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The books these 10 wealth managers have been reading this summer
by Harriet Dodd on Jul 19, 2013 at 12:11
There's no better time to catch up on a bit of reading than in the summer. We reveal the books at the top of these 10 wealth managers' summer hit lists.
The Last Tycoons by William D Cohan
Among the many excellent books about the financial world I have read in the past decade, a few have stood out and provided valuable lessons about the mad world we work in. The one I have most enjoyed reading is William D Cohan’s The Last Tycoons: The Secret History of Lazard Frères & Co.
This fantastic history shows how a small business built upon humble beginnings can go on to become a global financial giant and highly influential in the corridors of power. For all of us who have worked for small and aspirational businesses, it is inspirational reading.
The Last Tycoons describes how valuable people consider advice from ‘great men’ to be, and how intellect can triumph over wealth and power, if used properly to your advantage.
Lazard built a reputation founded on opinions that the wealthiest and biggest corporate clients believed they could not do without. The company earned huge fees from giving advice and were involved in most of the biggest mergers and acquisitions of the post-war decades.
This ensured legendary status for the firm’s ‘rainmakers’ such as Felix Rohatyn.
However, perhaps more importantly, it goes on to show how hubris can almost destroy a career or a business when power goes to the heads of the powerful – and how intercompany rivalry and squabbling can undo over a century of good work.
As a history of great riches and influence, great scandal and great men, Cohan’s tale certainly lights up our more mundane existences.
Tom Becket is chief investment officer at PSigma
Probable Outcomes by Ed Easterling
In order to persuade investors to put money into their funds, many fund managers try to convince people the outlook for their asset class is positive even when it isn’t.
To avoid being hoodwinked by such disingenuous logic, you need to be armed with the historical facts – and this is what Probable Outcomes does so brilliantly. As the title suggests, one can use history to gauge the most probable path of future returns and while no guarantee of success, at least it increases your chances of being right.
Key themes are:
- Learn to differentiate between long-term secular bull and bear markets and short-term cyclical rallies
- The most important driver of secular markets is change in valuation; all bull markets start at low valuations and end at high ones
- That the most important determinant of valuation is inflation expectations (inflation and deflation both result in lower price to earnings ratios but for different reasons)
- We are 12 years into a secular bear market that commenced in 2000 at a valuation 50% higher than previous bull market peaks
- The earnings cycle is more volatile than the economic cycle, so earnings must be normalised to provide an effective valuation metric
- Volatility can eat your returns in the long run
Easterling founded US firm Crestmont Research and the book contains many useful tables and diagrams that illustrate the historical drivers of stock market returns. He uses simple examples to explain complicated issues, and ends each chapter with a summary of the key points for the reader to take away.
While it does not promise the definitive answer of where markets are going, it gives you the framework to be able to make an educated forecast for yourself, and the facts to help your attach probabilities to your different scenarios.
Whether you are an amateur investor, a pension fund trustee or a wealth manager, I can strongly recommend this book as an antidote to some of short-term noise pedalled by so-called finance professionals.
Ian Lance is co-head of income at RWC Partners
The Signal and the Noise by Nate Silver
While some people might not see a link between investing and poker, it may be no coincidence that many of the most successful hedge fund managers, including David Einhorn, Marc Lasry and Peter Muller, are all keen players. And these interests of mine converge in one of my favourite investment books to be published recently.
Nate Silver’s The Signal and the Noise: the Art and Science of Prediction follows a well-trodden path: the failure of the economics profession to forecast major economic upheavals. But he also explores a less well-understood issue: the fundamental unreliability of economic data, on which politicians and the financial markets place far too much weight.
In particular, Silver points to the serial revisions of single-point data such as GDP, and suggests economic releases should instead have confidence ranges. The chapter on poker highlights the importance of calculating a range of odds and the caveat that winning probabilities are uncertain and imprecise.
Einhorn, Lasry and Muller have all had some success in understanding and calculating a range of probabilities based on some known information (your cards, community cards), some unknown information (your opponents’ cards) and some partly understood information (your opponents’ personality and playing style).
