Book suggestions

Dear investors,

Since many people tend to take at least a few days off in December and/or January, we've dedicated this month's letter to suggesting five books related to investing. These are books we really like, but perhaps aren't as well-known.

It's important to note that we read these books in their original English. Some of them are available in Portuguese, and we will reference their Brazilian titles, but we cannot comment on the quality of the translation.

“In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.” – Charlie Munger

A Man for All Markets: From Las Vegas to Wall Street, How I Beat the Dealer and the Market

Fascinating autobiography of Edward O. Thorp, a genius who rose from a poor childhood to excel in several areas of human knowledge: mathematics, computing, and finance.

In 1962, then aged 30, Thorp published the book "Beat the Dealer," in which he mathematically proved that the house edge in blackjack could be overcome by card counting, based on his studies as a professor at MIT. Not only did he prove this, but he also made money in casinos by applying his theory. As part of his gambling research, Thorp helped develop the world's first "wearable computer" (partly hidden in a shoe and partly in a pack of cigarettes), which he used to predict the number drawn on the roulette wheel and thus beat the casinos at this game as well. The inspiration for this came from the observation that the small ball spinning on a roulette wheel resembles the planetary system—if we can predict the trajectory of the planets, why not the roulette ball?

Gradually moving away from academia, Thorp began applying his advanced knowledge of probability and statistics to the financial market, discovering and exploiting various pricing anomalies in capital markets, such as in options pricing—around the same time that Black and Scholes were developing their research for which they received the Nobel Prize in Economics. He arguably created the world's first market-neutral hedge fund¹, achieving an average annual return of over 20% per year for over 30 years.

The book is highly engaging – a great read for an afternoon at the beach!

In Portuguese: A man for any market

You Can be a Stock Market Genius

Ignore the ridiculous title—this is a fantastic book! It's not a basic book for beginners, as it assumes the reader already has some knowledge (and experience) about investing, but the writing is lighthearted and even funny in places. It focuses primarily on event-driven investing or "special situations" like spinoffs, corporate restructurings, etc.

The book stands out for the richness of the detailed cases discussed and the practical application of the knowledge presented, unlike other books that tend to be more abstract (the book "The Most Important Thing" itself would be a typical example of investment literature). To illustrate, it's worth briefly citing the Sears case described in the book:

In 1992, Sears announced that it would sell 20% of two of its subsidiaries (Allstate Insurance and Dean Witter) to the public. At a later date, it would distribute the remaining 80% to its shareholders. Before the distribution, 1 share of Sears traded at $ 54, and entitled one to receive 1 share of Allstate (which was listed at $ 26) and 0.4 shares of Dean Witter (listed at $ 15). Greenblatt shows the simple math.

which led to the conclusion that the market was valuing Sears' core business at $5, when it could clearly be worth $15 or $20! More interestingly, it explains why these partial spin-off situations are more likely to offer very profitable investment opportunities.

The author, Joel Greenblatt, started his hedge fund alone when he was 28. In the first 10 years, he achieved an average gross return of 50% per year (!!), and net of management and performance fees, over 30%. After this period, and having already built up a substantial personal wealth, Greenblatt returned all the investors' money and dedicated himself solely to managing his assets. He began teaching Value Investing in the MBA program at Columbia University in New York.

Margin of Safety

Books published by renowned investors are typically written after a successful career. In the case of Margin of Safety, Seth Klarman was at the beginning of his career at the Baupost Group when he decided to write the book. It was published in 1991, when Seth had been working at the investment management firm for just over seven years, and initially sold only 5,000 copies (at $25 each), considered a publishing failure at the time.

Klarman remained undeterred, and by applying the principles outlined in the book, he became a successful investor, generating returns close to 201,000,000 annually since the beginning of his career and amassing a personal net worth of USD 1.5 billion. Because of his extremely private profile, Klarman has been described by the New York Times as "probably the most successful and influential investor you've never heard of."

