December 7, 2021

The 12 Days of Holiday Reading

Written by PenderFund

How do you balance risk and reward in an investment portfolio? Beginning in the 1950s, this question has captured the attention of some of the brightest minds in finance. Now, a recently published work, In Pursuit of the Perfect Portfolio maps out the development of modern portfolio theory by exploring the contributions of a number of key thinkers and practitioners in the field. The book was written in collaboration between Andrew Lo of MIT’s Sloan School of Management and Stephen Foerster of Canada’s Ivey School of Business, from whom I was lucky to take instruction many years ago.

The book tells the story of several leading lights in portfolio construction. There are chapters focused on theoretical leaders such as Harry Markowitz and Gene Fama. For the more practically inclined, Lo and Foerster also cover the careers of practitioners like Vanguard founder John Bogle and Greenwich Associates’ Charley Ellis. In studying the insights of the ten selected luminaries, a mosaic emerges of a disciplined, careful process that can inform the work of both investment managers and advisors. Additionally, each of Lo and Foerster’s interviewees reveal how they personally invest their own money, which adds an interesting wrinkle to this already fascinating book.

Written as a follow-up to his previous book, Startup CEO: A Field Guide to Scaling Up your Business, Matt Blumberg and his team take on the next topic of scaling up the key leadership functions of an organization in this second book. The book is organized into eleven parts, encompassing most of the main areas of a company, such as finance and administration, marketing, sales, and so on. Each section, written by experienced leaders from that functional area, covers everything from grasping the tactics and Key Performance Indicators for the department, to creating a forward-thinking strategic framework. Each part ends with CEO-to-CEO advice on what “great” looks like for each CXO* role, such as signs that the CXO is not scaling, when a fractional CXO may be good enough, and other key guidance. Although written by leaders of technology companies, the processes and knowledge cross virtually any geography and industry. This book is truly a guide for a company leader – a peer-based blueprint, if you will, to thinking both tactically and strategically about how to scale your own CXO role, your department and, by extension, the start-up.

* “CXO” is a generic reference to the C-level leaders in a business. The “X” is a place holder, so it can stand for the “F” in “Chief Financial Officer”, the “M” in “Chief Marketing Officer”, etc.” Source: Book Brief: Startup CXO

Michael Lewis’ latest book focuses on the pandemic, covering a group of real-life characters, including doctors, healthcare administrators, scientists and researchers who are trying to get the US government to take the threat of COIVD-19 seriously. The book discusses how bureaucracy, politics and misaligned incentives exacerbated the situation and made the US government slow to react and take the threat of the virus seriously.

Despite the US government and many global governments having precautionary plans in place to deal with a pandemic, and despite the insights of scientific and medical experts expressing their concerns over the serious implications of COVID-19, political leaders dismissed these concerns and were blind to the impact.

Lewis’ book discusses many examples of how bad systems result in bad outcomes. In this case, we had all the information we needed prior to the declaration of a pandemic to deal with the crisis earlier and more effectively. The book emphasizes the need for systems that encourage action, incentives to act quickly, and protection and support for those who do take action.

Although the pandemic is still very topical, I think Premonition also provides some enduring insights into human behaviour and human biases, and there are some applicable takeaways for business leaders, including how managers can make more informed decisions by listening to employees on the front-line who understand the challenges and nuances of dealing with a given issue.

We spend a lot of time on the equity team discussing behavioural finance and trying to understand, acknowledge and build an investment process that takes our own biases into account. The decision-making errors which occurred before COVID evolved into a full-blown pandemic and the errors made in the response highlight the same kinds of cognitive biases that many investors make. This includes confirmation and information bias; our tendency to extrapolate from data due to incentive-caused bias; and humanity’s inability to properly comprehend exponential growth and tail-risk.

I think the book really highlights and articulates that famous saying, “That those that fail to study history are doomed to repeat it.”

