Five thought-provoking books we’ve read in 2021
Our investment book club was established to help us draw investment insights from beyond everyday sources. Here’s what we’ve read this year – by Pablo Riveroll, Head of Latin American Equities
Book clubs aren’t just a way to while away a pleasant hour with friends as you discuss Jane Austen or Julian Barnes over a glass of wine. Our emerging market equities team has established a book club to seek investment insights from beyond the everyday sources.
We hope it will spark discussion, and nurture a broader appreciation of how societies, economies and people function – as well as make us better investors in the process.
Here are some of the most thought-provoking books our club has read over the past year – and how the insights offered might feed through into better returns for our clients.
1. Value, by Zhang Lei, 2020
Book proposer:Shuyu Gao, Emerging Markets Equities Analyst
What the book does:
Written by a Chinese investor, Value sets out a highly individual, perhaps very Chinese, approach to picking businesses that’s a long way from the traditional idea of “value” investing in the West.
Zhang Lei describes the on-the-ground research with which he started his career, which included 20-hour train-and-bus journeys across China to visit TV factories. Nowadays he applies the same intense scrutiny to companies’ organisational structure and culture, which he sees as key determinants of success – even if it can take years to become apparent.
He describes how he invested in some of China’s technology giants ten or more years ago and watched how some fell by the wayside when they failed to keep up with customers’ evolving needs, while others achieved astonishing levels of sustained growth.
Why did some succeed and others fail? Perhaps this quote, which for me sums up his investment philosophy, contains the answer:
“We shouldn’t just look at revenues or profits – the key is what problem the business is solving: does it increase the efficiency of society and create value for customers? The companies that create value like crazy will be rewarded with huge revenue and profit by society.”
What it taught us:
This book is full of different, and imaginatively and compellingly expressed, ways to look at businesses, people and societies – and therefore at investing.
The author is one of the most successful investors in Asia and founded Hillhouse, an investment firm. He started his career in the US with the investment legend David Swensen, who ran the Yale University endowment fund for a long time and generated fantastic returns.
Lei has historically invested in early-stage companies and really thinks long term. Because of that he managed to invest in a lot of China’s current crop of large businesses when they were a fraction of their present size.
We can learn from his focus on the culture of a company, the vision of its founders and its individual and organisational excellence. Lei defines value not in monetary terms, or a cheap multiple, but the value companies create for the society. This definition echoes with the ESG trend which hasn’t really become mainstream in the Chinese investment community. But after the recent government campaign on creating a more equal society, Lei seems forward-looking again.
The book has not yet been translated into English.
2. The Checklist Manifesto, by Atul Gawande, 2009
Book proposer:Alexander Deane, Global Small Cap Fund Manager
What the book does:
A rather mundane-sounding title belies the power and breadth of purpose of this book: who could have imagined that a humble checklist scribbled on a piece of paper could achieve the life-changing results Gawande describes?
One of his favourite examples comes from aviation. Before any pilot takes off he or she does a number of checks, such as making sure that all the controls work and that weight is distributed correctly. There’s too much information to remember so a simple checklist reduces the risk of missing something dramatically.
The same benefits have been felt in medicine, Gawande’s own area, which adopted checklists much later. Until recently, experienced surgeons were expected to remember all checks when carrying out an operation, leading to unnecessary mistakes. The introduction of a formal checklist cut the number of accidents dramatically, saving many lives.
What it taught us:
This book has directly influenced the way we work: now when we analyse a company we have a long investment case checklist that forces us to ask ourselves all the basic questions. It makes us think about things that we might otherwise overlook. Every time we learn a new lesson we consider adding it to our checklist.
When we have completed a checklist for a particular company we have more confidence in our case for investing in it, which makes us less likely to take a hasty decision to sell if the price later falls, for example.
We even have a special checklist for initial public offerings, which has on occasion stopped us from investing in companies about to list. The checklist prompts us to ask questions such as “Do we understand the motivation for the seller?” or “Do we really know the management?”. Sometimes the checklist makes us realise that we have less information than we would like.
3. Thinking, Fast and Slow by Daniel Kahneman, 2011
Book proposer: Robert Ledger, Emerging Markets Equities Analyst
What the book does:
It tells us that we have, in effect, two brains: one is our “animal” brain, our instincts, the one that chooses between flight and fight; the other is our rational, “human” brain, the one that’s capable of doubt and of evaluating what’s at stake in a cautious, thoughtful way.
