Wednesday, January 12, 2011

The Gorilla Game by Geoffrey A. Moore

I have a bizarre passion for reading investment books that were written for past market cycles. I suppose I like the humiliation of it--it keeps me humble and helps me remember the fundamental truth that investment styles that look brilliant at one time can quickly destroy your wealth at other times.

It also helps me maintain an attitude of contrarianism and cynicism in my investing. I almost always avoid or trade counter to strategies that I consider trendy, overly popular, or too widely embraced by other investors. Ironically, this has turned out to be one of my most dependable strategies for staying alive in the stock market over the past 15 years.

Thus it is with a deep sense of irony that I say this: The Gorilla Game is exactly the kind of book that would have crushed you if you read when it was published, but it might be a perfect time to apply the strategies in this book right now.

The thing is, books on investment strategies tend to come into the marketplace exactly when their strategies are about to go stale. This happens for a variety of reasons: the investment style may not get widely disseminated or understood until too late in the game, the lead time for publishing books tends to be long, etc. And when this book was published in mid-1998, you had just about one year to try to take advantage of an investment strategy that was about to go horribly, horribly wrong.

It's a bit sad, because there's a lot of wisdom in this book's key general principles:

1) Look for industries that are in or about to begin a period of hypergrowth. Identify companies that provide new products or services that can bring about a sea-change in how companies do business, where new supply chains and new spending cycles can bloom quickly and create enormous economic value.

2) Find the dominant players in these spaces, first by making field bets on all the stocks in that space, and then gradually concentrating on the few dominant players once it becomes clearer who has the best competitive position.

In short, your job as a follower of this strategy is to identify hypergrowth markets and then identify the gorillas in those markets.

Here's the problem: the stocks that were in apparent hypergrowth back when this book was published were all in technology. In fact, reading through the types of stocks the authors trafficked in is deeply horrifying: large, dominant tech companies with stocks that absolutely cratered during the tech wreck, like ORCL, CSCO, INTC; or worse, tech stocks that totally disappeared, like has-been telecom names such as PairGain, Cabletron, Ascend, and so on.

And of course the authors cited the usual monster stocks of the 1990s as conclusive "evidence" of the success of the strategy: MSFT was a two-hundred bagger! If you had invested $10,000 in CSCO in 1990, you'd be sitting on $1,285,000 now! Ugh. Another horribly rich irony. The fact is, if you had picked this book up sometime in late 1998 (again, the year it was first published), and had then invested $10,000 into CSCO say in early 1999, you'd now have... $7,200.

Yep, buying one of the most dominant gorilla companies of all time would earned you a 28% loss after twelve years. Nice. And heaven help you if you bought CSCO in early 2000--you'd be down by 66% and you'd need to have a triple just to get back to even.

The irony gets worse. The authors claim that this process of focusing on the dominant players in each sub-industry of tech provides investors with limited downside. That obviously did not work during the 2000-2002 bursting of the NASDAQ bubble. While I'll admit that the downside for dominant stocks in that era was less than the downside of stocks like, this provides an exceptional example of how investors almost always fail to appreciate, in advance, the nature of the risks they face. The risk to these investments wasn't in the survival or dominance of the gorilla companies, it was in the egregiously high valuations of their stocks, and the demented expectations for growth that investors had banked on when they bought those stocks.

Thus you would have had your face ripped off and handed to you if you had followed this strategy right after the book was published. Like I said, the market is cruel, and from time to time it can make even really good strategies seem really, really dumb.

But when you read books like these out of their cycle, years after they were designed to be used, they often provide far more value--and far more profit. A reasonable and logical strategy that failed laughably in one era may work extremely well in other eras.

My point? This book and its strategy are perfectly suited for right now. Tech is out of favor and underowned by almost all investors, and valuations are attractive for nearly all tech stocks. Further, tech is widely seen as a low- or no-growth at a time when there are legitimate and underappreciated growth prospects in many tech subsectors. I'll leave it to you, readers, to find them.

Stay cynical my friends. The market has a cruel sense of irony. Take advantage of it.

Sunday, January 9, 2011

Stumbling on Happiness by Daniel Gilbert

Stumbling on Happiness is by far the best book I've ever read on psychology. It's entertaining, easy to read and at times outright hilarious. Gilbert is a great writer, with a gift for a turn of phrase and a knack for coming up with amusing ways to describe the various foibles of our brains.

In fact, Gilbert writes this book a little bit too well. Unlike Malcolm Gladwell, who is such a talented writer that he makes books about nothing sound absolutely fascinating, Gilbert's book is crammed with all sorts of incredible insights that I found myself almost glossing over because of his entertaining writing style.

Which is a pity, because this book taught me more about my brain--how it misperceives, misremembers, misprojects and mismeasures nearly everything around it--than anything I've ever read. But I had to read it a second time (and take notes, even) to get the most out of it. Seriously, how often do you read a book that makes you want to not only re-read it, but take notes while you're re-reading it? Yep, it was that good.

I had a family member tell me when she was about half-way through the book, "when is it going to get to the part about being happy?" The thing is, this book isn't about happiness. It's about how our brains trick and mislead us, which is an insight that's actually far more important than teaching us how to be happy.