For the curious layperson, this book is one of the best introductions to how monetary systems work and the potential role of Bitcoin, in my opinion. Layered Money makes some noteworthy progress in demystifying this controversial and counterintuitive asset class.

Admittedly, I was a Bitcoin skeptic until the fall of 2020. I tend to be drawn more to microeconomics and company-specific subject matter than macroeconomics. But it became impossible to ignore the potential second- and third-order effects of the actions of global central banks in response to the pandemic. When people lose faith in central authorities, decentralized systems like Bitcoin gain credibility.

Bitcoin’s rapid adoption and institutional acceptance over the last year is fascinating on many fronts. For the two to three hours of time it takes to read this book, my guess is that you’ll probably understand more about Bitcoin and how money works than most investors.

The book provides an insightful deep dive and historical overview of money. You will better understand the role central banks, private banks and gold play in the various “layers” of the monetary system. The book’s thesis is that the current monetary system is unsustainable. Nothing lasts forever. Monetary regime change happens once in a while. The author persuasively argues that we are likely at another important inflection point.

The historical context of previous monetary systems will help readers better understand why the unique attributes of Bitcoin, and related innovations like the Lightning Network, make it more likely that it will play a significant role in the next “layered” monetary system. Bhatia argues that potential regime change, in turn, will impact almost everything we do.

Even if Bitcoin is not at the centre of the next monetary system, it is important to understand how central banks are thinking about digital currencies and how that impacts the monetary system. You will also find who might be most at risk and what role central bank digital currencies are likely to play in the future (hint: private banks are threatened). Bhatia argues that in the coming years, we will likely be moving away from a unipolar world dominated by the US dollar to something else.

Why do companies stop growing? Can this be avoided? And can they ever recover? Stall Points attempts to answer these questions but begins with “… sobering news: it is common to stall, it is hard to see a stall coming and it is extremely hard to recover from a stall. In fact, companies that do not recover quickly face long odds at returning to a sustainable growth track. Ever.”  Further, companies can stall at any stage or size; it is not an issue of becoming too big.

With this backdrop, the authors go deep into the root causes of growth stalls and discover that the vast majority of stalls (87%) are actually knowable, controllable, preventable and are the direct result of decisions made by senior management relating to strategy or organizational design. It is not the strategy per se that is flawed, rather it is the underlying assumptions upon which the strategy is based that are flawed or no longer valid that pose the greatest threat.

Stall Points explains that there are unfortunately no clear leading indicators that a stall is coming and interestingly, when a stall does come, it is equally surprising to both the market and the insiders of a company. Nevertheless, the book gives us hope, by exploring how management teams can potentially avoid a stall if they are proactive in constantly stress testing the assumptions that form the basis of their strategy.

William Green is a financial journalist who has written for many leading publications, collaborated on several best-selling books and interviewed many of the world’s best investors. His new book is a compilation of his most insightful conversations over the years and is filled with nuggets of wisdom from the likes of Charlie Munger, Sir John Templeton, Nick Sleep and over 30 others.

The book highlights how each investor applies the core principle of value investing, buying something for less than it is worth, and illustrates how value investing can take many different forms. The book also provides a rare window into the minds of these investors as they share their personal beliefs and motivations in conversation with Green.

One of my favourite excerpts is from an interview with Howard Marks, where the two are discussing efficient market theory. Marks tells the following joke:

“A professor of finance and a student are strolling across the Chicago campus. The student stops and exclaims, ‘Look! There’s a five-dollar bill on the ground!’ The professor replies, ‘It can’t be a five-dollar bill or someone else would have picked it up already.’ The professor walks away, so the student picks up the money and buys himself a beer.” Fittingly, Marks goes on to say that he keeps a five-dollar bill that he found in the Harvard library in his wallet as a reminder of the limitations of theory.

The Outsiders is a classic book that examines the characteristics of some of the greatest CEOs in recent history and how these CEOs enhanced long-term value creation for their shareholders. It is an excellent read that combines financial prowess with great storytelling.

