Original Chinese version: https://mp.weixin.qq.com/s/05AvVQf9NCZlHR6Q0FF-Cg

Recently, my eldest son suddenly said he wanted to learn about investing, which surprised me. Why would a 14-year-old suddenly develop this interest? He said several of his friends were learning, so he wanted to learn too. It seems teenagers just follow trends and compare themselves with each other. However, it’s not a bad thing for a child to want to learn about investing. I can share my passive investing experience with him and read the classic investment books I’ve always wanted to read together with him.

Coincidentally, Fidelity was running a promotion where you could open a youth investment account and get $50. After my son got the account, he randomly bought various company stocks and index ETFs, and then watched the rise and fall of his purchased stocks every day. He bought very little, yet cried foul over losing just a few dimes. It made my wife and me laugh our heads off.

Looking at my investment reading list over the weekend, I realized it actually listed over 30 books, because investing covers such a broad range of knowledge. When would we ever finish reading them all with the kid? I couldn’t help but think, what era are we in? Still foolishly reading page by page? Let’s continue to make heavy use of the best AI available now, ChatGPT! So, I spent an afternoon using the following prompt to have ChatGPT summarize 30 books one by one: Please summarize the key points of book "title here" by "authors here": Then I organized them into the following collection of key points (English version omitted here):

1. What is Investing?

Some definitions:

  • Dictionary: The action or process of investing money for profit or material result.

  • Wikipedia: Investing is the allocation of money with the expectation of a positive benefit/return in the future. Investment requires the sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is to generate a return from the invested asset.  

  • investopedia.com: An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.  

  • Investing is defined as purchasing securities with the intention of holding them for the long term, aiming to gain returns through dividends or capital appreciation. Investors are primarily concerned with the potential value and underlying growth of the company or asset they are purchasing, often focusing on long-term trends and fundamentals.

Key Characteristics of Investing:

  • Purchasing assets with growth potential: Such as stocks, bonds, or real estate, with the goal of receiving a return from that investment over time. This return is generated through a combination of capital appreciation and dividend or interest payments.

  • Involves a degree of risk: Investing usually involves some level of risk, but investors make informed decisions based on research and analysis.

  • Long-term nature: The definition of “long-term” in investing can vary depending on the context and the asset being considered. However, generally speaking, a long-term investment is typically considered one held for several years or more. For the stock market, a long-term investment is often considered one held for at least five years or longer. This timeframe allows investors to ride out short-term market volatility and see the long-term growth potential of a company. Similarly, bonds are often considered long-term investments if held until maturity, with terms ranging from several years to decades.

What Actions Are Not Investing?

  • Consumption: Buying a new car, which will likely depreciate immediately. The chance of a consumer good increasing in value is very low.

  • Gambling: Usually involves risking money on the outcome of an event largely determined by chance. Examples include playing casino games, buying lottery tickets, and sports betting. The goal of gambling is to win more money than invested, but the odds are typically against the gambler. Gambling is often considered a form of entertainment, but it can also be addictive and lead to financial problems.

  • Speculation: Defined as purchasing securities with the intent to quickly resell them at a higher price, aiming to profit from short-term market fluctuations. Speculators are more concerned with current market prices and trends and are willing to take on greater risk in pursuit of higher returns.

2. Requirements for the Intelligent Investor

  • Understand yourself and develop a unique investment strategy: Be different.

  • There are many ways to achieve successful investing: passive, active, specific assets, companies, or industries. Stocks, futures.

  • No single right way to invest: The importance of developing your own unique approach rather than relying solely on ready-made methods or formulas.

  • The importance of having a trading edge (e.g., unique market insight or strategy) for success in the stock market. Having unique insights into the market or individual stocks can be an advantage.

  • Investing is a game of thorough analysis and understanding. Play to your strengths when choosing the right strategy or asset type, stock type, etc.

  • Write down your strategy: Consider what to do during upswings and downswings. Follow plans and rules.

  • Importance of discipline: Many traders discuss the importance of discipline, adhering to a clearly defined set of rules, and not allowing emotions to influence trading decisions.

  • Be patient: Investors should be patient and stick with investments for the long term, rather than trying to time the market.

  • Understand what you own: Business model, what to do in different situations.

  • Long-term investment strategy: A long-term investment strategy is the best way to build wealth through the stock market. It’s advised that investors should focus on investing in established companies with strong fundamentals and hold them for the long term.

  • Keep learning forever: Many traders and investors discuss the importance of continuous learning and staying updated on market developments.

  • Importance of studying the past: Studying past market movements helps identify patterns that can be used to make better investment decisions in the future.

  • Adaptability and the importance of being able to adjust to changing market conditions.

  • Learn from mistakes: Many traders discuss the importance of learning from mistakes and being open to new ideas and methods. All investors make mistakes.

Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger is a collection of speeches, articles, and letters by Charles T. Munger, Vice Chairman of Berkshire Hathaway. Some key points from the book include:

  • Importance of rational thinking: Munger emphasizes the importance of rational thinking and the need to avoid emotional and cognitive biases when making decisions.

