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The Judging Eye: Book 1 of the Aspect-Emperor
The Judging Eye: Book 1 of the Aspect-Emperor
by R. Scott Bakker
Edition: Paperback
Price: 7.92

0 of 1 people found the following review helpful
3.0 out of 5 stars Too much background, not enough action, 12 Jun 2011
I really enjoyed the first two books of the Prince of Nothing series, but thought it was let down by the final book. I had high hopes for this one after seeing the three five star reviews, but it could have been much better. If you can plough through the endless turgid background stuff to the end of the book you'll be well rewarded (and I'm still looking forward to trying the next book to see what happens). But I think he really could have done with an editor strong enough to tell him that more action needed to be added and less background filler. He has some wonderful ideas but you lose interest wading through the lengthy scene setting.
Comment Comment (1) | Permalink | Most recent comment: Jan 29, 2012 10:11 PM GMT

Van Doren Carl : Benjamin Franklin
Van Doren Carl : Benjamin Franklin
by Carl Van Doren
Edition: Paperback

3 of 3 people found the following review helpful
4.0 out of 5 stars A life less ordinary, 19 Feb 2008
1991 Penguin Books reissue of 1st edition (1938), 862 pages (of which 782 pages form the main body of the book).

I read this book because of Charlie Munger (Warren Buffett's partner). Benjamin Franklin is the man Charlie Munger admires and has attempted to emulate most. Franklin's autobiography was one of the twenty books Munger recommended at the back of the second edition of Poor Charlie's Almanack (the most useful book I have read). After reading Franklin's autobiography I was very interested to learn more about him - which I'm sure was Munger's intention. Thus I was led to this biography (one of two on Franklin that Munger has recommended), which won the Pulitzer Prize in 1939. I chose to read Van Doren's before Walter Issacson's newer `Benjamin Franklin: An American Life,' as I liked the idea of being able to see what new material might have been discovered since 1938.

With each of the large biographies I have read over the last year, I have found it has taken quite a lot of reading before I really got into the book. This one was no different. It was only when I was about half way through, reading about Franklin's activities dealing with the appalling British government/monarchy in the run up to the American War of Independence, that I found myself gripped. That may have something to do with me having already read Franklin's autobiography, which was the main source for the early part of Van Doren's book (as the author said: `Plenty of other men could find materials for the story of his latest years. Only he had known about his obscure youth...').

I suspect another significant reason was that up until roughly that point there was very little information on what Franklin was actually like and how he spent his days (as opposed to things he had done or places he had been). Without this information I find it difficult to mentally associate or connect with the subject. This is one of the two key areas of weakness I identified in Van Doren's otherwise admirable book and is also the reason why I preferred Ron Chernow's biography of Rockefeller, Titan to Joseph Frazier Wall's biography of Andrew Carnegie. From about halfway through Van Doren's book we do get very interesting snippets, from Franklin himself and also from other people, about what Franklin was actually like (on pages 405, 419, 521, 600 & 649/650, in particular). I wish there was more, but perhaps the material was simply unavailable.

The second weakness was in the account of Franklin's finances. Franklin became quite wealthy through his printing activities before he left business and went to Britain. At sixty years of age, after many years of easy living and generosity, he found himself with money worries. His most important business partnership ended in 1766, depriving Franklin of a significant proportion of his income. He was also concerned that he might lose his position at the post office around the same time. Though this did not happen and he was actually appointed as agent to three further states, I was rather surprised that Franklin left a significant financial legacy when he was close to being hard up a little over twenty years before his death.

He did not appear to live frugally for the latter part of his life and so I am not sure where the funds came from. I would much have preferred it if this apparent paradox had been resolved. It seems of particular importance here, as Franklin was a man who preached the gospel of frugality, but also said: `frugality was "a virtue I never could acquire in myself."'

I suspect that Van Doren was correct when he said of Franklin: `That he talked about them [industry and frugality] so much made it clear that they came less from his nature than from his discipline.' So, after frugality had served its purpose he perhaps left it behind (though long held habits almost always leave a residue).

With those caveats, Van Doren's biography of Franklin is an impressive piece of work. I am not surprised that `The final writing of the book called for almost daily use of the New York Public Library over a period of two years.' And that `This book, full as it is, is a biography cut with hard labour to the bone.' The difficulty (as well as the interest) in writing a biography of a truly extraordinary man like Franklin was that he was extraordinary in many different areas. He was a successful businessman, an absolutely pre-eminent scientist and philosopher, as well as a remarkable and successful statesman (and that in a place and era when rank by birth was of paramount importance).

I am not paid for them and so write these book reviews primarily for myself. I thus like to include the most important things I have learned and that I wish to retain and include into my life and conduct. In this case - because of the subject - there are far too many to include here. And that is surely the reason why Franklin is Munger's biggest hero: he was not only successful but he was also wise, generous and benevolent with it. Unlike Rockefeller, for example, he seemed to really enjoy his life. And unlike Carnegie, who appeared to fail Solon's warning (I might rather call it Taleb's warning, as that is where I learned it) to Croesus to call no man happy until he is dead.

I do not wish to be happy because I have a distorted view of reality, but because I have seen the world as it is and can accept it. Franklin's life is thus a message of hope: he saw the world with exceptional clarity and was able to love it anyway.

