Powerful Books That Shaped My Thinking
In recent months, the contributors to this blog have been sharing lists of books that changed the way they think about the world or nonfinancial books that made them better finance professionals. What were the books that had the greatest influence on my thinking and maturity as an investor? As my tastes are pretty eclectic, my top books likewise span a wide range of topics. What follows are books that reflect my personal choices and are not necessarily recommended readings.
Common Stocks and Uncommon Profits by Philip A. Fisher
Fisher describes his particular approach to investing. Among other things, he details a process known as the scuttlebutt method, whereby he would plug into the industry of a target company to learn everything he could about its strengths and weaknesses prior to making an investment. This is an approach that I applied throughout my years as an analyst and fund manager. While it is not hard to identify industry contacts, most people actually find it hard to do so out of fear of rejection, inadequate communication skills, whatever. Get over it. You are paid to be an analyst. You can clearly set yourself apart from the crowd, and gain knowledge and insight about how a business actually works, in a way that you simply cannot by calling investor relations, reading an annual report, or listening to the well-choreographed conference calls staged for investors. If you want to uncover the truth and have nuanced insight about a business or security, you need to be an investigator, interviewer, analyst, and yes, a people person. Fisher shows you how.
Only the Paranoid Survive by Andrew S. Grove
Grove illustrates how and why communication within a large organization is so difficult. Employees, particularly in large, public companies, give deferential treatment to leaders, often fear delivering bad news, and can have conflicting incentives such that they can avoid direct, plain-spoken feedback about what is really happening within the organization. To combat groupthink, yes-men, and self-preservation instincts, Grove advocates that business leaders use a proactive approach of engaging with all those people in a position to know better. Second, Grove suggests turning the tables and proactively asking for feedback from people around you. Even though you may be expected to “know” all the answers, he says, you need to make yourself vulnerable and fight through any ignorance you may have by asking honest, open-ended questions. In this way, you can improve your knowledge about what is happening. Without necessarily knowing Philip Fisher’s terminology, Grove illustrates how to put the scuttlebutt method into practice.
The World Turned Upside Down by Melanie Phillips
Phillips does a masterful job analyzing a number of high-profile, hot-button issues. In it, she demonstrates how many times information is presented as fact by those in authority — those at prestigious institutions and with colossal reputations — who are nevertheless wrong. This book will help you understand that you are the only ballast in the harbor, and you must understand the sequence of assumptions necessary to establish any set of beliefs.
Information Rules: A Strategic Guide to the Network Economy by Hal Varian and Carl Shapiro
This book demonstrates that all businesses conform to the laws of economics, but as the underlying attributes of businesses differ, the laws apply differently to different businesses. First and foremost, the book lays out the economics of information goods. Secondly, the clarity and detail of the book helps you understand how these concepts apply to a wide range of companies that are not traditionally considered technology companies. As the world increasingly embraces digital and network technologies, these phenomena are ever more relevant to a wider and wider array of businesses.
Bandwagon Effects in High Technology Industries by Jeffrey Rohlfs
Rohlfs walks through the history of technology products ranging from the early telephone and primitive fax machine to personal computers and the Internet. Rohlfs describes the economics of technology goods from the start-up problem to network externalities. In essence, he demonstrates that bandwagon effects occur when the value of a network to each user grows with the addition of each user. Consequently, the value grows over time. With more and more technology going into more and more products, the presence of bandwagon effects remains poorly understood yet increasingly important.
One of the real gems in this book for me was a comparison of belief systems. In essence, two people confronted with the same exact problem, who apply the same exact logic, can come up with completely different conclusions. Why? Logic draws on our preexisting worldviews or belief systems. Consider the case of two men who own their own businesses. Both men dream of one day becoming independently wealthy. In consultation with their accountants, both men discover that they can disguise a large transaction by mischaracterizing certain off-balance-sheet liabilities. Both men are tempted by the transaction as each will stand to make a life-altering sum. Each man learns that Congress is currently looking at the issue and a new law that might close this loophole is imminent. Both men know that the transaction is clearly illegal, but it is also virtually impossible for anyone else to discover (at least for the sake of this example), so nobody would ever know. The only real difference between the men is that one man believes in life after death, the other does not. The first man says, “Life is short. I may never have this chance again.” The second man says, “Life is short. Do the right thing.” Whatever your belief system is, what is fascinating about this example is that they were both confronted with the same dilemma, they both used the same exact logic, yet they each came to different conclusions. The different conclusions occurred because they both operated under different belief systems, i.e., different worldviews. In other words, their starting points were different, hence their conclusions were different. And this is a simple one-step logic function (Life is short, therefore . . . ). So, this example illustrates a profound lesson about human nature. Our worldviews and preexisting beliefs shape how we process logic. When it comes to analysis — which is really an exercise in logic — that is infinitely more complex than one step. How do our existing beliefs affect our perceptions about the right answer? What is causing one man to sell and another man to buy at the same exact price? Are you on the wrong side of a trade, not because of your logic, which may be impeccable, but rather because of your starting point?
There are many places you can turn, such as the CFA® program, to learn the fundamentals of investing. Once mastered, however, the tools themselves don’t grant you the wisdom you need to use them successfully. Wisdom, of course, is a life-long journey. The books on this list helped to give me wisdom about human nature, organizations, the world as it is, and even life. I share them with you in the hopes they may help you on your journey.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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