Book Review
Since Christmas, I've delved into multiple investment books, extracting impactful quotes that prompted my reflections, noted in blue. This compilation serves as a personal log for self-reflection and future reference. By sharing this, I aim to share my values and mindset while also encouraging fellow investors to reflect on their own journey.
Peter Lynch: One Up on Wall Street
‘A typical Lynch winner takes three to ten years to play out’ (page 12). A winner requires patience and will not be an overnight success. The strategy, as with most great investors, is not to get rich quick but hold an investment over a long period of time. Impatience will be the downfall of most people chasing a quick return.
‘Stock Price is the least useful piece of information’ (page 13): This information is accessible to everyone – no meaningful edge is garnered from knowing it.
‘You have to keep track of where future growth is going to come from and when it is likely to slow down’ (page 16): It is essential to use second order thinking to anticipate future events and outcomes. If you only consider what has happened when selecting potential investments to either buy or sell, chances are you are already too late. Smart investors will have detected issues long ago and sold out of their position.
‘Stop listening to professionals’ (page 31): To outperform the major benchmarks, it is imperative to maintain independent thinking at all times. Entrusting financial decisions to others in the field carries significant risk of achieving only average performance. If you happen to identify someone capable of outperforming the market, you are often either too late to capitalize on their expertise or lack the necessary capital to qualify as an accredited investor for participation in a hedge fund.
The average individual, equipped with some capital, may opt to delegate investment decisions to a financial advisor, who frequently underperforms major indexes once their substantial fees are subtracted. Consequently, the most prudent course of action may be to invest in market indexes and set aside concerns about active investing for several years, especially if one lacks the time to devote to financial markets. In any event, delving deeply into individual companies and economic trends tends to rank low on most people's list of interests.
By simply investing in the leading market indexes, you stand a good chance of outperforming a majority of hedge funds and financial advisors combined, all with significantly less effort
‘The bigger it is, the more energy it takes to move it’ (page 65): This is one of the most important points to consider when investing. Don’t just look at the size of the company but also look at the industry it is in: is it growing, shrinking or in line with GDP growth? The worst scenario is obviously shrinking as the pie is getting smaller and the odds of future growth is thus hindered by the very market the company operates in. This was the unfortunate reality for a company I reviewed called
RediShred which was involved in the declining paper recycling industry. This point alone was enough to push me away after much consideration of their business.
‘Stocks are most likely to be accepted as prudent at the moment they’re not’ (page 73): Once the laggards discover the benefits of the investment the smart money has already capitalised on the price rise and are now exiting on the liquidity from unsophisticated investors coming in.
‘High IQ can be a hinderance to successful investing – the behaviour of stocks is more simple minded than they can imagine’1 (page 80-81): From what I have seen, hyper intelligent people cannot get out of their own way and go into granular analysis. In doing so they often find complex reasons the investment will or will not work. They get too specific. This creates a scenario where the investment will only work under a narrow range of outcomes and, as it is so specific, they often don’t come true. An investment should be obvious based on a relatively simple assessment. The easier it is to explain once studied, the more likely it is to be a success.
‘It is important to be able to make decisions without complete or perfect information’ (page 81): If you could make the decision only once the information became 100% clear investing would be easy. If it was easy then returns would reduce dramatically and you would not outperform: everyone would spot good investments a mile away. Your ability to mark decision is your opportunity to make real returns that outperform over a long-time horizon.
‘Insider selling is not an automatic sign of trouble’ (page 144): Whilst this requires further investigation, the selling of shares may have no reflection on the underlying business. Senior executives may need the cash for personal reasons.
‘It’s better to miss the first move in a stock and wait to see if a company’s plans are working out’ (page 232): It is a little counter intuitive to let an investment rocket past you. In the short term I have found that there is always some resentment in missing out on a high-flying company; however, it is about wealth protection as much as it is about increasing your capital. Without clarity your quick gains can turn into quick losses which are often far harder to come back from. As warren Buffet said: rule one: don’t lose money, rule two: don’t forget rule number one. Only once you have done your research and can assess future growth clearly should you put your money to work in a particular stock. This will also help you weather volatility, as I am sure there will be, without panic, fear and stress kicking in. Knowing what you have invested in is the best superpower you can have in preventing your reversion to normal herd mentality of those in the financial markets.
Richer, Wiser, Happier by William
Green1 This is paraphrased and not a direct quotation.