You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
You Can be a Stock Market Genius: Uncover the Secret Hiding Places of Stock Market Profits
by Joel Greenblatt
Edition: Paperback
Price: 13.60

30 of 31 people found the following review helpful
4.0 out of 5 stars Awful title, Excellent book, 10 Jan 2008
1999 Fireside reissue of 1st edition (1997), 299 pages (of which 261 pages form the main body of the book).

Despite the awful title, I really enjoyed `You can be a Stock Market Genius'. Greenblatt laces his (excellent) content with plenty of jokes, which I always think of as a somewhat risky approach: some readers who would otherwise appreciate the content will not like the delivery.

By the time of publication, Greenblatt's investment firm had already achieved 50% compound annual growth for 10 years, so could write his book however he pleased. I like it when people don't need to write books for financial reasons - you get a better look at the author.

Greenblatt's book reminds me strongly of Mohnish Pabrai's `The Dhandho Investor', which I read a few months ago. I don't think one should be particularly surprised, as they both belong in that tiny group of investors who have not just beaten the stock market, but have absolutely smashed it. The following summary points for `You can be a Stock Market Genius' could be used for either book:

1. Concentrate your efforts on areas where bargains are likely to occur ("If you preselect investment areas that put you ahead of the game even before you start ... the most important work is already done.")
2. Limit downside risk ("If you don't lose money, most of the remaining alternatives are good ones.")
3. Load up on only a few best ideas ("...don't screw up a perfectly good stock-market strategy by diversifying your way into mediocre returns.")

The second point, which is the same as the concept of `margin of safety,' works because it - unlike the world of analyst earnings forecasts - acknowledges the severe uncertainty that is reality. I particularly enjoyed Nassim Taleb's `The Black Swan', partly because the world he reveals ties in so well with the `value' approach to investing. Both good and bad large, unpredictable events occur more frequently than we expect. If you organise your investing (and your life) so that you are protected from some of the negative shocks, but left exposed to the positive ones, this is likely to serve you well.

Pabrai focuses on distressed situations (what he calls `high uncertainty, low risk') and Greenblatt likes special situations (spin-offs, merger securities, etc). But the theme is the same: in order to get really good results you've got to be looking in areas other people are not.

Greenblatt is willing to concentrate more than Pabrai, who simply limits his positions to a maximum 10%, to protect himself against error. But these are differences in style rather than substance. They both look for promising situations/ideas and only then do the necessary work. Both profess to avoid use of Excel spreadsheets (In 2006 Greenblatt was asked if he used spreadsheets: "I really don't know how to build spreadsheet models. But the good news is that you don't need spreadsheets to make money.") In other words, they keep it simple.

Before he gets into the specifics of special situation investing, Greenblatt spends a chapter going over `some basics'. This short section of the book is either an excellent primer or reminder of the general requirements of a successful investment strategy - and I commend it to you without reservation.

His book also contains some excellent advice about selling. It is something I have been thinking about a lot recently after reading Pabrai's `The Dhandho Investor' and Katsenelson's `Active Value Investing' - both of which make a strong case for the need to learn to sell in order to get significantly above market returns. The problem with this advice is that selling well is somewhere between extremely difficult and impossible (as various super investors, such as Greenblatt, Marty Whitman, Munger, etc. have said).

Greenblatt's advice is very simple:

"The bargain created or unmasked by the special corporate event - that's what draws me in. The quality and nature of the business - that's what usually determines how long I stay. So trade the bad ones, invest in the good ones."

(You may note that this is essentially the same as Buffett's counsel, who wrote: "when we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.")

I was struck by how often Greenblatt rammed home the importance of incentives throughout his book:

"Insider participation is one of the key areas to look for when picking and choosing between spinoffs - for me, the most important area."

His understanding of the critical importance of incentives is very wise and is surely one of the key reasons for his outstanding success (although I wonder if he still holds stock options in such high regard, now it is clearer that the lack of downside risk can encourage excessively risky behaviour?). Charlie Munger said this about incentives in `The Psychology of Human Misjudgement':

"...almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behaviour. But this is not often so. I think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power."

It's also one of the reasons why I like Karen Pryor's book, `Don't Shoot the Dog,' so much. Munger pointed out in the same talk I quoted him from above, that what economists call `incentives' is the same as what psychologists call `reinforcement'. Reading an excellent book on training using positive reinforcement (like Pryor's) is thus extremely useful in improving your understanding and critically, practice of making use of incentives.

So long as you're not the type who objects to a light-hearted approach, you're likely to find Greenblatt's book a lot better than the title suggests. Highly recommended.

Getting to Yes: Negotiating an Agreement Without Giving In
Getting to Yes: Negotiating an Agreement Without Giving In
by Roger Fisher
Edition: Paperback

33 of 33 people found the following review helpful
5.0 out of 5 stars Get to yes without going to war, 29 Dec 2007
1991 second edition, Penguin Books, 229 pages (of which 187 pages form the main body of the book).

If you've read any of my other reviews, you won't be surprised to discover this is another of the twenty books recommended by Charlie Munger in the second edition of Poor Charlie's Almanack (the most useful book I've read).

I have wanted to learn more about negotiation since last year, when I had particularly protracted and unpleasant negotiations over leaving my previous full time job. It was probably the most unpleasant time of my life, it went on for months and the return for that huge personal cost was very poor (for everyone except my lawyer, that is). My relations with all of the people at the firm were also destroyed by the time the mess finally ended. I figured there had to be a better way - and the sooner I learned it the better.

