Reading Roundup: March 2024
This month we read:
The Undoing Project by Michael Lewis
Atomic Habits by James Clear
The Wager: A Tale of Shipwreck, Mutiny and Murder by David Grann
How to Think Like a Roman Emperor by Donald Robertson
The Mission, The Men, and Me: Lessons from a Former Delta Force Commander by Pete Blaber
The Undoing Project by Michael Lewis
Outside of legendary investors such as Buffett, Munger, and Howard Marks etc. Daniel Kahneman has probably had the biggest influence on the way I view the world. The Undoing Project is the story about how Kahneman and his partner, Amos Tversky, developed “Prospect Theory”. It’s hard to come up with a psychological study that is more applicable to investing than the results of Kahneman and Tversky’s work in the 1970s.
There are more than a dozen human biases that are outlined in Prospect Theory, all of which are reviewed in detail in Kahneman’s book Thinking, Fast and Slow (required reading for any serious investor or business person, in my opinion), and Michael Lewis hits on each of them at a high level in this book which serves as a useful refresher.
Two of their ideas that are always worth keeping top of mind are the the Endowment Effect and Loss Aversion. Both are particularly relevant to investing.
The Endowment Effect explains that people tend to value something they already own more highly than if they were placing a value on the same item without already owning it. As a simple example, people who were given a coffee cup thought it was worth a significant premium compared to people who were not given the same coffee cup and asked how much they would pay for it. On a larger scale, this means people may tend to think their house should sell for more than it will.
As it relates to investing, the Endowment Effect means investors are likely to value a stock that they already own higher than would an unbiased person who doesn’t already own shares. Investors need to very intentionally try to detach themselves when assessing their portfolio; just because you own a stock does not mean a “sentimental premium” should be placed on it. In other words, when looking at a position you own always ask yourself; if I didn’t already own the stock, would I buy it (or not sell it) at today’s price?
Loss Aversion is interesting because it states that the pain of experiencing a financial loss (whether temporary or permanent) is about twice as high as the joy of experiencing a gain of the same magnitude. The simple takeaway here is investors should stop checking their portfolios so frequently. Whether or not stocks go up on any given day is almost a coinflip. Because checking your portfolio when it’s down is twice as painful as the happiness of seeing that your portfolio is up by the same amount, checking stock prices every day will probably be a net negative experience experience over time. This is likely to increase the chances you’ll behave irrationally with investment decisions or just be plain old grumpy more often than you need to be.
Other important concepts include the Sunk Cost Fallacy, Confirmation Bias, and people’s inability to think probabilistically (i.e. we assess a 90% probability of something happening as greater than 90% and a 10% probability of something happening as less than 10%).
Dan
Atomic Habits by James Clear
Atomic Habits has been on my list for awhile, and I finally go to it this month. I’m a big believer that if you get the small things right the big things will take care of themselves, and James Clear expands upon that idea in this book which is his practical guide for those looking to build good habits.
The most obvious parallel to investing is the power of compounding over long periods of time. Clear encourages his readers to try and consistently become 1% better at something - investing, working out, computer programming, etc. - and over a long period of time the results will be astounding.
Focusing on getting a little better helps avoid getting overwhelmed and trying to boil the ocean. You will not master the guitar in a month or become an adept investor in a year, so don’t make it your goal to make huge leaps in progress over short periods of time. That will only set yourself up for failure and you’ll probably quit. Instead, focus on the little tasks that make you 1% better and do them consistently. Read the 10K, run one mile, just go do something that advances you towards your goal. Combine that with time and it’s amazing how much progress you can make.
Another idea I liked is the fact that “you become your habits”. It helps if you decide and define first what kind of person you want to become, and then habits that support that vision are easier to follow. I decided many years ago I wanted to be someone who reads a lot. If I think of myself as someone who likes to learn and read, it’s easy for me to pick up a book or a 10K every day as it supports who I am. You can apply this concept to any area of your life to help foster good habits (“I am a healthy eater”, “I am someone who exercises every day”, “I am a person that spends a lot of time with my kids”, etc.).