With respect to investing, I like Silver’s analogy between the single-minded and inflexible hedgehog and the more dynamic and adaptable fox. The hedgehog typically makes grand statements with absolute certainty, and often features on TV. In investing parlance, the hedgehog’s information ratio is low quality, given likely binary outcomes.
This initially concerned me, as I occasionally appear on TV for Coutts. However, after reading this book I was pleased to recall that I used nuanced phrases like ‘this is a mixed message’.
Silver’s book suggests the fox, who makes lots of smaller decisions and has a more balanced view on investments, is likely to be more successful. The essence of his message is to diversify decision-making by capturing small advantages, which he highlights as superior to the ‘big plan’ as set out by the hedgehog.
Alan Higgins is UK CIO at Coutts
The Success Equation by Michael Mauboussin
For those who have read ‘Mauboussin on Strategy’ for years, it should come as no surprise he should expand his famous July 2010 piece on untangling skill and luck into his latest excellent book.
Mauboussin, formerly chief investment strategist at Legg Mason Capital Management and now head of global investment strategies at Credit Suisse, has written extensively for over a decade on strategy, behavioural finance and counterintuitive thinking.
Here he builds on Daniel Kahneman’s 1973 academic paper ‘On the Psychology of Prediction’ to break down the relative contribution of skill and luck in determining the outcome of a given situation. For while skill is controllable and repeatable, luck is not.
Where Mauboussin’s work differs from most popular books on investment and economics is that a third is devoted to concrete suggestions of how to adjust the relative contributions to your benefit. For example, he focuses on the difference between a useless statistic and a useful one; most statistics fail this simple test. Whereas useful statistics are predictive and persistent (the past highly correlates with the present), useless statistics cloud judgements and predictive capabilities, especially when there is an asymmetric outcome.
This is not a ‘how to make money’ book but rather a guide to limiting the chances you are the bigger fool. It is maddeningly difficult to judge what caused your success or failure.
Though (perhaps out of deference) not referenced in this book, Mauboussin’s former colleague Bill Miller would be the perfect example. After 15 straight years of beating the S&P, Miller’s luck ran out. His giant $47 billion Legg Mason Value Trust fund lost more than 70% in the crash and remains severely underwater, underperforming the S&P by 5.9% a year on an annualised basis through to February 2013. The lucky are not always skilful and the most skilful do not always win.
James von Simson is a portfolio manager at Thurleigh Investment Managers
Mao's Last Dancer by Li Cunxin
This is an extraordinary autobiography by Li Cunxin, who was born into extreme poverty but rose to become a world famous ballet dancer and is now a stockbroker in Australia.
The story begins in rural Qingdao in Shandong Province. Once a thriving port, by the time Cunxin’s parents marry in 1946 it had suffered Japanese occupation and civil war.
The large and loving family existed in grinding poverty. Cunxin, the sixth of seven sons, was born in 1961 and during his early years was indoctrinated in Communism and was proud to be a junior Red Guard, firmly believing that Chairman Mao was a god and father of the nation. Cunxin’s door to a new life was a great example of serendipity. The cultural revolution was sweeping the country and Madame Mao was instigating a ballet school and sending scouts to search for pupils.
At the age of 11 he was taken from his family to attend the ballet school. Terribly homesick, it is hard to read that he never got over his enforced separation from his family. However, his parents understood that this was his passport to a better life.
Cunxin was given the rare opportunity to leave the closed country to visit the US and it was there he met Mary McKendry, who became his second wife and mother of their three children. In a dramatic defection, Cunxin was locked up in the Chinese Embassy and there ensued a diplomatic incident involving president George Bush Senior (then US vice-president).
As a free man, Cunxin had a wonderful career with the Houston Ballet Company. Just when one thinks this extraordinary man can achieve no more, we learn that while living in his wife’s native Australia and performing as a principal dancer, Cunxin, with his rudimentary education but with a huge ingrained work ethic, took the Australian Securities exams and qualified as a stockbroker.
This is an inspirational true story of rags to riches and a fascinating insight into the dissolution of the Communist ideal.
