The Best Quote from the Last Five Investing Books I’ve Read

The $10 I spend on a book buys me a batch of passages and notes. I love to extract the best bits of good books. With some books, I highlight more than 100 passages. 20 is more typical. Here is my single favorite passage from the last five investing books I’ve read (I had to go back more than 50 books to find 5 investing books!).

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen (15 passages highlighted, 1 note)

when you are looking for new cool trading ideas, think about whether there is information that most investors overlook, new ways to combine various sources of information, a smart way to get the information fast, or what type of information is not fully reflected in the price because of limited arbitrage.

This is a helpful guide to active investing. If you are going to bother trying to beat the market you need to be different and have an edge. This advice pretty much applies to any pursuit (art, entrepreneurship, etc).

Successful Investing Is a Process: Structuring Efficient Portfolios for Outperformance by Jacques Lussier (20 passages highlighted, 5 notes)

Some managers should never have existed, a majority of them are good but unremarkable and a few are incredibly sophisticated (but, does sophistication guarantee superior performance?) and/or have good investment processes. However, once you have met with the representatives of dozens of management firms in one particular area of expertise, who declare that they offer a unique expertise and process (although their “uniqueness” argument sometimes seems very familiar), you start asking yourself: How many of these organizations are truly exceptional?

Notice the common theme. For example, “we buy high quality companies at good prices” is not unique. If someone told me “we buy terrible companies at high prices,” I’d be very curious to hear more, if only for a little variety!

The Dao of Capital: Austrian Investing in a Distorted World by Mark Spitznagel (30 passages highlighted, 4 notes)

As we know, roundabout production—bearing the costs of capital investment—typically results in an immediate hit on profits (particularly from noncapitalized investment such as research and development). Our constant refrain sounds again: We live in the seen (what is available to us), and we extrapolate the seen such that we are deceived as it curves (minor leaguers hit linearly extrapolated fast balls, major leaguers hit curve balls); the roundabout is hard, and we are not biologically cut out for it. Thus, the stock market tends to be about immediate bets (or expectations) on distant outcomes—yet all that matters to the bettors tends to be the immediate outcomes. That is, among high ROIC firms, stock valuations and the resulting Faustmann ratios seem to anticipate future profits in the short run so accurately that they miss the curves and the changeups.

One of the most important variables in any investing process is time horizon. Momentum is a great strategy if you favor very recent information and hold for a fairly short period. Value is a great strategy if you can sit patiently. Perhaps quality is the best of all if you can hold indefinitely. People complain about Wall Street’s myopic focus on quarterly results, but I love it! It creates the chance to differentiate one’s investing process by focusing on the longer term.

The Value Investors: Lessons from the World’s Top Fund Managers by Ronald Chan (23 passages highlighted, 4 notes)

Instead of asking questions about the company’s latest earnings outlook or long-term strategic plan, Eveillard’s goal was always to get a sense of the management team’s personality. He explained, “There is no point asking about a company’s earnings outlook because if we are investing for the long term, then short-term earnings never affect our intrinsic value calculation. Asking management about long-term plans is also pointless to me because the world changes. No one can predict what will happen, and so what is more important for us as analysts is to discover the underlying strengths and weaknesses of the business ourselves.”

Short-term earnings won’t affect our outcome because we will hold for a long time and long-term earnings are unpredictable so screw it! Lovely.

Value Investing: Tools and Techniques for Intelligent Investment by James Montier (22 passages highlighted, 0 notes)

The near fatal mistake that investors seem to make repeatedly is to assume that market risk is like roulette. In roulette, the odds are fixed and the actions of other players are irrelevant to your decision. Sadly, our world is more like playing poker. In poker, of course, your decisions are influenced by the behaviour you witness around you.

This Black Swan-y quote is perfect. We so badly want to quantify risk and the odds of bad outcomes, but the market is just US, and who knows how and when we will all go crazy.




If you are a fan of books, check out the book club that I run: I send 3-4 of the best books I’ve read to you in an email each month, culled from the best of the 100 or so I read per year. You can sign up here.