  • Importance of a multidisciplinary approach: Munger stresses the importance of a multidisciplinary approach to decision-making, utilizing knowledge and insights from various fields to gain a more comprehensive understanding of a problem or situation.

  • Importance of mental models: Munger highlights the importance of mental models, which are frameworks or concepts that can be used to help understand complex systems or problems.

  • Importance of inversion (thinking backward): Munger advocates the technique of inversion, which involves considering the opposite of a problem or goal to find creative solutions.

  • Importance of patience and long-term thinking: Munger emphasizes the importance of patience and long-term thinking, and the need to avoid succumbing to short-term pressures or temptations. The importance of waiting for the right opportunities and not getting caught up in market hype or chasing trends.

  • Importance of integrity and ethics: Munger stresses the importance of integrity and ethics, and the need to act with integrity in all aspects of life.

  • Importance of humility and avoiding overconfidence: Investors should be humble and avoid overconfidence, as this can lead to errors and poor investment decisions.

    • Several ways to check if you are overconfident in investment decisions:

      • Keep a “record” of your investment decisions and track your performance over time. Compare your performance against a benchmark or index to see if you are outperforming or underperforming.

      • Seek objective “feedback” from other investors or financial professionals. This can help you understand your investment decisions and identify areas where you might be overconfident.

      • Be “open to new information and willing to change”: If new information contradicts your previous beliefs or decisions, be willing to re-evaluate your position and adjust as needed.

      • Be aware of “common behavioral cognitive biases,” such as confirmation bias (seeking only information that confirms your existing beliefs) and the sunk cost fallacy (continuing to invest in something because you’ve already invested significant time or money).

      • Be aware of the difference between “luck and skill.” Even if you’ve had some past success, it’s not always a guarantee of future success, especially if you become overconfident.

      • Develop a plan and stick to it. Having a plan will help you make decisions based on facts rather than emotions or overconfidence.

    • It’s important to remember that overconfidence can be a major pitfall for investors, so being aware of it and taking steps to mitigate it is crucial.

3. Individual and Group Psychology

Thinking, Fast and Slow is a book by Daniel Kahneman that explores the psychology of decision-making and the cognitive biases that often lead to errors in judgment. Based on Kahneman’s extensive research in behavioral psychology, the book provides a detailed analysis of the two systems of thinking that influence our decisions: “System 1” and “System 2.” Some key points from the book include:

  • System 1 thinking is fast, intuitive, and automatic, while System 2 thinking is slower, more deliberate, and requires more mental effort.

  • System 1 thinking is prone to cognitive biases, such as the availability heuristic (leading us to overestimate the likelihood of events that are easily recalled) and the framing effect (causing our decisions to be influenced by how a question is presented).

  • System 2 thinking is more objective but also prone to errors, such as overconfidence in one’s abilities and an excessive sense of control over events.

  • Kahneman argues that our brains are not designed to make optimal decisions, but rather to make decisions quickly and efficiently in most situations.

  • The book also covers the concept of Prospect Theory, which explains how people evaluate and make decisions under risk, and how they perceive and weigh gains and losses.

  • Kahneman also explores the concept of “happiness” and how it is influenced by circumstances, social interactions, and other factors.

  • Overall, “Thinking, Fast and Slow” offers a deep dive into the cognitive processes that affect our decision-making and provides valuable insights into how we can avoid common biases and improve our ability to make rational choices.

Two books specifically study ways of group thinking:

The Crowd: A Study of the Popular Mind is a book first published in 1895 by French social psychologist Gustave Le Bon. The book is a psychological study of crowd behavior and its impact on individual capabilities. Some key points from the book include:

  • Crowds have a distinct psychology: Le Bon argued that in a crowd, individuals lose their sense of personal responsibility and become susceptible to the emotions and ideas of the crowd.

  • Crowds are irrational: Le Bon believed that crowds are irrational and make decisions based on emotion rather than reason. He argued that crowds are more likely to make impulsive and ill-considered decisions compared to individuals.

  • Crowds are led by “suggestible” individuals: Le Bon argued that crowd leaders are individuals who are highly suggestible and easily influenced. He believed these individuals are more likely to become crowd leaders because they are more susceptible to the emotions and ideas of the crowd.

  • Crowds are easily manipulated: Le Bon believed that crowds can be easily manipulated by skilled leaders. Leaders can use techniques like rhetoric, slogans, and emotional appeals to influence crowd behavior.

  • Crowds are a powerful force: Le Bon argued that crowds are a powerful force in society and can be used for both positive and negative purposes. Crowds can be used to create social and political change, but also to incite violence and mob mentality.

  • Crowds can be dangerous: Le Bon believed crowds can be dangerous when they become irrational and violent. He suggested that crowds can be used to incite violence and mob mentality.