Dan
The Wager: A Tale of Shipwreck, Mutiny and Murder by David Grann
I read The Wager after the WSJ named it one of their top books of 2023. It is a true story of adventure, disaster, mutiny, and leadership, from the author of Killers of the Flower Moon. If you liked Alfred Lansin’s book Endurance: Shackleton's Incredible Voyage (one of my all time favorites) then you’ll like this too.
The book showcases the extremes of human nature. The characters exhibit incredible courage, selflessness, and resourcefulness in the face of starvation, disease, and the cold. At other times these same characters display a capacity for cruelty, violence, and self-preservation rarely seen inside a modern, functioning civilization. It reminds me of New Orleans during Hurricane Katrina when it only took four or five days without access to food, water, and electricity for American society to devolve into violent anarchy.
One of the book’s themes is the power of narrative. The shipwrecked sailors quickly split into rival factions. None of the factions think that they’re the “bad guy.” They shape their narrative to fit their individual perspective of events and their own desires, motivations, and incentives.
When the sailors return home, they race to tell their interpretation of events to exonerate themselves and vilify their rivals. Controlling the narrative is one of the keys to gaining and maintaining power, whether in government, the boardroom, or court house. It reminds me of the saying that there are three sides to every story: your story, my story, and the truth.
Investing is all about sorting through these rival narratives. It’s easy to fool yourself with confirmation bias and commitment and consistency bias. As Richard Feynman said, “The first principle is not to fool yourself – and you are the easiest person to fool.” That’s why Charles Darwin made a point to immediately write a note about any disconfirming evidence he found. He knew that merely trying to remember it would fail.
Investors also need to learn to apply “windage” to the stories they read in the paper and hear on conference calls. It’s not that journalists and management aim to lie and defraud investors, it’s that they have their own perspective and own motivation (clicks on an article, staying in the C-suite) that can wash away some of the truth. Most people tell the truth, but it’s not always the “whole truth” or “nothing but the truth.”
Matt
How to Think Like a Roman Emperor by Donald Robertson
To be successful in investing, emotional control and resilience are at least as important, and probably more so, as being able to evaluate and value a business. The ancient stoics (mostly Greek and Roman) are an excellent resource in emotional fortitude and their practices are directly applicable to long-term investing as well as life in general.
Vitaliy Katsenelson, one of my favorite authors and investors, talks a lot about stoic philosophy. In his recent book Soul in the Game he dedicates a number of chapters to his thoughts about applying stoic techniques to his daily and investing life. How to Think Like a Roman Emperor is one of his recommendations, and it doesn’t disappoint.
My favorite idea from the stoics is how they treat setbacks. Rather than complain or feel sorry for themselves, stoics encourage us to view setbacks as emotional sparring partners. When something does not go your way, it should be viewed as an opportunity to strengthen your emotional fortitude - a test from the ancient stoics to see how you’ll respond. I like to keep this frame of mind when, inevitably, one of the stocks we own encounters a rough patch or sells off after an unfavorable earnings report. Like it or not, long-term investing will provide plenty of chances to test your emotional resilience, so treat these experiences as opportunities and be thankful for them.
Like many top notch modern day thinkers the stoics emphasized process over outcome. They use hunting as an analogy; Marcus Aurelius would practice relentlessly with his bow, and when he was out hunting his goal was to apply his training and release his arrow as best as he could. Bow hunting is hard, the animal might flinch, the arrow might hit a twig, or your breathing might cause you to miss by two inches, any of which could result in a miss. Many of these variables that could cause a bad result are also out of your control, so you shouldn’t spend time worrying about them.
Similarly, investors cannot control where interest rates are set, what the economy does, or if the price of the stocks they own goes up or down, for that matter. We can control the types of businesses we are willing to buy, the prices we are willing to pay, and our emotional response to changes in stock prices, all of which can tilt the odds in favor of having a successful result.
If you focus on what you can control and apply a sound process (to investing, bow hunting, or anything else where luck plays a part), you’re likely to have a satisfactory outcome over the long run.