Having a single book on the subject recommended by a very well read and extremely effective individual in his eighties like Munger was ideal. If there is a single, most useful text on negotiation, this should be it. Fortunately, even with such high expectations, I wasn't disappointed. I would include Getting to Yes amongst the top ten most useful books I have read.

It makes an excellent companion volume to Karen Pryor's Don't Shoot the Dog, which I have just re-read. Getting to Yes tells you how to approach forming agreements between people (whether a divorce or simply which film to watch at the cinema this week). Don't Shoot the Dog shows you how to teach (whether animals, people or yourself) and learn. Between them they cover most of the important situations in which conflict is likely to occur.

Their general approach is the same: that efforts to dominate or be combative are unnecessary and usually counter-productive. The most obvious specific similarity is their suggestion that one always try to look at the situation from the other side:

"The ability to see the situation as the other side sees it, as difficult as it may be, is one of the most important skills a negotiator can possess."

Many people (previously including myself) think that if one is not being `tough' then one is being weak. Both of these wonderfully humane books show clearly that this is not the case. You can be pleasant and understanding whilst still being tough (in the principled sense) and unyieldingly fair. What a relief to know that you can be both - and be more effective.

I found Getting to Yes rather painful to read at times, as I kept comparing the advice and examples in the book with my own experiences of the previous year. Many times the authors advise acting in a certain way and warn what is likely to happen with other (more common) approaches. My book is littered with scribbled comments saying things like `oh dear - this is exactly what happened in my situation'.

Most people view negotiation (I certainly did) as simply a choice between hard and soft positional bargaining. Fortunately it turns out that this view is wrong:

"If you do not like the choice between hard and soft positional bargaining, you can change the game.
The game of negotiation takes place at two levels. At one level, negotiation addresses the substance; at another it focuses - usually implicitly - on the procedure for dealing with the substance."

This whole book is about how one changes the procedural game from positional bargaining to what the authors call `principled negotiation'. Principled negotiation involves attacking the problem independent of the people by focussing on interests rather than positions. By focussing on the interests - that literally must underlie all positions - the authors show that it is often possible to invent additional options that fulfil those interests better than the obvious initial positions. By insisting on the use of objective criteria, the authors also show how one can form wiser agreements and cope with intransigent positional bargainers (it becomes difficult to sustain arbitrary positions in the face of a negotiator who brings in objective, external standards to justify all of his suggestions).

It is welcome to see that the authors realise their methods are no panacea. They understand that the best a method of negotiation can achieve is the wisest result possible for all parties, bearing in mind the situation and the people involved.

I particularly liked the brevity and clear structure of Getting to Yes. There is a danger in `how to' books like this of being presented with so many individual pieces of advice that, whilst individually sensible, we find ourselves overwhelmed when we try to put them into practice. All the advice forms a sort of mental sludge from which little stands out.

I noted with interest the authors mention in the preface that their editor reorganised the book and cut it in half: "To spare our readers, he had the good sense not to spare our feelings." I couldn't agree more and I`m very grateful to their (clearly first rate) editor. It reminds me of a comment Elmore Leonard made about his own books: "if it reads easy, it was because it was written hard". That's the way books should be.

Guns, Germs and Steel: A short history of everybody for the last 13,000 years
Guns, Germs and Steel: A short history of everybody for the last 13,000 years
by Jared Diamond
Edition: Paperback
Price: 7.69

4 of 6 people found the following review helpful
5.0 out of 5 stars Curing our blindness, 20 Dec 2007
2005 Vintage reprint of 1st edition (1997), 480 pages.

This is another of the twenty books Charlie Munger recommends in the second edition of Poor Charlie's Almanack (the most useful book I have read) along with Diamond's first book, The Third Chimpanzee.

The Third Chimpanzee is the story of how humans became 'different' to other animals and what the future might hold for us, as evidenced by our recent past. It contains a section on why some peoples and societies came to dominate others. Guns, Germs and Steel is that section made into a book.

I found this detracted from my interest somewhat, as I was already aware of Diamond's broad conclusions and why he had reached them before starting the book (conversely, I found that section of The Third Chimpanzee very interesting). I have no regrets, though. Reading the books in the order they were published allows us to understand Diamond's thoughts and research better, as we get to follow his progress.

I talked in my earlier review of The Third Chimpanzee about the dangers of man-with-a-hammer syndrome (those who focus only on a narrow discipline are likely to interpret all findings through a single, distorted lens - just as a man equipped only with a hammer tends to see everything as a nail). Jared Diamond is an exemplar of the opposite: he started off in medical research, then pursued a parallel second career in bird ecology, evolution and biogeography and is (or was) learning his twelfth language. I greatly admire the way he synthesizes huge amounts of data across several disciplines to arrive at his striking conclusions.

Guns, Germs and Steel - as with another book on Munger's list of twenty recommended books, Garrett Hardin's Living Within Limits - is both a terrific book on its specific subject but also provides a superb broader example of how to think critically.

A couple of examples might help to illustrate what I mean. The first is a theme of both of Diamond's first two books: searching always for the ultimate rather than the proximate explanation. Eurasian technology, germs and societal structure were key factors that allowed Eurasian societies to dominate the others. However, Diamond asserts that underlying these proximate factors were the ultimate factors of the plant and animal species available for domestication and the general geography.

