Book Marks:
3 Good Reads — Back to the Basics

Categories Author: Patrick O'Shaughnessy, Investing

Now is a good time to take your mind off all of the current events and noise that might otherwise distract investors from staying the course. Here are some books that keep it all in perspective and lay out some fundamentals to help get us through any kind of market environment:

Concentrated Investing:
Strategies of the World’s Greatest Concentrated Value Investors

by Allen C. Benello, Michael van Biema, Tobias E. Carlisle

book cover

This book reminded me a bit of The Outsiders: it is structured as nine different stories about successful concentrated value investors. The chapter of Kristian Siem—whose story is well known in Europe but not in the U.S.—is worth the price of the book on its own. It was one of the best chapters in an investing book that I’ve ever read.

What this book re-affirmed for me was the importance of “committed” capital. None of these investors would have been as successful if they were myopically focused on quarterly performance numbers and investor cash flows. The principle-agent problem is rampant in the asset management business. No matter how smart a portfolio manager is (or no matter how big their “edge”), they will fail if they cannot keep their investors invested. This means that even the best will sometimes position their portfolios to maximize the odds of client retention, not long-term returns. Not having to worry about outflows is a huge (and rare) advantage—one enjoyed by several of the people profiled in this book.

Capital Returns:
Investing Through the Capital Cycle: A Money Manager’s Reports 2002–15

by Edward Chancellor

book cover

You rarely find a good investing book these days. Most of the best investing writing comes in the form of quarterly letters, research papers, or interviews. Every investor should read this book. It focuses on my favorite topic: capital allocation. While value investing can capture a lot of the opportunity that is created by the capital cycle, it does not capture it all. This book dives deeper. The introduction by Edward Chancellor (who wrote a top five investing book, Devil Take the Hindmost) is phenomenal and worth the price of the book on its own. Best investing book so far in 2016.

The capital cycle turns down as excess capacity becomes apparent and past demand forecasts are shown to have been overly optimistic. As profits collapse, management teams are changed, capital expenditure is slashed, and the industry starts to consolidate. The reduction in investment and contraction in industry supply paves the way for a recovery of profits. For an investor who understands the capital cycle this is the moment when a beaten down stock becomes potentially interesting.

The Dao of Capital: Austrian Investing in a Distorted World
by Mark Spitznagel

book cover

I just read this book again, my third time. It is dense, but its central idea will likely cause you to question your investment strategy in SOME way, which is always valuable. Spitznagel suggests a very contrarian approach that would require insane discipline to make work. In many ways, I think this book is more valuable for individual investors than for professionals. As a professional all too familiar with the dynamics of career risk and quarterly performance reporting, I know firsthand that following a strategy like the one suggested in The Dao of Capital would be career suicide unless you get really lucky timing when you start. Spitznagel discusses a market-level strategy (basically using Tobin’s Q to get into and out of the market) and a stock level strategy (basically, price/book and return on invested capital in the general spirit of Joel Greenblatt). But what’s most valuable isn’t these basic strategies, but rather the logical backing for them. If nothing else, you’ll learn a lot about conifers.

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