My day job is managing a hedge fund, but on weekends and evenings I hold an online course in equity research and investing. I even taught a short 14-hour version of it this spring (2022) for students at London School of Economics.
I’ve worked as an analyst and later as a portfolio manager since 1994, so I’ve given the craft of investing a lot of thought – not least here on the blog but also in the two books I’ve written on the topic. Me and my two main colleagues at Futuris (Brummer) were actually awarded a prize as The European Hedge Fund Of The Decade 2000-2009 in competition with thousands of aspirational hedge fund managers. Hence, I should know both how to invest, and how teach, and the best ways to learn, to invest.
The Swedish version of the course is heading into its sixth installment by October 2022. It consists of some 300 pages of really condensed material, plus supporting videos and spreadsheets, and runs over 12 weeks. I’ve done my utmost to keep it as short as possible, cutting out all the unnecessary fluff and bullshit that tend to go into investment courses. It’s concise and pedagogical, as witnessed by hundreds of the attendants, over 400 which are active in our private online group. I’m currently working on a version for an English speaking audience, but the adaptation is taking some time to complete, since I’m basically both working two jobs and preparing that new course.
I think about this stuff all the time.
So, how do you get good enough at investing to work as a portfolio manager? A friend recently, i.e., yesterday, asked me to point him to instructive interviews, books and other material that I think would help him learn investing well enough to eventually break into the hedge fund industry. I told him that apart from the sources I had already provided, I can’t remember or recommend any individual episodes that encompass the art of investing in a representative or useful way. Both here on the blog and in our previous conversations I have pointed out the 25 most important investment books, a dozen finance films, a dozen different investing podcast shows, including a few specific episodes, some fifty other books on psychology, decision making, science, history, philosophy as well as sci-fi books, ten newsletters from legends like Howard Marks, plus some other various resources that can be found online.
Rather than recommending reading all that, and formulate a complex and complicated investment method, my view on investing can be summed up such:
Use history as a guide to make forecasts for fundamentals and valuations. Use those to buy cheap & sell expensive, while respecting the cyclical nature of everything human, including the economy, psychology, profitability, procyclical accounting, analyst recency bias, and valuation fads. There is more nuance than that of course, but that is the gist of it.
You would actually do very good as an investor by just reading one single book about investing by Howard Marks, conveniently titled The Most Important Thing. It teaches you how to buy assets at a price less than their value, as well as points out the pitfalls of fear and fomo.
It’s probably better to read Marks’ book “The Most Important Thing” twice a year for five years than read ten other books on investing, but if you’re looking for more inspiration and vantage points to triangulate the art of buying low and selling high, you could add one book about Macro by Peter Schiff (HAEG), one book about the very big picture by Ray Dalio (e.g., The Changing World Order), The DAO of capital by Spitznagel to understand the psychology of trading, Fed Up by DiMartino Booth about the workings of central banks, Zero To One about start-ups, Hedgehogging on the topic of actually starting and running a hedgefund, Signals and other books about understanding macro and geopolitics by Pippa Malmgren, and a few monthly newsletters about valuation, annual returns and technical market signals by John Hussman. All of these I’ve listed and recommended publicly many times. I thus only mention a few of the best ones from the top of my mind here. Oh, I almost forgot to mention Russel Napier’s Anatomy of A Bear (how bear markets come about and play out). A final specific investment book tip is The Man Who Solved The Market, about the impossibility of technical analysis and pure pattern trading. Simons, however impossibly it was, eventually did solve the stock market.
From there on, I would suggest keeping up to date with trends in the economy and the financial markets by listening to weekly podcasts like MacroVoices, Invest Like The Best, Eurodollar University, What Is Money, Bankless, Hidden Forces, The Memo, Superinvestors, Smarter Markets and possibly a few more.
I would also include reading newsletters from some of the greatest financial thinkers of the last half century. They are very well known and widely read. Consequently, studying the newsletters won’t provide you with a significant investment edge, but it will teach you how some of the best and brightest think about investing:
Jeremy Grantham (Superbubble), Ray Dalio, John Hussman, Howard Marks, Jesse Felder, Pippa Malmgren, Marc Faber, Lyn Alden (Investment cycles), Fred Hickey, Genevieve Roch-Decter (GRIT), Variant Perception, Luke Gromen (FFTT), Brent Johnson (Santiago Capital; “USD milkshake theory”), Jeffrey Snider and so on. I would not least highly recommend watching interviews with Stanley Druckenmiller (e.g., the following seven 1, 2 [the link does work with a little trickery], 3, 4, 5, 6, 7; but also other superinvestors, such as Soros, Rogers, Zell, Icahn, Burry, Ackman, Munger (cognitive biases), Tudor-Jones). You won’t find any clear-cut answers there, not specific or crucial knowledge either. The letters and interviews are only meant as inspiration for finding your own path to buying the right assets in the right amounts at the right time, subsequently selling them in order to buy more of the right things at a later point.