  • Overall, the book is a psychological study of crowd behavior and its impact on individual capabilities. The author argues that crowds possess a unique psychology distinct from individual psychology, that crowds are irrational, making decisions based on emotion rather than reason. It also posits that crowds are led by highly suggestible and easily influenced individuals, and that crowds are a powerful force in society, capable of being used for both positive and negative ends.

Extraordinary Popular Delusions and the Madness of Crowds is a book by Charles MacKay, first published in 1841. The book is a historical study of mass delusions and the ways they affect individuals and society. Some key points from the book include:

  • Popular delusions are prevalent: MacKay argued that popular delusions have been common throughout history and have affected individuals and society in many different ways. He believed popular delusions can be caused by various factors, including economic conditions, social unrest, and political turmoil.

  • Delusions are fueled by human emotions: MacKay argued that popular delusions are fueled by human emotions such as fear, greed, and hope. He believed these emotions can drive individuals to make irrational decisions, leading to the formation of widespread delusions.

  • Delusions can lead to financial bubbles: MacKay argued that popular delusions can lead to financial bubbles, where individuals invest in overvalued assets and subsequently lose money when the bubble bursts. He believed financial bubbles are caused by a combination of speculation, irrational exuberance, and herd behavior.

  • Delusions can have serious consequences: MacKay argued that popular delusions can have severe consequences for individuals and society. He believed they can lead to economic collapse, social unrest, and even violence.

  • Charismatic leaders often fuel delusions: MacKay argued that popular delusions are often fueled by charismatic leaders who can manipulate the emotions of the crowd. He suggested these leaders use rhetoric, symbols, and emotional appeals to gain the crowd’s trust and influence their behavior.

  • Delusions are often followed by a period of “mania”: MacKay argued that popular delusions are often followed by a period of “mania,” during which individuals become obsessed with the delusion and lose all sense of rationality. He believed these manias can lead to irrational behavior and even violence.

  • Overall, the book is a historical study of popular delusions and their impact on individuals and society.

4. Stock Market

There are two different views on the stock market:

  • The stock market is completely random and unpredictable in the short term, but has a high probability of growth in the long term, so one can hold for long-term appreciation.

  • The value of certain stocks in the market can be estimated, and their rise and fall can be timed: achieving buy low, sell high.

Looking at these two views with critical thinking, both can have supporting arguments. The truth likely lies in the gray area between them, depending on the specific situation. Prediction itself is difficult, especially for short-term fluctuations of individual stocks, but I feel that predicting the long-term trend of the overall stock market probably has a high chance of success.

Mastering The Market Cycle: Getting the Odds on Your Side This book was published in 2018. ChatGPT surprisingly said it didn’t know this book. I randomly found a book review online to fill the gap:

  • Understand the importance of the “big picture”: Suggests looking beyond short-term fluctuations and considering broader economic and political conditions that might affect the market.

  • A fundamental cornerstone for the author (Howard Marks) is that financial markets, in the short to medium term, cannot be predicted with any practically usable precision. This doesn’t mean all market outcomes are equally likely at all times.

  • According to Marks, by observing the current situation and forming an opinion on where we are in the market cycle, investors can tilt their portfolios to take advantage of what is more likely to happen in the coming years. This depends both on what one thinks will happen, where one is, and the probability of it happening compared to other scenarios. If an investor is good at this game, they should be rewarded in the long run, tilting the odds of success in their favor.

  • The core is: Prepare, don’t predict.

  • Another key foundation of mastering the cycle is understanding that things don’t just happen one after another – unfortunately, it’s irregular – in cyclical patterns. What happens in one phase of the market cycle instead causes it to enter the next phase. Cycles are chains of cause and effect. After two introductory chapters, the main part of the book is dedicated to describing a large number of interconnected and parallel cycles:

    • The economic cycle,

    • The earnings cycle,

    • The risk attitude cycle,

    • The credit cycle, etc.

  • Behind all these lies the cyclical pattern of investor psychology – a topic apparently closest to Marks’ heart. To a large extent, Marks reads various psychological markers and positions himself within the cycle based on them.

  • The next chapter attempts to combine all the above cycle information into a complete approach to market cycles. The book concludes with some more practical closing chapters and an unnecessarily cut-and-paste style summary.

4.1 Efficient Market Hypothesis

A Random Walk Down Wall Street is a book by Burton Malkiel. Assumptions:

  • Efficient Market Hypothesis (EMH): Malkiel argues that the stock market is “efficient,” meaning all publicly available information about a stock is already reflected in its current price. He states this makes it impossible to consistently outperform the market by picking individual stocks.

  • The stock market is “random,” and future stock prices cannot be predicted.

  • Active management is unlikely to outperform the market: Malkiel argues that actively managed mutual funds are unlikely to beat the market in the long run. He believes this is because mutual fund managers cannot consistently identify undervalued stocks, and the high fees associated with active management erode returns.

  • Index funds are a better option: Malkiel argues that index funds, which simply track a market index like the S&P 500, are a better choice for most investors. He suggests index funds are cheaper than actively managed funds and provide returns similar to the overall market.

