Double Journey

One of my favorite investment books is One Up on Wall Street by Peter Lynch.  I like it so much because he explains stock picking in a way that the average person can really understand.  One point he brings up is to use your own day-to-day experiences to guide you in your stock picking.  Does your kid have a favorite toy that he says all the kids need to have?  Does your daughter need that hot pair of jeans from that great new retailer?  Stay in a nice hotel that was clean and affordable?  Find out if the company is public and buy the stock!

I often use this bit of advice to try and figure out what stocks I want to buy. But today I got just the opposite.  I decided not to buy a stock because of my own experience.  I had been considering for some time whether or not I wanted to buy Yum Brands.  This is the company that holds such companies like KFC and Taco Bell.  I’m not a huge fan of these restaurants but I like the space and I like the exposure that Yum Brands has in China.

I do not personally go to any of its restaurants too often but every once in a while I get a craving for a Chalupa.   So I went to Taco Bell today, the second time I have gone in the last six months.  But for the second time in as many visits, my service was horrible.  I had to wait almost 15 minutes from when I ordered my food to when I got it.  How is this “fast food”.  It isn’t even slow food.  It is food moving at glacial speeds.

Could these be just isolated incidents?  Maybe.  But it has convinced me not to go back to a Taco Bell and it convinced me not to touch the stock.

I read Malcolm Gladwell’s Outliers: The Story of Success this past week. I have read his other books Blink and The Tipping Point and enjoyed them. So when I heard that he had a new book out, I figured I would check it out.

From the onset I was intrigued by the subject matter. The focus of the book is what makes some of us successful and others of us not. Is it genetics, upbringing, or environment? Is it something else entirely? As someone who considers himself success and is looking to become more so, I was interested in what factors may have and will continue to contribute to this outcome.

Gladwell spends the first few chapters looking at people who anybody would consider outliers and looking at the set of circumstances that made the person successful. He looks at people like Bill Gates, Bill Joy, and Robert Oppenheimer. He looks at a group of people like professional hockey players and wondered if successful athletes have any common characteristics. What was perhaps the most interesting part of the book (which unfortunately was at the very beginning), he points out that one startling fact is that the vast majority of people who plan in the best leagues in Canada are born in the first three months of the year. This is not some strange statistical anomaly. No, the results are so skewed something must be going on. It turns out your birthday can have a dramatic effect on your eventual success. Think about it. Canadian youth hockey groups kids by their age. The cutoff is January 1st. So all kids born in the same calendar year play in the same league. But wait. What if you were born on January 1st? You play in the same league as someone born on Dec 31st, someone who is almost a full year younger. A year when you are 30 is no big thing, a year when you are 5 or 6 is huge, and it represents 20% of your life already. Naturally the kids born earlier are going to be slightly bigger and stronger as they are slightly more physically mature. These kids are singled out as being “better” as they look better compared to the much younger counterparts. This slight advantage means they get more playing time and more attention, which just makes them better. It is a virtuous cycle. This small seemingly insignificant fact like birthdates has ripple effects that factor in for years as the same pattern holds true all the way to the top ranks of hockey. Crazy huh?
He looks at their success of these outliers through the lens of other unknowns who seem to be blessed with similar talent yet somehow did not become wildly successful as Gates or Oppenheimer. In the end he concludes that outliers’ successes are very much correlated to things external to themselves. Sure, these people might be successful, but would they be true outliers. He shows that to be a technology giant in today’s world you needed to be born in 1954 or 1955 and that you stood a much better chance to be a successful NY lawyer if you grew up in a Jewish family from the Garment District and were born in 1930. Now mind you, he is not saying these people were successful solely because of these quirks in circumstance. He is not saying all Jewish kids born in NYC will be successful lawyers. He is simply stating that there are certain facts and circumstances that must be present for someone to be a true outlier.

He spends the second half of the book exploring ideas about culture and how the contribute to the failures and success of its people. There is an explanation on why Korean and Columbian airlines had such horrific air traffic safety records for decades (pilots defer too much to their superiors in their cultures). There is an explanation about why Chinese are so good at Math (and no, it is not just because we are smarter than everyone else). One of the most interesting conclusions is given near the end of the book. He looks at education levels among poor and rich kids. It is no secret that rich kids do better on standardized tests than poor kids but the reason he draws may surprise you. He concludes that we do not have an education problem. We actually may have a vacation problem. Rich kids never stop learning. There is always camp, a parent, or a book lying around the house for them to engage in over the summer. Not so for poor kids who may get a good vacation but come back to school behind their rich counterparts who spent the summer learning. What should we do about this? Year round school!