The availability of far better plant and animal species allowed farming and animal husbandry to take hold much earlier in Eurasia. This allowed much higher population densities - both of humans and their domesticated animals. This in turn led to a larger incidence of powerful human epidemic diseases - which in a number of cases originated from the domesticated animals. The more efficient food production and higher population densities in their turn allowed for specialisation, as societal classes could exist whose practitioners did not have to provide their own food (including professional soldiers).

Thus, the ultimate factors determine the existence of the proximate factors. Most people never see beyond the proximate factors - which appear to explain the outcomes, but in fact do not. This is an extremely important lesson.

Charlie Munger's mental models, for example, can be best viewed as an attempt to distil the way the world works to the simplest underlying (ultimate) reasons. This approach carries two massive benefits: if ultimate explanations exist we cannot understand how the world works (become 'wise') without knowing what they are (or even knowing that we should be searching for them). And secondly, it is much easier to remember and make use of fewer, simpler underlying factors.

Once you begin looking for ultimate factors, you begin to see them everywhere. The search for underlying reasons is usually explicit (or at least implicit) in all of the really good books. Karen Pryor shows this clearly in `Don't Shoot the Dog' (one of my favourite books that I have just re-read):

"These principles [of training with reinforcement] are laws, like the laws of physics. They underlie all learning-teaching situations as surely as the law of gravity underlies the falling of an apple. Whenever we attempt to change behaviour, in ourselves or others, we are using these laws, whether we know it or not."

The second excellent example of an approach to problem solving from Diamond is one of Charlie Munger's favourites. Diamond calls it the Anna Karenina principle, after the first sentence in Tolstoy's novel:

"Happy families are all alike; every unhappy family is unhappy in its own way."

Diamond explains what Tolstoy means: in order for a marriage to be a success, it must succeed in many different respects. The failure of any one of, for example, sexual attraction, agreement about money, child discipline or religion can doom a marriage - no matter how positive all the other factors.

Diamond then uses this principle to show us why so few animals have been successfully domesticated (because every one of at least six significant factors must be present for a species to be a suitable candidate for human domestication):

"This principle can be extended to understanding much else about life besides marriage. We tend to seek easy, single-factor explanations of success. For most important things, though, success actually requires avoiding many separate possible causes of failure."

This principle underlies the reasoning behind the Harvard School Commencement speech Charlie Munger gave in 1986 (included in Poor Charlie's Almanack). In it Munger inverts the problem of achieving a good and successful life by telling his audience how to virtually guarantee a miserable and unsuccessful life. By avoiding the key causes of failure, one is likely to end up with success by default: sometimes difficult problems are best solved (or even can only be solved) backwards.

As Sertillanges says: "What is knowledge, but the slow and gradual cure of our blindness?" I am grateful to Diamond (and Munger, who pointed me towards him) for helping me to see a little better.
Comment Comment (1) | Permalink | Most recent comment: May 10, 2009 2:07 AM BST

Don't Shoot the Dog!: The New Art of Teaching and Training
Don't Shoot the Dog!: The New Art of Teaching and Training
by Karen Pryor
Edition: Paperback
Price: 5.59

10 of 11 people found the following review helpful
5.0 out of 5 stars One of the most beneficial books you could ever read, 28 Nov 2007
I first read this book a couple of years ago and since then have recommended it to anyone who would listen. I've also bought four copies and given them as gifts.

I decided recently that I should reread it to reinforce the ideas and to see if it was as good as I remembered. It is.

When I first read this book I can remember being literally horrified at the methods I had been using to try to modify other peoples' behaviour (family, girlfriend, colleagues, etc.). Any time you attempt to change the behaviour of any person or animal you are - whether you realise it or not - attempting to train them.

It turns out that the methods most people use (usually unconsciously or because they do not know better) are both ineffective and unpleasant - especially punishment. It is rare in life that you can change to a different method of doing something vitally important that is both much more pleasant for all of those involved and produces better results. This book demonstrates one of these happy occasions.

All of our attempts to change the behaviour of other creatures can be broken down into three categories: punishment, negative reinforcement and positive reinforcement. Punishment is an aversive applied after the event (such as grounding your kids or putting a criminal in jail). Negative reinforcement is an aversive (punisher) applied when an unwanted behaviour is occurring which is then stopped when the unwanted behaviour stops (such as the use of a choke chain on a dog). Positive reinforcement involves rewarding desired behaviour (for example using praise or food).

Karen Pryor's methods originate with the findings of American psychologist B F Skinner and her work as a dolphin trainer. Dolphins are unusual creatures in that it is not really possible to train them using the traditional methods of negative reinforcement or punishment. Dolphin trainers thus had no choice except to explore what was possible using only positive reinforcement, particularly using the powerful tool of a conditioned reinforcer - something that the training subject associates with a reward, such as a clicker or whistle.

(The advantage of a conditioned reinforcer is that it becomes possible to show the subject precisely what it was you liked because you can indicate without any delay. A lot of training problems are simply due to problems in communication. For example, when you yell at your dog for jumping into the lake and it comes over to you and you then tell it off forcefully, how does the dog know that you are telling it off for jumping in the lake rather than coming over to you when you call? And should you be surprised when you find your dog won't come reliably when you call for it?)

