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Reading List J Montier 2008-06-16

Reading List J Montier 2008-06-16

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Published by rodmorley
James Montier's reading list from the summer of '08
James Montier's reading list from the summer of '08

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Published by: rodmorley on Jul 29, 2009
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05/11/2014

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  WorldGlobal Strategy 
 
16 June 2008
 
Mind
Matters
 
Investment 201: a summer reading list
James Montier
(44) 20 7762 5872 james.montier@sgcib.com
IMPORTANT: PLEASE READDISCLOSURES AND DISCLAIMERSBEGINNING ON PAGE 12
www.sgresearch.socgen.com
In the past I have put together a reading list of books that to my mind forms the core of whatevery investor should know. Every so often someone will ask me what I would add to that listtoday. This note seeks to answer that question by selecting 10 additions to my original list.The choices are personal and eclectic, as ever. My top two picks for summer reading areDavid Einhorn’s
Fooling all of the people some of the time
and Dan Ariely’s
PredictablyIrrational.
 
 
To give my selections some structure I have split them into three categories: Finance (5books), Psychology (3 books) and Hidden Gems ( 2 books). In the Finance sections, my firstchoice was David Einhorn
s
Fooling all of the people some of the time.
Not only is itexcellently written, but the lessons on just how far a corporate will go to hide the truth, andhow to conduct fundamental analysis are salient to all of us. Rob Arnott et al
s
TheFundamental index
is a must-read
anything that provokes almost vitriolic responses fromboth active and passive managers must be good! Louis Lowenstein
s
The Investors Dilemma
 will make uncomfortable reading for many in the fund management industry as it highlightsthe problems caused by the conflict of interest raised when management companies areseparate from the funds themselves.
 
My last two books in the finance section aren
t necessarily beach reading but they are akey part of the investor
s toolkit. Howard Schilit
s
Financial Shenanigans
, and CharlesMulford and Eugene Comiskey
s
Creative Cash Flow Reporting
both cover the topic ofspotting companies that may be attempting to mislead investors. After a five-year earnings-driven bull run, these skills may well need some refreshing.
 
In the psychology section, Dan Ariely
s
Predictably Irrational
is the must read of the year.It is a field guide to just how far our behaviour deviates from a
rational
benchmark. Theexperiments that Ariely runs are ingenious, insightful and fun. Coming in a close second is
Mistakes were made (but not by me)
by Carol Tavris and Elliot Aronson. This book details theself justification that we indulge in when faced with situations where our actions and beliefscome into conflict. Carol Dweck
s
Mindset
is my third choice. This book concerns how wedeal with failure, and how we can learn from our mistakes
 
The two hidden gems for this year are Atul Gawande
s
Better: A surgeon’s notes onperformance
and Sydney Finkelstein
s
Why Smart Executive Fail
. The former details thecriteria required for success in medicine which seems to have a high degree of overlap withfinance. The latter is the antithesis of all the management success books out there
casestudies in failure help to highlight common areas of corporate disasters. Albert and I wish to thank our readers for their continued support. The results of the 2008Thomson Extel Survey of European Analysts were recently announced, and due to yourvotes, we were voted not only the top Global Strategy team, but also the top team acrossthe entire survey (combining both macro and equity sectors). We really appreciate this levelof support and hope we can continue the flow of stimulating ideas to justify it.
 
Mind Matters
16 June 20082
Investment 201: a summer reading list
Back in March 2007 I wrote a note on the best books in investment (an investment reading list101 if you like). For those who may not have seen the original note, the books I chose weresplit into four categories:
The Classics:
Security Analysis by Ben Graham and David Dodd (1934 Edition)Chapter 12 of the General Theory of Employment, Interest and Money by John MaynardKeynesTheory of Investment Value by John Burr WilliamsManias, Panics and Crashes by Charles KindelbegerReminiscences of a Stock Operator by Edwin Lefévre
Modern Wonders:
The Little Book That Beats the Market by Joel GreenblattThe Little Book of Value Investing by Chris BrowneFooled by Randomness by Nassim TalebContrarian Investment Strategies by David DremanSpeculative Contagion by Frank Martin
Psychological Musts:
Robot
s Rebellion by Keith StanovichStrangers to Ourselves by Tim WilsonHow we know what isn
t so by Tom GilovichStumbling on Happiness by Daniel GilbertThe Psychology of Intelligence Analysis by Richard Heuer Jnr
Hidden Gems:
Halo Effect by Phil RosenzweigMindless Eating by Brian WansinkThe Inefficient Stock Market by Robert HaugenThe Margin of Safety by Seth KlarmanYour Money and your Brain by Jason ZweigOne of the most frequent questions I get is
what would you add to the list now?
So this noteseeks to provide a guide to books that I would include as required reading in addition to thosein the previous note. As ever my selection is eclectic and personal. However, to provide somestructure I have separated the books into three groups: finance (5 books), psychology (3books) and hidden gems (2 books).
 
Mind Matters
16 June 20083
 
Finance
Every so often a book comes along that seems to capture the hearts and minds of investors.When I started out in this business it was Michael Lewis
Liars Pokers. Then When GeniusFailed by Roger Lowenstein, Fooled by Randomness by Nassim Taleb was probably the lastsuch book. I have a candidate for the book I think will be next in this mode. It is
Fooling all ofthe people
,
some of the time
by David Einhorn.The subtitle of this remarkable book is a long short story, and that is exactly what the bookdiscusses. Einhorn went short Allied Capital, and then gave a
public
speech on the subject.The book documents the lengths that Allied Capital have gone to avoid answering Einhorn
scriticisms, and the nefarious behaviour that they have been willing to engage in (such asstealing Einhorn
s phone records).The book should be required reading for all analysts. Why? For (at least) two reasons. Firstly, itdocuments just how far a company will go to maintain its illusion of respectability. All too oftenanalysts seem to be little better than glorified PR departments for corporates, accepting whatthey are told as gospel truth (possibly an oxymoron in its own right). This book should serve asa wake up call to investors and analysts alike over the fact that corporates lie and cheat (whenit suits them). After all, for a short seller, such a position amounts to one of many in a portfolio,but, to the company, it is everything.Secondly, the book is inspiring in terms of the portrait of fundamental analysis that it provides.Einhorn and his team went to great lengths to research their investment case. They provide ashining example of the way in which research should be done (and note not a single earningsforecast in sight!).Not only is the book a great read, thanks to Einhorn
s gifted writing style, but the profits madeon the book go to a worthwhile charity (in fact, the same one that Einhorn originally gave thespeech on Allied Capital for). This book is simply a must-read.My second choice in the finance section is Rob Arnott et al
s excellent
The Fundamental Index
.The concept of fundamental indexing has attracted much debate in finance. Rob and hiscolleagues have been attacked by the fans of passive and active investment alike. In theinterests of full disclosure I am a fan of the fundamental indexing approach. Regardless of mypersonal views on the idea, anything that upsets quite so many people must surely be ofinterest.The basic idea is simple and powerful. If markets are inefficient then market cap weighting isno longer the outcome of theory. The CAPM leads to market cap weighting, if we break theassumptions underlying the model, then the conclusions change and market cap weighting isno longer efficient. A better index can be constructed.Rob and his colleagues have developed an alternative to CAPM inspired cap weighting. Anindex weighted by fundamentals such as earnings, dividends and cash flows. Some haveattacked the idea for simply being a small cap/value bias. However, Rob presents somearguments that the index is more than this. It is effectively a way of contrarian indexing. By itsvery construction it will trade against whatever is doing particularly well in the market be itvalue, growth, large or small.

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