Interesting Reading – October 16, 2016

Published on October 16, 2016

Note to readers:  In this series, we suggest worthwhile reading material on a variety of topics, not all of which are directly related to investing.  Some of the articles are behind pay walls.  However, it is often possible to read such articles by going to Google News and searching for the article’s title.  

Joel Greenblatt’s Investing Secrets Revealed – Barron’s, October 15, 2016.  Joel Greenblatt, co-founder of Gotham Asset Management, has an exceptionally strong investment track record and is closely followed by value investors.  As the author of You Can Be a Stock Market Genius, The Little Book That Still Beats the Market, and The Big Secret for the Small Investor, Mr. Greenblatt’s views have been widely disseminated in recent years. However, many investors are not inclined to do the work to actively invest their portfolio based on these techniques.  Mr. Greenblatt created a series of hedge funds for investors who wish to delegate the task.  More recently, he created Gotham Index Plus which he discusses in this Barron’s interview along with his bullish views on Apple and CVS.

The Best Way to Improve Investment Skills:  “One Case Study After Another” – Base Hit Investing, September 27, 2013.  John Huber describes how case studies are an integral part of his investment process.  Case studies involve reading about specific investment results and then attempting to reverse engineer the thought process that the investor had when the decision was made to buy the stock.  By learning from the successes and mistakes of others, one can begin to build a picture of the right checklists and mental models to adopt in order to achieve success and avoid failure.  As an aside, one of the most popular posts on The Rational Walk in recent memory was a review last week of Inside the Investments of Warren Buffett, a book that uses the case study approach to look at what the author considers to be Mr. Buffett’s twenty most important investments.

Deutsche Bank:  A Greek Tragedy at a German Institution? – Musings on Markets, October 6, 2016.  Musings on Markets is the personal blog of Aswath Damodaran who is Professor of Finance at the Stern School of Business at NYU.  One of the nice things about this blog involves the valuation models that are provided as well as video commentary accompanying most posts.  This post on Deutsche Bank is particularly interesting for those who do not necessarily understand large financial institutions that well and want to get an overview as well as potential models to pursue a valuation.

Imagining a Cashless World – The New Yorker, October 10, 2016.  The widespread use of credit cards and, more recently, completely virtual methods of payment such as Apple Pay, might obscure the fact that cash still serves as the payment mechanism for 85 percent of consumer transactions globally.  For consumers in advanced economies, particularly younger individuals, paying with cash is increasingly the exception rather than the rule.  Larry Summers recently advocated for elimination of the $100 bill.  Kenneth Rogoff’s recent book, The Curse of Cash, has only added to the debate over whether advanced economies should move to eventually eliminate currency.  In The New Yorker article, Nathan Heller describes his travels in Sweden where the use of cash has become increasingly rare.  In many cases, it is not even possible to pay with cash.  There are serious implications associated with the elimination of cash including further erosion of personal privacy and the risk of giving governments the ability to confiscate wealth through negative interest rate policy.  Mr. Heller’s lengthy narrative gives us a picture of how a cashless society might look in practice. For some of the common objections, see Elaine Ou’s Bloomberg article:  The Cashless Society Is a Creepy Fantasy.

At Some Point, You Have to Eat The Broccoli – Farnam Street, October 10, 2016.  No matter how attractive a proven methodology might be, there is no practical value in it if people merely read about it and fail to put it into practice.  The Farnam Street is a well known intellectual hub for those interested in the type of multi-disciplinary thinking long advocated by Charlie Munger.  Many of these concepts are deceptively simple.  For example, one can read over 9,000 pages per year by committing to read only 25 pages per day.  This is pretty close to a 10,000 page-per-year goal that would cover around 30 average size books.  It sounds really good and not hard to implement in practice but few people who read about it will actually follow through.  However, eventually as habits develop, reading 25 pages per day might not seem like eating broccoli:  “And the real and comforting truth is that you might really start liking, and even get used to eating, broccoli.  Eating potato chips and candy will eventually feel like the uncomfortable and unnatural thing.” 

John Maynard Keynes:  Courage Is the Key to Investing – The Wall Street Journal, October 14, 2016.  Most likely, everyone reading this will know John Maynard Keynes primarily as the author of The General Theory of Employment, Interest, and Money rather than as an investor to potentially emulate.  However, Keynes was, in fact, a great investor and much of his success can be attributed to the fact that he bravely purchased U.S. stocks during the worst periods of the Great Depression.  Losing money at least “on paper”, which is inevitable when buying stocks in relentlessly falling markets, is almost unbearable for the vast majority of investors.  Those who have the temperament to be courageous during difficult times and also employ a solid intellectual framework for investing have a durable edge.

Can America Trust Its Aging Nuclear Arsenal?  – The Wall Street Journal, October 15, 2016.  Much has been written recently regarding whether the candidates running for President have the temperament required to effectively deal with the demands of the job.  No demand is greater than the potential use of nuclear weapons.  In this essay, Steven Koonin describes his experiences as a physicist who has served on the governing boards of the Los Alamos, Lawrence Livermore, and Sandia National Laboratories.  Due to aging facilities and lack of a testing program in recent decades, the effectiveness of the nuclear arsenal cannot be taken for granted.  According to Mr. Koonin, “The goal should be a long-term strategic view of managing our nuclear-weapons complex and investing in it.  Otherwise, the question of who can be entrusted with the nuclear “button” will eventually give way to concerns about whether, in that awful eventuality, the button is connected to anything that actually works.” 

2016 Nobel Prize in Economics – The Royal Swedish Academy of Sciences, October 10, 2016.  Oliver Hart and Bengt Holmström were awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.  Their work has to do with “contract theory” and involves much thought regarding the incentive systems created by various forms of contracts including executive compensation.  As Charlie Munger often says, “Never think about something else when you should be thinking about the power of incentives.”  This link is for the press release announcing the prize.  There are links to background papers at the end of the press release.

Interesting Reading – October 16, 2016