Multi-Disciplinary Reading – Book Reviews

A Zebra in Lion Country, Ralph Wanger, 1997 – This is probably one of the funniest investing books, maybe after ‘Where are the Customer’s yachts’. Funny doesn’t mean its not insightful though. Its a nice short, thoroughly enjoyable read on all things investing.

My notes –

• Investing philosophy – invests in small companies with growing earnings whose stocks are still good value

• Most of today’s hot new issues will be in cold storage in 5 years

• Acorn Fund (author’s fund) started in Dec 31, 1969 – Apr-May 1970 was a severe bear market which cut the fund value by a third. ‘73 and ‘74, the fund was down by 24% and 28%. After 6 years, in ‘76, the fund had just about regained original value

• Early 70s Nifty Fiftys were trading at very high valuations and market became two-tiered. Disney 76x, McDonald’s at 81x and Polaroid at 97x while rest of the market underperformed (it looked like market was manipulated but it was just groupthink)

• Tough markets are no time to be serious. That’s when you need the comic relief. (Author wrote lively letters and attracted attention to his fund). Nobody pays attention if you are serious

• When the expensive Nifty-Fifty finally dropped, even reasonably priced stocks dropped too. When a large segment of the market gets overpriced and corrects, everybody gets nailed – the guilty, less guilty, the bystander. Even your sensible portfolio will go down (It might recover fast as the former high-flyers are on everybody’s avoid list)

• The cat that sits down on a hot stove lid will never sit down on a stove lid again – hot or cold (paraphrasing Mark Twain). Mid-to-late 70s saw interest drop in the market and avg. volumes dried up dramatically

• “Like an over-sexed guy in a whorehouse. This is the time to start investing” – Buffett comment was made Oct ‘74. Strong upturn though didn’t arrive until 1982 (all portfolio managers wanted to do the same thing again)

• Banks’ commercial loan depts were loading up on mortgages (to real-estate) but at the same time their equity analysts hated their stocks – whenever one end of the bank is doing one thing and the other end another thing – there’s opportunity for arbitrage (real-estate stocks were available for a pittance)

• When all of hear the same news within seconds, we act like a herd of zebras who have sensed a pride of lions sneaking up

• Paid hands are not the same as owners and drivers of small companies – even with bonus.

• When a company develops into a multi-industry giant, even the company’s top management can’t understand all that it does.

• Not all small companies are same – some are small because they are young and haven’t been around long. Others have been big but are losing money now and have shrunk their market cap – in other words, they have had smallness thrust upon them

• The highways suburbanized the US. Everybody then moved from their city apartments for single-family housing. Also, everyone needed an automobile. Malls, drive-in fast food were born

• IBM made deals with business through people at the top while selling $5 million machines. When it had to sell $2000 machines, it had to make deals with VPs who were unwilling to tolerate the arrogance of IBM’s sales reps. IBM realized it but could do nothing about it

• When the highway system was built in the US, movement of goods shifted to trucks. (Cheap oil perhaps drove it. We might be going in reverse as our situation is different.)

• Small companies are well-suited to respond to rapid change. Big companies have layers of management and are slow

• Four different ways stocks price can rise 1. Growth 2. Acquisition 3. Repurchase 4. Revaluation

• If you don’t make some misjudgements, you are doing it wrong – you’ve not taken enough risks and you’ll never score a big one. You do best when you stray furthest from the herd

• Small is good, micro is not – smaller the stock, bigger the risk. Acorn invests in quality small companies, seasoned rather than new, with strong financials, dominance in their segment, entrepreneurial management, and understandability (simple businesses). Owns about a dozen of them to offset the duds

• When people comment on health of market – they mean the index, maybe DJIA or S&P500 but the health of the patient in the next bed (small stocks) might be very different. There are two different markets and their fortunes alternate

• Trying to sell a small illiquid stock in a down market brings the image of galley slaves, chained to their bench while the ship sinks (Ben Hur)

• If you are pursuing a style that doesn’t suit you, you will be unhappy and an unhappy investor is an unsuccessful investor

• GARP – Growth at a Reasonable Price. Looks like the term originated at Acorn

• When growth stocks stumble, resist the temptation to buy. A fall due to one disappointing quarter may not stop with one disappointing quarter (like there’s never one cockroach in the kitchen)

• How high can a tree grow? As high as its trunk allows it to, until it collapses under a column failure

• Walmart reported 99 consecutive quarters of earnings growth until 4th quarter of 1995 when it de-grew 10%

• Earnings disappointments aren’t as rough on value stocks. Over long periods value investors earn better returns than growth investors. You can’t make 5-10-20x if you don’t hold on.

• In gambling there’s a steady flow of wealth from hopeful gamblers to ones that know what their odds are. Bargain stocks, long-shot opportunities are cheap for a reason, just like lottery tickets – because their odds are low

• Dollar gain isn’t equal to a dollar lost (Tversky & Kahneman). At even odds, no two neighbours will bet their cars against each other – because a no car is far worse than 2 cars is good (non-linear value function)

• Most people ignore probabilities, exaggerate risks, and are prone to sacrifice returns in favour of perceived safety

• Bets on long shots are popular on last race of the day

• When something negative happens, a stock may go down much more than the news warrants (over-discounting bad news)

• The further you stray from stocks you really understand, the more likely you are gambling rather than investing. (Make sure your portfolio isn’t an haphazard collection of second-hand “stories”)

• Too often people start with discipline but abandon it. Then you end up buying the hot sector at the peak of the cycle

• If you are not a risk-taker but chase fast-growing small companies because that’s where the big money is made, you will be dismayed by the gyrations (know thy risk tolerance)

• There’s no field of human knowledge that isn’t valuable somewhere in the investment process and hence no one can know all that’s valuable

• Many US ticker symbols are like vanity license plates. RARE (steak house), DOSE (Drug company), BID (Sotheby’s), JAVA (Coffee) etc.