This book, along with Nassim Taleb's The Black Swan, revolutionized how I think. I can't say that about many books. Highly, highly recommended.

Sunday, January 2, 2011

The Two Income Trap by Elizabeth Warren

What is wrong with the following statement?

"But the two-income family didn't just lose its safety net. By sending both adults into the labor force, these families actually increased the chances that they would need that safety net. In fact, they doubled the risk. With two adults in the workforce, the dual-income family has double the odds that someone could get laid off, downsized, or other wise left without a paycheck. Mom or Dad could suddenly lose a job."

You've just read the fundamental thesis of The Two-Income Trap. If you agree with it--although I truly hope you're a better critical thinker than that--you'll have your views reinforced. Thus reading this book would be an unadulterated waste of your time.

If on the other hand you are capable of critical thinking and you can successfully see through hilariously unrigorous "logic" of the above statement, then this book will still be a waste of your time (unless you like reading books for the sheer pleasure of laughing at their lack of rigor).

Either way, you'll have to wade through 162 pages of hand-wringing and one-sided statistics to get to any actual solutions--and those solutions should have been written on a 3x5 card that says:

1) Don't incur high fixed costs--manage your big-ticket spending items like housing and cars so they don't crush you down the road.
2) Don't compete with your neighbors.
3) Save money.

Better still, watch this Saturday Night Live skit instead. There. I just saved you four precious hours of your life.

Friday, August 13, 2010

A Bit On the Side by William Trevor

I haven't been reading much fiction lately, and sadly, I can't remember the last time I read a book of short stories.

And now, thanks to reading William Trevor's book A Bit on the Side, I've been reminded all over again of the elegance and artistry of a really good short story.

An Irish writer, Trevor has a gift for describing how regular people face the harsh challenges of life. His touching and elegantly worded stories address our fallibility, our loneliness, our fundamental weakness.

His work reminds me a bit of Thomas Hardy, except his characters aren't quite such hapless victims of fate. His story Sacred Statues is a textbook Hardy-esque tragedy, a slow, grinding calamity where the reader hopes against all odds that things will work out for the main characters--yet the odds play out just as expected. Sitting with the Dead, the first story in this collection, is a brief and moving vignette about a woman greedy for what marriage might be, who paid for it with the best years of her life.

Readers familiar with the classic short stories of O. Henry will love William Trevor too. Let me qualify that: lovers of O. Henry will love William Trevor more, because they won't be forced to suspend disbelief and swallow implausible plot twists.

These stories were a gift to read, and I can't recommend them enough. If you're a fan of short fiction, you'll enjoy this book thoroughly.

Highly, highly recommended.

Tuesday, June 22, 2010

Flyboys by James Bradley

"Nations tend to see the other side's war atrocities as systemic and indicative of their culture--and their own atrocities as justified or the acts of stressed combatants."

After thoroughly enjoying James Bradley's book Flags of Our Fathers, a compelling history of the World War II battle for Iwo Jima, I was looking forward to reading his follow up book Flyboys, which tells the little-known story of Chichi Jima, a tiny island in the Pacific that literally--and figuratively--sits in Iwo Jima's shadow.

Bradley's book tries to be quite a number of things, but at its core it's a history of a series of atrocities committed by Japanese soldiers on American airmen captured during bombing runs over the island. The atrocities were astonishing in their depravity, involving summary executions, decapitations and cannibalism.

I'll state one minor weakness of the book up front: About a hundred or so pages covers historical background of the Pacific War that readers can find in any of dozens of other books. It will be review material for anyone who knows their WWII history, but it's worth wading through it in order to get to the new ground that this book breaks--the stories of the airmen who were caught, tortured and killed on a tiny island in the middle of nowhere.

Sadly, what took place on this island was kept secret by the US military for decades. It's disturbing that the Navy knew all along what happened to these eight pilots, yet it chose to withhold this information from their families even to this day. Thanks to Bradley, who obtained access to these airmen's service records through a secret source inside the military, these soldiers' stories can now be told.

And since Stephen Ambrose's reputation has turned rotten under the heat of numerous plagiarism allegations, it's my view that James Bradley is staking out ground as one of the best current military history storytellers out there right now. Recommended.

Reading List for Flags of Our Fathers:
A note to new readers of this blog: I create reading lists from the books I read so if I choose to go deeper into the subject matter, I have a ready-made list of titles to choose from. I share these book lists with my readers in case they wish to do the same.

1) The Second World War by John Keegan (This is the first book I'd recommend to readers interested in an exceptional and comprehensive history of World War II)
2) Hirohito and the Making of Modern Japan by Herbert Bix
3) Looking Forward by George Bush with Victor Gould (long before he became President, George Bush senior was a Navy pilot who was shot down near Chichi Jima)
4) Tojo and the Coming of the War by Robert Butow
5) Embracing Defeat: Japan in the Wake of World War II by John Dower (this is an exceptional book that I'm now reading)
6) American Caesar: Douglas MacArthur by William Manchester
Japan: A Modern History by James McClain
7) The Right Stuff by Tom Wolf (an entertaining and at times hilarious history of the early days of test-pilots and astronauts in the USA)