“The Efficient Market Hypothesis” is Eugene Fama’s theory exploring the concept of an efficient market, a “theoretical” market where all available information is fully and immediately reflected in asset prices. The book is considered a classic in finance and is widely used as a reference by academics, practitioners, and students. Some key points include:

  • The Efficient Market Hypothesis (EMH) states that it is impossible to consistently achieve returns exceeding the market average by using any publicly available information.

  • EMH is based on three forms: weak, semi-strong, and strong.

    • The weak form states that all historical stock prices are reflected in current prices, rendering technical analysis useless.

    • The semi-strong form states that all publicly available information is reflected in stock prices, rendering fundamental analysis useless.

    • The strong form states that all information, including insider information, is reflected in stock prices.

  • Fama argues that EMH implies that active investment management and stock picking are futile, and investors are better off investing in passive index funds.

  • Fama also argues that market prices adjust quickly and efficiently to new information, making it impossible for investors to consistently achieve returns above the market average.

  • Fama also examines the empirical evidence for EMH and finds that while the evidence is largely consistent with the hypothesis, there are some anomalies that are difficult to explain, such as the small-firm effect and the January effect.

  • Overall, “The Efficient Market Hypothesis” provides a detailed analysis of the concept of efficient markets and its implications for investors and financial markets. It is considered an important reference in finance and economics, though it’s worth noting that criticisms and alternative theories have emerged.

5. Government Regulators

Warren Buffett’s views on government regulation:

  • He is a proponent of minimizing government intervention in the economy and financial industry.

  • He has been outspokenly critical of deregulation, especially in banking and financial services, arguing it led to increased risk-taking and instability.

  • However, he has also stated that the government has a role to play in providing oversight and enforcing rules to prevent fraud and protect consumers.

  • He has also been a supporter of higher taxes on the wealthy and has advocated for a more progressive tax system.

  • Overall, Buffett’s view is that the government should play a limited but important role in ensuring a fair and stable economy.

  • Sometimes government regulation is lacking or encourages risky financial transactions: for example, the subprime loans created by the US government, triggering the 2008 financial crisis.

6. Risk and Management

  • Risk and reward are closely related: To achieve higher returns, investors must be willing to accept higher levels of risk.

  • Risk Management: Always be prepared for the unexpected, fraud.

  • Antifragility: Benefiting from shocks and volatility.

  • Hedging.

  • Diversification is key: Diversification is crucial for successful investing. It’s advised that investors should spread their money across various different asset classes, such as stocks, bonds, and real estate, to minimize risk. Stock selection: also diversify across multiple stocks to minimize risk.

  • Embrace randomness, experimentation, and adaptation.

  • Use stop-loss orders when trading stocks to limit potential losses.

  • Take calculated risks: Investing in the stock market is inherently risky, and investors should be willing to take risks to achieve above-average returns.

  • Importance of trading discipline: Many traders and investors emphasize the importance of discipline and consistency in trading and investing. Not being swayed by emotions.

7. Passive Investing

  • Market unpredictability: Several books highlight the unpredictability of the stock market and the view that no one can consistently predict its movements. Therefore, completely abandon active stock picking, valuation, and timing predictions for buying and selling.

7.1 How Passive Investing Generates Profit

  • Passive investing generates profit through the returns of the underlying assets in the portfolio, such as stocks or bonds.

  • Passive investments like index funds or exchange-traded funds (ETFs) aim to track the performance of a market index, rather than trying to beat it through active stock selection or market timing.

  • The returns on these investments depend on the performance of the underlying assets, and investors can share in the profits generated by the companies in the index.

  • Additionally, dividends can be received from the stocks held by the fund.

  • Over the long term, passive investing can generate profits through the compounding effect of earned returns.

  • US stock index funds generate long-term profits by tracking the performance of a specific market index, such as the S&P 500. These funds invest in a diversified portfolio of stocks representing the companies included in the index. As these companies grow and become profitable, their stock prices rise, and the value of the index fund increases accordingly. Furthermore, many companies in the index pay dividends, which can provide a steady stream of income for the fund and its investors.

  • Historically, the stock market has generated returns exceeding inflation over the long term, helping to maintain the purchasing power of investments. As the economy grows and the companies in the index grow, the value of the index fund increases, creating profits for investors.

  • It’s important to note that past performance does not guarantee future results, and there is always risk involved in stock market investing. However, historically, the US stock market has generally been a good long-term investment, and index funds are a simple way for investors to participate in the market’s growth potential.

7.2 Core of Passive Investing: Asset Allocation

The Intelligent Asset Allocator by William Bernstein is a book focusing on the principles of modern portfolio theory and the process of asset allocation. The author, William Bernstein, is an investment advisor, author, and historian. Key points from the book include:

  • Importance of diversification: Bernstein emphasizes the importance of diversifying investments across different asset classes (like stocks, bonds, and real estate) to reduce risk and increase returns.