Dolphins were (are?) considered different to other animals in their level of intelligence, playfulness, curiosity and friendliness to humans. I found it absolutely fascinating that Pryor has found that when other animals - dogs, horses, bears and even fish - are trained only using positive reinforcement they show the same characteristics as dolphins. Even more interesting is Pryor's finding that if even a small amount of negative training (all of which involve use of a punisher) is mixed in you lose all or virtually all of the benefits. And what good sense this makes: how could a dog that is regularly throttled with a chain by its 'beloved' owner have the same level of trust, curiosity and freedom from fear as one that was only praised when it did something that was desired? This has extremely important ramifications for our conduct in our daily lives.

One of the principal benefits of Pryor's book is that she teaches us that it is often helpful to make an effort to see the situation from the other side. This sounds trite but is actually the opposite: a simple but very powerful tool. Often problems originate from a communication problem and/or because we find we are actually not rewarding or punishing the behaviour we think we are (as my dog example above shows).

I have found Pryor's methods immensely liberating. Previously I always felt that is was somehow my 'duty' to try to correct unwanted behaviour (whether is was something my girlfriend did, service I was unhappy about at a restaurant, or whatever). Thus I either ended up with an unpleasant situation (when is remonstrating with people pleasant?) or felt that I had given up because I was weak. Now I understand that one can and should just wait for behaviour one wants and deliberately reward it. This is the difference between a life filled with negativity and the total opposite. And the results are also better! What a marvellous gift Karen Pryor has given us.
Comment Comment (1) | Permalink | Most recent comment: Mar 17, 2014 1:46 AM GMT

Active Value Investing: Making Money in Range-bound Markets (Wiley Finance)
Active Value Investing: Making Money in Range-bound Markets (Wiley Finance)
by Vitaliy N. Katsenelson
Edition: Hardcover
Price: 31.26

11 of 11 people found the following review helpful
4.0 out of 5 stars Valuable data and ideas, 14 Nov 2007
2007 Wiley Finance, 295 pages (of which 256 pages form the main body of the book).

Before I start this review, you should know that I didn't just buy a copy of this book, read and then review it (as I've done with all my other reviews). The author (who I'd not come across before) contacted me, asked if I would review his book and supplied me with a copy. As it was endorsed by Nassim Taleb and James Montier, I thought it might be worth reading.

I was a bit sceptical of the book's title: surely value investing is value investing and the 'active' bit must be a gimmick? After reading the book I've come around, mainly won over by the extensive and very interesting statistics. Apart from the book's value in providing revision and reinforcement of the key value investing principles, it presents two particularly useful ideas. The first is that average stock market returns don't happen very often and the second is Katsenelson's multi-input PER (price/earnings ratio) model.

The first of these points is Katsenelson's main thesis: very long term (100 years+) average stock market returns (in the US) comprised protracted periods of above average returns (bull markets) followed by similarly long periods of below average returns (what Katsenelson calls 'range-bound' markets). I like the way the author puts it:

"...investors expecting the average returns observed over the past century are likely to be disappointed, as average happens a lot less frequently than we've been told."

This brings us to the most useful part of Katsenelson's book. His examination of data going back through several of these long-term cycles shows that economic growth, interest rates and inflation didn't explain the different returns in the periods of above average vs. below average returns. It was the starting valuation (PER) that mattered. The expansion or contraction of the market PER was responsible for virtually all of the difference in returns (with the exception of the Great Crash of 1929-1932) in the different market phases over the past century. I found this extremely interesting: I knew valuation mattered a lot, but I didn't know it was likely the only thing that matters (short of utter disaster).

Following on from this, Katsenelson attempts to show where we are in the cycles of above vs. below average returns (fortunately he understands that the most one can say at any point in time is that a certain outcome has a higher probability than other outcomes). I liked the way he approached this. Rather than using only, say, the one year historic PER, he presents the data in different ways: using the one year trailing PER and then also using the three, five and ten year average trailing PERs. This provides a useful sensitivity analysis to adjust for the current extremely high return on equity in the US and also allows us to draw our own conclusions if our opinion differs from that of the author (I think this is a great idea).

His analysis shows that we are very likely within a range-bound market that started in 2000, leading to two important practical investment considerations. The first is that dividends are critically important: they accounted for 90% of the average 5.9% nominal annual return during the range-bound markets Katsenelson has identified over the past century! The second is that being fully invested is much less important than in bull markets because, though the market fluctuates significantly in range-bound markets, the fluctuations cancel out.

Mohnish Pabrai comes to the same rejection of the long-term buy and hold approach in The Dhandho Investor from the perspective of seeking the highest possible returns (without reference to the market). Katsenelson, however, believes that only substantial outperformance will produce satisfactory returns owing to the overall market's likely poor returns. Thus they both agree that an investor has to learn to sell (which many super-investors, including Marty Whitman and Joel Greenblatt consider very difficult or impossible to do well). Interestingly, Pabrai and Katsenelson both agree on the general principle: that you should have your exit plan in place before you invest.

This brings us on to Katsenelson's multi-input PER model, where he suggests using a simple PER model that adjusts an 'average' PER for such factors as growth, business quality, financial risk and dividend yield. I think this is a very good idea and is something I intend to try out.

