding companies, and often it is even harder to stick with them while others are being greedy or fearful, but this is the best way I know for building wealth through investing.

Buffett endorses being greedy when others are fearful, and fearful when others are greedy, but this is advice coming from a man who has a long track record of controlling his urges and doing nothing when others are being active.  If you are someone who struggles with fear, then being greedy when others are fearful might in fact be a bad move.  If you are going to capitulate, goes an old Wall Street adage, might as well do so early.  The best approach, though, is to find a way to keep greed and fear out of the picture.  I know it’s easier said than done, but here is my suggestion: find an investment philosophy and program that makes sense regardless of whether people are fearful or greedy and stick with it for the long haul. By making fear and greed irrelevant, your chances of achieving your investment goals will be much higher.

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I am not alone in drawing inspiration from Warren Buffett, even if he is no fan of investment managers like ourselves, who charge fees for our services. It is hard to disagree with Buffett’s assertions that most professional money managers don’t add value, but that is precisely what has drawn me to this business and compelled me to start our firm eight years ago.  Buffett himself is proof that it is possible for a money manager to make people’s dreams come true, and he is certainly not the only one who has done it.  While he is undoubtedly a talented investor, it was not only his investing that made dreams come true, but his talents as a communicator and his ability to inspire trust, comfort and, most importantly, the belief in a better future.

Towards the end of his latest letter, dated February 26, 2022, Buffett explains what really enabled so many of his investors to realize their dreams.  His shareholders often acknowledge that “Berkshire might be far from the best selection they could have made. But they would add that Berkshire would rank high among those with which they would be most comfortable. And people who are comfortable with their investments will, on average, achieve better results than those who are motivated by ever-changing headlines, chatter and promises.” I cannot emphasize enough the impact that this statement made on me as I read it the day his letter was published.  Sure, people can invest on their own or they can buy ETFs or large funds that charge discounted fees, but can they get the degree of comfort that enables them to stay the course when the going gets tough?  Some people can do that, but most cannot.  Having a manager who is credible, transparent, consistent, and devoted to keeping it simple, goes a long way in helping people achieve their dreams.

It is not only individuals and families that require trust and comfort to stick with their investments for the long-term. Sophisticated institutional investors, plan sponsors, wealth managers, and fund allocators, have just as much (and sometimes even more) need for transparency and information about what their managers are doing and thinking.  This is the reason we consider our letters, webinars, and other communication efforts so fundamental to our job, even if they do add an extra workload. But technical information on companies is not enough to make a good investor. Many investors fail to make their dreams come true because of behavioral biases.  Even when they understand what it takes to make it to dreamland, they still succumb to fear and despair by hitting the sell button, often near bottoms, and often with scars that keep them from ever coming back in.  Allow me to illustrate some of these behaviors by using the stories of Bob, Faust and Ms. Groner.

Bob’s story comes from this 2014 article by Ben Carlson.  Bob is a fictional character who began his career in 1970 at age 22. He saved $2,000 a year during the 1970s and bumped the amount up by $2,000 each decade until he could retire at age 65 in 2013.  He tucked away $4,000/year in the 80s, $6,000/year in the 90s, and $8,000/year until he retired. Bob’s problem was that he only had the courage to put his money to work in the market after a huge run-up. So the first three years of his savings ($6,000) went into an S&P 500 index fund at the end of 1972, right before the market dropped nearly 50% in 1973-74.  Bob didn’t feel comfortable about investing again until August of 1987, after another huge bull market.  After 15 years of saving he had $46,000 in cash to put to work. He invested this money again into the S&P 500 at a market peak, before it lost more than 30%. After the 1987 crash, Bob didn’t feel right about putting his future savings back into stocks until the tech bubble really ramped up at the end of 1999. He had accumulated $68,000 of cash this time, which he put to work at the end of December in 1999, just before a 50% drop that lasted until 2002. After being burned again, Bob saved in cash until October of 2007, when he finally decided to invest the $64,000 he had accumulated since 2000. He bought just before another 50% crash, after which he decided to continue to save his money in the bank until retiring in 2013 (another $40,000).

It is important to note that even after each crash Bob did not sell out of the market – he just did not invest more. So, while Bob couldn’t time his buys, he still ended up with $1.1 million upon his retirement at 65.  Despite being a terrible market timer, Bob is a success story because he saved more than he spent, and he invested those savings into the stock market. Had Bob simply dollar cost averaged into the market on an annual basis with his earned savings, though, he would have ended up twice as rich.  Bob’s story is rare because very few people would have refrained from selling after such traumatic experiences. Had Bob found an investment manager he trusted, and who educated him on the nature of the companies he was investing in (like Warren Buffett does so well), instead of just “the market,” then maybe Bob’s dreams would have come true in a much bigger way.