The first brain is a kind of autopilot: it takes yes-or-no decisions instantly. The second takes time to reach its decisions – hence the book’s title.
What it taught us:
This book brought home to us just how much we use ‘shortcuts’ in our thinking – and that those shortcuts reside in the quick, instinctive side of our brains.
One such shortcut is “anchoring”, which is the way our brains allow information they already have to influence our judgement about something new – even when the pre-existing information is irrelevant.
The book includes this example: most people, when asked whether Gandhi was more than 114 years old when he died, will provide a much greater estimate of his age at death than others who were asked whether he was more or less than 35 at the time of his death.
How does this help us as investors? It tells us how important it is to form an independent view of a company before we look for supporting information or ask other people for their views – because if we heard those things beforehand there is every likelihood that they would influence our own judgement.
You also need to try to form judgements that are independent of your own preconceptions and experiences – your own baggage, if you like – and look at a broad number of events across space and time to have a more precise estimate of the likelihood of a certain outcome materialising.
On the surface this is not a book about finance – but it’s still the best behavioural finance book we’ve ever read.
4. Rebel Ideas, by Matthew Syed, 2019
Book proposer:Andrew Rymer, Emerging Markets Investment Specialist
What the book does:
Matthew Syed has written six books on mindset and high performance. These are subjects he can claim to understand in view of his own achievements: he left school at 16 to focus on his table tennis career and was England number one for almost a decade. He taught himself A-levels around his training schedule and earned a place to study philosophy, politics and economics at Oxford, then became an award-winning journalist and broadcaster.
In this book he turns his attention to the performance of teams and organisations.
A group of clever people who all think in the same way – perhaps because they come from similar backgrounds and were educated in the same way – will not perform as well collectively as one that consists of clever people who think differently from each other, Syed says.
He offers as evidence the failure of the CIA to prevent the September 11 terrorist attacks. The agency had a rigorous recruitment process but tended to hire people from similar backgrounds. Individually clever, those recruits shared mental blind spots: they dismissed Osama bin Laden as primitive, for example, because of his habit of living in caves. A CIA agent from a Muslim background would have known how differently this would be viewed in the Islamic world, where caves have deep religious significance.
So successful teams need diversity of background and thought, Syed says, but also the right atmosphere and dynamics: you get the best from their collective brains only if you avoid overbearing leaders and allow all voices to be heard – and if those various voices can be distilled into useful conclusions as opposed to talking across one another. Diverse thought processes need to complement, not contradict – you do want a team of rebels, but rebels with the same cause.
This book is a great reminder of the importance of diversity of thought when building a team, running a company or making investment decisions. It reinforced our team’s attempts not only to make itself more diverse but to encourage the companies we invest in, and especially their boards, to do the same.
We can see from our own experience in the fund management industry how trust in collective brain power is gradually displacing dependence on the supposedly brilliant individual: 25 years ago most funds were managed by single individuals; now the vast majority are run by teams.
5. Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor, by Seth Klarman, 1991
Book proposer:Pablo Riveroll, Head of Latin American Equities and Emerging Market Research
What the book does:
This is another book that seeks to pin down what exactly “value” investing is, or at least what makes a successful value investor. It does so in a most inhospitable climate: “growth” investing has carried all before it for the past decade or more and the popularity of value investing has faded along with the returns from the investment style.
Klarman builds on the famous work of Benjamin Graham and David Dodd in their book Security Analysis. For him, the primary goal of value investors is the preservation of their capital. It follows that these investors seek a margin of safety, allowing room for imprecision, bad luck or analytical error in order to avoid sizeable losses.
A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable and investors are human and make mistakes. It is adherence to the concept of a margin of safety, he says, that best distinguishes value investors from all others.
What it taught us:
We read this book because the growth investing style had outperformed value for so long. As investors with a relatively balanced style approach, we wondered how much longer this trend could last, and whether it was time to dust off our value capabilities. We wanted to be ready – and Seth Klarman is a very widely respected value investor whose hedge fund has made consistent long-term gains even in a harsh environment for value.
We did shift more to value stocks at the end of last year because the valuations of growth stocks had become excessive. But it was in choosing which ones to buy that the book really helped us – its advice on how to avoid “value traps” – value stocks that are cheap but deserve to be cheap – was invaluable, for example.
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