  • Role of asset allocation in investment success: Bernstein argues that asset allocation is the most important factor determining investment success, and investors should focus on this aspect rather than trying to pick individual stocks or time the market.

  • Benefits of low-cost, passive investment strategies: Bernstein advocates for low-cost, passive investment strategies, such as index funds, which can provide investors with returns similar to more expensive actively managed strategies at a lower cost.

  • Importance of understanding market history and cycles: Bernstein stresses the importance of understanding market history and cycles for making informed investment decisions.

  • Role of bonds in a portfolio: Bernstein explains the role of bonds in a portfolio and how they can provide stability and income to balance the volatility of stocks.

  • Benefits of global diversification: Bernstein advises diversifying globally, not just domestically, to reduce risk and increase returns.

  • Importance of avoiding behavioral biases: Bernstein highlights the importance of avoiding behavioral biases that can lead to poor investment decisions, such as overconfidence and greed.

  • Overall, the book provides a comprehensive and accessible introduction to the principles of modern portfolio theory and asset allocation, offering practical advice on how to build and manage a diversified investment portfolio.

Why the Best-Laid Investment Plans Usually Go Wrong & How You Can Find Safety & Profit in an Uncertain World is a book by Harry Browne.

  • Permanent Portfolio strategy: Browne introduces his Permanent Portfolio strategy, which advises diversifying among stocks, bonds, cash, and gold. The goal of this strategy is to provide stable returns over time and limit the risk of large losses during market downturns.

8. Active Investing

  • Picking stocks, estimating prices at different points in time, buying low and selling high to obtain profits.

8.1 Focus on Your Interests

  • So many industries, geographical locations, and companies.

  • Investors should invest in companies they know and understand, aligning with their interests and hobbies.

  • Then you can continue researching them and understand them before buying.

8.2 Researching Companies

  • Extensive research on a company is needed before investing in its stock, including analyzing its management, products, and industry trends.

  • Use financial statements and other publicly available information to analyze the company’s financial health.

  • Talk to industry insiders, suppliers, and customers to gain deep insights into the company’s operations and prospects.

  • The importance of researching and understanding the companies you invest in. He suggests investors study a company’s products, customers, competitors, and management team to make informed decisions.

  • Some believe growth stocks with high future earnings potential might be more valuable than stocks currently paying high dividends. Look for growth: Lynch believed growth is the most important factor to consider when choosing investments. He advised investors to look for companies whose sales and earnings are growing faster than the overall market.

8.3 Evaluating Management

Warren Buffett has several key recommendations on how to evaluate a company’s management, outlined in his letters to shareholders, compiled in “The Essays of Warren Buffett: Lessons for Corporate America”. Some of these include:

  • Look for a long-term focus: Buffett believes the most successful companies are run with a long-term perspective, not focused on short-term gains. He looks for management teams with a track record of making decisions that benefit the company’s long-term interests.

  • Assess management’s integrity: Buffett believes a company’s management should be honest and transparent with shareholders. He looks for management teams with a strong sense of integrity and willingness to admit mistakes.

  • Evaluate alignment of interests: Buffett believes management teams that hold significant stakes in the company are more likely to make decisions in the best interest of shareholders. He looks for management teams with a large portion of their net worth invested in the company.

  • Consider management’s experience and track record: Buffett believes management teams with a successful track record are more likely to continue creating value for shareholders in the future. He looks for management teams with a history of creating value for shareholders and a deep understanding of their industry.

  • Look for rationality: Buffett looks for management teams that are rational and unemotional in their decision-making and can adapt to changing circumstances. He believes management teams that make rational decisions based on facts rather than emotions are more likely to create value for shareholders over time.

8.4 Quantitative Analysis

  • Determining stock prices: Guiding buy-low, sell-high decisions.

  • The concept of “intrinsic value” and how to assess securities.

  • Consider the Price-to-Earnings (P/E) ratio: Lynch discussed the P/E ratio, which compares a company’s stock price to its earnings per share. He suggested investors look for companies with low P/E ratios, as they might be undervalued.

  • Don’t pay too much: Lynch advised investors to pay attention to valuation and avoid overpaying for stocks. He suggested investors look for stocks trading below their intrinsic value, providing a margin of safety.

  • The technique of determining a “margin of safety” when buying stocks, which is the difference between its intrinsic value and its market price. It acts as a buffer between the price paid for a stock and its estimated intrinsic value, protecting investors from potential downsides if the stock’s intrinsic value was overestimated. When buying stocks, the margin of safety is used to determine how much room for error an investor has in their estimate of intrinsic value.

Several methods to determine the margin of safety when buying stocks include:

  • Using a discount to intrinsic value: One method is to calculate the stock’s intrinsic value using one of the methods discussed earlier and then compare it to the stock’s current market price. The difference between the intrinsic value and the market price is the margin of safety.

