This article is authored by MOI Global instructor Adam Crocker, Chief Investment Officer of Logbook Investments, based in New York.
I look forward to presenting at European Investing Summit 2018, hosted by MOI Global. In order to frame the discussion, it may be useful to describe Logbook’s investing philosophy and how ingraining books into a research process leads us to different approaches of studying businesses and developing non-consensus views on key issues.
What is Logbook Investments?
Logbook is a fund that gleans insights on core positions from books. What does this mean? We believe that there is a vast pool of knowledge generally untapped by the investor community that can be unearthed by reading the work of literary experts. In a practical sense, once we find an investment idea meriting deeper research, we look for books that may augment our understanding beyond company filings, analyst reports, primary research, transcripts, et cetera. The types of books sourced could include:
• Biography of company founder or senior executive
• History of company
• History of industry
• Behavioral writings that are relevant to investment situation
• Seemingly unrelated book that “rhymes” with situation at hand
In my experience, insights from these non-Wall Street sources often provide perspective that other investors may overlook. It is also useful to learn from a source that has no interest in selling you anything, and often minimal awareness of the business as an investment. The information extracted from books is often more unbiased and unfiltered.
This process also requires a certain discipline, because not every book provides a profound insight. Just because we have devoted the time to read a book about a subject does not mean it merits a position in the fund—being willing to pass after a sinking time into deeper research is an important part of the process. However, when insights appear, they are often very clear and provide a strong basis for differentiated opinion. A brief sampling of books that have informed past Logbook decisions include:
The insights gleaned from books underpin our investment writeup that incorporates valuation, competitive dynamics, unique company attributes and so forth. At our last presentation to the Manual of Ideas in January 2017, Logbook cited Mondo Agnelli, referencing the parallels in business model and management style between the leaders of Fiat Chrysler and Peugeot. As an example of how the lessons from books can be evergreen, that research informed certain aspects of our upcoming presentation. This Manual of Ideas talk will provide further examples of the added dimensions books can provide to an investment thesis.
Why are investment writeups important?
The name Logbook refers to a pilot’s logbook, which must be completed every time before operating an aircraft. We believe the same checklist-based rigor should apply to investing. At Logbook, our checklist takes the form of an investment writeup, whose components have been assembled over many years. A sampling of the questions we ask ourselves include:
• Would anyone care if this company didn’t exist?
• What is the nature of its competitive advantage?
• What are key risks? Likely culprits if we have made a mistake?
• How has capital been allocated in the past?
• Any notable changes to risk factors or management incentives?
• What is our estimate of valuation, and how do current multiples compare to history?
These questions are the basis for a roughly fifteen-page report that serves as the template for our investment. More importantly, throughout the course of owning a business, this document is the primary reference point to compare unfolding events versus our initial expectations. It is much harder to delude oneself when reading your own words from a past writeup.
When share prices move up or down based on events not contemplated in our writeup, we are much more likely to move on from a position, booking a gain or loss. However, if results have been consistent with our initial probability distribution, it is likely that Logbook will remain invested in the particular situation. We can be much more confident in our original analysis when we predicted the possibility of unfolding events, instead of justifying surprises as they appear as “reflected in valuation.”
Book summary document
As a supplement to Logbook’s direct investing process, we try to read broadly to improve overall thinking, and also because it makes life more interesting. Beginning over a decade ago, I began compiling a document that is basically a “greatest hits” of books read in recent years. As Steven Johnson notes in Where Good Ideas Come From,
The great minds of the period—Milton, Bacon, Locke—were zealous believers in the memory-enhancing powers of the commonplace book. In its most customary form, “commonplacing,” as it was called, involved transcribing interesting or inspirational passages from one’s reading, assembling a personalized encyclopedia of quotations.
While reading a book, I write and underline a lot, and every couple years go back and type up the underlined parts worth remembering. This document serves as a wonderful refresher about favorite books, useful themes and pitfalls to avoid. It safeguards vital knowledge from fading too far into memory to be useful. As noted in The Atlantic,
The key thing was to write the words in your own hand—by this means, by laboriously and carefully copying out the insights of people smarter than you, you could absorb and internalize their wisdom. Call it osmosis-by-handwriting. Commonplace Books: The Tumblrs of an earlier Era; 1/23/12
Over time, by continuing to learn from the wisdom of great minds, Logbook aims to develop investment insights that benefit our partners.