Now consider the story of Faust, another fictional, though highly representative character.  He was terrified of bear markets, so he found himself out of the market whenever stocks turned lower.  His belief was that he did not need to be invested when the trend was downward, so he always sold out when his account was down more than 20% and he required that “the market” demonstrate that it had bottomed before he jumped back in on the other side. This mentality practically ensured that he missed out on the biggest up moves, which typically happen when the outlook is bleakest and the market runs out of sellers.

Faust’s story was inspired by Todd Petzel’s book, Modern Portfolio Management (2021), which illustrates what tends to happen to people who behave like Faust. Petzel shares a chart in Chapter 4 showing how from 1988 to Q1-2019, the S&P 500 compounded at an annual rate of 10.3%, but when one removes the best day from each year from the series, the compounding rate drops to 6.4%.  Unless they are extremely lucky or great market timers, an investor acting on such a Faustian mentality likely received an even lower return on an after-tax basis.

Now let’s review the true story of Ms. Groner, which Todd Petzel recounts in his book, and which is like the stories that Thomas Phelps tells in my favorite book, 100 to 1 in the Stock Market (1972).  As disclosed in a March 2010 article in the Chicago Tribune (link), Ms. Groner was a career secretary at Abbott Labs who purchased three shares of the company for $180 in 1935, when she was 25 years old.  Over the subsequent 75 years, and after many splits and reinvested dividends, her three shares turned into $7 million, which was all donated to Lake Forest College upon her death at 100 in 2010.  While that seems amazing, the appreciation comes out to a fairly reasonable annualized rate of return of 15%. Had she not donated the money and her family kept it invested in Abbott stock after her death, her stake would be worth nearly $34 million today – 12 years later, since Abbott has continued to compound in the mid-teens.  It is no wonder that when Fidelity did a study to determine the profile of the best performing accounts on their platform (link), they discovered that those accounts were the ones that belonged to dead people.

Of course the investors that do worst are the ones who think like Bob in bull markets and then turn into Faust in bear markets.  Not only do they systematically buy near the top, they also sell near the bottom.  Sadly, according to some studies (including those done by Fidelity), this describes most individual investors.  It also happens that many financial advisors, whose job is to keep their clients from behaving this way, end up doing the same out of fear of being fired, or some other conflict of interest.  The solution, in my opinion, is to adopt a long–term mentality that is grounded on a simple concept: let the outstanding companies out there work for us. It is critical that our investors know that they are not investing in “the market”, and that we are behaving neither like Bob nor Faust.  Like Warren Buffett and Charlie Munger, our investors are allocating their capital to outstanding managements running outstanding businesses that stand a good chance of remaining outstanding for decades, regardless of the market.  As such, while Bob and Faust might manage to accumulate some wealth if they save more than they earn, our investors stand a chance of doing much better than that.  That’s what we mean by making dreams come true. 

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– Warren Buffett 2012 Annual Letter to Shareholders

“Many a bad move has been made by standing still.”

– Chinese fortune cookie

When you invest, you place your trust in others. You trust that the electric utility will honor those bond payments. You trust that the company whose stock you just bought will not be mismanaged and will grow and be more profitable than it is today. You trust that the person you rent your apartment to, the one you just bought with a hefty mortgage, will pay the rent and take good care of the property.

What many people don’t realize is that no matter where you keep your money, you are investing, because you are placing your trust in others.

This is true even if you keep your money in cash: you are trusting that your government will keep honoring that colored piece of paper and that it will retain its purchasing power. Granted, the former has a very high probability – especially in the developed world; but the probability of the latter is extremely low because of inflation. Let’s just say that you are more likely to get struck by lightning than to preserve your purchasing power by hoarding cash.

The same is true of gold, silver, diamonds or any other metal or rock that people think are valuable or a “store of wealth.” In all of these cases, you are trusting that others will keep seeing value in these inanimate objects that produce no cash and pay no interest.  Even high-grade bonds that do pay interest require trust.  Not only that the payer will remain solvent, but that the interest will be enough to offset inflation.  When the income is fixed, so too is your upside.  It’s no wonder Benjamin Graham called bond investing “a negative art.”

