Benjamin Graham | David L. Dodd
In Value Investing’s Bible, Benjamin Graham minutely, and with many examples, exposes the basic concepts that would come to be adopted by some of the world’s best investors in decades following. In the period when the book was written, after 1929’s crisis, the author had a diverse set of striking examples of dislocation between stock prices and the value of the underlying companies. With an enviable analytical rigor, Graham shows this dislocation in many cases and goes through the reasons for its existence. At that time the market, characterized as “Mr. Market” by the author, was extremely pessimist, but the opposite also happens from time to time. At Nebraska, we always have in mind Graham’s teachings, especially in order to keep ourselves rational and analytical during moments of upheaval.
Common Stocks and Uncommon Profits
Philip A. Fisher
Besides Graham, the other author that significantly influenced Warren Buffett’s career (and increasingly so over the years) was Philip Fischer. While Graham used to focus on quantitative indicators to look for investment opportunities, Fisher developed a method based on a company’s qualitative characteristics. With a process he deemed “scuttlebutt”, Fisher would analyze a company exhaustively and from many angles; he would, for example, interview executives, clients and suppliers with a list of pre-defined questions and take note of everything he learned about that company and its sector. Through these studies, he could, with a high degree of success, identify the companies whose results would be more sustainable and growing in the future. He would, then, concentrate his investments in the best identified businesses and rarely sell them. At Nebraska, we use Fisher’s teachings a lot; before simply looking at quantitative metrics of many companies and trying to spot the “cheapest” ones, we focus, initially, on selecting a group of businesses with superior qualitative features, in sectors we understand, so that we are ready to invest in them when times of upheaval in the market give us the chance, or when we believe to see something not yet priced. In our investment process, we always try to answer the question: “Where is this company going to?” – If the answer is unsatisfactory, there is hardly a cheap enough price to buy its shares. Just as Fisher, we are very long term shareholders.
William N., Jr. Thorndike
In this book, which was highly praised by Warren Buffett, William Thorndike analyzes management and capital allocation methods from eight CEOs whose companies delivered shareholder returns much above the average and for long periods. The book’s title says a lot; these CEOs brought an outside perspective to the businesses and sectors in which they operated and adopted unconventional practices, such as Tom Murphy’s decentralization of managerial decisions in his local broadcasters, and Kay Graham’s aggressive buybacks of Washington Post’s shares during downturns. These, as well as other practices, mentioned in the book later became common sense, but adopting those back then required managers who were deeply rational and aligned with shareholders. Escaping conventionality is always risk, but the companies that do so with excellence are the ones that deliver the best results. At Nebraska we pay special attention to executives and companies escaping conventionality, always looking for those that do so in a rational and well aligned manner.
This is one of the greatest books on risk ever written. Its author, Mark Buchanan, uses examples to argue that catastrophes and/or relevant unexpected events don’t come out of nowhere. If the appropriate conditions exist, risk is built over time, until it reaches a critical state in which a small spark leads to a big event. Everyone has seen this when that single gram of sand brings a castle of sand down on the beach. When humans constantly control their environments to avoid unpleasant or unwanted events, we are often boosting the buildup of risk; for example, when we suppress small fires in forests, we let the vegetation goes increasingly denser and prone to an uncontrollable fire, which can be triggered by a small cigar-but (on which we often put the blame). It is impossible to define the exact moment in which risk will show up in a big event, but by understanding systems and their histories, we can identify where/when risk has accumulated too close to that dangerous critical state. At Nebraska we use this mental model extensively when studying businesses, especially for companies in the financial sector, in which the buildup of risk is not only natural, but often hidden, as well as hugely important.
Tudo ou Nada
We see this book by Malu Gaspar amid the best business books ever published in Brazil. With an intriguing narrative, the author brings us through Eike Batista’s entrepreneurial adventures, focusing on the emotional and psychological aspects (not only from the protagonist, but also from all involved, including investors) that allowed the empire’s ascent, as well as its inevitable downfall. This is a valuable history for investors aiming to avoid permanent capital losses. (Fortunately, we have never been shareholders in Eike’s ventures.)
This book tells us the history of John Malone, an executive/entrepreneur who took the reins of small cable company (TCI, in the Denver area) in 1973 and revolutionized not only the cable TV niche, but also all the telecom sector through his unconventional strategy for operational and capital management. On operations, Malone favored decentralization and agility. On the financial side, he made history (and followers) by using assets with resilient and growing cash flows to take on debt that allowed him to significantly invest in operations, while also providing shareholders generous returns (through buybacks, more tax-efficient than dividends). Malone currently controls many public traded companies, most of which under our radar. This is one amid many great books detailing businessman and businesses’ paths that we have in our library; such books are very useful for us not only to learn about sectors of the economy, but also to identify differentiated leaders. It is just amazing how differentiated managers can deliver great results, even in the toughest sectors.