A few other letters worthy of mention are Bison Interests (their latest letter on oil was quite interesting), Cliff Asness (aqr), Zoltan Pozsar (Credit Suisse) and Kuppy’s adventures in capitalism.
In my own books “The Retarded Hedge Fund Manager” and “TAOS”, I demonstrate the importance of psychology, wihile showing that any investment style can work, as long as you are disciplined, take notes, use those notes, consistently update your strategy (see More Money Than God regarding the importance of keeping up with the changing tides of the market) and most importantly avoid too much hubris. My first fifteen years as a hedge fund manager the years 2000-2014 first and foremost made me identify The Hubris Cycle, which by the way had been a much more fitting and timeless title for the book. You start out ambitious and disciplined, then when the results accumulate you tend to rest on your laurels thinking you’re a genius. Your hubris leads to losses and eventually to working hard and hopefully good performance once again.
A simple valuation multiple
can’t capture the reflexiveness
of a crowd
of psychologically unstable investors
You won’t learn investing in a practical sense from reading any of the books listed above, or from listening to the podcasts and reading tons of newsletters. You learn investing by actually investing and then course correcting, just as you learn to live a good life by trial and error, and bicycling by hopping on a bike and falling off a few times. You can read books about life too, but living is the only way of truly learning what life is about.
Investing isn’t hard, and that’s why it is immensely difficult at the same time. It’s a reflexive endeavour as detailed by George Soros in The Alchemy Of Finance, and by Buffett and Munger in the quip about the market being a beauty contest: If you want to find the winner, you’re not trying to estimate who’s the prettiest in the line-up, but who others are estimating others will vote for (i.e., not who those others consider beautiful, but who they guess most will vote for).
Being reflexive means that the financial markets change behavior over time, since the participants that create the market adapt to the actions of others in a constantly evolving feedback loop. It’s a kind of 3-Body Problem of psychology (a very good sci-fi trilogy by Cixin Liu, by the way, that I highly recommend). There is no stable solution, price patterns will keep changing forever. The underlying actual value, the sum total of available cashflows from various assets, however, is much more predictable. And in the end, buying an asset for a price below its value will always net you a profit, if you are patient enough (as well as calculated correctly, and had a nice Margin Of Safety against bad luck [read the book!])
I see investing as a self-devouring snake, an Ouroboros. All components feed on each other and almost teleologically require the subsequent steps to execute the present one. The very first step [head or tail] demands knowledge of the entire process [the snake]. For example, you can’t make quality investments without a good strategy and relevant investment notes, which require having already gone through a full cycle of investing from notes to evaluation.
The market often reacts to events in surprising ways, often in the opposite direction of what one might logically expect. Spitznagel, e.g., talks about his roundabout approach to investing. The legendary George Soros calls it Reflexivity. I would add the book Obliquity – why our goals are best achieved indirectly, as input to how to think about approaching life, happiness and investing sideways. The teachings of Tao (Dao), e.g., as expressed in Tao Te Ching (and explanations of its verses) are also helpful in seeing how things are both the way they seem and not that way at all at the same time. In The Matter With Things, Iain McGilchrist explains how we need to move away both from binary thinking (either/or) and away from first order non-binary thinking (both/and), to a second order non-binary regime of both both/and and either/or thinking.
McGilchrist’s meditations resonate with my experiences of how the market first appears perfectly logical and rational, then morphing into a contradictory beast requiring upside-down reasoning, only to sooner or later start appearing logical again – first in the Just Do The Opposite way, but then actually just plain logical and understandable. And then it cycles back to incomprehensible again. And then to being comprehensibly incomprehensible. And so it goes, undulating, cycling, morphing, being reflexive, where you are your own enemy chasing your own tail. The process reminds me of the third book in the Atopia Chronicles, where the protagonist turns out to be his own antagonist – a bit like in the, however completely different, movie Predestination.
Neither the general idea of investing, nor the mathematics of it are difficult to grasp. Just buy good companies for less than they’re worth. You pay cash for a stock and make a forecast of how much cash you’ll get back from the investment in the form of dividends from the company’s earnings and in form of what you can sell the stock for at a later point.
The price you can expect for the stock in the future is what another investor would pay for it, given his thoughts about price, worth, earnings, dividends and the future stock selling price. I’ve written here about the one single valuation multiple you need to assess the value of an investment: FCF/MC (the normalized free cash flow yield).
You could hope for a bigger fool to pay an irrationally high price for the asset in the future, but it’s a more robust strategy to assume future buyers will be about as rational as you are when assessing the value, thus basing their willingness to pay for the stock on the asset’s cash flow in their future.