What distinguishes the different options of where you can keep your money is risk – the probability of losing part or all of that hard-earned money. But risk is only one side of the coin. The other is reward. The risk side of the coin often weighs heavier on the psyche. Risk is a word that immediately elicits a feeling of fear and caution. Reward is typically in the distance, and often beyond the horizon of reality. Risk is immediate, and most avoid going down that road.

What many don’t realize is that they are already on that road, and that everywhere they turn, there are new risks to contemplate.  Staying put is not risk-free either, because things will constantly be coming in your direction. My favorite line of one of my favorite books is a simple one: “Living is very dangerous.” (Grande Sertão Veredas, by Brazilian author João Guimarães Rosa). It is a poignant reminder that life is a constant balancing act over an abyss that we have to come to terms with.

The litany of fears is endless, but we learn to live with risk, right? And more importantly, we take risks in order to live. We get in a car or an airplane in order to travel to that dream vacation in the Caribbean. We buy the dream house with a hefty mortgage even though there is no guarantee that we will be well-employed in the coming year, much less ten years from now.

If you want to have big rewards along your journey, you will need to face the risks of the paths that lead to those rewards. If you want to go to the Caribbean, you will need to board a boat or an airplane. If you are not willing, because you think they are too risky, then sorry – no Caribbean vacation for you.

Back to investing, there is no doubt that buying stocks carries risk.  Stock markets can be volatile, and even the best stocks have been known to crash.   But just like airplane manufacturers have learned over time to reduce the risks of catastrophic inflight failures, it is also possible to reduce the risk of crashing in investing.  Great investors do that by researching and learning about the companies to whom they entrust their money.

The longer a company has been around, the more data one is able to gather, so if you think risk management is a good idea, older companies have a natural advantage over start-ups. But age is not a reflection of quality. You want companies with proven track records, whose management and culture have been battle-tested. Have they been able to grow the company and its profits through good and bad times?  You want companies that make products or render services that are not only in demand today, but whose offerings will transcend cycles and the fads that they invariably inspire.

Finding these companies is not easy – in fact, it can take hundreds, even thousands of hours of work to truly understand just one company. But that’s where the other side of the coin kicks in: reward. Because once you do find such a company, it will reward you for years or decades to come. The work will have paid off, and the reward will come with less risk.

This is how real investors think. They know reward comes with risk, but they seek to make the reward side of the coin heavier by confronting risk with knowledge instead of merely avoiding it.

Let the reward weigh on you, not the risk.

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Steinhardt had a love-hate relationship with his father, who had left his mom and who he could not bring himself to call Dad or much less say “I love you.” “Throughout his life, my father was erratic and unpredictable. I never knew when he would appear or when he would once again disappear,” he wrote in his autobiography, No Bull: My Life In and Out of Markets (2008). It is not an exaggeration to say that his father is the main character of his book, since he mentions him dozens of times. “Father was always generous indeed,” he admits, “exceptionally generous.” Having made most of his money in the jewelry business, he put Steinhardt through college and became one of the early investors in his fund. His dad was also a compulsive gambler who gained prominence in the casino scene in his later years. “My gambling in the stock market was clearly a much better bet than the sort of gambling my father did,” Steinhardt reflects. “I enjoyed significantly better odds, and I always had a high degree of confidence that my investments would work. Somehow, it mattered to me that picking stocks, being a good analyst, and speculating had a purpose to it that truly distinguished it from my father’s gambling. It was important to me to be doing something of value. As it turned out, I made my father a lot of money.” Yet, as Steinhardt reveals, “I felt nothing I could do would ever be good enough for my father.” It was this insatiable drive to please his father that Steinhardt credits for his impressive record as a hedge fund manager.

In his autobiography, The Ride of a Lifetime (2019), Bob Iger also painted an unglamorous picture of his father, who struggled personally and financially. “As I grew older,” he claims, “I became more aware of my father’s disappointment in himself. He’d led a life that was unsatisfying to him and was a failure in his own eyes. It’s part of why he pushed us to work so hard and be productive, so that we might be successful in a way that he never was. His employment troubles meant that if I wanted to have any spending money, I needed to find my own jobs.” Iger’s father would later be diagnosed with manic depression. “As the older child,” Iger continues, “I bore the brunt of his emotional unpredictability. I never felt threatened by his moods, but I was acutely aware of his dark side and felt sad for him. We never knew which Dad was coming home at night, and I can distinctly recall sitting in my room on the second floor of our house, knowing by the sound of the way he opened and shut the door and walked up the steps whether it was happy or sad Dad.” While sad and traumatizing, much like Steinhardt, Iger lived his whole life with a burning drive to do better than his dad, who is someone he credits for his thirst for learning and grit.

