Most of the featured investors are acolytes of Warren Buffett and Munger, and while there’s little of their wisdom any casual student of investing won’t have encountered before, hearing their maxims through the voices of others renders them as fresh as they can be. Other conventional insights resonate because Green is a good storyteller. He recounts how Howard Marks, a co-chairman of Oaktree Capital Management, which manages $120 billion and specializes in less-well-trodden areas of the market like distressed debt, keeps in his wallet a folded $5 bill that he found in the Harvard Business School library as a reminder of the limitations of the efficient-market theory (which essentially posits that $5 bills don’t lie around waiting to be picked up). The experience helps remind him to avoid the most efficient markets and focus exclusively on less-efficient ones.
There’s also a wealth (pun intended) of less-obvious insights. Ken Shubin Stein, a doctor turned hedge fund manager turned Columbia University professor, explains that to invest successfully, you have to know your own mind. He says that for his part, he’s highly susceptible to “authority bias,” which has led him to place too much faith in stocks owned by investment luminaries whom he admires. To help counter this, he always asks himself, “Have I done the work?” Jeffrey Gundlach, a “brash and brilliant billionaire known as the King of Bonds,” says he’s wrong about 30 percent of the time. So before he makes an investment, he asks, “If I assume that I’m wrong on this, what’s the consequence going to be?” His advice: “Make your mistakes nonfatal.”
There’s also some wonderful history. In 1939, as the world was going to war, the man who would become Sir John Templeton opened the Wall Street Journal, picked 104 American companies whose stocks were selling for $1 or less, and invested $100 in each of them. As war raged, the Dow fell to a generational low of 92, and stocks became so synonymous with risk that New York state insurance regulators banned them from the portfolios of insurance companies. Templeton stuck with his bet. He ended up making five times his money. Six decades later, in 1999, he shorted a basket of dot-com stocks that were adored by the crowd, and when the bubble popped in March 2000, he earned a profit of more than $90 million.
Green’s book does suffer from some of the same flaws that affect most investing “how tos.” We’re told over and over again that, as famed investor Joel Greenblatt, the founder of Gotham Capital, says, the entire secret of successful stock picking comes down to this: “Figure out what something is worth and pay a lot less.” Or as Benjamin Graham, the inventor of value investing and the intellectual forefather of Buffett, Munger and most of the investors in this book, said, make sure you have a “margin of safety.”
Well, yes, but that’s way easier said than done. Green nods to the difficulty when he asks the reader, “Do you know how to value a business?” His answer is a discussion of Greenblatt’s various techniques, such as an analytical exercise called a discounted cash flow analysis — which can sound like science. What goes unsaid is that any valuation methodology is only as good as the many, many assumptions that go into it, and therein lies the art.
The book also backfires in its implicit promise that the secrets of great investors can be synthesized into consistency. They can’t. Investors like Mohnish Pabrai, Greenblatt and Sleep often invest almost all of their money in just a few stocks. That’s contrary to the advice given by Graham, who says diversification is key, and contrary to what’s done by many of the other featured investors, like Jean-Marie Eveillard, who began running SoGen International in 1979 and who routinely owned more than 100 stocks.
Many of the investors talk about how they have created systems to mitigate risk, to the point that Green writes, “Adopting systematic analytical procedures is the sixth strategy in our epic quest to be non-idiotic.” But former SAC Capital hedge fund manager Jason Karp argues that every system is doomed to fail. He became frustrated with running his fund because, he says, there was no “clear linkage between process and outcome.” He added, “There’s so much randomness that it can drive you insane.”
You’ll read about Matthew McLennan, who oversees more than $100 billion at First Eagle Investment Management and who doesn’t believe in growth in perpetuity. His opinion — based, he says, on the scientific fact that 99 percent of species that have ever existed are extinct — is that “everything is on a path to fade.” On the other hand, there’s Fidelity Investment’s Will Danoff, who is monomaniacal about his view that earnings growth is the only thing that matters and who cares so little about valuation levels that he owns Tesla. (Ummm, margin of safety?)
In fact, the book almost proves that you can’t emulate these investors. Greenblatt, for instance, set up a preapproved list of stocks people could buy and gave them two options: They could either make their own decisions about when to buy and sell, or follow a predetermined system. When Greenblatt studied thousands of clients’ accounts, he was shocked to discover how much worse the DIY investors performed: They failed to beat the S&P 500, whereas the group that followed the system beat the S&P by 21.4 percentage points. “Their ‘judgment’ had transformed a market-beating strategy into a market-trailing dud,” Green writes. “It was a startling display of self-sabotage.”
If emulating these investors to become rich is nice in theory but tough to execute, emulating the way they live to become happy might not work even in theory. In one of the book’s few non-fanboy moments, Green confesses that he didn’t really like Templeton. “I saw in him a cold austerity that I found unnerving,” he writes. He also notes that many great investors might be somewhere on the autism spectrum. After all, it’s easier not to follow the herd if you don’t care what the herd thinks. At one point, he asks Munger if he has to work against emotions like fear. Munger says no: He doesn’t experience such emotions.
Another investor, Christopher Davis, who runs Davis Advisors, an investment firm his father founded in 1969, observes that many of the best investors struggle when it comes to “bonding with others” and nurturing “warm attachments in their family life.” In a section with the subhead “Very Few People Could be Married To Me,” Paul Lountzis, the president of Lountzis Asset Management, says he regards social functions as a “bothersome distraction” and cherishes his wife because she “places no demands on me.” Wonderful. For him.
Green’s real message may be “don’t try this at home,” but his book still offers many nuggets of wisdom. Great investors are rarely just money minds but also, as Green writes, “seekers of what the economist John Maynard Keynes called ‘worldly wisdom.’ ” They study fields ranging from economic history to neuroscience to literature to stoicism to the science of habit formation, and try to use the insights they glean to make themselves better investors. You don’t have to apply their insights to investing to appreciate them. Take Marks, who has long been a student of Buddhism, which has led him to admit that he can’t predict or control the future. As a result, he says, he is more humble than he might otherwise be. Hurrah.
Green also shows how insights from great literature can be applied to investing. He quotes the increasingly mad and tragic Blanche DuBois in “A Streetcar Named Desire.” “I have always depended on the kindness of strangers,” she says. In his 2018 letter to shareholders, Buffett wrote, “Charlie and I never will operate Berkshire in a manner that depends on the kindness of strangers.” In other words, make yourself resilient so you don’t have to ask for favors from people who may not give a damn about you. Eliminate debt and excessive expenses, and be aware of dangers in your path. Again, it’s a life lesson, not just an investing one.
The reason to read this book is not so much that it contains a recipe for anything — unless you’re baking, there may be no such thing — but rather that it offers a smorgasbord of ideas from which you can pick and choose what works for you. The first investor Green profiles, Pabrai, says his strategy is cloning: He finds a strategy he admires, and he copies it. Lountzis does a similar thing, but he says he isn’t trying to replicate anyone else’s behavior. “You can’t mimic them because you’re not them,” he says. “Learn it and adapt it and modify it into your own process.”
Wise words indeed.
Richer, Wiser, Happier
How the World’s Greatest Investors Win in Markets
By William Green
282 pp. $28