  • Using a discount to the company’s financial data: Another method is to compare the stock’s current market price to its financial metrics, such as Price-to-Earnings (P/E), Price-to-Book (P/B), or Price-to-Sales (P/S) ratio. A stock trading at a significant discount to its historical P/E, P/B, or P/S ratio is considered to have a larger margin of safety.

  • Using absolute value metrics: Another way is to use absolute value metrics, such as the company’s tangible book value, cash and cash equivalents, or net current assets.

  • It is important to note that the margin of safety is a relative metric, and the required level of safety will vary depending on an individual investor’s risk tolerance and investment goals. Also, a larger margin of safety does not guarantee profitability; it only reduces the risk of loss.

8.5 Qualitative Analysis

Built to Last: Successful Habits of Visionary Companies is a book co-authored by Jim Collins and Jerry Porras in 1994.

  • A clear and defined corporate vision is essential for long-term success.

  • Companies must have strong core values that guide decision-making and behavior.

  • The most successful companies have a unique “hedgehog concept,” which combines a deep understanding of what they can be the best in the world at, with what drives their economic engine.

  • The most successful companies have a culture of discipline, enabling them to be both opportunistic and proactive.

  • The most successful companies have a leadership culture that emphasizes the importance of individual and organizational humility.

  • The most successful companies have a culture of innovation, allowing them to continuously improve and adapt.

  • The most successful companies have a culture of setting “Big, Hairy, Audacious Goals” (BHAGs) that inspire and motivate employees to achieve greatness.

  • The most successful companies have a culture of “building the clock” rather than “telling the time,” meaning they focus more on building an enduring and lasting company than on short-term gains.

  • Finally, the most successful companies have a culture of preserving the core and stimulating progress, meaning they can embrace change and innovation while maintaining their core values and mission.

8.6 Being a Contrarian Investor

  • Be a contrarian investor: Emphasizes the importance of being a contrarian investor, meaning going against the crowd and making investment decisions that are unpopular or not widely accepted.

  • Avoid fads: Advises investors to avoid investing in trendy and fashionable companies, as they can be risky and short-lived.

  • Advised to be willing to be unpopular and take positions others are unwilling to take.

9. Main Method of Active Investing: Value Investing

Many books focus on this, with similar emphasis.

The Intelligent Investor is a classic work on value investing, written by Benjamin Graham and first published in 1949. The book provides a comprehensive introduction to the principles of value investing and is considered essential reading for anyone interested in this approach. Some key points from the book include:

  • Value Investing: The book emphasizes the importance of buying stocks at a significant discount to their intrinsic value, which is determined by analyzing the company’s financial statements and other data.

  • Margin of Safety: The book stresses the importance of having a margin of safety when investing in stocks, meaning buying stocks at a substantial discount relative to their intrinsic value to reduce the risk of loss.

  • Diversification: The book advises investors to diversify their portfolios to spread risk across different types of investments and different industries.

  • Long-Term Perspective: The book argues that investors should adopt a long-term perspective when investing in stocks, rather than trying to time the market or react to short-term fluctuations. To benefit from compounding.

  • Emotional Control: The book emphasizes the importance of maintaining emotional control when investing and not letting fear or greed drive investment decisions.

  • Active vs. Passive Investing: The book explains the difference between active and passive investing and argues that passive investing (e.g., index funds) is often a more effective way to invest.

  • Importance of Financial Statement Analysis: The book explains how to analyze a company’s financial statements to determine its intrinsic value and how to use this information to make informed investment decisions.

  • Risk Management: The book emphasizes the importance of managing risk when investing and explains how to use diversification and other strategies to reduce the risk of loss.

“The Warren Buffett Way” is a book by Robert G. Hagstrom that delves into the investment strategies of Warren Buffett, one of the most successful investors of all time. The book was first published in 1994 and has been updated multiple times since. Additional key points from the book include:

  • Quality over Quantity: The book explains how Warren Buffett looks for quality companies with sustainable competitive advantages, rather than trying to make quick profits by buying and selling large numbers of stocks.

  • Importance of Financial Statement Analysis: The book details how Warren Buffett uses financial statement analysis to identify undervalued companies and how he uses this information to make informed investment decisions.

  • Risk Management: How he uses the margin of safety to reduce the risk of loss.

  • Active vs. Passive Investing: The book explains how Warren Buffett’s investment approach is more active than passive investing, and how he looks for undervalued companies to buy and hold for the long term.

  • Investing in what you know: The book explains how Warren Buffett focuses on investing in industries and companies he understands, and how he uses his knowledge and expertise to make informed investment decisions.

  • Importance of Patience: The book illustrates how patient Warren Buffett is with his investments and how he waits for the right investment opportunities.

“The Essays of Warren Buffett: Lessons for Corporate America” is a compilation of letters written by Warren Buffett, Chairman and CEO of Berkshire Hathaway, to the company’s shareholders. The book covers multiple topics, including Buffett’s investment philosophy, his thoughts on corporate governance, and his insights into the economy and stock market. Additional key points from the book include:

  • Buffett’s value investing philosophy, emphasizing the importance of understanding the underlying value of a company before investing in its stock.

