Book review: Excess Returns
Michael Wassermann | July 20, 2014
Excess Returns: A Comparative Study of the Methods of the World?s Greatest Investors by Frederik Vanhaverbeke.
The book starts with an insightful chart showing the annual excess return of top investors versus the S&P 500. It shows that excess returns tend to decrease when the observation period gets longer, and neatly illustrates the exceptional track record of Warren Buffett.
The remainder of the book gives a comprehensive overview of the practices applied by the most successful fundamental investors, including adepts of Benjamin Graham and adepts of Warren Buffett.
The author holds a PhD in Electrical Engineering and seems to have read in his free time everything that matters for stock investing. The book is very structured and exhaustive, as can be expected from an engineer. It contains a number of frameworks that puts the different analytical elements together (for example page 145 on business analysis and page 172 on valuation tools). This makes the book a valuable read for investors looking to improve their investment process.
I also liked the chapters covering investment mistakes. The list includes confusing investing with trading, lack of analytical independence, selling winners and hanging on to losers, selling quickly after a takeover announcement.
The book is full of interesting quotes about investing. Below is a selection (I tried to avoid the best known ones).
- On long-term investing: ?The most important attribute for success in value investing is patience, patience, and more patience.? Peter Cundill
- On accounting: ?If you read a financial disclosure three times and cannot understand it, it is intentional.? Jim Chanos
- On spinoffs: ?Any time you read about a spinoff being accomplished through a rights offering, stop whatever you?re doing and take a look.? Joel Greenblatt
- On psychology: ?Nothing sedates rationality like large doses of effortless money.? Warren Buffett
- On selling: ?We never invent new reasons to continue with a position when the original reasons are no longer available.? David Einhorn
- On risk management: ?To invest successfully you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets.? Warren Buffett
I want to end with an additional quote, this time from the most recent quarterly report of Pzena Investment Management. The quote does not appear in the book but reflects well its philosophy as well as my current ? and permanent ? mindset:
It seems like an almost daily occurrence that equity markets in the developed world hit new highs. Even the emerging markets, after three years of weakness, found their footing. Yet despite the good news, there is an air of unease in the investment world. Sluggish economies, geopolitical events and valuation all raise concerns. Our approach to dealing with this uncertainty is the same as it has always been: focus on identifying good businesses with downside protection that are trading at attractive valuations compared to their long-term earnings power.