Thorndike takes eight companies and their CEOs as case studies. He includes Henry Singleton from Teledyne Technologies, John Malone from TCI and of course, Warren Buffett from Berkshire Hathaway, among others. In these case studies, Thorndike breaks down the role of CEO into two main areas of responsibility: generating cash flow from operations of the business and deploying that cash flow. He zeros in on how these great CEOs often acted in contrast to the established beliefs and conventional wisdom of their time and found they were somewhat contrarian.

One example is how these CEOs focused on cash flow per share value metrics, instead of earnings. They ran decentralized operations that put more control and responsibility into the hands of their managers. This meant their people were doing what they did best: running operations, which generated cash flow for the business and allowed the CEOs to spend more of their time on allocating capital to the value creation.

A lot of this may seem obvious today, as many of these practices and beliefs have been broadly adopted, but it wasn’t common in the 70s and 80s when these CEOs were making their mark – they were writing the textbook in real time.

The obvious lesson here is while an idea may seem a little ‘unconventional’ as Thorndike puts it, it is always important to keep an open mind.

The book is a good introduction to the state of genetic engineering today, where the technology is headed, the short- and long-term consequences of the tech and some of the ethical, policy and geopolitical questions associated with it.

The author takes the approach of asking a series of questions to inspire the reader to think about genetic science. He discusses how new technology should always result in a net benefit for society and argues that technological advances should be done with restraint and should demonstrate the consensus of all nations and all interests. There are many obstacles on the road to genetic innovation – inefficient healthcare systems, a lack of expertise and generally conservative medical cultures. In addition, Metzl argues that the medical sector must move from generic care to personalized healthcare. He contends that doctors will increasingly focus on causes rather than symptoms to make their diagnoses, and the focus will shift from treatment to prevention. In a series of incremental steps, genetic engineering will alter our evolutionary trajectory as a species.

There remain many concerns around genetic technologies in terms of understanding, regulation, ethics, equality of access and more. However, this is a wonderful time to be thinking about this. The cost of genome sequencing has fallen close to the cost of the materials required and thus genetic science is becoming increasingly commoditized.

Cheaper data and improvements in computing powers will lay the foundations for new discoveries. The emergence of big data represents a great start for the acceleration of genomic studies. Not to mention, the global community of scientists is sharing ideas at a level and speed that would have been unthinkable a decade ago.

Nonsense on Stilts is highly relevant to everything going on in society today, especially the public perception and interpretation of scientific news and advances. The author draws distinctions between hard science, soft science, pseudoscience and anti-science. The book covers a wide range of topics, from vaccinations, climate change and fake news, to more esoteric subjects, such as string theory, quantum physics and the search for extra-terrestrial intelligence.

This well-written book uses humour to make many of its points. It is accessible to non-scientists and highlights the difference between critical thinking and wishful thinking. The author specifically makes the case for critical thinking in matters of science and that society needs to maintain a line between expertise and opinion. That is, people have the right to their own opinions but not to their own facts.

The author makes frequent use of quotations; even the title “Nonsense on Stilts” is a phrase coined by the 18th and 19th-century English philosopher Jeremy Bentham to define a really, really tall order of nonsense.

My favourite quotation is from the economist Thomas Sowell, who said “For every expert there is an equal and opposite expert; but for every fact there is not necessarily and equal and opposite fact.”

I picked this book up after watching the “Down to Earth with Zac Efron” series on Netflix. The show follows Efron and Olien around the globe as they explore healthy and sustainable ways to live. I liked the show so thought I would read the book. What I was hoping to get out of this book were some key takeaways to help me live a more healthy and balanced life, and who doesn’t want to be “eternally awesome”?