Dan
The Mission, The Men, and Me: Lessons from a Former Delta Force Commander by Pete Blaber
The Mission, The Men, and Me was an unexpectedly enjoyable and educational book. The book focuses on management and leadership in complex and uncertain situations. There’s plenty of good action stories from military engagements, but they’re only there to demonstrate the leadership principle at hand. If you like Jocko Willink’s books Extreme Ownership and The Dichotomy of Leadership then you’ll like this.
Blaber’s central theme is that being prepared is more important than crafting the perfect plan. Afterall, no plan survives first contact with the enemy. Since the world is uncertain and rapidly changing, it does not make sense to hold to a strict plan or structure. Teams must be fluid and adaptable, which requires preparation and training.
Leaders are most effective and flexible when they are trained to recognize common patterns and stick to simple principles.
One of Blaber’s principles is “listen to the man on the ground.” In the military, as in large corporations, decisions are often made by an officer or executive thousands of miles away and with little first hand knowledge of the situation on the ground or in the factory. The power of decentralized decision making has been proven again and again by companies from Berkshire Hathaway to Constellation Software and TransDigm. The Toyota Production System empowers factory workers to share ideas and information, which has helped the company become the largest in the world. Workers on the factory floor have a much better view of the situation on the factory floor than the executives in the corner office of a skyscraper. Danaher copied Toyota’s system, which is a big part of its success.
Another of Blaber’s principles is “it’s not reality unless its shared.” Blaber illustrates this principle by recounting Operation Anaconda, a battle in 2002 in Afghanistan’s Shahi Khot Valley. Blaber’s men had prepared to infiltrate the valley for weeks. Their mission was to gain control of the high points so that they could call in air strikes to protect the conventional army forces when they rolled in.
The Delta Force operatives easily achieved their objective because they had prepared for weeks, not because it was easy. Their preparation made it look easy.
When the conventional forces arrived, the units lost their radio connections and were unable to speak to each other. Commanders back at base camp were micromanaging the situation without a complete picture of reality. The ensuing chaos cost 8 American lives and 72 more wounded.
Blaber has three recommendations for creating a shared reality.
First, organization. Teams should be willing to disregard rigid hierarchies that don’t serve the immediate mission. Leaders should ask, “how would we organize ourselves if we didn’t already know how to organize?”.
Second, communication should be boundary-less. Too often teams within organizations battle with each other and end up compartmentalizing information. Does the engineering team know which features the sales team constantly gets requests for? Does the sales team understand the budget that finance has set for engineering?
Third, effective leadership requires common sense and no ego. Leaders should be willing to ask men on the ground for their recommendation. Asking shows that the leader respects the men on the ground and is willing to listen to them. This creates a cohesive team and a shared reality.
The title of the book follows from Blaber’s priorities. First, achieve the mission’s objective. Second, put the men in no unnecessary danger. Last, yourself, your career, and your ego.
Matt
The Best Of The Rest
John Huber: Thoughts on Ben Graham's "Unpopular Large Caps": A Still-Effective Strategy. “I always invest with an indefinite time horizon (don't buy the stock if you aren't willing to hold it for a decade), but the reality is these category 2's often work out much faster than you might expect. Realistically, I expect to own them for 3-5 years and often the price revalues itself in a year or two, sometimes even less.”
Vaclav Smil: Halfway Between Kyoto and 2050: Zero Carbon Is A Highly Unlikely Outcome.
WSJ: Realtors Reach Settlement That Will Change How Americans Buy and Sell Homes
WSJ: Why Volkswagen Is Priced for Failure. “The most striking evidence of VW’s low valuation is that its own market value is roughly the same as that of its roughly 75% stake in sports carmaker Porsche, which was partly spun out via a minority initial public offering in 2022. Never mind that the company has masses of net cash and other valuable brands including Audi, Lamborghini and Bentley.“ At surface level VW seems to rhyme with Fiat circa 2012.
WSJ: Activist Investor Land & Buildings Urges Office Owner to Liquidate.
“Equity Commonwealth has a market value of about $2 billion, which Litt pointed out is less than the $2.2 billion of cash the company holds.”WSJ: Advance Auto Parts Strikes Settlement With Dan Loeb’s Third Point.
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