  • His belief that a company should be run for the benefit of its shareholders, and that management’s role is to effectively allocate resources and create value for shareholders.

  • His criticisms of Wall Street and the financial industry, which often focus on short-term gains rather than long-term value.

  • His advice on how to evaluate a company’s management and assess its growth potential.

  • His views on the role of government in regulating the economy and financial industry.

9.1 How Exactly to Find Undervalued Stocks?

Some books provide more details:

The Little Book That Beats the Market is a book by Joel Greenblatt, first published in 2005. The book presents a simple yet effective investment strategy based on the principles of value investing. The strategy, known as the “Magic Formula,” aims to help individual investors identify undervalued companies with the potential for high returns. Some key points from the book include:

  • The Magic Formula: The book explains the author’s “Magic Formula” used to identify undervalued companies. The formula is based on two key ratios: earnings yield and return on capital. The idea is to buy companies with high earnings yields (the inverse of the P/E ratio) and high returns on capital, and hold them for one year.

  • Backtesting: The book shows how the Magic Formula has been backtested over decades and consistently generated returns above the market average.

  • Diversification: The book advises investors to diversify their portfolios by investing in a basket of companies selected using the Magic Formula, to spread risk across different types of investments and industries.

You Can Be a Stock Market Genius is a book by value investor and hedge fund manager Joel Greenblatt. The book provides guidance on Greenblatt’s investment philosophy and strategies, aimed at individual investors looking to succeed in the stock market. Some key points from the book include:

  • Look for special situations: Greenblatt suggests investors should focus on special situations like spin-offs, mergers, and bankruptcies, as these can offer opportunities for high returns. He also advises looking for companies that are undervalued and misunderstood by the market.

  • Use quantitative methods: Greenblatt recommends using quantitative methods for stock selection, such as using financial ratios like P/E ratio and return on capital to identify undervalued stocks.

  • Focus on value: Greenblatt is a value investor who emphasizes the importance of buying stocks that are undervalued relative to their intrinsic value. He suggests using various financial metrics like P/E, P/B, and P/S ratios to identify undervalued stocks.

  • Willingness to take risk: Greenblatt stresses that investing in the stock market is inherently risky, and investors should be willing to take risks to achieve above-average returns. He also encourages investors to diversify their portfolios and not put all their eggs in one basket.

  • Go against the crowd: Greenblatt encourages investors to think independently and not follow the herd. He advises looking for companies that are out of favor with Wall Street but have strong fundamentals and bright prospects, as these are often undervalued opportunities.

10. Secondary Method of Active Investing: Short Selling

Still buy low and sell high, but the temporal order is reversed (first borrow stock to sell high, then buy back low to return).

Short selling is a trading strategy where an investor:

  • Borrows shares they believe will decrease in value, sells these shares at the current market price, and

  • Then waits for the price to fall so they can buy back the shares at a lower price, return them to the lender, and pocket the difference as profit.

  • Investors must pay interest on the borrowed shares and may also need to adhere to margin requirements, which is collateral the investor must maintain to cover any potential losses. Short selling is considered a high-risk strategy because there is theoretically no limit to how high a stock price can rise, and if the stock price increases instead of decreases, the investor’s losses could exceed their initial investment.

“The Art of Short Selling” is a book by Kathryn Staley that explores the technique of short selling, a method for profiting from falling stock prices. The book is aimed at investors and traders who want to learn more about short selling and how it can be used as a tool to manage risk and generate returns. Some key points from the book include:

  • Short selling is a way to profit from a stock price decline by borrowing shares and selling them, with the expectation of buying them back later at a lower price and returning them to the lender.

  • Short selling is a more advanced trading strategy that requires a deeper understanding of the market and the stock you are shorting, as well as a higher risk tolerance.

  • Staley emphasizes the importance of clearly understanding a company’s financials, management, and industry before shorting its stock.

  • She also stresses the importance of having a clear exit strategy, including stop-loss orders, to manage risk.

  • Staley also provides examples of different types of short-selling strategies, such as shorting overvalued stocks or shorting companies with accounting irregularities.

  • The book also covers the mechanics of short selling, including the risks involved, such as the potential for unlimited losses and the need to pay margin interest.

  • Overall, “The Art of Short Selling” provides a comprehensive guide to the technique of short selling and how it can be used as a tool for managing risk and generating returns. It is aimed at experienced investors and traders looking to learn more about short selling.

Successful case of short selling:

The Big Short is a non-fiction book by Michael Lewis that tells the story of the 2008 financial crisis and the individuals who were able to predict and profit from it by “shorting” the housing market. The book describes how the housing bubble was created by:

  • The widespread practice of issuing high-risk mortgages to people who couldn’t afford them.

  • The failure of rating agencies and regulators to properly oversee the financial industry.

  • The book also highlights the stories of several individuals and firms, including hedge fund managers Michael Burry and Steve Eisman, who realized the impending collapse and bet against the housing market.

