10 investing lessons from Michael Lewis

I've recently started reading Panic: The Story of Modern Financial Insanity. Michael Lewis has edited a compilation of magazine pieces about various financial meltdowns, from the crash of '87 to our present subprime fiasco.

There are a lot of good pieces in the book, but I gravitated to the pieces by Lewis himself. In particular, I loved a piece he did for the New York Times Magazine back in October 2002. It's called "In Defense of the Boom." Before you dismiss it as glib sophistry, please read it. It might be the most dispassionate, well-reasoned, even-handed summary of the benefits and deficiencies of the Internet Bubble. Even though it was written nearly six years ago, it's still a really relevant piece, actually, it's more prophetic than relevant.

The same boosterism and asleep-at-the-wheel regulatory bodies and media were just as present in 1997 as they were in 2007. Though the Internet boom had it's poster boy in the form of Henry Blodget, this era has yet to name one (Bernie Madoff and Angelo Mozillo are probably ranked 1 and 2 for this dubious honor). In hindsight, we often pillory booms as some sort of amorphous collective haze that obscured everyone's vision. Lewis paints a different, more nuanced picture. Booms are a byproduct of an intensely competitive, self-interested people and system (capitalism). He accurately points out that wealth is not so much destroyed as transferred (I think Gordon Gekko, made a similar point in Wall Street, but I digress).

Anyway, read the piece and make your own calls about it. However, I took away five points from it that I think could benefit every investor. These points aren't necessarily new or original, but they are easily forgotten.

1. Booms and busts have always been with us and always will be with us. You can't repeal the law of supply and demand or eliminate the business cycle.

2. Booms produce benefits that can't accurately be quantified and who's beneficial nature may not be apparent for years.

3. Brokerage analysts are useless.

4. The people who ought to know better(institutional investors and smart financial journalists for example) are no better equipped emotionally than retail investors to recognize and/or avoid a bubble.

5. The media is very adept and creating heroes and than tearing them down. Jeff Bezos was Time's Person of the Year in 1999.

6. The Internet is a new technology, but is still like all other previously new technologies. It's pros and cons will be overstated.

7. Human nature will never change.

8. Good or bad, even profitable, depends largely upon perspective. As Obi-Wan Kenobi famously said, "many of the truths we cling to depend greatly on our point of view”

9. Failure is useful. Even if you don't learn from it, someone will.

10. The business of America is business. As Michael Lewis, so eloquently points out in the article:

There's plenty to criticize about American financial life, but the problems are less with rule-breaking than with the game itself. Even in the most fastidious of times it is boorishly single-minded. It elevates the desire to make money over other, nobler desires. It's more than a little nuts for a man who has a billion dollars to devote his life to making another billion, but that's what some of our most exalted citizens do, over and over again. That's who we are; that's how we seem to like to spend our time. Americans are incapable of hating the rich; certainly they will always prefer them to the poor. The boom and everything that went with it -- the hype, the hope, the mad scramble for a piece of the action, the ever escalating definition of ''rich,'' the grotesque ratcheting up of executive pay -- is much closer to our hearts than the bust and everything that goes with it.

These are all great lessons that will hopefully allow to keep your head during the next boom. They might not be able to keep you from being swept up in it, but they might help you bail with some money in your pocket before the ride comes to its inevitable end.

Finding the Next Starbucks

I know. This is a book about growth investing and I'm a value investor. Still, Michael Moe's book, has good lessons for investors of all stripes. Michael Moe also have a great website that accompanies the book and provides in depth interviews with some of the greatest investors, venture capitalists,and captains of industry. Michael Moe is a veteran equity analyst who currently heads his own shop, ThinkEquity Partners. His claim to fame is that he was early in predicting the amazing success that Starbucks would have, thus the title of the book.

The part of the book that will be of most use to value investors are the chapters that deal with megatrends and how they currently affect and will affect various industries in the future. As a value investor, it's very important to me to find a business will be effectively protected form such changes or only changed very little. Failing that, I want to at least align myself with these secular changes. The book does a very good job of providing examples of both public and private companies that will play a part in shaping and benefitting form these trends.

The Dhando Investor

Da Vinci is credited with saying, "simplicity is the ultimate sophistication." This quote definitely applies to Monish Pabrai's slim volume, The Dhando Investor. Quite simply, this is the best investing book that I've read this year. The book is only 183 pages long, but has more insights than a book twice as long. Monish Pabrai is a hedge fund manager based in Southern California who has shamelessly adopted the tenets of Graham, Buffett, and Munger with a great deal of success. The title of the book comes from a Sankskrit word which effectively translates as "business." Therein lies the crux to Pabrai's approach. Like the value investing masters he emulates, he views a stock as a share of a business. Ideally, he wants to buy a simple business with a moat, in a distressed industry, at a discount price. He then generally holds on to the stock for 2-3 years while the market catches up with its intrinsic value. This patient approach has netted his investors 28% returns during the life of his funds. Pabrai is obssessed with minimizing the downside in his investment decisions. He rejects the old saw about low risk, and low return. Pabrai also doesn't trade excessively or own a large number of stocks. He runs a focused portfolio and makes only a few big,infrequent bets whose size are dictated by the Kelly formula. When there is nothing to buy, he buys nothing. When something attractive comes along, he invests with conviction. Simply put, he is a rational investor, the most rare of birds in any market.

Book Review: Commodities Rising by Jeffrey M. Christian

Commodities Rising is an excellent, hype-free primer on the commodities markets. Mr. Christian, who heads CPM Group, a commodities research firm that provides consulting and investment banking services to individuals, institutions, and corporations, and international organizations. Christian does not believe that we are in a commodities supercycle. I do not agree with these thesis, but I appreciate the thoroughness of his arguments and his long-term perspective on the markets.
The book does an excellent job with providing a general overview of the various ways in which to participate in the commodities markets, i.e. futures, forwards, stocks, ETFs, etc. The author shares two particularly interesting insights about the commodities markets. First, they are filled with misinformation and outright lies. The commodities markets are assymetric as regards information. Secondly, most transactions take place in the cash market in the form of forwards, not the futures market deliveries. The weakness of this book is that there is very little in the way of concrete counsel on how to profit from commodities. He offers no specific companies that he particularly likes, nor trading or options strategies. Also, it can be a bit repetitive and boastful of the author's intelligence and experience.