Book review:

The Emotionally Intelligent Investor: How self-awareness, empathy and intuition drive performance by Ravee Mehta

Finished reading: 29 Jan 2017

https://www.amazon.com/Emotionally-Intelligent-Investor-self-awareness-performance/dp/0615688322

I found the book to be incredibly valuable as it includes valuable insights into how to become a better investor. Historically most of the literature I have read on investing has been focused on value investing. More recently I have begun to read more literature on traders. This book provides comfort to the investor that there is no one correct approach and they should choose their own style that fits towards their personality and not try to shape themselves within a particular style of investing. “Relying on someone else’s work simply does not put you in control.  There is nothing wrong with listening or reading about the ideas of others, but in the end, you need to do your own analysis and make decisions that fit an investing style based on your own personal set of strengths, weakness, motivations and personality characteristics”. “Value investing involves trying to make money by guessing that the pendulum is near the end of its swing, all the way to the left or all the way to the right, and that it should eventually swing the other way.  Growth or Momentum investing involves betting that the pendulum will continue in its current direction, left to right (let’s call it “bullish”) or right to left (let’s call it “bearish").  Success in each of these styles generally requires distinct personality traits and strengths.”

It is also important to understand the underlying motivation for yourself as an investor as this work infor your basic philosophy on investing. “The author’s conclusion is the best long-lasting motivator for success is self-improvement based.  Instead of focusing on how much money I make or whether I am wrong or right on a given investment, I try to put the focus on continuous learning.”

The first part of the book the author describes of various cognitive biases and suggest when we may become susceptible to these biases and the likely effects from falling prey to them.

The author spends a lot of time describing how he tries to emphasize with other investors in the market and in the particular stocks he is looking to invest. An understanding of how other investors are feelign will inform him as to how the stocks will likely behave given the investors reactions.

For example he tries to understand whether the existing investors are mainly growth type or value type investors as they will behave differently to stock price movements and earnings announcements.

Another interesting observation is why intuition should not be ignored especially when intuition has been built up through years of observations in a particular field. Intuition is valuable because of the patterns that investors are able to draw two similar past investments and the likelihood of certain outcomes occurring from a particular set of facts.

The author advocates keeping a trading journal and being very introspective as and analysing past decisions and why they were made . One useful exercise is to keep a journal in which you try to keep track of when and how often you fall victim to these common mistakes as well as when you are successful in avoiding them. It can be useful to write down in a journal what type of mood you are in.  “The better we can understand our feelings, the better we will be able to control and recognize how they impact our decision-making.” “Kasparov believes that the secret to success in chess and in most other endeavors is a relentless review of prior decisions and focused practice on areas that require improvement.  Critiquing prior decisions develops intuition, because it increases the odds that prior patterns stick somewhere in one’s mind.”

The author describes that our common investing mistakes can be placed into three categories:  Self-defense mechanisms against feeling shame, regret and fear.  Irrational reactions to stress and overloading of the brain’s capacity for rational thought.  Vulnerabilities caused by fluctuations in mood.

Another tip that came out of the book was to visualise how an investment could perform before investing, especially on the down side. By visualising this scenario it will better prepare you for how you will react in such a situation. It is also beneficial to seek out the counsel of other investors as they are more likely to see the pitfalls in an investment rather than yourself, given the cognitive biases you have to an investment idea that you have generated personally.

The author also advocates the use of technical analysis to understand what the market is feeling towards a stock. He combines the use of intuition based on pattern recognition, fundamental analysis which is based more on deliberate rational thought and technical analysis to emphasise with how the market is feeling about a stock.

Conclusion

This is one of the best books I have read in a long time as it contains reflections from an investment practitioner who has spent a lot of time in self reflection and endeavoured to understand what techniques are helpful for improving process and becoming a better investor and human being.

Book review: Warren Buffett's Ground Rules: Words of Wisdom from the Partnership Letters of the World's Greatest Investor by Jeremy Miller

Finished reading: 9 Jan 2017

https://www.amazon.com/Warren-Buffetts-Ground-Rules-Partnership/dp/0062415565

The book provides a good summary of the key principles that came from the Buffett Partnership letters.

How to think about the market

As has been written many times before the letters emphasises Buffett approach to investing in businesses and not stocks. There is a common theme that stocks should be held for the long term and that the long-term performance from stocks will be determined by the underlying fundamentals that the business generates.

The fact that businesses have a quotation should be used to the investors’ advantage and at all other times they should be free to disregard the current price quotation. Buffett believes the investor would be better off if there was no stock market quotation at all for he would then be spared the mental anguish caused to him by other persons mistakes of judgement.