In this emotionally charged YouTube video (link), Arnold Schwarzenegger tells a traumatic story from his childhood in post-war Austria. “I was born in 1947, two years after the second world war,” Schwarzenegger recounts, “Growing up, I was surrounded by broken men drinking away the guilt over their participation in the most evil regime in history…I have never shared this so publicly because it is a painful memory, but my father would come home drunk once or twice a week, and he would scream and hit us and scare my mother. I did not hold him totally responsible.” Now Schwarzenegger didn’t say this, and I don’t know if he would even admit it, but I am confident his steadfast determination to become huge, both physically and personally, as a human being, an actor, and a political leader, comes largely from his father. In his autobiography, Total Recall: My Unbelievably True Life Story (2012), he admits that while his father was an SS officer during the war, he has personally paid for extensive research to ascertain that his dad was not a criminal.

Bill Rosenberg was another highly successful businessman driven by his father, who had a strong moral compass and read extensively, yet was a business failure. Rosenberg wrote in his autobiography, Time to Make the Donuts (2001): “My father was more intellectual. He taught us the five books of Moses. He had strong principles and high moral standards. He used to tell us all the time, ‘Listen, I always want you to tell the truth. I cannot bear to have anybody lie to me. Don’t ever lie to me. If you tell me the truth, no matter what you do, God forbid even if you commit murder, if you tell me the truth and tell me the story, I’ll go to hell and back again to try to help you. But if you lie to me, I can’t have anything to do with you. I cannot tolerate a liar.’ … My father also taught me that reputation, not money, was the most important thing in the world. I heard this over and over in all kinds of situations. If I told a fib or did something wrong around the house or at school, he’d reiterate it. He said, ‘You know, when you die, the only thing you’re going to die with is the reputation you created as a person when you lived. All the money in the world isn’t going to make you a better person. You’re going to be respected and remembered for the type of person you were and the character you had. So be truthful, be honest, and be a good neighbor.’” Rosenberg concludes: “Having made many millions of dollars, I can attest that money is not the sole criterion for success. Many other factors come into play: good relationships, fulfillment in what you choose to do in life, giving back to the community, caring for one’s family, and being honest.”

As with Steinhardt and Iger, Rosenberg’s most important lessons came from his father’s shortcomings. He applied this one particular lesson throughout his highly successful business career: Don’t take shortcuts. “My father had a blind spot,” he explains, “With all his innate ability, his cleverness, intelligence, and salesmanship, he always wanted to start near the top. Consequently, most of the time he was always shooting for what I thought were unreachable goals. He had big ideas for things, but he didn’t seem to want to start at the beginning and work up to those goals. As a result, he often failed to obtain them. From this I learned to set goals that are obtainable. If you start out setting too high a goal in the beginning, you set yourself up for failure. I applied this principle to all my ventures—Industrial Luncheon, Wilrose Farms, and Dunkin’ Donuts. For instance, when I opened my first Dunkin’ Donuts store, I focused on making that first store a success, then I moved on to the second store, the third, and the fourth. I gave my heart and soul to making that first store a winner. You start and learn and build and keep changing your goals as you achieve them.”

So, in the end, while wholesome learning and strong values can come from good experiences and a love-filled upbringing, there is no doubt that a bad father and/or a struggling childhood are behind some of the most incredible achievements in history.  The memories and experiences gained in our formative days remain as back-seat drivers that guide us through life. Successful people have learned to distinguish the sound advice from the bad, and to recognize that the best lessons can be learned from pain and suffering.

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So, all told, my collection of uncompleted books has swelled to the hundreds.  And yet, the more garbage I consume, the more I appreciate those few precious books that stand out.  Being one of those people that cannot bear having to re-watch a movie, it’s incredible how I never seem to tire from re-reading my favorite books over and over, especially the ones on investing.  The book I have re-read the most over the years is Phil Fisher’s Common Stocks and Uncommon Profits (1958), which for a long time was my favorite book, although it recently took second place to 100 to 1 in the Stock Market (1972), by Thomas Phelps. Barton Biggs’ Wealth, War & Wisdom (2008) is still up there, as are Democracy in America (1835/40) and The Great Depression, A Diary (1930s), but investing is my favorite subject, so the top two are hard to unseat.

