Hedgehogging
by Barton Biggs
Having spent 35 years in the industry, and I still love it every day, I have nothing but respect and admiration for this man who spent most of his career at Morgan Stanley. He was actually the lead man in putting together the Morgan Stanley research department. This is a major feat by itself. By whatever matrix you want to compare this man, you will find him on every winner’s list.
I have run into him at several conferences, and I have never failed to be impressed by his massive intellect, which can focus like a laser on individual stocks, sectors, commodities or equities, and a whole array of economic issues.
He is a first rate thinker, and a first rate analyst. He’s just basically smarter than his peers, and he has decades of experience to couple that brainpower with. In this book you have the opportunity to take in about 300 pages of pure wisdom. How else are you going to be able to do this, and from who?
Every couple of years I try to retool. It helps me remain humble. This can be done in a number of ways. You can take a stack of books like this one, tuck them under your arm and get away to a retreat or a beach somewhere, and just start taking in the knowledge, and try to integrate it.
Back at the height of the Internet Boom when I couldn’t understand the valuations being given to hundreds of companies with no earnings, I decided to retool. It wasn’t that I just couldn’t understand the lack of earnings. I couldn’t even find companies that had a hint of an earnings stream. It was suppose to be the new economy. The old methods of valuation were thrown out the window. If you didn’t conform, you were mocked, antiquated, a dinosaur.
One of the so-called dotcoms we looked at had a valuation greater than the combined valuations of 10 massive, old-line industrial companies that we followed and respected. I ran up to Harvard, which I have done a number of times to see what the academics were thinking. I sat in a classroom with a brilliant professor, who then began to pontificate on why this specific dotcom was worth the price the stock was selling at. I looked at him, and instantly knew he OWNED THE STOCK. Ownership is always a surefire basis for BIAS.
Now when you read Barton Biggs’ Hedgehogging, you will understand precisely the emotional mechanisms that the professor in question suffered from. Biggs covers it on page 29 of his book. It’s called Confirmatory Bias. This is the tendency to collect all the information that agrees with your position, and to ignore the information that doesn’t.
He even tells you how to fight off Confirmatory Bias, which is something the Professor in question never thought of, or about for that matter. It’s interesting to note that the Professor in question lost his shirt along with about 98% of all other investors at the time.
I went back to taking my basket of books and hit the beach in Hawaii. Reading by the shore as the surfers made the morning waves is a great way to try to re-connect with what’s going on. If you do decide to go to the beach, Barton Bigg’s book would be right up there near the top of the list for your enlightenment. Every page is choked full of wisdom by a man who has paid the price with his own cash for that wisdom.
Are there other books that you should take to the beach with you along with this one? You bet there are. Take Graham and Dodd’s Security Analysis. There are several editions. Warren Buffett has read this book probably 15 times from cover to cover in his lifetime. As you know, Benjamin Graham was Buffet’s professor at Columbia University.
Edwin Lefevre’s Reminiscences of a Stock Operator may be the greatest book ever written about trading. I first read it as a teenager, and I still re-read it every couple of years. It never gets dull, and every time I go through it, I find things I have never seen before. It’s that extraordinary. You need to own it, and own the knowledge that’s in it as well.
Read Bernard Baruch’s “My Own Story”. Baruch is to the first fifty years of the 20th century what Warren Buffett is the second half of the century. Both were unequalled investors. Each was the premiere investor of his time.
If you have an institutional bent to you, try David Swensen’s book on “Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment Management”. Swensen is the man who ran the Yale endowment for the last twenty years, bringing it back from the ash heap of history to being the number one college endowment in performance for the last generation. No mean achievement when you consider he was up against every professional money manager in America.
Let’s talk about some of the concepts you are going to learn from Barton Biggs in this wonderful book called Hedgehogging:
· You learn about Robert Wilson, the man who shorted Resorts International and lost $100 million for his efforts. Biggs is polite, he doesn’t mention the real names of most of the players. He doesn’t want to embarrass anyone, but if you have been in the market long enough, you know who is talking about.
· Morgan Stanley’s Breakers Hedge Fund Conference- Biggs is not a professional writer, but his writing is brilliant. In this section he discusses attending a conference of hedge fund participants, and aspiring players. His descriptions of these people by itself is worth reading the whole book. Listen to this sentence, “Former investment bankers exchange distinguished lies with portly ex diplomats, permanently deformed by self-importance.” (P 50) He uses language like this throughout the book, and it’s a joy to read.
· There’s dinner with Fayez Sarofim where Biggs describes a man who is Buffett’s equal in brainpower, and the techniques he uses to amass multiple fortunes. “My favorite holding period is forever,” says the master.(P70)
· He discusses with his father, a great investor in his own right, entering the brokerage business. The father hands him a copy of Benjamin Graham’s Security Analysis, and says, READ IT. Biggs reads it, underlines it, annotates it, and goes back to his father. The father pulls out a new copy and says DO IT AGAIN. This is how you learn, and the information you learn is priceless. P81
· Biggs tells you what to read, “It is better to read The Economist from cover to cover once a week than the Wall street Journal every morning.” P108
· The public never learns. Jesse Livermore the greatest trader of the early 20th century said, “Buy Low-Sell High,” but Biggs expands upon the theme. “The public instead does just the opposite. It buys high and sells low, partly because the mutual fund industry has an overwhelming incentive to sell what is easy to sell, and what is easy to sell is what has just been hot.” P121
· Biggs’ description of the secular bear market of 1969 – 1974 (P127) is the best description I have ever read of a history that I lived through. He’s got it down pat. He captures the emotionality, the flavor of the times. You feel the heat, the pain, and the agony of not being able to sell, of stocks going down day after day with no volume. Every MBA kid making a million a year in the market right now, and I have hired plenty of them, should be forced to memorize sections of this book, because they are going to pay for their lack of knowledge of history with the market value of their client’s accounts.
· He teaches you an understanding of private equity (very big right now, probably getting bigger). He goes into the law of large numbers and why these funds cannot continue to bring in the returns that they have been showing for the last 10 plus years. If you are in the market you need to understand what Biggs is talking about. This is priceless information, and he’s giving it to you for the price of a book. P142
· He gives a scholarly presentation of the concept of the Fibonacci’s number series, and its impact on the market. It’s a brilliant, easy to understand presentation (P163), but even better is his analysis of GROUPTHINK, and its impact on the market.(P169) Professor Irving Janis of the University of Michigan is the father of Groupthink; but his book is out of print. Bigg’s analysis of the process is the best thing out there. It will not only help you in the market, but it will help you understand how we got to where we are in Iraq as well.
In the whole book, I only caught one error, and that’s because Bigg’s knowledge, and his breath of knowledge is so astounding that he relies on memory in most instances to do his writing. When you do this, sometimes you can be faulty in your memory. He simply recalled a book whose author he did not name, as being written by a famous professor at MIT. The book was about the innovator’s dilemma. The author was from Harvard, not MIT, and Christensen authored it.
Here’s the bottom line. If you could find ten books like this, you would be better off owning the knowledge in them, instead of getting yourself an MBA in finance from any of the top business schools in this country. A book like this is that important, that influential, and that informative. You would have to own the knowledge in this book, not just read it casually. You would need a pen to underline, to take notes, to write in the margins, to make this knowledge yours, and then with some experience, you would become AN INVESTOR. Good luck, and I say that respectfully.