Book Review: The Best Investment Writing

Cambria Investment Management’s Meb Faber has always done excellent research. I read his first published book, the Ivy Portfolio, years ago and keep a copy in my office.  Ivy did a lot to change my views on alternative investments, which I now use extensively in my practice.

Faber rarely tries to reinvent the wheel. In fact, a lot of his work centers around studying and replicating the work done by others. That was the focus of Ivy and his more recent Invest With the House: Hacking the Top Hedge Funds, his collaboration with AlphaClone, and his excellent blog The Idea Farm.

True to form, Faber has compiled recent work from some of the best investment writers in the business into eminently readable new book, The Best Investment Writing: Selected Writing From Leading Investors and Authors.

As Faber comments, investors today are completely saturated with information and choice; “too many market experts shouting too many conflicting opinions at us,” which leads to bad investment decisions.

Faber has done his readers a service by hacking through the noise and leaving them with a curated volume of very solid and mostly timeless investment advice. This is not a “how to” book that will teach you a new trading system, and it certainly won’t give you a top-ten list of stocks to buy. But it will make you a better investor and give you a more nuanced perspective.

Every essay included in the book is worth your time to read, but there are a couple that particularly stuck with me. Jason Zweig, a respected columnist for the Wall Street Journal, writes about his experiences trading antiques with his parents as a child. In the 1970s, long before the internet and Antiques Roadshow, the collectibles market was extremely opaque and illiquid. If you were an astute collector who had done their research and knew what they were doing, you had a major information advantage and could earn excellent returns.

Today, that’s no longer the case. The returns Zweig consistently earned with his parents are simply not possible when you have an army of collectors with smartphones able to do instant research at every estate sale in America. Of course, the parallels to stock investing are clear. As Zweig writes,

Decades ago, stock-picking was a handicraft in which information moved slowly and unevenly, so the person who knew the most could perform the best – by a wide margin. Think of Warren Buffett buying such tiny flecks of corporate plankton as Sanborn Map and Dempster Mill Manufacturing. Today, with more than 120,000 chartered financial analysts and 325,000 Bloomberg terminals worldwide and with Regulation FD requiring companies to disclose material information simultaneously to all investors, the playing field is close to perfectly level.

If you’re applying the tools that worked so well in the inefficient markets of the past to the efficient markets of today, you are wasting your time and energy. An investor who devotes weeks or months of research to analyzing a single widely-traded stock is like an antique dealer driving across the back roads of New England searching for bargains that, for the most part, disappeared decades ago. It isn’t impossible that you will find a bargain, but the odds that the rewards will justify the pursuit are low.

I also found Patrick O’Shaughnessy’s essay “Alpha or Assets” to be particularly insightful, and I’d recommend it to anyone looking to hire a money manager or advisor. O’Shaughnessy writes that “strategies should be built for alpha, not scale,” which should be obvious. A manager with a fiduciary responsibility to act in his client’s best interest should be most concerned with the performance of the portfolio, not his ability gather more assets. O’Shaughnessy writes:

Professionally managed investment strategies have two components: an investing component (seeking alpha) and a business component (seeking assets). Outperformance is one goal, scale is another… In the asset management business, two variables matter: fees and assets…. When fees fall, assets need to rise. For assets to rise across a business, the strategies offered need to be able to accommodate more invested money.

He points out that more assets are great for the business, but they’re often terrible for returns, as the manager can’t trade smaller or more thinly traded securities without moving the market.

This brings up interesting questions about fees. In a vacuum, low fees are wonderful. But if low fees force a manager to compensate by gathering more assets… and reducing the effectiveness of their strategy in the process… that low fee can prove to be quite expensive.

I’ll wrap this up with what is probably the best headline for article I’ve seen in years: “Even God Would Get Fired as an Active Investor.”

Wes Gray, whose work I’ve reviewed in the past, showed empirically that “an active manager who was clairvoyant (i.e. ‘God’), and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people’s money.”

When even the Almighty would get fired, you know it’s a rough business.

My compliments to Meb Faber and to each of the writers he highlighted for putting together a very solid volume.