Below I update my top four list by subject. These are the ones that, if I had more time, I would re-read.  Note that this list changes with time as my perceptions change. There are some books I downgraded after re-reading, such as The Davis Dynasty (2001) by John Rothchild, and others that I upgraded, such as Ray Dalio’s Principles (2017).  Also note that there is considerable overlap among the subject matters.

If you see a title that interests you and want to know why I liked it so much, don’t hesitate to reach out.

Cheers,

Adriano.

TOP 4 BY SUBJECT (updated October 25, 2022)

INVESTING

1. 100 to 1 in the Stock Market (1972) – Thomas Phelps
2. Common Stocks and Uncommon Profits (1958) – Phil Fisher
3. Quality Investing (2016) – Torkell Eide
4. Principles (2017) – Ray Dalio

INVESTOR BIOGRAPHIES

1. Killing the Market (2016) – Roemer McPhee
2. T. Rowe Price (2019) – Cornelius Bond
3. The Rule (2019) – Larry Hite
4. Keynes: The Return of the Master (2009) – Robert Skidelsky

NON-INVESTOR BIOGRAPHIES

1. The Beatles: The Biography (2005) – Bob Spitz
2. Zealot: The Life and Times of Jesus of Nazareth (2013) – Reza Aslan
3. Hamilton (2004) – Ron Chernow
4. Churchill (2018) – Andrew Roberts

MARKETS

1. Wealth War & Wisdom (2008) – Barton Biggs
2. The Great Wave (1996) – David Hackett Fischer
3. Fifty Years in Wall Street (1908) – Henry Clews
4. Markets Never Forget (2011) – Ken Fisher

COMPANIES

1. Working Backwards: Insights, Stories, and Secrets from Inside Amazon (2021) – Colin Bryar
2. Repeatability: Build Enduring Businesses for a World of Constant Change (2012) – Chris Zook
3. Honest Weight: The Story of Toledo Scale (1999) – Bob Terry
4. Made in America (1992) – Sam Walton

SOCIAL HISTORY

1. The Cycles of American History (1986) – Arthur M. Schlesinger Jr.
2. The End is Always Near (2019) – Dan Carlin
3. Only Yesterday (1931) – Frederick Lewis Allen
4. The Invention of Yesterday (2019) – Tamim Ansary

GEOPOLITICAL HISTORY

1. The Rise and Fall of Great Powers (1987) – Paul Kennedy
2. The Next 100 Years (2009) – George Friedman
3. World Order (2014) – Henry Kissinger
4. The Gates of Europe (2015) – Serhii Plokhy

PSYCHOLOGY

1. The Selfish Gene (1976) – Richard Dawkins
2. The Wisdom of Crowds (2004) – James Surowiecki
3. The Hidden Habits of Genius (2020) – Craig Wright
4. Everybody Lies (2017) – Seth Stephens-Davidowitz

NEGOTIATION

1. Start with No (2002) – Jim Camp
2. Arms and Influence (1966) – Thomas Schelling
3. Getting Past No (1993) – William Ury
4. Negotiating to Win (2020) – Alan Schoonmaker

STRATEGY

1. Zero to One (2014) – Peter Thiel
2. The Firm: The Story of McKinsey (2016) – Duff McDonald
3. The Art of War (5^th Century BC) – Sun Tzu, translated by Thomas Cleary (2011)
4. Irrationally Passionate (2020) – Jason Kothari

TECHNOLOGY

1. Platform Delusion (2021) – Jonathan A. Knee
2. Nothing but Net (2021) – Mark Mahaney
3. The World Beyond Physics (2019) – Stuart Kauffman
4. Platform Revolution (2016) – Jeoffrey Parker

PHILOSOPHY

1. A Small Treatise on the Great Virtues (1995) – Andre Comte-Sponville
2. Zen and the Art of Motorcycle Maintenance (1974) – Robert M. Pirsig
3. The Poverty of Historicism (1956) – Karl Popper
4. Tolstoy: A Russian Life (2011) – Rosemund Bartlett

RELIGION

1. God in Search of Man (1955) – Abraham Joshua Heschel
2. The Five Books of Moses: A Translation with Commentary (2008) – Robert Alter
3. Paul the Traveler (1974) – Ernle Bradford
4. Bible and Sword (1965) – Barbara Tuchman

MONEY

1. The Future of Money (2021) – Eswar S. Prasad
2. Money Mischief (1992) – Milton Friedman
3. The Ascent of Money (2008) – Niall Ferguson
4. 21^st Century Monetary Policy (2022) – Ben Bernanke