To sum it up, Outliers tries to show that success is actually pretty predictable. When you combine hard work with the right circumstance, you have a recipe for success. It is not just about having the most talent or random luck. It is about a gift people are given when opportunities present themselves and they have the strength to grab hold of it. He concludes the book by wondering what would happen if the same types of opportunities were given to everyone. If we understand which opportunities are needed for success, and gave these opportunities for all, would the outcome not become greater success for all?
Overall, I enjoyed the book. I think Gladwell tends to oversimplify a lot of issues but it is necessary in this type of book to keep it enjoyable. Usually his ideas follow mine, which make the reading more enjoyable and easier to write about. I agree wholeheartedly that success is determined by the confluence of hard work and the right circumstances. Anyone looking for a book that is a light read on a subject that is fairly interesting, I recommend picking this one up.

I recently read The Logic of Life: The Rational Economics of an Irrational World by Tim Harford. I generally really like these type of books, books that try to bring economic theory to the masses. Similar books like Freakonomics do a really good job of trying to explain simple economic principles and apply them in very interesting ways.

The book particularly caught my interest because I really would like to believe that people actually make rational choices.  Now that does not mean that I think people make good choices or even sane ones.   This is not what rationality is about.  Rationality, as defined by economist, is about how people respond to incentives.  If you make something more expensive, a rational person will consume less of it.  Make it cheaper, and a rational person will consume more of it.  As they try to decide what to do, they take into account other things in their life, not just this one choice, and they weigh the cost and benefit of this choice amongst the other choices they have.  Now notice there is no value judgment in this definition.  And that is important.  Also note that the cost of something can be more than just monetary; costs can include time, danger, pleasure, etc.  People can rationally make a choice that you and I think is totally crazy because they value something very differently than you or I would.  Having this view on life would allow us to make decisions and policies that would essentially “fix” many problems rather than throwing our hands up by simply creating the right incentives.

The book starts out strong.  It first starts out with an explanation of sex.  With such a start, who would not be instantly pulled in? It explores why oral sex is rising in popularity among teenagers when compared to previous generations (teenagers act rationally to the threat of life threatening diseases like HIV).  The book continues to explore such interesting topics like, “Is Divorce Underrated”, “Why Your Boss is Overpaid” and “Is Racism Rational?”.  The best parts of the book site either studies that economist  have used to try and add credibility to certain theories or how economic theory can lead to certain surprising conclusions.  Here are some of the better ideas.

•  The theory of comparative advantage means that men are not typically the breadwinners because they are better at it than women.  They might just be that much worse at helping around the house and being parents.  This might mean that women are actually better at everything but our society just adapted to the fact that women were comparatively so much better at raising the family.
•   Divorce is a good thing. Studies have show people who are divorced are happier one year after they are divorced than when they were married.  He argues that an increase in divorces might be caused by women having more options than they have had in the past both family and career wise.  Few would argue that this is a bad thing.  This actually could have caused a feedback loop and has made husbands behave better less their partner file for divorce.  Data bears this out as domestic violence has fallen substantially over the last several decades.
• Tournament theory suggests your boss needs to be overpaid not because she does a good job but because the only way to encourage those under her to perform is to provide a very strong incentive.  At the top, performance is harder to translate into fair compensation and incentives are often misaligned.  This leads to the conclusion that it does not matter what the CEO at a company does.  He could do nothing and it might still be a good idea to pay him the high salary!
• Ghettos can be caused by perfectly rational people behaving in a way that is not at all racist if people have even the smallest preference to be around people similar to themselves.
• An interesting experiment took place which demonstrates how random things can lead to big difference in the amount of education any group decides to get and even to what looks on the surface to be racism.  It demonstrated a vicious cycle where one group did not get education because they could not get hired and that group was not hired because they did not get an education.  All of this when all groups started on a perfectly level playing field but through random chance made choices that effected the group later on.
• Are system of special interest in government is perfectly rational even if it produces results that is bad for all of us.  It is the exploitation of the many by the few but makes sense since a few citizens with a lot to gain will fight much harder than a huge group with very little to lose.

Overall the book is good and worth reading if you have an interest in economics and how little, seemingly inconsequential details can have far reaching effects.  It starts to fade a little bit at the end as the author starts to dive more into theory and less into studies that produce interesting results.  It becomes a lot more speculative at the end rather than concrete, but I believe this was the author’s intent.  The book ends kind of disappointingly and kind of abruptly, but overall worth a read if you enjoy economics.

I’m trying to get back into the swing of reading. Of course, I naturally gravitate toward financial investment books.  As I’ve posted before in my blog about the best investment books to read, the best books are those you will actually pick up and finish.  I’ve been hard for time lately, so I decided to pick up another book in “The Little Book” series.

This time, I picked up The Little Book That Builds Wealth by Pat Dorsey.   You will notice that this is the same Pat Dorsey who wrote another one of my recommendations, The Five Rules for Successful Stock Investing.  I like his style of writing, even though some might find it dry.  I find it to be easily understandable for even the average person with little investing background.