I didn't like all of Katsenelson's book. For example, I found his effort to explain discounted cash flow analysis, using Tevye the milkman and his cow, somewhat confusing and I spotted a higher number of errors than normal (though I'm not sure if I was emailed the final version of the book).

The author's general conclusions about future US stock market returns have also already been presented by Warren Buffett in two articles published in Fortune magazine in 1999 and 2001 entitled "Warren Buffett on the stock market", both by Carol Loomis.

Buffett and Katsenelson differ in their view of the importance of interest rates in affecting historical returns and Katsenelson (necessarily, as his is a book) presents considerably more detailed statistics. I'm also not sure that Buffett would believe that most investors would obtain any benefit from efforts to turn over their portfolios faster (the vast majority of investors have the opposite problem - as Katsenelson himself shows when he quotes a study showing the absurdly awful returns mutual fund investors actually achieved compared to the overall market in the 19 years to 2002).

So, where does that leave us? With a book containing some good ideas and excellent data and statistics but with a central conclusion (do more selling) that I suspect most investors will simply find too difficult to do well (notwithstanding Katsenelson's advice on how we might do so). Problems that originate from our psychological biases are very difficult to deal with satisfactorily: sometimes our efforts to improve (returns) can have the opposite effect.

The Intellectual Life: Its Spirit, Conditions, Methods
The Intellectual Life: Its Spirit, Conditions, Methods
by James V. Schall
Edition: Paperback
Price: 17.64

14 of 15 people found the following review helpful
5.0 out of 5 stars Contact with Genius, 27 Oct 2007
1998 reprint of 1987 edition, Catholic University of America Press, 296 pages (of which 260 pages form the main body of the book)
Translated from the French (1934 2nd edition) by Mary Ryan

I came across this unusual book when discussing with my most well read friend the problem of deciding how much to read. He told me this topic was covered in Sertillanges' book and suggested I read it.

The title makes it sound as if the book might be pretentious, but it is not. In the same way that Peter Drucker's superb The Effective Executive is a book for any knowledge worker rather than just for managers, Sertillanges' book should be helpful for anyone who wishes to work using their intellect, rather than just for rarefied intellectuals.

The 1998 reissue (the 1992 date listed on is incorrect) of the 1987 edition has a new forward by James Schall. I think he captures the essence of Sertillanges' book very well:

"At first sight...this is a quaint book. At second sight it is an utterly demanding book."

The subtitle of The Intellectual Life describes its contents well: "Its Spirit, Conditions, Methods". For Sertillanges, intellectual work is not something done in isolation of the rest of a person's life. He believes strongly that in order to do intellectual work to one's capacity, one must order the whole of one's life with this goal in mind. And further, that this requires habits of simplicity, detachment, note taking, memory, writing and more. His book is thus a step-by-step manual that sets out these requirements from the general (virtues, character) to the specific (note-taking, writing).

For most people who are not already members of religious orders (Sertillanges was a Dominican friar) it would be terrifically demanding to follow all of Sertillanges' prescriptions - and involve major changes to one's life. Sertillanges does believe, however, that if one takes care with the rest of one's life then intellectual work can be done satisfactorily using only a couple of hours a day. His book is thus a mixture of the extremely demanding and eminently practical - particularly as much of his advice involves cutting out and eliminating habits that waste time and disturb thought (e.g. pointless correspondence and interactions with people, reading of novels and newspapers).

After reading Ben Franklin's autobiography and Charlie Munger's Poor Charlie's Almanack at the beginning of the year, I have become increasingly aware of the crucial role of habits in determining the outcome of peoples' lives. I was stupid enough to have spent a good proportion of my life testing out the truth of Franklin's maxim: "Experience keeps a dear school, yet Fools will learn in no other." I no longer have any doubt that forming good habits - and most especially avoiding forming bad ones - is terribly important. After all, reliability - which Munger considers the single most important determining characteristic for a person's life - is really just another habit.

Sertillanges understood this very well and the importance of habits that facilitate intellectual work is a topic that he brings up repeatedly - and in my view very wisely - in his book:

"One acquires facility in thinking just as one acquires facility in playing the piano, in riding, or painting.... The mind gets into the way of doing what is often demanded of it."

This is not the only resemblance between the advice in Sertillanges' book and that given by Charlie Munger (the best source for his ideas and the most useful book I have ever read is Poor Charlie's Almanack). The importance of a broad base of knowledge, the danger of over-specialisation and the critical importance of only a few ideas in each subject are all covered in this book.

Another striking similarity is Sertillanges' view of the importance of 'contact with genius' and how one goes about acquiring wisdom:

"...the principal profit from reading, at least from reading great works, is not the acquisition of scattered truths, it is the increase of our wisdom."

I was left with somewhat mixed feelings as I progressed through The Intellectual Life. At times Sertillanges' overt religiosity became a little much for me (I am not a religious person) and I found his prescriptions rather daunting.

As I neared the end of the book, however, my view changed and I found myself extremely grateful that Sertillanges' had written this book for us. It was partly because his section on writing answered with great clarity some problems that I had been wrestling with, and partly because I realised that one could simply take what one needed from his book - rather than the whole package.