  • The book highlights the greed and incompetence of many in the financial industry and the ways the system failed to protect the public from the consequences of the crisis.

10.1 Risk of Unlimited Loss

The possibility of unlimited loss is one of the primary risks of short selling. Unlike a traditional long position where the maximum loss is limited to the amount invested, short selling has the potential for infinite losses. This is because a stock’s price can theoretically rise indefinitely, and if the short seller cannot buy back the stock at a lower price, they will continue to incur losses.

  • For example, if an investor shorts a stock at $50, and the price rises to $100, the short seller will need to buy back the stock at $100, losing $50 per share. If the stock price continues to rise to $200, the short seller will need to buy back the stock at $200, losing $150 per share. In this scenario, the potential for loss is unlimited and can exceed the initial investment amount.

  • To manage these risks, short sellers need to have a clear exit strategy, including stop-loss orders, which automatically close the position if the stock price reaches a certain level. It is also important to have a clear understanding of the company’s financials, management, and industry before shorting a stock.

10.2 Cost from Margin Interest

Margin interest is the interest charged on the borrowed shares used when an investor shorts a stock. When an investor shorts a stock, they borrow the shares from their broker and sell them on the market. The borrowed shares are held in a margin account, and the investor is required to pay interest on the borrowed shares. This is known as margin interest.

  • For example, suppose an investor wants to short 100 shares of XYZ stock, currently trading at $50 per share. The total value of the borrowed shares is $5,000 (100 shares x $50 per share).

  • If the broker charges an annual interest rate of 5% on the margin account, the investor would need to pay $25 in interest for the first year (5% x $5,000).

  • If the short position is held for multiple years, the interest cost will continue to accumulate.

  • It’s important to note that margin interest rates can vary between brokers and are subject to change. Some brokerage firms may also charge additional fees for short selling, such as higher commission rates or fees for borrowing shares.

  • It is important to consider the cost of margin interest when shorting stocks, as it adds to the total cost of the trade and reduces potential profits. It’s also important to remember that margin interest costs will increase if the short position is held for a longer period, making it crucial for short sellers to have a clear exit strategy.

12. Conclusion

Reading 30 books in one afternoon is impossible for anyone. However, with AI tools generating the key points of books, getting a general understanding of the main ideas of 30 books is feasible. This allows for a grasp of the major directions involved in investing. The downside is that the generated points may not be entirely accurate and should be taken with a grain of salt; detailed reading of the corresponding books is necessary when specific actions are required. OpenAI’s website lists a research project using AI to generate book summaries (https://openai.com/blog/summarizing-books/), so the quality of automatically extracted book points should improve in the future, which is good news for busy people who love to read.

Recently, I’ve found myself using Google less and less. ChatGPT directly generates precise, actionable answers to most of my questions (including technical programming ones). In contrast, Google search returns a pile of links for me to sift through, read, and test one by one. In terms of user experience, Google is completely defeated. Google, being adept at data-driven trend analysis, must have internally seen the negative impact of ChatGPT’s emergence on traditional search traffic; it’s hard to imagine red alerts aren’t sounding.

11. Partial Book List

  • A Random Walk Down Wall Street by Burton Malkiel

  • A Treasury of Wall Street Wisdom by Harry Schultz

  • Antifragile by Nassim Taleb

  • Built to Last: Successful Habits of Visionary Companies

  • Common Stocks and Uncommon Profits by Phillip Fisher

  • Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

  • Mastering The Market Cycle: Getting the Odds on Your Side, Howard Marks

  • One Up On Wall Street by Peter Lynch

  • Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger

  • Reminiscences of a Stock Operator by Edwin Lefèvre

  • Security Analysis by Benjamin Graham (1934 edition)

  • Stock Market Wizards (2001).

  • The Art of Short Selling by Kathryn Staley

  • The Art of Value Investing by John Heins and Whitney Tilson

  • The Big Short by Michael Lewis and Liars Poker

  • The Black Swan by Nassim Nicholas Taleb

  • The Crowd: A Study of the Popular Mind by Gustave Lebon

  • The Efficient Market Hypothesis by Eugene Fama

  • The Essays of Warren Buffett: Lessons for Corporate America by Warren Buffett

  • The Intelligent Asset Allocator by William Bernstein

  • The Intelligent Investor by Benjamin Graham

  • The Little Book That Beats the Market by Joel Greenblatt

  • The Most Important Thing by Howard Marks

  • The New Market Wizards (1992)

  • The Rise and Fall of the Great Powers by Paul Kennedy

  • The Warren Buffett Way by Robert Hagstrom

  • Thinking, Fast and Slow by Daniel Kahneman

  • Why Stocks Go Up And Down: A Guide to Sound Investing by William Pike

  • Why the Best-Laid Investment Plans Usually Go Wrong & How You Can Find Safety & Profit in an Uncertain World by Harry Browne

  • You Can Be a Stock Market Genius by Joel Greenblatt