In this book, Olien covers what he calls the “five life forces”: quality nutrition, hydration, detoxification, oxygenation and alkalization. He argues that if we pay close attention to these five forces, we will be healthy, fit and free of illness. A lot of it makes sense. I found the forces of hydration and oxygenation fascinating. I realized I had definitely underestimated the importance of proper hydration and found that the breathing technique outlined in the book really helped me focus on and manage stress.

I recommend this book because I think the author does a great job of highlighting the importance of monitoring what we put in our bodies. We need balance in our lives to reach optimal performance.

Daniel Kahneman is the author of Thinking, Fast and Slow which looked at intuitive human judgment. Noise is an extension of that research and looks at flaws in decision-making. To do that, the authors needed to understand the concepts of “bias” and “noise” in the decision-making process. They use a great analogy to explain the two: shooting for the bullseye of a target. A biased result occurs when all the shots are clustered, or systematically off target, whereas with a noisy result, the shots are widely scattered around the bullseye in a random pattern.

The topic of bias in decision-making has been widely studied and discussed, but noise has received far less coverage. Bias leads to errors which can lead to unfair results, but noise is also a critical factor, and we know less about it.

The key theme of this book is that whenever a judgment is made, there is noise – and more of it than you would think. They define noise as: “the unwanted variability of judgments”. Occasional noise, for instance, is a function of the moment when a professional makes a judgment. The book talks about a study showing that doctors were significantly more likely to order cancer screenings early in the morning than late in the afternoon. The book suggests that the noise here is perhaps caused by extraneous factors (maybe stress or fatigue) that shouldn’t impact a judgment but do anyway. In the context of healthcare, a patient’s appointment time could, in theory, impact whether early detection was achieved.

Given the prevalence and negative impact of noise on human judgment, the book also offers suggestions for reducing noise. For instance, “decision hygiene,” which involves strategies such as getting independent judgments from multiple judges and rules-based decision-making.

The book describes judgment as measurement in which the instrument is the human mind. Given that our lives, whether it be personal or professional, require us to make judgments regularly, often with significant impact, understanding potential errors in judgment and having some tools to reduce these errors is helpful.


Day 9 – Daniel Chung

Junk to Gold, by Willis Johnson

The practice of long-term investing requires a thorough assessment of a company’s leadership team, and one way of identifying competent leadership involves researching exceptional leaders. Willis Johnson, the founder of Copart, is one such exceptional leader. In his book Junk to Gold, Willis shares the lessons he learned throughout his entrepreneurial journey, clearly demonstrating how and why Copart became a multi-billion dollar business under his command. A few of the lessons that spoke to me most were the importance of people, innovation and culture.

By constantly adding to his rolodex and maintaining good relationships, Willis often attained new business ideas and buyout opportunities that proved to be extremely lucrative and had no shortage of people who were willing to go into business with him as partners. Willis makes it very clear that his wide-reaching network and ability to form genuine relationships played a key role in scaling Copart in its early days.

In any industry, the innovation mindset can be the key that unlocks market leadership. Willis and his team were always looking to innovate and enhance the customer experience, and it wasn’t long before this customer obsession paved the way for Copart to become the industry pioneer of an online auction bidding system. Though there were certainly other key factors at play, an innovation mindset is what ultimately allowed Copart to surpass its primary competitor, IAA.

Finally, Willis emphasizes the importance of culture. As a business scales, it becomes hard to keep company culture intact. The leadership team at Copart realized that its culture was starting to dissipate as the business grew, so they engaged in several initiatives to reintroduce camaraderie within the company. One such initiative was the World Tour, whereby the management team visited every Copart yard across America to meet every employee. Willis attributes much of Copart’s success and ability to handily respond to difficult circumstances (e.g. Hurricane Katrina) to initiatives like the World Tour. The emphasis Willis puts on culture gave me a stronger appreciation for the importance of culture in identifying a great business.

