What’s on your bookshelf, inspired by Morgan Housel

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I was pleased to see that Morgan Housel of Collaborative Fund included a couple of investing books within his “23 Books That Changed My Life” (May 12, 2017) that I happened to have on my shelf. John Train’s Famous Financial Fiascos is one of them. I serendipitously found several Train books at the Friends of S.F. public library’s massive annual sale years ago as a recent grad going through the obligatory investment learning cycle (e.g. books by the Gardner brothers, founders of The Motley Fool — Housel was previously with MF —  progressing to Train and Benjamin Graham — I found Security Analysis and The Intelligent Investor waiting for me at the same book sale, and thankfully had the latter to lean on before taking the plunge on the former). I have written about Train a few times over the years.

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Investing in Banks?

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Check out Oddball Stocks for details of a book about investing in banks in the works that Nate Tobik is co-authoring. A sample chapter (about whether bank stocks are risky) is available there for download. I enjoyed it and highlighted the following, which supports a couple of key points the authors make in the chapter about investment opportunities with banks:

In 2012, a rogue trader (nicknamed by the media as the “London Whale”) at JP Morgan caused a loss of $6.2b. JP Morgan was able to absorb this loss and move forward without an impact to their business. Consider that of the 6,279 banks in existence in the US at the end of Q3 2015 only 177 had more than $6b in total assets. The London Whale made three bad trades that in the aggregate lost more money than 97% of the banks in the US hold in assets on their balance sheets.

Separately, the Heard of the Street section of the WSJ is often a good source of interesting statistics and commentary. For example, in the Thursday 3/10 edition, Aaron Back describes how banks have been preparing for higher rates by classifying more and more (debt) securities to “held to maturity” instead of “available for sale.” The so-called big four U.S. banks’ held-to-maturity holdings have increased from under 5% in 2011 to approaching 20% by year end 2015. Interest rates, however, at least presently, have not reciprocated. It sounds like a little FIFO, LIFO shifting. Very interesting to think about the various implications and juxtapositions of capital cushions / distressed debt levels / whether oil and gas companies will further tap credit lines / potential broader slowdown in CRE / health of auto loan and lease payments / student loan repayments and loan securitization/syndication and etc.

There is excess capacity in too many areas (and not just commodities). Reinsurance, for example. Retail real estate spinoff dreams, for another (the Sears and Macy’s locations I’ve seen are fairly typical in their feeling quite dated and needing serious renovations while leaving me scratching my head about who would actually want to lease or own stores other than Amazon). Not to mention consumer electronics, which is one area where it’s easy to understand how Japan (a longtime investment focus of mine) has struggled to remain relevant on a global scale: far too much domestic capacity where intense competition and me-tooism hurts profit margins, not to mention the overall glut when including global capacity from companies in China, South Korea and Taiwan, making meaningful differentiation near impossible and commodifying nearly everything. Perhaps almost the same can be said about investing in Banks in Japan. And even the global investment banks leading up to 2008 and for many the ongoing struggles today.

There’s a sort of natural Batesian mimicry in business and investing with one too many geniuses (and unfocused/undisciplined companies) masquerading as value-creators while in fact serving as a drag, ultimately, on pricing power and profit margins for the industry (and securities markets) at large. In some ways, consumers may benefit (and especially some patient and disciplined value investors) as prices come down, although there is often plenty of collateral damage or negative externalities by association.

Let me end by saying I like Nate’s approach with the smaller banks and oddball companies among which we are more likely to find simplicity (e.g. balance sheets), focus (one core or a limited number of profit drivers) and less competition (e.g. more attractive market valuation at time of purchase or accumulation). I haven’t commented about my newsletter in awhile — suffice it to say the rather obscure Japanese smaller caps are necessitating the aforementioned patience and discipline, which I believe is now essentially a matter of arbitraging time to realize value. I hasten to add however, as a I said recently to a friend, that opportunity cost may prove to be a bitch in some cases!

Business Adventures Book Summary

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I followed the herd and read Business Adventures (by the late John Brooks, originally published in 1969) over the summer like many others did after learning the book was Bill Gates’ favorite all-time business book (even better, it came recommended to him from none other than Warren Buffett). I previously posted some of my favorite quotes and notes from the excellent first chapter that covers the May 1962 crash, a flash crash of sorts of the time. Reading that post before or after my summary thoughts about Business Adventures that follow below is worth your time.