Due to his successful trajectory after the book's publication, attention turned to his teachings, compiled while he was still a "beginner." Since Klarman was never interested in 1 In his investment philosophy, Thorpe combined long and short positions to take advantage of relative price anomalies and mitigate market exposure. This way, his fund could make money regardless of the direction (up or down) of the stock market and the markets in general. To publish a new edition, original versions of the book are rare and can cost as much as $4,000! University libraries report the book as having the longest waiting lists, and also as being one of the most frequently reported "lost" books by students who check it out.

We could summarize Margin of Safety as “avoiding losses should be the main objective of every investor.

The way to avoid losses is to invest with a significant margin of safety. A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and make mistakes.” However, the book's greatest asset lies in its practical discussions about the difficulty of making the right portfolio decisions and selling timing, given the human biases and pressure for short-term returns that we ultimately experience.

Algorithms to Live By: The Computer Science of Human Decisions

Um livro surpreendente, para ser lido e relido. O objetivo dos autores Brian Christian, cientista da computação, e Tom Griffiths, professor de psicologia e ciência cognitiva, é mostrar como algoritmos simples, originalmente desenvolvidos para resolver problemas da ciência da computação, podem ser aplicados para nos ajudar a resolver questões práticas e curiosas do nosso cotidiano:

• Na aquisição de uma casa, quantas alternativas visitar antes de tomar a decisão “ótima” da melhor compra? Resposta: Para maximizar a probabilidade de escolher a melhor casa possível, dedique 37% do seu tempo de busca para ver o que tem por aí, sem compromissos, (digamos, se pensa em comprar nos próximos 3 meses, dedique pouco mais de 1 mês a explorar) mas esteja preparado para aceitar a primeira oferta de qualidade que for igual ou superior ao que você já viu assim que exceder este tempo.
• Quando experimentar um novo restaurante que abriu, e quando decidir voltar ao seu favorito.
• A questão de “data overfitting” – não complique demais um problema. Em tempos de “big data”, os autores criticam a prática da “idolatria dos dados”: um modelo complexo pode muito bem levar a menos precisão ao invés de mais.
• Qual o “grau de bagunça” aceitável em sua mesa de trabalho? Qual o jeito mais fácil de encontrar suas anotações? Vale a pena gastar tempo organizando a papelada?

His writing style is easy to read and entertaining, detailed enough for the reader to grasp the content without being overly technical or mathematical. Ultimately, the book helps us think about how to make better decisions by recognizing our limitations and cognitive biases—a fundamental skill in investment management.

In Portuguese: Algorithms for Living – The Exact Science of Human Decisions

The Most Important Thing: Uncommon Sense for the Thoughtful Investor

This book distills the knowledge Howard Marks has gained throughout his highly successful investment career. Marks founded Oaktree Capital Management in 1985, and today his investment firm is the largest global manager focused on distressed assets, with USD 125 billion in assets under management.

His memos to clients, sent periodically for over four decades, stood out for the depth and originality of their insights, written concisely and candidly. Warren Buffett has said that these memos are the first thing he opens and reads whenever he receives one. As an example of his style, we highlight a paragraph from a letter sent in 1990:

“Simply put (…) in equities, if you can avoid losers (and losing years), the winners will take care of themselves. I believe most strongly that this holds true in my group's opportunistic niches as well — that the best foundation for above-average long-term performance is an absence of disasters. It is for this reason that a quest for consistency and protection, not single-year greatness, is a common thread underlying all of our investment products.”

"The Most Important Thing" is a fascinating collection of essays by Howard Marks on investment philosophy. Structured in 20 chapters, it revisits principles that should be basic to any investor, but which are often recklessly ignored in the pursuit of quick and easy gains.

Vale destacar que Marks escreve com a propriedade de um investidor que começou “do zero” e acumulou uma fortuna estimada em USD 2,5 bilhões, entregando um retorno médio superior a 17% ao ano por várias décadas.

Uma tradução do livro será lançada no dia 15 de dezembro deste ano com o título em Português: “O Mais Importante para o Investidor: Lições de um gênio do mercado financeiro”

Whether you're an experienced investor or just starting out, we believe the books above will offer valuable lessons and a good dose of fun. Without further ado, enjoy your reading!