Amy Lazenby was an investment manager at Wilson King Investment
“You say tomayto…” by Alastair Mundy
Many fund managers consider themselves to be contrarian investors, but few genuinely are. And even those that go against market trends often endure periods of poor performance, which even if proven correct in the long run, require nerves of steel.
While this is a skill few fund managers possess, there are some notable exceptions. In the UK, Anthony Bolton springs to mind, along with Alastair Mundy of Investec Asset Management.
Alastair is an exceptional talent who has over a long-term time horizon consistently beaten the market. His recent book is written in a similar fashion to Anthony Bolton’s Investing against the tide, a series of summaries in which a fund manager considers the significance of a business before making an investment.
Mundy’s book comprises several years’ worth of monthly investment commentaries, consisting of his ‘thoughts of the month’ articles designed to shed light on his systemic investment process and the possible challenges that contrarian and value investors are facing.
It provides a wealth of thoughtful advice and a good pinch of modesty. The stories, opinions and discussions presented are an accurate interpretation of the author’s character, and to anyone who has met him, you can actually appreciate the financial expertise, and good humour, that he possesses.
Mundy’s use of analogies and cartoons to explain his points add to the character of the book and what it embraces. He avoids the ostentatious language that so often litters investment literature, instead providing an understandable and easy read that does not require a degree or in-depth knowledge of either the markets, or indeed, economics.
I would suggest any budding contrarian, or long-term value investors read this book which captures the wisdom, and humour of a brilliant contrarian investor, mindful of the fact that he only tells Mrs Mundy about her investments on a ‘need to know’ basis.
Peter Lowman is CIO at Investment Quorum.
A History of Capitalism According to the Jubilee Line by John O’Farrell
This is one of a series of 12 novellas from a diverse range of contemporary authors, released by Penguin to celebrate the 150th anniversary of the London Underground (a book dedicated to each of the 12 lines).
Other authors in the series include John Lanchester, who wrote the excellent Capital, and Lucy Wadham, bestselling author of The Secret Life of France.
These pocket-sized books are too short to offer an engrossing holiday read but will provide a more intellectually stimulating way to pass your daily commute than completing a level of Angry Birds.
O’Farrell’s story features a carriage full of passengers trapped underground (albeit as part of a fairly surreal dream of the lead character).
The passengers become stranded on the Jubilee line following a power outage and need to formulate an escape plan.
O’Farrell takes their quandary and turns it into an entertaining debate over the pros and cons of capitalism versus socialism (given his regular column in The Guardian, you can guess where his loyalties lie).
Along the way, there are some snippets of historical information and insights about London and the underground that you don’t have to be a train spotter to find of interest (including revealing the only tube station name that doesn’t include a letter from the word ‘mackerel’).
The diverse range of characters are the sort of people many of us share our underground journey with each day.
Somewhat topically, the late Margaret Thatcher also turns up to offer her perspective, and a couple of feuding philosophers add to the surrealism.
However, perhaps the most farfetched aspect is the thought of a carriage full of strangers on the tube actually talking to each other – never.
Gavin Haynes is managing director of Whitechurch Securities in Bristol
The Checklist Manifesto by Atul Gawande
In 2006, US surgeon Atul Gawande was asked by the World Health Organisation to develop a global programme to reduce avoidable deaths and harm from surgery. His answer was to produce a very basic 19-point checklist to perform in theatre before and after operations. The result? Hospitals around the world saw major complication rates post-surgery fall by -36%, while deaths dropped by -47%.
The Checklist Manifesto is a homage to the simple art of making and following lists. Gawande’s surgical checklist was inspired by the aviation industry where the benefits of lists have been long understood, allowing pilots to get things right when stress, fatigue or information overload might otherwise lead to simple mistakes.
Gawande argues that checklists are useful for any endeavour that requires the mastery of complexity and/or large amounts of knowledge. They act as a ‘cognitive net’, catching mental flaws inherent in all of us – flaws of memory, attention and thoroughness. Gawande briefly discusses checklists in investment, and their benefits when used as an aide-memoire for adhering to one’s investment process through thick and thin.