This book sets out the key aspects of “choice architecture”, which refers to the way that a choice is structured and presented; in other words, how someone poses a question. A choice architect is the person who designs a question, and the decision-maker is the person answering. The author refers to the choice architecture as the unspoken conversation between these two people.

The book sets out the scope of tools available to the choice architect in their question design and how they fundamentally work. Johnson shows that the way information is presented can impact choice, and explores these variables, such as determining the number of options to present, the effects of the ordering options, the sorting options made available to the chooser and the simultaneous or sequential presentation of options.

The author provides the example of how the choice architecture used by Netflix is optimized to quickly find you something to watch, as opposed to finding you what you may have set out to search for.

My key takeaways were that choice architects must thoughtfully make design choices in a way that advances their goals, particularly in the context of a software sale, while the decision-maker must better understand how decision architecture can subtly affect their choices.

One Up on Wall Street is one of my favourite books on investing. The book was written over 20 years ago and remains a practical book with informative facts and useful insights from Peter Lynch, one of the greatest investors of all time. Lynch provides valuable advice on how to prepare to invest, how to pick winners (“tenbaggers”) and when to buy or sell with a long-term view. It is well-written, entertaining and easy to read. What is particularly useful is that he put stocks into six categories based on their major characteristics and provides a checklist of qualities that investors should pay close attention to in each category.

I really like the real-life examples Lynch uses to illustrate his investment philosophy. Many of the companies mentioned are household names like Taco Bell, Subaru, Chrysler, Home Depot and others. Lynch explains what he looks for when trying to pick a winner in a simple and understandable manner, but with an emphasis on common sense and sound judgment. Many of these examples are outdated, but the thought processes he used remain valid, and the basic principles still apply, including “know what you own and why you own it.”

Equally, some of the bad practices Lynch mentions in the book remain prevalent among today’s investors. He lists twelve of the silliest (or most dangerous) things people say to themselves about stock prices. For example, “If it’s gone down this much already, it can’t go much lower,” or “This stock’s gone up, so I must be right,” or “The stock’s gone down so I must be wrong”. I am sure you have heard of some of these at least once or twice in your investing life.

Last but not least, I am very impressed by Lynch’s honesty and sense of humor in discussing his own triumphs and mistakes.  All in all, this is a great book to add to your collection.

House of Morgan is the history of JP Morgan, the financial services institution we know today, from its founding, all the way through to the modern day. It is so interesting to see how entrepreneurs build businesses and cultures, and to see the strategies they use. This book is really relevant today as we watch crypto currencies move rapidly, with the potential to disrupt financial institutions like JP Morgan. In order to understand how crypto might disrupt these financial institutions, it is imperative to understand how these institutions were built, back when they were disrupting the sector themselves. What were the legacy decisions that went into building these financial services companies to make them what they are today? Clearly these institutions were built on trust and that trust is the bedrock on which the entire industry stands today. If you want to understand the world you need to understand how we got here, and this book is a great insight into the banking sector and its foundations as it faces down, or adapts to, a world with crypto currencies.

This book became a must-read after I kept hearing it mentioned and recommended by a string of successful entrepreneurs and technologists on the podcasts and blog posts I digest. Many mentioned how this book has helped to shape their corporate strategy. The Seven Powers are almost an evolution of Michael Porter’s Five Forces, but they go above and beyond that with real world, tangible examples of how businesses can think about the attributes that can lead to long-term, sustainable success in business, which often equates to long-term, enduring shareholder returns. Some of the powers are intuitive, some are less intuitive, but the tangible examples Helmer gives really help. Although this is essentially a strategy book and I picked it up thinking it was going to be very similar to other strategy books that I have read, it is not. It doesn’t prescribe a strategy for management to use and push down through the organization and out to stakeholders. This is different. It doesn’t replace operational excellence or customer feedback loops but, as the name suggests, empowers you and provides a framework for you to think about your business, “Should I be charging for this differently” or “Should I tackle that a different way”. It was really eye opening as being not-your-average business strategy book.