ECONOMICS

1. The Great Depression: A Diary (Written in the 1930s, published in 2009) – Benjamin Roth
2. The Money Revolution (2022) – Richard Duncan
3. Lords of Finance (2009) – Liaquat Ahamed
4. A History of Interest Rates (1963) – Sidney Homer

POLITICAL SCIENCE

1. John Kenneth Galbraith (2005) – Richard Parker
2. The Man Who Understood Democracy (2022) – Oliver Zunz
3. Coming Apart (2012) – Charles Murray
4. The Great Debate (2013) – Yuval Levin

SELF HELP

1. Mindset (2006) – Carol Dweck
2. The Passion Paradox (2019) – Brad Slulberg
3. Prescription for Life (2014) – Richard Furman
4. Backable (2021) – Suneel Gupta

ART

1. Goethe (2017) – Rudiger Safransky
2. Balzac (1946) – Stefan Zweig
3. Duchamp’s Pipe (2020) – Celia Rabinovitch
4. Broken Music: A Memoir (2003) – Sting

CLASSICS

1. Democracy in America (1835/40) – Alexis de Tocqueville
2. A Monetary History of the United States (1963) – Anna Schwartz and Milton Friedman
3. Reminiscences of a Stock Operator (1923) – Edwin Lefevre
4. Man’s Search for Meaning (1946) – Viktor Frankl

MAXIMS

1. The Maxims (1665) – Francois Duc De La Rochefoucauld, translated by J. W. Willis Bund
2. Maxims and Reflections (1906) – Johann Wolfgang Von Goethe, translated by Bailey Saunders
3. Selections from the Maxims of Washington (2012) – compiled by J. F. Schroeder
4. Napoleon’s Military Maxims (2011) – translated by Colonel D’Aguilar

PARENTING

1. Showing Up for Life (2009) – Bill Gates Sr.
2. Grit (2016) – Angela Duckworth
3. Don’t Trust Your Gut (2022) – Seth Stephens-Davidowitz
4. The Road Back to You (2016) – Ian Morgan Cron

SHORT SELLING

1. Downside Protection (2019) – Nitin Sacheti
2. The Art of Short Selling (1996) – Kathryn Staley
3. Dead Company Walking (2015) – Scott Fearon
4. A Life on TheStreet (2014) – Doug Kass

The post Top Books by Top Subjects appeared first on VII Capital Management.

– Charlie Munger

This weekend on LinkedIn I came across a well-crafted visualization of how gold held its value against the dollar, the pound, and the yen since 1900, with a caption espousing its quality as a “store of value” across the ages. This post reminded me of Berkshire Hathaway’s 2011 letter, where Warren Buffett compares the merits of investing in productive versus non-productive assets. Buffett’s main point is that wealth must be continuously produced if one’s purchasing power is to be maintained.  Simply tucking away money, or hoarding an asset like gold, won’t do the job.

William Bernstein makes this same point in The Power of Gold (2012): “Stores of wealth sit. Money moves. It travels from one pocket to another. A store of wealth is mass; money is measurement of wealth.” In the epilogue to his seminal history of gold, Bernstein concludes: “Those who believed that gold was a hedge against the uncertainties of life, failed to understand that the pursuit of eternity is not to be satisfied by gold, or by anything else we choose to replace gold—dollars, euros, whatever. Gold as an end in itself is meaningless. Hoarding does not create wealth.” His main point is that wealth is created by the movement of money.  Bury a million dollars six feet under and it will do nothing for you.

With his customary eloquence, Buffett’s 2011 letter makes a strong case for investing in productive assets. “Ideally,” he writes, “these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola, IBM and our own See’s Candy meet that double-barreled test.”  Conversely, he portrays investments in currency-based assets such as bank deposits, money-market funds, bonds, and mortgages, as dangerous.  “Most of these currency-based investments are thought of as safe,” he explains, but “in truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge. Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur.”

Indeed, the people who espouse the merits of investing in a non-productive asset like gold do so because of the terrible track record of currencies that Buffett warns about.  “Even in the U.S.,” Buffett maintains, “where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power.”  This sort of math is what the author of the post was using to make his case that gold is a good “store of value.” But is it really?  Charlie Munger’s quote above suggests otherwise.