• Author picks the theme to invest in first and then picks the attractive stocks within the theme

• Funds do well as long as portfolio decisions are made by a small group of people

• Bottom-up stock picking makes you end up with lot of stocks, hard to follow and quantify risk at portfolio level. Top-down lets you choose attractive stocks within areas of market that are compelling

• Author wants to be convinced that management is competent, that product line is exciting, but also that its particular industry is one with superb prospects

• How do you identify investment themes? “You see you do not observe” (Sherlock Holmes to Watson). Observe trends around you

• How do you know when a theme has played out? Price are high, Wall St. is cranking out new issues, magazine covers declare its importance and so on.

• If you can see where the con men are flocking, you can tell which ones are about to peak

• Since the industrial revolution began, investing in companies that benefit from technology than in technology companies has often proved the smarter strategy (Going downstream)

• People coming into casinos for excitement are transferring their money to people following laborious, boring routines

• Solid tripod – Growth potential, financial strength and fundamental value

• Usually market pays what you might call an entertainment premium for stocks with an exciting story (hilarious insight)

• Quit test – If you were authorized sufficient line of credit, will you buy all the stock and takeover and run the company? Those are the ones the author finds worth investing in

• Good management to Wall St. is 3 quarters of rising earnings. Make it 4 and you have a great management (hilarious insight)

• Good managements gets everyone working in the same general direction and ensuring the direction is a sensible one. Great managements can change the direction of a company

• Annual reports can be useful but you must be more interested in what the company doesn’t want you to read

• If a company that normally has 25% sales in inventory suddenly has 50% – start asking questions. Its possible that there’s rapid expansion causing it, but more often than not, its impending doom. (Mirza Intl. and Parag Foods come to mind)

• Disaggregating business segments allows you to discover “hidden value”. Eg. A poor segment might be dragging overall earnings down – the good part is worth more than what the company is selling for (Similar to Kahneman’s dinner plates experiment – very imp. mental model to have)

• Sometimes company’s asset value might be considerably different from its book value – fixed assets depreciated to the point that book value is negligible but there’s still economic value

• Author expresses reason for owning in a short, clear statement – “Expansion of hotel and casino business will double earnings” for eg. When statement is no longer valid, its easier to sell (Most times we try to “predict” instead of “react” – so write down thesis and react post sufficient confirmation)

• Prices are set by optimists (earnings overestimated by those who like and own the stock). You have to remind yourself of that fact and leave room for disappointments.

• Discounted at 12%, a $100 payout 20 years down the line is worth $10 now. At 7%, its worth $26. When interest rates dropped in the mid-80s, most stocks, especially growth stocks with payouts into the future, had large P/E re-rating

• Stock market vs Chess – number of rules of the game is not known and rules change over time

• Aureodigititis – disease of the golden finger. In bull markets, anything our finger points to, turns to gold and we delude ourselves as “intuitive” stock pickers and skimp on research leading to disaster

• When men want something, they will without reflection leave that to hope, while they employ full force of reason to reject anything they find unpalatable (Thycidides)

• Exceptional growth usually sows the seeds of its own decline (Invites competition)

• Any yardstick for valuation, even one with sound theoretical basis that has worked for a century can stop working (Jeremy Siegel in ‘Stocks for the Long run’)

• People calling market direction are more interested in trying to prove their brilliance than making money

• When market’s going down, its not because you are stupid. When its going up, its not because you are smart.

• Later stages of a bull market a witches coos in your ears “There is no risk. The market will only go up. IPOs are marvelous. Your stockbroker is your best friend. A limitless, effortless fortune awaits you”

• What we made in a year, we lost in a week (’87 crash)

• When you live through something catastrophic, its hard to recollect/relive it in the future when you are far removed. Maintaining a journal helps give voice to the experiencing self (Kahneman talks extensively of this). Author got the idea from Soros’ Alchemy of finance to maintain a journal

• Mutual funds were forced to sell as their shareholders changed from careful investors to a lynch mob (’87 crash)

• When you are frightened, its hard to tell calmness from paralysis

• If the market is collapsing what you own hardly matters, as when there’s a runaway bull market. The best investors are kids who have never lived through a bear market and who just heedlessly buy whatever’s moving

• Tulip mania – End of 1636, a pound of tulips sold for a year’s income of a middle class family

• Optimists aren’t compelling and they don’t have a lot to say and they sound naive.

• “Don’t bitch. Switch” – Find growing companies wherever they are domiciled and switch to them when you don’t find growth where you are

• Seventy years of communism was like five years of total war (Russia)

• Until ‘93 only 5% of US money went global but in ‘93 money earmarked for global went to 50%

• Its tempting to pay back debt in cheaper dollars. That’s the only solution politician can think of. Inflation is more palatable than unemployment

• Singapore shipyards are lowest cost yards in the world for merchant fleets that need upgrading (wonder where we fit in now)

• China and Taiwan were equally poor in ‘49. By ‘78 Taiwanese income approached European levels

• When an investor first hears about China, it sounds like heaven. China needs honest books and written agreements and stable laws.

• When some developing countries grow between 6-10%, the disposable income grows at 15-20% and their companies can grow 25-30%.

• Any place in the world that gets richer eats more meat and protein, less bread and rice, wears nicer clothing, owns a car, a large air-conditioned house and feel entitled to a pair of Reeboks and a meal at McDonald’s once in a while. Find companies that satisfy these desires

Having read quite few of these investing books by fund managers and academics, this is one that is closer to ‘One up on Wall St.’ and is more actionable and suited for retail and its funny to boot. 9/10