My difficulty in deciding how much to read remains somewhat unresolved: there is a tension between Sertillanges' advice on reading and that of people like Warren Buffett and Charlie Munger on investment (my own profession/hobby). Sertillanges advises cutting down on excess (particularly undirected) reading, including, for example, newspapers:

"As to newspapers, defend yourself against them with the energy that the continuity and the indiscretion of their assault make indispensable. You must know what the papers contain, but they contain so little..."

Buffett, on the other hand, claims to read five newspapers a day and urges us to read everything in sight!

I suspect the different advice is due to the type of work. Firstly, I am not sure that investing is an inherently intellectual pursuit (Buffett has often said that after an average level of intelligence the right temperament is more important). Secondly, intelligent investment is just applied opportunism - and in order to take advantage of opportunities we must first be aware of their existence.

I did not find this an easy review to write. I have had to leave out various topics that I would like to have discussed more fully (such as Sertillanges' excellent advice on writing) and still feel this review may be overlong. However, I believe a review that does not attempt to set its subject firmly in context is of limited use. I'll leave the final word to Sertillanges:

"There are books everywhere and only a few are necessary."

I commend this unusual book to you as one of the necessary ones.
Comment Comments (2) | Permalink | Most recent comment: Apr 27, 2010 4:15 AM BST

The Dhandho Investor: The Low Risk Value Method to High Returns
The Dhandho Investor: The Low Risk Value Method to High Returns
by Mohnish Pabrai
Edition: Hardcover
Price: 19.99

13 of 13 people found the following review helpful
4.0 out of 5 stars Buffett and Munger would be proud, 22 Oct 2007
2007 Wiley, 196 pages (of which 183 pages form the main body of the book)

On the back of the Dhandho Investor is some blurb by Whitney Tilson saying that he read the book from start to finish in one sitting. The Dhandho Investor is that kind of book: it is short and engaging.

Pabrai's book is about what he calls high uncertainty, low risk investment. The main idea is that there are certain types of situations, which - though heavily shrouded by uncertainty and thus apparently very risky - actually offer very low risk of capital loss and good odds of a decent return. I like the way Pabrai puts it when discussing Stewart Enterprises:

"Wall Street could not distinguish between risk and uncertainty, and it got confused between the two."

Pabrai's book is basically an exposition of the key ideas from Warren Buffett and Charlie Munger in the form of a usable framework to produce really significant stock market outperformance. I would like to emphasise that last point: really significant outperformance. Pabrai understands very well that the long-term buy-and-hold strategy Buffett and Munger espouse publicly literally cannot produce returns that are very significantly above the market (over the long term and without use of leverage or insurance float). Here is what Pabrai said on the subject in a recent Q&A with Gurufocus (a US financial website):

"Very, very few businesses generate ROE [return on equity] exceeding 15-20% annually and have the ability to redeploy earnings at greater than 15-20% ROE. Thus it is unlikely Berkshire's stock portfolio can generate long-term returns exceeding 15%. Their float helps them get higher effective returns."

(I had to remove the links to the two Q&A sessions with Pabrai as refused to publish them. This is a shame as they are particularly useful: I could not find these explicit comments on why Pabrai does not follow Buffett's buy-and-hold-forever philosophy in The Dhandho Investor - though it is implicit in the book's content. If you wish to read them please either contact me via or find the same review on (who were happy to publish the links). Alternatively, Pabrai's exemplary reasoning is explained in an interview with him published in James Altucher's book, Trade Like Warren Buffett.)

Pabrai's book is entirely successful when looked at from the point of view of providing the framework I referred to above for major stock market outperformance. It is less successful when Pabrai goes into using the Kelly Formula for calculating optimum position sizes. (The Kelly Formula is a mathematical formula for calculating the optimum percentage of your bankroll to bet on a favourable bet, if you know the correct odds compared to the actual odds being offered on the bet.)

Pabrai's use of the Kelly Formula in The Dhandho Investor reads as an afterthought. For example, in his Stewart Enterprises case study Pabrai states:

"I hadn't heard of the Kelly Formula back then, but I didn't need anything beyond third grade math to know that this is a very favourable bet to make."

He then goes on to state that the Kelly Formula indicates he should have bet 97% (sic) of his bankroll, but that Pabrai Funds actually invested 10% of its assets in Stewart Enterprises.

However, now that Pabrai does know about the Kelly Formula he still invests 10% of assets in each investment and does not attempt to change the position sizing according to his assessment of the odds of each bet (investment).

As the answers produced by the Kelly Formula bear little resemblance to Pabrai's actual positions, his entire use of the Kelly Formula reads like an ex post attempt to explain what he was already doing.

To be fair, Pabrai does try - though not entirely convincingly - to reconcile the differences between his actual position sizing and the results dictated by the Kelly Formula. For example, he explains that the situations are too uncertain for him to be sure which potential investments will actually produce the best result. However, this seems to argue against any attempt at exact use of the Kelly Formula - rather than plugging in the numbers and then disregarding the answer.

His much better explanation of his sub-Kelly position sizing is that he has an overabundance of roughly equally good ideas and thus wishes to buy them all. However, he doesn't say what he would do (or has done) if he found a dearth of clearly good ideas: would he hold cash or increase the weighting of his best ideas? (This would surely be the test of whether he actually uses the Kelly Formula, rather than just talks about it.)