Just for fun I googled what an ounce of gold could buy in 1900.  Among the answers were two cows and 10 acres of land in South Carolina, which came from this article.  While an ounce of gold today might still get you a cow, the real value is not in the cow itself, but the notion that the cows could be bred into a herd and eventually built into a vibrant, producing farm.  Buffett makes this case so well in his 2011 letter, I could not help but reproduce most of the passage below:

“The second major category of investments involves assets that will never produce anything, but that are purchased in the buyer’s hope that someone else — who also knows that the assets will be forever unproductive — will pay more for them in the future. Tulips, of all things, briefly became a favorite of such buyers in the 17th century. This type of investment requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further. Owners are not inspired by what the asset itself can produce — it will remain lifeless forever — but rather by the belief that others will desire it even more avidly in the future. The major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful). Gold, however, has two significant shortcomings, being neither of much use nor procreative. … Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be $9.6 trillion. Call this cube pile A. Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). … A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond. Admittedly, when people a century from now are fearful, it’s likely many will still rush to gold. I’m confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B. … Metaphorically, these commercial “cows” will live for centuries and give ever greater quantities of “milk” to boot. Their value will be determined not by the medium of exchange but rather by their capacity to deliver milk. Proceeds from the sale of the milk will compound for the owners of the cows, just as they did during the 20th century when the Dow increased from 66 to 11,497 (and paid loads of dividends as well). Berkshire’s goal will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety — but we will also be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner among the three we’ve examined. More important, it will be by far the safest.”

While Buffett’s cow analogy makes his point well, it does not emphasize enough the power of growth, in my opinion. A plot of farmland or and oil well can certainly generate more wealth than a non-producing brick of gold, but to compound wealth like Buffett has done, the output needs to be re-invested for growth. A cow can produce milk for a maximum of two years, after which it can be consumed as meat – but as the old saying goes, you can’t have the cake and eat it too.  The same applies to Exxon and the other stocks that propelled the Dow over the centuries. Sticking with the cow analogy, the majority of wealth creation has come not from the milk itself, but from the growth that the milk enables.

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Starting with the premise that no empire lasts forever, he profiles how empires rose and fell in the past before predicting that America will be unseated by China in the new world order.  I have no doubt that Dalio and his staff have done their homework, but I don’t agree with his framework nor his call.  He downplays the differences with the past to focus on the similarities.  Much like he did the first time, when he wrongly proclaimed that the world order would change in the early 1980s, he data mines for patterns to fit his pre-conceived thesis.

In my opinion, Dalio’s way of thinking misses the notion that history is path dependent.  Europe would likely not have started World War I if it weren’t for the scars left by the Thirty Years War almost four centuries earlier.  The Thirty Years War would likely not have happened if it wasn’t for the fall of Rome in the 400s.  But an even more serious flaw, in my opinion, is the sense of urgency which Dalio builds around his prediction about a trajectory for which the timing is simply unknowable.  He even observes that “great empires of the past have lasted roughly 250 years” before adding “give or take 150 years” – but then he uses this data to make short term-macro calls on currencies and rates.

Some of his claims, such as the fact that the average American is losing intellectual ground to the average Chinese, or that America is being hurt by rising political polarization, are hard to refute – unless one recognizes that its rarely about the averages. The video shows many waves converging in the background, so as to suggest that Dalio has cracked the code, but I’m pretty sure he hasn’t.  Aside from the fact that it comes from a famous hedge fund manager, there isn’t much that’s new from Dalio’s attempts at predicting the future, because, in the end, nobody can really know these things – and nobody ever has, no matter what their AUM and the number of people crunching the numbers.

Henry Kissinger’s page-turner, which he titled World Order (2014), offered a better and more detailed review of how history can be used to understand geopolitical risks.  Tocqueville, Galbraith, and Schlesinger are also great sources.  But my favorite was George Friedman’s The Next 100 Years (2009).  At around the same time that Dalio was calling for the end of American history, George Friedman was predicting another century of American dominance.  Unlike Dalio, who feels the need to frequently remind the reader of his credentials, Friedman shows humility by stating that “when it comes to the future, the only thing one can be sure of is that common sense will be wrong,” and that, “things that appear to be so permanent and dominant at any given moment in history can change with stunning rapidity.”

With the typical caveats out of the way, Friedman compares America not with the failing empires of the past, but with an adolescent: “For the short term—and by that I mean the next hundred years—I will argue that the United States’ power is so extraordinarily overwhelming, and so deeply rooted in economic, technological, and cultural realities, that the country will continue to surge through the twenty-first century, buffeted though it will be by wars and crises. This isn’t incompatible with American self-doubt. Psychologically, the United States is a bizarre mixture of overconfidence and insecurity. Interestingly, this is the precise description of the adolescent mind, and that is exactly the American condition in the twenty-first century. The world’s leading power is having an extended adolescent identity crisis, complete with incredible new strength and irrational mood swings. … if we think of the United States as an adolescent, early in its overall history, then we also know that, regardless of its self-image, adulthood lies ahead. Adults tend to be more stable and more powerful than adolescents. Therefore, it is logical to conclude that America is in the earliest phase of its power.”