The book focuses on the concepts of economic moats.   It is a concept used heavily by the likes of Warren Buffet as well as the company Pat Dorsey works for, Morningstar.  The idea is simple.  Those companies that have sustainable and strong competitive advantages, will in the end be worth more money than those that don’t have such advantages.  Despite the rather simple concept, the book does spend some time trying to convince the reader why the concept is important.  It actually is something that needs to be explained, because it is a rule often ignored by so many (myself included).

For me personally, the most useful thing was not how to think about companies that I am looking to invest in.  It was most useful to me as a way to think about my own company.  It got be thinking about the industry I am in as well as my company’s position in it.  The book made me think about ways I can help my company create a lasting economic moat or if it was a waste of time to even try given my industry’s dynamic.  I actually recommend it highly to anyone who has major influence in a company and is looking to jump start ideas on how to create strong competitive advantages.

So overall I recommend the book.  Probably because it fits in so nicely with my own investment style.  Just take a look at my Shopping List (which I know needs to be slightly updated) .  Almost every single one of those picks are a wide moat company.  All of them were picked before I ever read this book.    Great minds just think alike.

I took a self-assessment at work the other day.  It was based on a book called Stregthsfinder 2.0.  The theory behind this book is that we often focus too much on our weaknesses.  The way we try to improve and get ahead is by working on your weaknesses until the are no longer your weakness rather than focusing on what we are good at and using that to our advantage and getting ahead.  It is a philosophy that I actually share and so I was interested to see what it would say are my strengths.

If you buy the book, you can take an online test to determine what your strengths are.  They ask you a lot of questions, and you are supposed to say whether you agree with one more than the other.  It was somewhat difficult because a lot of the comparisons were relatively close in meaning, but you had to try and pick one.  After taking the test, you are given five strengths.  These strengths are supposed to describe what you are good at and what you are interested in, and gives you a course of action to utilize this information in you work.  My results are as follows.

• Strategic - People who are especially talented in the Strategic theme create alternative ways to proceed. Faced with any given scenario, they can quickly spot the relevant patterns and issues.
• Significance - People who are especially talented in the Significance theme want to be very important in the eyes of others. They are independent and want to be recognized.
• Competition - People who are especially talented in the Competition theme measure their progress against the
  performance of others. They strive to win first place and revel in contests.
• Individualization - People who are especially talented in the Individualization theme are intrigued with the unique qualities of each person. They have a gift for figuring out how people who are different can work together productively.
• Futuristic  - People who are especially talented in the Futuristic theme are inspired by the future and what could be. They inspire others with their visions of the future.

For the most part, I agree with the results. I actually don’t think I’m as competitive as I used to be, I had to win at EVERYTHING growing up, but it is still definitely part of my personality. But overall, it is pretty good. It does tell me that I’m probably in almost the right job, but not quite the perfect job.  My job, right now, tends to be a lot more tactical in nature and present focused rather than on the future.

So for those of you who know me, how close do you think this is?  Is it an accurate description of the type of strengths I exhibit?

I’ve often been asked what are the best investment books for someone to read if they are just starting out. I’ve read a lot of books on the topic and I’m happy to share my opinion on what the best books are for someone just starting out.

One Up On Wall Street- If there is one book the average investor should read about buying individual stocks, this is probably it. It is very well written and offers very pragmatic advice on how tho think about individual stocks.  It is written by Peter Lynch who became famous running Fidelity’s Magellan fund and it is written to show how an ordinary person has some rather large advantages over the boys in Wall Street.

Robert Hagstrom’s The Warren Buffett Way -Readers of my blog know how much I admire Buffet. I believe his technique (despite what I may espouse on this website) is the way to go. Buy well run companies that are easy to understand and that are attractively priced. Buffet himself has never written a book, but Hagstrom clearly outlines what Buffet has done to make himself one of the wealthiest men on the planet.

Pat Dorsey’s The Five Rules for Successful Stock Investing - This is a really great book to teach you the basics of how to evaluate a company and what the important metrics are.  I also like the fact that it has in its appendix how to evaluate companies in different sectors.  Evaluating a bank is much different than evaluating a tech company, and this book shows you the basics so you can get started.

Joel Greenblatt’s The Little Book That Beats the Market-  The best book is the book that you read and you finish.  That’s why I put this book on the list.  It’s very short and a very quick read.  The advice is actually half way decent, but more importantly it is simple to follow.  He even has a website that does all the work for you.  The thing I like about it most is that it should make it really simple for you to invest, and the most important thing when it comes to investing is to just start.

There are a lot more books I suggest you read, but this should give you an excellent starting point.  Like I said, start with the basics and then go from there.