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Berkshire Beyond Buffett Notes

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The rent is too damn high and the weather is too damn cold. Can I interest you in an all-weather portfolio? All kidding aside, if not already in your possession, get Larry Cunningham’s Berkshire Beyond Buffett: The Enduring Value of Values and enjoy the latest of Larry’s deep dives into Berkshire Hathaway (BRK.A, BRK.B). To keep these posts short I’ll share some interesting Berkshire Beyond Buffett notes every few chapters or so.  Continue reading

Warren Buffett: 85% Fisher, 15% Graham

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In John Train’s The Midas Touch (Amazon; recent post), published in 1987, he describes Warren Buffett as 85% influenced by Benjamin Graham and 15% by Philip Fisher. After re-reading Fisher’s Common Stocks and Uncommon Profits and typing up 15+ pages of notes to substitute for a future re-read, I am convinced that Buffett is much closer to 85%-Fisher and 15%-Graham, and he was arguably already leaning more Fisher-like than Graham when Train began writing about him. Put Common Stocks on your reading list and consider a re-read if it’s already on your shelf. Continue reading

Business Adventures notes

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Like many others, I became aware of John Brooks’ Business Adventures after the recent WSJ essay by Bill Gates wherein Gates said the book was his favorite of the business genre and that it was Warren Buffett’s recommendation to him in 1991 when he asked Buffett for his best business read (the story goes that Buffett mailed Gates his personal copy and Gates has kept it to this day). I’m in the middle of chapter three (about the U.S. federal income tax) but wanted to share a few notes from the first chapter, “The Fluctuation: The Little Crash in ’62” [chapter two is a 50-page entry about the failed Ford Edsel, a rather quick, enjoyable and informative read]. Continue reading

Bernard Baruch: ‘speculator’ and statesman

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Bernard Baruch (1870 – 1965) published his memoirs, My Own Story, in 1957. I was pleasantly surprised by his account of his career on Wall Street, learning that he was not so much a speculator — which then, and now, carries a negative connotation — but clearly a very astute investor.  Amassing an ever larger fortune was not his game, he claimed, instead he found serving his country more satisfying (he served under presidents Wilson and Roosevelt). It appears that he thwarted profiteering as much as one man could by securing highly favorable rates for select commodities needed during war. It’s a disservice to Baruch’s legacy to say that he was merely a “speculator” or gambler. In his memoirs he explains that ‘speculator’ comes from the Latin word speculari, which actually means to spy out and observe; or in his words: to get the facts, form a judgement, and take action accordingly.

Baruch applied such a perceptive and properly defined speculator’s approach to investing as well as his government service. Baruch’s belief in the fundamental importance of supply and demand, and his ability to recognize and take advantage of market imbalances, resembles the commonsensical approach of the likes of Jim Rogers and Marc Faber in today’s world (and what we have all read of Benjamin Graham’s approach until his late days, as well as Warren Buffett’s astuteness vis-à-vis the Berkshire Hathaway – Burlington Northern Sante Fe investment, for instance). Continue reading

Martin Whitman: unwavering value investor

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Just over a month ago I reviewed Martin Whitman’s, “Value Investing: A Balanced Approach” (my review), which was published in 1999. I found that his approach to value investing sounds exactly the same today as it did then. In fact, it sounds nearly identical to, The Aggressive Conservative Investor, which he coauthored with professor Martin Shubik in 1979. While Whitman’s name may not be invoked like Graham’s and his name doesn’t command headlines like Buffett’s, he belongs alongside them at the top of the batting order. Whitman — unlike Graham who maintained a broad portfolio of securities and was increasingly formulaic, to the point that very late in his career he even suggested most (analysts and individuals alike) would be best off indexing — is an intensely focused investor (resembling much more the young Graham) with a solid understanding and appreciation of capital structure and the numerous ways to realize gains beside hoping for a higher stock price (many of which by what he calls resource-conversion, or asset-conversion, activities). Continue reading

Benjamin Graham’s memoirs

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Benjamin Graham: The Memoirs of the Dean of Wall Street, is a refreshingly candid story of the man (1894 – 1976) most investors associate with his value investing classic, Security Analysis. His memoirs are not to be read for takeaways to improve one’s investing methods. Rather, his memoirs serve as the story behind the composition of a truly brilliant, multi-talented man, who with fortuitous timing uncovered an opportunity in mis-priced securities that led to a highly successful career in investing. Graham was very serious about his work, but did not take himself too seriously (he was not full of conceit despite his superior knowledge; and he never sought to attract attention). Continue reading