Ten Insightful Books for Value Investors

Thursday, 06 January 2022 08:34

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Here within the Schroders Value Team, we are always on the lookout for an opportunity to gain an investment advantage. Books don’t necessarily need to be directly related to investing to help us find new perspectives. Here we consider a variety of books which we believe may offer useful insights to investors.

Juan Torres Rodriguez suggests two books: “The Biggest Bluff” and “Is That A Big Number? Which are both centered on numbers and mathematics but applied in very different formats.

“The biggest bluff” by Maria Konnikova

Rodriguez said, “Maria Konnikova’s journey from an amateur poker player to winning a few big tournaments in less than two years is fascinating read. It guides the reader through its journey to understand how luck plays an important role in everyone’s life and how much control we have over the outcome.

“She finds that a probabilistic mindset is essential to decision making when playing poker. Maria goes on to explain how she also applies the same approach to her life outside of poker as a journalist and writer.

“In February of last year, Maria appeared on the Schroders Value Perspective podcast where she spoke about how important, yet difficult, it is to adopt probabilistic thinking.

As she said herself in our session: ‘The vast majority of how our brains learn is through experience – that’s what’s left – but, unfortunately, the probabilities are not evenly distributed. in life. We don’t live in a perfect bell cast and so if something is supposed to happen 25% of the time it doesn’t automatically follow that if it hasn’t happened the first three times it will happen. the fourth time. That’s not how odds work – and yet we keep learning from what happens to us. So we will overestimate the likelihood of something when we know someone it has happened to or when it has happened to us. On the other hand, we will underestimate the probability of something when we have no personal experience of it. It’s always biased.

“For investors, there are a few key concepts here that are valuable: the impact of worsening a small advantage, embracing variance and its dark side, the importance of keeping a decision journal and to stay focused on the process. “

“Is it a large number? By Andrew Elliott

Rodriguez said, “As applicable to the world of investing as to any other aspect of life, this book is about understanding the world through numbers.

“It provides useful tools and references that help improve readers’ numeracy and their ability to contextualize the data points they regularly consume from newspapers or social media, for example. As Andrew Elliott says in his book, “Decision making needs understanding. Understanding requires knowledge. Knowledge needs numeracy.

Following, Vera German selected what might be called the Value Investor’s Bible as well as other books focusing on human behavior.

Benjamin Graham’s “Smart Investor”

German said: “Almost a century later, despite its detractors, this book still has great relevance and is the closest thing to a ‘religious text’ in the world of value investing.

“Warren Buffet’s preface to the Fourth Edition says it better than I do: ‘To invest successfully … what it takes is a strong intellectual framework to make decisions and the ability to prevent emotions from corroding it. framework. This book precisely and clearly prescribes the appropriate framework. You have to provide emotional discipline ”.

“Judgment in Managerial Decision Making” by Max Bazerman and Don Moore

German said, “Emotional discipline is an important tenet of value investing. With this in mind, understanding human flaws is a topic that interests many team members.

“Thinking Fast and Slow by Daniel Kahneman is the obvious choice here. But this book gives a compact summary of the psychological biases to which we are potentially subject, the academic research behind the theories and suggestions for overcoming these biases.

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“In Search of Wisdom – From Darwin to Munger” by Peter Bevelin

“Charlie Munger identified ‘human error in judgment’ as a major challenge in investing. His 1995 Harvard University speech on the subject predates much of what Kahneman later popularized, ”German said.

“Munger is also an advocate for the accumulation and combination of mental models from different disciplines. This book explains some of these models very well.

“It also shows the importance of looking at the challenges from multiple angles, and why relying on solutions from many different disciplines to solve these problems can be beneficial.”

Simon adler chose two contrasting books, one focused on organizing and applying checklists, and the other a deep personal memory of WWII.

“The Checklist Manifesto” by Atul Gawande

“If the previous books on this list had led us to the conclusion that the world is complex with risks that are difficult to define, then this book offers some answers,” Adler said.

“In an increasingly complex world, the simplicity of a checklist has a lot to offer and provides an opportunity for consistency in decision-making. This is a book influencing our process and one of the reasons we currently have a “Seven Red Questions” approach to identifying risks in the stocks we are reviewing. “

“The search for meaning in man” by Viktor Frankl

Adler said: “No investor will go through the same adversity that Viktor Frankl describes in this book (his experience in the concentration camps), but there is a lot to be taken from the way Frankl handled the most appalling circumstances.

“Every investor will face a time when things do not go as planned and the ability to accept and manage this adversity is an important facet of investing. Part of the team has also benefited from reading Stoicism, either directly (Marcus Aurelius, Seneca) or through more modern interpretations (Ryan Holiday, Donald Robertson).

Andrew evans chose the last three books that focus on how humans have dealt with and approached risk throughout history.

“Against the gods: the remarkable story of risk” by Peter L Bernstein

“Risk management is an essential part of an investor’s toolbox,” said Evans.

“As a topic, risk has probably been the most discussed topic on our desk over the years and one that we have explored in detail. This book is a wonderful starting point for understanding how humans have thought about risk over time and how it has evolved to this day.

“The origin of wealth: evolution, complexity and radical overhaul of the economy” by Eric Beinhocker

Evans said, “Multidisciplinary thinking has been a fundamental tenet of the Santa Fe Institute over time, with complexity. In this book, one of Santa Fe’s external faculty explores the implications of thinking about complexity versus economics.

“As a subject, economics has generally been taught as if economics were a linear model with rational beings going about their business. This book looks at the economy from a different perspective and should be food for thought for anyone who thinks that forecasting GDP for the next quarter is the right answer for investing.

“Incerto” Nassim Taleb

“It’s a cheat because these are four of Taleb’s books,” Evans said.

“Taleb may be an acquired taste, but these books present thought-provoking insights into how we see the world and challenge a world of investing that relies on thinking about risk through the lens of traditional statistics, on the basis of normal distributions.

“He convincingly argues that reality does not look like this and presents us with important mental models such as considering alternate realities.”

A version of this article first appeared on trustnet.com

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