IN FOCUS6-8 min read

Ten insightful books for value investors

We highlight a selection of informative and insightful books which we think should be in a value investor’s library.

21/12/2021
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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value
Vera German
Fund Manager, Equity Value
Simon Adler
Fund Manager, Equity Value
Andrew Evans
Fund Manager, Equity Value

Here on the Schroders value team, we’re always looking for an opportunity to gain an investment edge. Books don’t necessarily need to be directly connected to investing in order to help us find new insights. Here, we consider a variety of books that we think can offer useful perspectives to investors.  

Juan Torres Rodriguez suggests two books: ‘The Biggest Bluff’ and ‘Is That A Big Number?’, which are both centred around numbers and mathematics but applied in very different formats.

"The Biggest Bluff" by Maria Konnikova

Rodriguez said “Maria Konnikova’s journey from amateur poker player to winning a couple of big tournaments all in less than two years is a fascinating read. It takes the reader through her journey of understanding how luck plays a big role in everyone’s lives and how much control we have over the outcome.

“She discovers that a probabilistic mindset is critical to decision making when playing poker. Maria continues to explain how she also applies the same approach to her life outside poker as a journalist and writer.

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

“As she put it herself during our session: ‘Overwhelmingly the way our brain learns is through experience – that is what sticks – but, unfortunately, probabilities are not evenly distributed in life. We do not live in a perfect bell-curve distribution and so, if something is supposed to happen 25 per cent of the time, it does not automatically follow that, if it did not happen the first three times, it is going to happen the fourth time. That is not how probabilities work – and yet we continue to learn from what happens to us. So we will overestimate the probability of something when we know someone to whom it has happened or when it has happened to us. In contrast, we will understate the probability of something when we do not have any personal experience of it. It is always skewed.’

“For investors, there are some key concepts here that are valuable: the impact of compounding a small edge, embracing variance and its dark side, the importance of keeping a decision journal and maintaining a focus on the process.”

"Is that a big number?" by Andrew Elliott

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

“It provides useful tools and benchmarks that help to improve the readers’ numeracy and ability to contextualise data points which they are regularly consuming from newspapers or social media, for example. As Andrew Elliott says in his book: ‘Decision-making needs understanding. Understanding needs knowledge. Knowledge needs numeracy.’”

Next, Vera German has selected what could be called the value investor’s Bible as well as other books focusing on human behaviour.

"The Intelligent Investor" by Benjamin Graham

German said: “Nearly a century on, despite detractors, this book still has huge 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 could: 'To invest successfully … what’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply emotional discipline’.”

"Judgement 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 subject which interests many team members.

“Daniel Kahneman’s ‘Thinking Fast and Slow’ is the obvious choice here. But this book gives a compact summary of the psychological biases we are potentially prone to, the academic research underlying the theories and suggestions for overcoming these biases.”

"Seeking Wisdom – From Darwin to Munger" by Peter Bevelin

“Charlie Munger identified ‘human misjudgement’ as a key challenge in investing. His speech in 1995 at Harvard University on the subject pre-dated much of what Kahneman went on to popularise,” German said.

“Munger is also an advocate for accumulating and combining mental models from across different disciplines. This book does a great job of explaining some of these models.

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

Simon Adler has chosen two contrasting books, one focusing on organisation and the application of checklists, and the other a profound personal recollection from World War II.

"The Checklist Manifesto" by Atul Gawande

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

“In a world that has become increasingly complex, the simplicity of a checklist has a lot to offer and presents an opportunity for consistency in decision making. This is an influential book for our process and one of the reasons we currently have a ‘Seven Red Questions’ approach to identifying risks in stocks we look at.”

"Man’s Search For Meaning" by Viktor Frankl

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

“Every investor will face a time when things aren’t going their way and having an ability to accept and deal with that adversity is an important facet of investing. A number of the team also benefited from reading Stoicism, either directly (Marcus Aurelius, Seneca) or through more modern interpretations (Ryan Holiday, Donald Robertson).”

Andrew Evans picked the final three books which focus on how humans have dealt with and approached risk throughout history.

"Against the Gods: The Remarkable Story of Risk" by Peter L Bernstein

“The management of risk is an essential part of an investor’s toolkit,” Evans said.

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

"The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics" by Eric Beinhocker

Evans said “Multidisciplinary thinking has been a core tenet of the Santa Fe Institute over time, along with complexity. In this book, one of Santa Fe’s external professors explores the implications of thinking about complexity in relation to economics.

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

"Incerto" Nassim Taleb

“This a cheat, because it’s four of Taleb’s books,” Evans said.

“Taleb can be an acquired taste, but these books set out thought-provoking ideas for how we view the world and questions an investment world which is built on thinking about risk through the lens of the traditional statistics, based on the normal distributions.

“He makes the compelling case that reality doesn’t look like that and presents us with important mental models such as considering alternative realities.”

A version of this article first appeared on trustnet.com

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Authors

Juan Torres Rodriguez
Fund Manager, Equity Value
Vera German
Fund Manager, Equity Value
Simon Adler
Fund Manager, Equity Value
Andrew Evans
Fund Manager, Equity Value

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