Getting Things Done

I wanted to quickly mention a book that I recently read and felt the need to recommend to my readers: Getting Things Done: The Art of Stress-Free Productivity by David Allen.

It is basically a walkthrough of a system that Allen has developed over his years as a "personal productivity consultant" for executives and organizations.

You might already have a good system for organizing and prioritizing your work, but I can guarantee you that you'll be able to improve some of your weak areas by reading this book. You can read some more specifics and reviews on Amazon, and I may bring up some of the info in later posts, but let me just pick out a particular area I was able to improve after reading the book: filing.

I have never been a great filer. I have plenty of space, plenty of folders, and no shortage of reference material, current projects, and other assorted paperwork in and around my desk at work, but I have never been satisfied with my filing system. The folders are always hard to read, the stuff is always hard to find, and things always end up looking untidy and unprofessional.

David Allen helped me change that. He suggests buying a labeler, using only one folder per file hanger, and creating an alphabetically sorted reference system. As he mentions in the book, there is something about using an automatic labeler (such as the Brother P-Touch) that changes your entire relationship to your filing system. After going through all my files, labeling them properly, and resorting them about a month ago, I have exponentially increased my ability to both find the reference documents I need, and keep my desktop clear of the bits of paper that always seem to pile up as the months go by.

Anyway, just wanted to pass that along... anyone else read that book and care to comment?

Buffettology by Mary Buffett

Buffettology was among the first investing books that I read way back when I was a 19 year old college senior, and it remains one of the foundations of my investment philosophy.

Mary Buffett was Warren Buffett's daughter-in-law for 12 years and wrote this book following her 1993 divorce from Warren's son Peter (for the sake of clarity, I will refer to Ms. Buffett as "Mary" and Warren as "Buffett" from here out). It gives her "insider" perspective on on Buffett's investing style and offers a fairly in-depth look at how she thinks he makes his decisions.

The book is broken into two main parts- "The Art of Basic Buffettology" and "Advanced Buffettology."

If you think the stock market is about ticker symbols, three week moving averages, relative strength, reading analyst reports, buying, selling, and momentum, then anything you hear from or about Buffett will seem counterintuitive.

Mary lays this out right at the beginning of the book "Warren had little use for typical Wall Street banter. He didn't seem to care which way the Dow Jones Industrial Average went, and he certainly had no use for all the soothsayers and their predictions. In fact, he acted as if the entire stock market didn't exist. He never looked at a chart, and if anyone tried to give him a stock tip, he would usually shut him or her off... He seemed to care only about the individual businesses he was interested in owning."

From the book you will quickly learn that Buffett takes a business perspective to investing. He doesn't think of buying stocks like the way many people think about buying them. He understands that they represent an ownership interest in a business, and evaluates whether or not he wants to own a piece of that business.

Of particular interest in the first half of the book is Mary's treatment of the general kinds of businesses Buffett likes to invest in. According to Mary, Buffett divided businesses into two basic categories - commodity type businesses and excellent businesses.

The commodity-type businesses "offer the least for future growth of shareholder value," and they share some or all of the following characteristics: low profit margins, low returns on equity, absence of brand-name loyalty, the presence of multiple producers, the existence of substantial excess production capacity in the industry, erratic profits, and profitability almost entirely dependent upon management's abilities to efficiently utilize tangible assets. Buffett stays away from these kinds of businesses, she says, because price competition generally reduces profits, and in the event that the business does earn some profits, "the capital is usually spent upgrading plant and equipment to keep abreast of the competition."

The excellent businesses, on the other hand, have something called a "consumer monopoly" going for them. When a company produces products with "some distinctive attributes that are particularly attractive to buyers, who then form an attachment to a company and the products it sells," that company has a consumer monopoly.

Mary lists nine questions to help determine if a business is an excellent one:

"1) Does the business have an identifiable consumer monopoly?
2) Are the earnings of the company strong and showing an upward trend?
3) Is the company conservatively financed?
4) Does the business consistently earn a high rate of return on shareholders' equity?
5) Does the business get to retain its earnings?
6) How much does the business have to spend on maintaining current operations?
7) Is the company free to reinvest retained earnings in new business opportunities, expansion of operations, or share repurchases? How good a job does the managment do at this?
8) Is the company free to adjust prices to inflation?
9) Will the value added by retained earnings increase the market value of the company?"