‘The Future is so “intrinsically uncertain” that investors should focus on avoiding permanent losses and build “a portfolio that can endure various states of the world.”’ 2(page 97): Similar to the prior point, permanent loss should be focused on and avoided at all costs. As insightful as the above point is I do often think this wisdom leads the reader to focus on diversification. Whilst some diversification is prudent the benefits of doing some diminish as you add more and more companies. The question then leads to: ‘How to build a relatively concentrated portfolio that endures various states of the world?’. In my view, the product(s): the company produces must be relevant in a world that exists no matter the state (during war times, peace and prosperity). A good example of the prior would be Colgate and toothpaste, and Walmart with the necessity of food shopping. Both companies would continue during wartime or relative peace. My point here is that a good company may become bad if the very specific environment it currently exists in changes in any way.
‘Nicholas Taleb writes in Antifragile: Things that gain from disorder, “it is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it.”’ (page 106): It is far clearer to work out the fragility of a business than it is to foresee the event that will lead to its undoing. If all your mental effort goes into avoiding such an event, it is far easier to avoid the company completely.
‘His aim is never to replicate other investors behaviour. “You can’t mimic them because you are not them”, he says. “Learn it and adopt it, and modify it into your own process.”’ 3 (page 187): You will need to carve out a process that works for yourself. Unfortunately, this will come from experience and cannot be done any other way; however, the experiences and advice of others can be incorporated into your process to fast track your learning and experience. The best takeaway I got from this is the fact that nothing trumps experience. Start out with a small amount of capital and use it to learn, as you get more confident and experienced, I would suggest increasing the capital you work with. Eventually you may feel comfortable enough to invest all of your free cash flow.
‘A single piece of evidence can support more than one hypothesis’4 (page 220): This can be good and bad. A positive would be that multiple viewpoints can be correct from an investment standpoint. Negatively, you may form a hypothesis that is both logical and sensible but does not playout in reality. This backs up Warren Buffett’s idea of acting within your circle of competence more than ever. To act in your circle of competence increases the odds that you understand the industry and company inside and out. Your hypotheses are more likely to be correct and you make money. You need to have the confidence that your hypotheses will generate returns on your investment before putting any money into it.
Seessel2 Quote from Matthew McLennan.
3 The quoted wisdom comes from Paul Lountzis: the president of Lountzis Asset Management.
4 Quoted from Richards J. Heuer jr.
Where the money is by Adam‘Does a company I’m studying have a low market share of a large and growing market, and does it have a durable edge?’ (page 73): The odds of an investment appreciating are dramatically increased when there is natural increasing demand for a product. I always think the hurdle rate is increased if the industry is stagnant or declining and the company is already large. If a company is already large you need to be realistic where it can double in size again.
‘Tech companies’ moats spring from phenomena like first-mover advantage and networks effects’ (page 94): for me, network effects are the single most important part of a technology play. Once the network if fully established, there is often a switching cost. Think of Apple and the inconvenience of trying to move all of your information to Android. Apple also make it convenient for those who decided to stay in the network creating positive feedback loops.
‘Now that we’re on the second half of the chess-board, even more radical change and innovation seems inevitable’ (page 216): this is the most influential line in the book for me as I had not really considered compounding in such a way. Whether it is technological advancement or compounding on an investment, the real big change comes later on. For instance, the majority of money is made later in life after many years of compounding or in technology after several decades of work. For instance, Warren Buffett has made the majority of his money after the age of 60 and the advance of AI hit light speed towards the end of 2022 despite development going back to the 1950s 5 .
The Joys of Compounding
‘What you need is to identify the core principles – generally three to twelve of them – that govern the field’6(page 19): don’t overcomplicate the investment processes. The majority of good investment practice can de distilled into a few key principles. If I had to select the three most important principles in investing, I would choose:
- Margine of safety
- Circle of competence
- Compounding
‘And therein lies the big life lesson for all of us: this moment is all that we have with us, and we need to prioritize things we want to do now’ (page 39): At first glance, this may seem to contradict the principle of long-term thinking as an investor. We are always trying to look two steps ahead and conserve capital and grow our nest egg. The idea here is to not lose sight of why you are investing in the first place, like improving your life and standard of living or to gain financial independence. If all you are doing in the present is sacrificing everything then you will likely look back on life with regret. There is a fine line between overspending and extreme frugality. Whilst you need to put as much aside as is possible it is important to spend time with loved ones and experience life along the way –take that holiday with your partner and enjoy some of the fruits of your labour along your investing
5 The birth of artificial intelligence came about in 1956 at the Dartmouth Conference where machines replicating human intelligence was discussed.
6 Quote paraphrased from John Reed.
journey. You might look back and realise you may have put things off so long you can no longer do them no matter your net worth.
