Our analysts’ <br>7 must-read books
Investments / 2019.07.12

Our analysts’
7 must-read books

SPW Contributors Sanlam Private Wealth

Legendary investor Warren Buffett is believed to spend 80% of his time reading, and has been quoted as saying everyone should ‘read 500 pages every day’. This may be a bit much for most people, but when our analysts at Sanlam Private Wealth have a spare moment, they do enjoy diving into the latest investment-related reads. Here are their favourites.

David Lerche, Senior Investment Analyst`
What The Dog Saw: And Other Adventures, Malcolm Gladwell

Malcolm Gladwell is one of my favourite authors since he makes you think about non-obvious reasons behind events. Across a selection of short stories, he shows that the seemingly obvious, and widely accepted, causes of events are often not the real drivers. Gladwell is able to turn dry topics into engaging human stories, which transforms the learning experience from soporific to mesmerising. It feels like you’re chatting to a really clever friend over lunch.

In this book, he touches on topics such as how to make care for the homeless more efficient, why there are many mustards but only one tomato sauce, flaws in interview techniques, and how Nassim Nicholas Taleb (another of my favourite authors) makes money. The primary benefit of reading Gladwell’s works is that they encourage you to think – whether you agree with his conclusions is secondary. And in the world of investing, while it’s easy to just go with the conventional wisdom, it’s only by thinking differently that you’re likely to outperform the market.

Renier de Bruyn, Investment Analyst
The Most Important Thing, Howard Marks

This is an insightful and easy-to-follow book on investment philosophy, drawn from the popular memos that Howard Marks, co-founder of Oaktree Capital Management, has written over many years to his investors. To outperform the market, an investor requires ‘second-level’ thinking, a way of thinking that’s different and more complex to that of others. You need to do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong – due to tendencies such as the desire for more, fear of missing out, or comparisons with others. A crucial starting point is an accurate estimate of the intrinsic value of an investment.

I like the way Marks describes investment risk – he says it’s a function of the price you pay for an investment and not of its perceived ‘quality’. So ‘high quality’ assets can be risky if investors overpay for them, leading to poor future returns, while ‘low quality’ assets can be safe if an investor buys them for less than they’re really worth. Investment risk often resides where it’s least perceived. For example, the government bonds of first world countries, generally seen as the safest investments in the world, are now in many cases offering negative yields that provide for poor prospective returns.

Alwyn van der Merwe, Director of Investments
The Outsiders, William N Thorndike

In assessing the merits of a particular company as an investment, stock pickers often cite the quality of management, or more specifically a successful CEO, as a key factor. The question is: what is a successful CEO? Analysts might say it’s a seasoned manager with deep industry expertise. Others might point to the qualities of so-called celebrity CEOs – charisma and a confident management style. William N Thorndike says the hallmark of exceptional CEO performance is quite simply the returns produced for shareholders over the longer term. This view resonates well with our own investment philosophy – we believe a CEO’s success should be measured in numbers, and over the longer term.

Thorndike analyses the traits and methods of eight CEOs (and no, Jack Welch isn’t one of them) of companies that produced exceptional shareholder returns over the long term. These individuals were humble, and often frugal. As outsiders they shunned Wall Street and shied away from the hottest management trends. Instead, they shared traits that put their companies on winning trajectories, a laser-sharp focus on share value, an exceptional talent for allocating capital and a belief that cash flow (and not reported earnings) determines a company’s long-term value. It’s these traits of CEOs that we at Sanlam Private Wealth also consider when we invest in companies.

Christiaan Bothma, member of SPW Investment Team
The Frackers: The Outrageous Inside Story Of The New Billionaire Wildcatters, Gregory Zuckerman

Hydraulic fracturing, or fracking, involves extracting oil and gas from shale rock formations situated a few kilometres below the earth’s surface. Even though the technique isn’t new, it’s only become economically viable over the past few decades through technological innovation. Despite the environmental criticism against it, learning to extract oil and gas economically from shale rock has arguably been one of the most transformational events of the 21st century.

The Frackers tells the story of the individuals behind the revolution and how their actions shaped it. What makes this tale so fascinating is that these discoveries weren’t made by the major oil companies, but by a collection of interesting people who risked it all for the potential of massive riches. Their stories are told in an intriguing way, revealing both the successes and failures along the way. I found it to be an enjoyable and insightful read, and although not directly about investments, certainly most relevant to the investment world.

Richard Colburn, Equity Analyst
Moneyball: The Art Of Winning An Unfair Game, Michael Lewis

The top performers in the US baseball league have more often than not been teams with bigger budgets. This book explores the unexpected success of Oakland Athletics (known as the A’s) – a team with a smaller budget. To compete with the wealthier sides, A’s manager Billy Beane created a strategy to find players undervalued by the general bidding market – by better understanding true value metrics as opposed to the gut-feel based approach commonly used by scouts at the time. Beane traded out overvalued players and traded in those who were undervalued in an attempt to create a team that had a statistically higher probability of consistently winning.

Many parallels can be drawn between the book and investments. The bottom line is that in order to produce consistent outperformance, our investment strategy requires us to sell shares that are overvalued and replace them with those that are undervalued. Taking a contrarian view, as Beane did, can be unpopular in the short term but will improve the probability of success over the longer term.

Zain Ghoor, member of SPW Investment Team
The Little Book That Builds Wealth, Pat Dorsey

This book is about sustainable competitive advantage, or what Warren Buffett called an ‘economic moat’. Just as moats were dug around mediaeval castles to keep enemies at bay, economic moats protect the high returns on capital enjoyed by the world’s best companies. At Sanlam Private Wealth, we’re always looking for companies that have a sustainable competitive advantage, which we’re able to purchase for reasonable prices.

This book is a great introduction for investors to learn about economic moats and why they’re such strong indicators of great long-term performance. Businesses that earn high returns on capital invariably attract lots of competition, and companies with no moat will see their profit margins and sales growth decrease as competitors capture more market share. The author clearly explains the sources of moats: intangibles (brands, patents and licences), switching costs, network effects and cost advantages.

Odwa Ngwane, member of SPW Investment Team
Capital Returns: Investing Through The Capital Cycle: A Money Manager’s Report 2002-2015, edited by Edward Chancellor

This book is a collection of quarterly reports by London-based investment firm Marathon Asset Management. Capital Returns looks at the supply side of industries, how investments in productive capacity alter the competitive advantage of a company and the supply dynamics of the industry, and ultimately how these changes affect shareholder returns.

I found this book interesting, since when we at Sanlam Private Wealth invest in commodity companies, we also study the capital expenditure of industry participants relative to current demand – with the view that commodity prices will inevitably respond to changes in supply.

Related articles

Asset allocation: where to now for investors?
Investments / Alwyn van der Merwe

Asset allocation: where to now for investors?

Stor-Age: why we’re keeping it
Investments / Richard Colburn

Stor-Age: why we’re keeping it

Naspers sets date for Amsterdam listing
Investments / SPW Contributors

Naspers sets date for Amsterdam listing