Friedman’s book points to the poor record of Dalio’s fatalistic conclusions. “There is a deep-seated belief in America,” Friedman writes, “that the United States is approaching the eve of its destruction. Disastrous wars, uncontrolled deficits, high gasoline prices, shootings at universities, corruption in business and government, and an endless litany of other shortcomings—all of them quite real—create a sense that the American dream has been shattered and that America is past its prime. If that doesn’t convince you, listen to Europeans. They will assure you that America’s best day is behind it. The odd thing is that all of this foreboding was present during the presidency of Richard Nixon, together with many of the same issues. … But the fact is that the United States is stunningly powerful. It may be that it is heading for a catastrophe, but it is hard to see one when you look at the basic facts. … There are many answers to the question of why the U.S. economy is so powerful, but the simplest answer is military power. The United States completely dominates a continent that is invulnerable to invasion and occupation and in which its military overwhelms those of its neighbors. Virtually every other industrial power in the world has experienced devastating warfare in the twentieth century. The United States waged war, but America itself never experienced it. Military power and geographical reality created an economic reality. Other countries have lost time recovering from wars. The United States has not. It has actually grown because of them.”

One of George Friedman’s predictions (which is now 13 years old), was that the US would have problems with Russia well into the 21^st century.  He observed that “the Russians can’t avoid trying to reassert power, and the United States can’t avoid trying to resist.”   Given how many of Friedman’s other predictions have been spot on, it is reassuring that he concluded that “Russia can’t win.”

Friedman also disagrees with Dalio on China: “There are many who predict that China is the next challenger to the United States, not Russia. I don’t agree with that view for three reasons. First, when you look at a map of China closely, you see that it is really a very isolated country physically. With Siberia in the north, the Himalayas and jungles to the south, and most of China’s population in the eastern part of the country, the Chinese aren’t going to easily expand. Second, China has not been a major naval power for centuries, and building a navy requires a long time not only to build ships but to create well-trained and experienced sailors.”

For those (like me) who worry about the risk that a crazy man, when trapped, might push the nuclear button – here is another precious passage from Friedman’s book:  “Geopolitics and economics both assume that the players are rational, at least in the sense of knowing their own short-term self-interest. As rational actors, reality provides them with limited choices. It is assumed that, on the whole, people and nations will pursue their self-interest, if not flawlessly, then at least not randomly. Think of a chess game. On the surface, it appears that each player has twenty potential opening moves. In fact, there are many fewer because most of these moves are so bad that they quickly lead to defeat. The better you are at chess, the more clearly you see your options, and the fewer moves there actually are available. The better the player, the more predictable the moves. The grandmaster plays with absolute predictable precision—until that one brilliant, unexpected stroke. Nations behave the same way. The millions or hundreds of millions of people who make up a nation are constrained by reality. They generate leaders who would not become leaders if they were irrational. Climbing to the top of millions of people is not something fools often do. Leaders understand their menu of next moves and execute them, if not flawlessly, then at least pretty well. An occasional master will come along with a stunningly unexpected and successful move, but for the most part, the act of governance is simply executing the necessary and logical next step. When politicians run a country’s foreign policy, they operate the same way. If a leader dies and is replaced, another emerges and more likely than not continues what the first one was doing.”

Back to Dalio, I recall well the long interview he did with Baron’s near the historic bottom in 2009.  He predicted then, with eloquence and persuasiveness, that the global economy was in a deflationary bust.  Then in mid-2010, as the Fed began its quantitative easing campaign, he predicted that the dollar would collapse. He brags in his book that he made money in 2008 thanks to his time-tested “principles,” but that did not help the millions of unsuspecting readers who got talked out of investing in U.S. stocks at what turned out to be generational lows. Dalio’s financial dreams came true despite his propensity to predict Armageddon over the years, but that does not make him a good source for advice, in my opinion, near market bottoms.  Everyone is entitled to their opinions, but the best ones don’t tend to get 23 million views.  As Buffett warned in his letter to shareholders dated February 27, 2009, “beware the investment activity that produces applause; the greatest moves are usually greeted by yawns.”

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