‘As Charlie Munger says, “The goal of investment is to find situations where it is safe not to diversify.”’ (page 71): Diversification can potentially lower your returns, and extreme diversification often results in achieving market-average returns. For stock pickers, maintaining a concentrated portfolio is typically favoured to outperform the market and generate significant wealth. Many investors aim to grow their wealth rather than merely preserving it. Achieving this often necessitates consolidating the portfolio to include only a few carefully selected companies. To succeed with a highly concentrated portfolio, it's essential to purchase companies at a discount, within industries you understand well, and without employing leverage. Doing so can help ensure restful nights and prevent panic reactions to fluctuations in stock prices.
‘It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy’ 7 (page 86): sacrificing everything in your pursuit will lead to an unfulfilled life. Many of the things that make it special cannot be brought so it is important to maintain them along the way. For instance, maintain relationships: ring your parents, focus on those close to you and maintain relationships, to do anything just for yourself is a hollow victory at best. How many rich sad people have you heard of? Chances are they are lonely with all their loot.
‘Character is how you treat others when you have the upper hand and no one is watching’ (page 95): To be kind and/or to do the right thing no matter who is watching or what you will lose from your lack of exploitation pays off in other ways. No guilt will follow you; you will sleep with a clear conscience.
‘You must buy on the way down. There is far more volume on the way down than on the way back up, and far less competition amongst buyers. It is almost always better to be too early than too late, but you must be prepared for price markdowns on what you buy – Seth Klarman’ (page 102): Don’t try and time the market perfectly. You will not sell at the absolute top nor buy at the absolute bottom. If this does happen you will likely have done so out of sheer luck. What is important is buying something for less than its intrinsic value and selling when it exceeds your interpretation of intrinsic value. Do not beat yourself up when the market works against you in the short term, trust in your process. A good process will ensure your success over the long term.
‘Epictetus said, “self-sufficiency is the greatest of all wealth. Wealth consists not in having great possessions, but having few wants.”’ (page 109): There are very few things in life that make us truly happy – most of them are free. The main benefit of wealth comes from the security and freedom it bestows on the owner of such wealth. When wealth is earned from sacrifices and delayed gratification, the reward is magnified.
7 Quote taken from George Lorimer.
‘” Is the expenditure likely to result in a sustainable rise in economic earnings in the future?”’ (page 164): Expenditures within a business should help expand profits and increase earnings for shareholders. If this is not the case and the company continues to do the opposite, the investment is worth avoiding.
‘I have learned to respect the market’s wisdom. Everything trades at the level it does for a reason’ (page 174): Most of the time, the market is rational. You may think the market is overvalued and you are the only one making sense, but there is likely a rational reason for such valuations. However, the market does become irrational from time to time which is when you should put your capital to work. Investing requires you to do the opposite of the crowed or at least do what the crowed will do long before they get involved.
‘If a stock’s price rise is on low volumes, it may be topping out’ (page 185): Less new buyers will lead to a crash in price as some investors exit their positions. This may be your queue to get out of an investment or present a buying opportunity in the near future as price reflects reality. However, the larger your amount of invested capital is within the company, the harder this will be to do.
‘” The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”’8 (page 214): Whilst I consider the prior important to bear in mind when assessing and valuing companies – it is always each company’s individual strengths and competitive edge that should be considered fundamental and most important.
‘It is not the strongest of species that survive, nor the most intelligent, but the one most responsive to change – Charles Darwin’ (page 284): Sunk cost fallacy must be avoided by investors at all costs. A failure to change your mind when the data is telling you otherwise will often end badly.
‘For the great majority of transactions being stubborn about a tiny fractional difference in the price can prove extremely costly – Philip Fisher’ (page 337): When a company is close or around your target it may be good to start purchasing shares. Don’t get too hung up on the price hitting a very specific target otherwise it may rebound just before it reaches your entry level. A good example which worked out for Warren Buffett and Charlie Munger is their purchase of Sees Candy where they were unwilling to pay a penny more than their asking price. Whilst they got the company it turns out Sees was worth far more and they ran the risk of missing all of the upside based on a very exact purchase price. They could have purchased the company higher and Sees Candy would have worked out brilliantly.
8 Quote from Warren Buffett was originally given in his 1999 interview with Fortune.
‘Great wisdom can be found in Earnest Hemingway’s words: “There is nothing noble in being superior to your fellow man; true nobility is being superior to your former self.”’ (page 340): Don’t focus on keeping up with the Jones’s, focus on your own progress. Wake up each day and try to do one think that makes you better. After a while you will look back and see how much progress you have made without the headache and stress of comparing yourself with your neighbour.