That carping aside, I really enjoyed The Dhandho Investor and thought it was an excellent reminder of how important it is to load up on a few best ideas if you want really good results. There are also odd bits of other very good advice throughout the book, as when he advises strongly to focus on one potential investment at a time before investing or discarding and then moving on. Highly recommended.

The Black Swan: The Impact of the Highly Improbable
The Black Swan: The Impact of the Highly Improbable
by Nassim Nicholas Taleb
Edition: Hardcover

107 of 128 people found the following review helpful
5.0 out of 5 stars The return of Nero Tulip, 7 Sep 2007
2007 Random House, 396 pages (of which 305 pages for main body of book)

The Black Swan is a very unusual book. A couple of days after finishing it I still feel like I'm struggling to integrate its message with life. It reminds me a little of Richard Dawkins' Selfish Gene in that respect: its central thesis, which appears to be unassailably argued, indicates that the standard view of the world is wrong. In Dawkins' case, the primacy of the individual (as opposed to the gene) and in Taleb's case, the view that the world is essentially driven by normal, day-to-day events.

The subtitle of Taleb's book tells you what it is about: The Impact of the Highly Improbable. According to Taleb, high-impact rare events ('Black Swans') are not anything like as rare as we think they are and their effect is so disproportionately large that they effectively drive events in the world.

This may not sound all that provocative, but Taleb's argument is that virtually everybody's view of the world as essentially linear and step-by-step is just an illusion that protects us from understanding that our progress through life is much more random and fragile than we think.

Taleb's outstanding first book, Fooled by Randomness, is about the much greater role of luck in life than is commonly understood. The Black Swan develops this thesis further and shows that rare and unexpected events (what you might think of as a subdivision of luck) drive much of the results in the world.

Since reading Richard Koch's The 80/20 Principle eight or so years ago - after which I began to look at the world through the lens of unequal cause and effect - I have been coming gradually around to Taleb's views. Even so, The Black Swan is difficult to assimilate - and it must seem extremely odd (and itself most improbable) to those who have not had some preparation.

One can see this difficulty in the absolute refusal of modern academic finance to give up theories of how the world works (the bell curve or pattern of 'normal' distribution) that allow them to use complicated mathematics and which are just plain wrong. Taleb thought the Long Term Capital Management debacle in 1998 - in which various Nobel-winning economists proved their (Nobel-winning) ideas did not apply in the real world - would be the end of these dangerously wrong beliefs.

However, it was Taleb who was wrong about that: a whole gang of academics who have invested a good chunk of their lives in an idea that turns out to be worthless (actually significantly negative) won't give it up easily (and perhaps not until they are all dead). The sub-prime mess, with accompanying cries of surprise and of '25-standard deviation events' from various hog-greedy financiers and hedge fund managers, shows the continued prevalence of these appalling ideas.

After the success of Fooled by Randomness, it would appear that Taleb had more freedom to write (and be published) however he wanted. It makes The Black Swan more idiosyncratic and aggressive than Fooled by Randomness. I imagine this will act as a polariser and some people who would otherwise appreciate the content may not like the delivery. Personally, though, I loved it.

As someone who has tried working in various jobs in the City of London (the UK equivalent of Wall Street) I feel in some ways that Taleb is a kindred spirit: I can't stand arrogant, ignorant 'empty suits' either. I thought his "Get Another Job" section (p. 163) was perfect:

"There are those people who produce forecasts uncritically. When asked why they forecast, they answer, "Well, that's what we're paid to do here."
My suggestion: get another job.
This suggestion is not too demanding: unless you are a slave, I assume you have some amount of control over your job selection. Otherwise this becomes a problem of ethics, and a grave one at that. People who are trapped in their jobs who forecast simply because "that's my job," knowing pretty well that their forecast is ineffectual, are not what I would call ethical. What they do is no different from repeating lies simply because "it's my job.""

Taleb's very severe and aggressive criticism of risk measurement techniques in modern finance could be interpreted as an intemperate rant. I don't subscribe to this view and suspect Taleb chose this approach deliberately in order to make it clear that the prevalent financial risk management techniques and his ideas cannot in any way coexist: they are absolutely and totally mutually exclusive. (Taleb mentions that after finding it impossible to refute his ideas some people then try to combine them with their old ways of operating.)

I also liked the way Taleb approached and structured his book: he uses stories to get ideas across (as with Nero Tulip in Fooled by Randomness) and has separated his book into sections that allow one to understand his ideas with or without the scientific underlay (I think this is a great idea).

Some people (whether wilfully or not) confused the central theme of Fooled by Randomness, that much of life is driven by luck, with the superficially similar but totally different 'all of life is driven by luck'. In a similar way, I believe some people think that Taleb's message in The Black Swan is unremittingly negative: that we are all permanently exposed to large unexpected events that can wreck all our plans in an instant, and which we can do nothing about.

Taleb's point is rather that most specific forecasting is pointless, as large, rare and unexpected events (which by definition could not have been included in the forecast) will render the forecast useless. However, as Black Swans can be both negative and positive, we can try to structure our lives in order to minimise the effect of the negative Black Swans and maximise the impact of the positive ones.

I think this is excellent advice on how to live one's life and seems to be equivalent, for example, to the focus on downside protection (rather than upside potential) that has led to the success of the 'value' approach to investing. Highly recommended.
Comment Comment (1) | Permalink | Most recent comment: Nov 16, 2012 7:50 PM GMT

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