Gawande is realistic, though, about the limits of a checklist. They will not work if they are too long or vague. And, as he puts it, ‘a checklist will not fly a plane’, however useful these lists have been to the aviation industry over the years. But perhaps the biggest challenge for a checklist is its adoption in the first place. In Gawande’s words: ‘It somehow feels beneath us to use a checklist, an embarrassment. It runs counter to our deep-held beliefs about how the truly great among us – those we aspire to – handle situations of high stakes and complexity. The truly great are daring. They improvise. They do not have protocols and checklists. Maybe our idea of heroism needs updating.’
Hugh Yarrow is an investment manager at Wise Investment
The Most Important Thing by Howard Marks
In this aide memoire by Howard Marks, founder of Oaktree Capital Management, behavioural finance meets value investing. Drawing on the 40 years’ experience that have seen Marks rise to the top of our profession, this is a compendium of insights.
Marks considers dealing with risk to be the essential element in investing, devoting three chapters to it. ‘Understanding Risk’ looks at how we understand riskier investments can’t be relied on to produce higher returns but must offer the possibility of higher returns in order for rational market participants to direct capital to them. How well do our clients grasp this concept and how good are we at explaining it?
Marks articulates something we all know but that flies in the face of conventional financial theory: risk does not equal volatility or the standard deviation of returns. It is the possibility of permanent capital loss that concerns most of our clients, and therefore should concern us.
In reality, common sense is hijacked by the blurring of this concept into benchmark risk, peer group risk and even career risk.
‘Recognising Risk’ is a useful reminder of why any rigid asset allocation strategy is doomed. Marks highlights the effect of the crowd on risk analysis, such that ultimately whether an investment is risky or not is determined to a significant degree by the popular perception of its status. Current examples include the yield on UK gilts and US Treasuries, where we appear willing to accept significant capital destruction in real terms for the knowledge that nominally our money is safe.
In ‘Controlling Risk’, Marks compares house building to portfolio construction, the analogy being you only find out if your house or your portfolio is solid when you encounter adverse conditions. The best among us are those able to clearly perceive the risks being borne and mitigate them via portfolios with favourable asymmetry.
I hope this whets your appetite for Marks’ writing and you enjoy reading The Most Important Thing.
James Maltin is an investment director at Rathbone Investment Management
Ashes to Ashes by Marcus Berkmann
Cricket isn’t common in Northern Thailand, but for the past 25 years, a group of adventurous souls have been staging a six-a-side charitable tournament in Chiang Mai to support the development of cricket in local schools. The results are plain to see, as local children are now giving visitors more than a run for their money!
As part of the visiting team, I chose for my reading matter a reminder of the ecstasy and the humiliation of the one of the world’s longest and fiercest sporting soap operas: the Ashes series between England and Australia.
Marcus Berkmann’s Ashes to Ashes is a personal, light-hearted journey through recent Ashes history, and his timeline pretty much matches my own. His odyssey began in 1972 when Australia were a young team getting better and England were in gradual decline. I particularly related to the beginning when he describes how at the time he (like thousands of English school kids) was desperate for news of the England team playing at night on the other side of the world. We would stay up late, listening to the wireless under our bed sheets, turned down as low as possible so as not to wake mum and dad.
Through the 1970s to the 1990s, Berkmann takes us through all the highs and lows (mainly lows, to be frank). All of our childhood heroes and villains are there: Chappell, Greig, Border, Boycott, Gooch, Gatting, Lillee, Brearly, Snow, Knott, Botham, Gower, too many to list.
What an era. But just when we thought we could start to stand up to the Aussies, along came the best cricketing team of all time. Those of us trying to build teams and businesses could learn a lot from these guys.
Berkmann’s delivery is such that, although you know the outcome, the pace and prose maintains the excitement of every match as if you were reading about it for the first time.
For anyone with even a passing interest in cricket, this book is a great warm-up for this summer’s forthcoming grudge match. But beware – even Berkmann acknowledges that this is principally a book about suffering.
Richard Ford is CEO of Iveagh Ltd