The second half of the book is called "Advanced Buffettology" and takes a more quantitative look at some of the Buffett tools such as projecting rates of return, forecasting future earnings, and playing the short term arbitrage game. To wrap it up, Mary presents a few case studies of stocks that Buffett has actually purchased, and walks through his most likely rationale for making the investments that he did.

Coupled with a reading of Buffett's shareholder letters, this book makes an excellent introduction to the investing style of Warren Buffett. Mary lays it all out in short, distinct modules that make it very easy to pick up the book, spend 10-20 minutes reading, then put it down to come back to at another time.

Since Buffett has never written a book himself, we may never get a perfect insight into how he selects and values stocks. However, I think it is an extremely worthwhile exercise to try to figure it out using the materials available to us. If you are interested, I would recommend picking up a copy of this book and adding to your knowledge of The Oracle of Omaha.

Peter Lynch's One Up on Wall Street

One of the first books I ever read about investing was Peter Lynch's One Up On Wall Street.

For those of you who have never heard of Peter Lynch (wikipedia), he ran Fidelity's Magellan fund from 1977-1990 and put together one of the most enviable fund manager records of all time. The fund showed a CAGR of approximately 29% during his tenure, and he only underperformed the S&P twice.

The first 80 pages alone are worth the price of this book, and if I taught a course in investing, I would be sure this section (Part I: Preparing to Invest) was required reading. The ideas in these chapters form the foundation of a sensible investment philosophy.

Chapter 4, Passing the Mirror Test, has a particularly useful exercise for anyone who is thinking about investing. Lynch suggests that you stop, look at yourself in the mirror, and ask these three questions:

1) Do I own a house? Lynch suggests that you buy a house before you invest your money in the stock market because, "in 99 cases out of 100, a house will be a money-maker." The way he sees it, a house is rigged in your favor. You can acquire one for 20% down (without having to make the cash call like you would with a stock bought on margin), the leverage you use increases your returns, and the interest on the loan is tax deductible. In addition, people generally do more research when they buy a home than when they buy a stock, which further increases the chances that the investment will turn out well.

2) Do I Need the Money? I think this is the single most valuable piece of advice someone will ever give you about investing. Lynch says the formula for figuring out what percentage of your assets should be put into stocks is simple: "Only invest what you could afford to lose without that loss having any effect on your daily life in the forseeable future."

I can't say it any better myself. The stock market is not magic. If you need to pay for something within the next five years or so (such as a new house, college tuition for a kid, etc...), do not put that money into the stock market because there is no guarantee that it will be there when you need it.

3) Do I Have the Personal Qualities it Takes to Succeed? Lynch says that this is the most important question of all. The personal qualities he lists as necessary for success in the market are "patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit to mistakes, and the ability to ignore general panic... It's also important to be able to make decisions without complete or perfect information... And finally, it's crucial to be able to resist your human nature and your 'gut feelings.'"

After setting out this foundation, Lynch moves into Part II - Picking Winners. He takes the reader through a process they can use to discover undervalued stocks on their own, and continually stresses that people should exploit any edge they have to identify promising companies. He says to stay on the lookout for things that are happening at your company, stores that seem crowded, prices that are going up, products that are in demand, and you might notice something before Wall Street does. For example, "You don't have to be a vice president at Exxon to sense the growing prosperity in that company, or a turnaround in oil prices. You can be a roustabout [ed note: whatever that is], a geologist, a driller, a supplier, a gas-station owner, a grease monkey, or even a client at the gas pumps."

Once you've located an opportunity, Lynch walks you through the next steps in the research process, from looking up the financials, to calling the company for more information, and ultimately, deciding if it is worth buying.

I'm not a fan of picking your own stocks, unless you are really willing to put some time into doing the research. If you do choose to get into this, however, this book would make an excellent addition to your shelf.

As an added bonus, it is extremely easy to read. There are no boring parts, and Lynch has a somewhat light-hearted style.

Lynch followed this book up with "Beating The Street" where he went more in-depth about specific stocks that he selected and why. If you liked this book, "One Up On Wall Street" would make a logical next read.