Think of stocks (1) as fractional claims on entire businesses, (2) that swing somewhat erratically in the short term but (3) behave more in line with their gains in intrinsic business value over the longer term, which, when (4) viewed through the lens of a long-term compounding program (5) tend to produce pretty good results, which, with (6) an index product, can be captured efficiently in a low-cost, easy-to-implement way. From here we’re going to turn to Buffett as an active investor, starting with his ideas on what exactly he’s setting out to achieve and how he intends to measure it.

Redemptions / withdrawals

Interesting insights that I learnt was that Buffett operated a system whereby partners could only withdrawal once per year and if they wanted to withdraw before that time they could do so however at a cost of 6% interest. Partners could also pre-fund year end additions where the partners would receive 6% therefore compensating those who wish to add to the existing investment.

Buffett’s investments were divided into three categories being generals, workouts and controls.

Generals

Many of the generals were acquired at steep discounts to their appraised intrinsic value. These companies tended to be much smaller companies where if the stock remain dormant and price for long enough Buffett would come to gain a large in stake to have a say over how it was being run.

Buying Generals represented a two strings to a situation where Buffett would either benefit from an appreciation in the securities price as a minority shareholder or force events to occur by gaining control of the company and acting as a corporate Raider.

Buffett believed his return from investing in Generals over the 12 year history of the Buffett partnerships was probably 50 times or more is total losses.

Buffett also implemented a long-short strategy. Buffett mitigated some of that risk by hedging them, meaning when he bought one he would sell short1 the more expensive peer company. For example, by buying a stock trading at 10 times earnings and simultaneously shorting a similar company trading at 20 times earnings, Buffett reduced the risk of overpaying for the company he liked because if it declined to, say, 8 times, one would expect the stock of the company he sold short (at 20 times) to decline further.

Quality compounder method
However, as they years passed and opportunities to put money to work in the small capitalisation Generals diminished Buffett became more focused on the qualitative aspects of business. Instead of jumping from undervalued stock to another undervalued stock Buffett realised that this was the wrong foundation on which to build a large and enduring enterprise.

“So the really big money tends to be made by investors who are right on qualitative decisions but, at least in my opinion, the more sure money tends to be made on the obvious quantitative decisions.”

Here is a checklist for evaluating a potential investment in a General: (1) Orient: What tools or special knowledge is required to understand the situation? Do I have them? (2) Analyze: What are the economics inherent to the business and the industry? How do they relate to my long-term expectations for earnings and cash flows? (3) Invert: What are the likely ways I’ll be wrong? If I’m wrong, how much can I lose? (4) What is the current intrinsic value of the business? How fast is it growing or shrinking? And finally, (5) Compare: does the discount to intrinsic value, properly weighted for both the downside risk and upside reward, compare favorably to all the other options available to me?

Buffett also emphasised being very selective about your investments.

I will only swing at pitches that I really like. If you do it 10 times in your life, you’ll be rich. You should approach investing like you have a punch card with 20 punch-outs, one for each trade in your life.

Work-outs

Everyone can benefit from the diversification workouts offer, but workouts aren’t something everyone is going to be comfortable doing. For the latter group, other outlets exist for investing that can produce high returns and are also not tightly correlated to the overall market direction from day to day.

Buffett often did use leverage when investing in special situations, or “workouts” as he called them.

Controls

“Everything else being equal, I would much rather let others do the work. However, when an active role is necessary to optimize the employment of capital, you can be sure we will not be standing in the wings.”

Some of the best situations arise when you find a General where you can make a significant investment of your own but some other investor is doing the work to improve management’s decision making. Today activists are still agitating managements to improve their operations. In fact, it’s become a very popular strategy that has gained a lot of attention; the funds dedicated to this activity have attracted a lot of assets.

The later partnership letters Buffett was commenting on how he was revising down his goal of outperformance over the Dow as a function of having much more money under management and also the general level of the market. Buffett was also disparaging of momentum and growth funds that performed well when the market was strong but suffered significant impairments when the market turned. Buffett believed such funds where an attempt to anticipate market action over business valuations.

Buffett decided to shut down his partnership in 1969 as he thought an all-out effort to continually beat the Dow was not what he wanted to pursue going forward. He would rather pursue other ideas in the investment field that do not promise the greatest economic reward such as buying a great business and owning the forever.

Feedback

The book was a good summary of the Buffett Partnership letters. I think it would be valuable to go through the letters themselves in chronological order as sometimes I felt that the book jumped around in time periods as it attempted to collate comments from the letters under particular topics. I think you would also gain more from the examples provided by reading the letters themselves.

Conclusion

Overall I would recommend the book. It is easy to read and provide a good summary of how Buffett was so successful investing in the Partnerships.