Try it out, i.e., go back in time 5 years, 10 years, 20-30 years through reading old annual reports and calculate the then prevailing NFCF/MC yield, and see if you would have wanted to buy the stock or not based on the yield. Then check the price chart going forward from there on and see what happened.
As you can tell, it’s pretty useless over reasonably long time periods, just like all other valuation gauges on a stand-alone basis.
Of course they’re useless! A valuation multiple can’t capture the reflexiveness of a crowd of psychologically unstable investors. Some multiples are more reliable over very long stretches of time, but you sometimes would have to wait 10, 20 or even 30 years for today’s valuation multiples to exert their full power over subsequent annual returns. Twelve years is, however, often enough for whole markets – as John Hussmann pedagogically demonstrates again and again in his newsletters.
A multiple like Price/Sales, or my suggested cash flow yield, or the theoretically correct but impossibly useless Discounted Cash Flow formula won’t save you, won’t help you become a good investor. Knowing that you should buy low and sell high won’t either.
What you need is a place to start, a kick in the butt to actually begin investing with real money, and a path to improving over time. My Finance Course really actually is a great resource for all this; for learning how to do real equity research and investing, taught by an experienced practitioner. Unfortunately 12 weeks of material can’t be summarized easily. Well, it can be but you wouldn’t get it. Buy cheap, sell expensive just won’t help you get to the finish line without all the rest, including some basic questions and definitions:
What is cheap? Who decides? When? How much should I invest? How long do I need to wait? When do I sell? What do I buy then? How do I make robust forecasts for fundamentals? How so for valuations? What about technical analysis? Macroeconomic data? How can I implement an investment commonplace for evaluation and adaption?
Ultimately it all boils down to this simple and straightforward question: What determines the value of an asset och what determines its price (and when)?
I unpackage that question thoroughly in my finance course, since unfortunately there just isn’t that one single podcast, let alone single episode, that can sum it all up in a nutshell. Except: Buy Cheap, Sell Expensive.
Sure, the following four podcast episodes are really good, but they still won’t help you unless you realize the truth – that there is no spoon, no secret formula, except just doing it, then learning from your mistakes:
- Something of Value, Howard Marks (his book “The Most Important Thing” is a must)
- Superinvestors with John Hussman
- Invest like the best with Jeremy Grantham on bubbles
- Edward Chancellor on interest rates (Superinvestors) – EC explains how he as a historian views interest rates: Are they the price of time, of money, of risk, of fear, of hope, or something else. IRs synchronate of human behaviour
Good luck, and see you once I get the English adaption of The Finance Course ready. Meanwhile, you can find the Swedish version here: https://finanskursen.se/
P.S. If there are just two books you should read to foster a good research and investment routine, they are: Atomic Habits, by James Clear, and Deep Work, by Cal Newport. They have nothing to do with investing, but everything to do with focus and the power of good habits.
Some other great books related to investing
The New Case For Gold, James Rickards
HAEG: How An Economy Grows And Why It Crashes, Peter Schiff
BULL, Maggie Megahar
The Real Crash, Galbraith
Reminiscences of A Stock Operator, Edwin Lefevre
The Little Book That Beats The Market
Fooling some of the people all of the time, Einhorn
The Black Swan, Taleb
The death of money, James Rickards
The hour between dog and wolf
Tomorrow’s gold, Marc Faber
Lords of finance, Ahamed
Manias, panics and crashes, Kindleberger
Investing psychology, Tim Richards
Finance-themed pop culture
The Big Short
Inside Job (2010)
Margin Call (2011)
Too Big To Fail
The Wolf Of Wall Street
Various non-financial books for understanding the human psyche and world in general
Thinking fast and slow
The Master And His Emissary
The User Illusion
The doors of perception
Realms of the human unconscious
Secret teachers of the western world
Why We Sleep
The order of time
Something deeply hidden
The Naked Ape
The Singularity Is Near
Engines of creation
The road to serfdom
How to create a mind
The fourth turning
The fabric of reality
Wholeness and the implicate order
Einstein’s unfinished revolution
Surely you’re joking mr Feynman
What is real
Maps of meaning
The way of the SEAL
Lessons of History
History of Philosophy
Ender’s Game (on the importance of understanding the other side of the trade to the point of loving it)
Influence, by Cialdini (also see here)
Thinking in bets, Annie Duke
Sean Carroll’s Mindscape
The After On Podcast
Brain Science with dr Ginger Campbell
Report on psychedelics
Tech meme ride home
A few more newsletters
James Clear: 3-2-1
The Felder Report
Epsilon Theory, Ben Hunt
Some good twitter accounts to follow: