Book Reviews
June 25, 2020

Pender’s Summer Holiday Reading List – June 2020

Written by PenderFund

Building a Business

Felix Narhi – The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, Jim McKelvey

Tony Rautava – The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers, Ben Horowitz

Business Evaluation

Don Walker – Valuation: Measuring and Managing the Value of Companies, by McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels

Investing Philosophy, Process & Best Practice

Felix Narhi – The Essays of Warren Buffett: Lessons for Corporate America, Warren E. Buffett

Human Behavior

Maria Pacella – The Person and the Situation: Perspectives of Social Psychology, Lee Ross and Richard E. Nisbett

Macro Factors

Kenndal McArdle – Owning the Earth: The Transforming History of Land Ownership, Andro Linklater

David Barr – The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care, Eric Topol MD

Parul Garg – Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable, Mark Gilbert

Amar Pandya – The Fifth Risk: Undoing Democracy, Michael Lewis

Emily Wheeler – Money of the Mind: Borrowing and Lending in America From the Civil War to Michael Milken, James Grant

Victoria Zhang – Digital Transformation: Survive and Thrive in an Era of Mass Extinction, Thomas M. Siebel

Lukasz Darowski – Against the Gods: The Remarkable Story of Risk, Peter L. Bernstein

Biographies

Sharon Wang – How to Live: A Life of Montaigne in One Question and Twenty Attempts at an Answer, Sarah Bakewell

Tracy Tidy – The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company, Robert Iger, Joel Lovell

Other

Felix Narhi – Dignity: Seeking Respect in Back Row America, Chris Arnade

Geoff Castle – The Plague, Albert Camus

Rolf Dekleer – Rebooting AI: Building Artificial Intelligence We Can Trust, Gary Markus and Ernest Davis

Building a Business

Felix Narhi
The Innovation Stack: Building an Unbeatable Business One Crazy Idea at a Time, Jim McKelvey

This book was written by Jim McKelvey, the less well known cofounder of Square (NYSE:SQ). Jack Dorsey, who is also the founder of Twitter (NYSE:TWTR), is the more famous cofounder. I initially picked this up to learn more about Square, a new Pender holding bought during the COVID-19 market dislocation. What I found were inspiring stories about entrepreneurship and plausible theories about what it takes to build resilient, world-changing companies that go well beyond just Square. Square was originally launched to find digital payments solutions for micro merchants – the market segment of very small business owners that were all but ignored by the incumbent giants, Visa and Mastercard. Square’s initial success and rapid growth soon attracted the attention of Amazon who also aggressively entered the market. And surprisingly, failed. The idea for this book came when McKelvey wanted to find out why Square was the only start up ever to survive a full-on attack by Amazon. Square’s survival was especially fascinating because it did not do anything special in response to Amazon’s entry into their markets. Remarkably, despite very hard-hitting tactics, Amazon made little headway and eventually just gave up. Why was Square the modern-day David that beat Goliath? McKelvey’s thesis for its resilience revolves around the company’s “innovation stack”, or the series of new innovations that is interrelated, dependent upon and reinforced by the others. Sure, Amazon could copy an idea or two from Square. But unless it was able to copy them all, it was very hard to displace Square from the new innovative payments solutions it was pioneering. He “tests” his thesis by comparing his experience at Square to a few other founder-led and industry-defining companies like the Bank of Italy (which became Bank of America), IKEA and Southwest Airlines. These are all interesting stories which he cites as proof that his theory does not only apply to technology companies. This new “innovation stack” mental model might be particularly interesting to those learning about companies expanding into “blue oceans”, or new markets with unmet needs. As a bonus, the author has a great sense of humour which made the reading breezier.

A favourite passage: “Customers new to a market hold few preconceptions, which is one of the great benefits of massively expanding an industry through innovation. Your new customers learn how to participate in the market from your way of doing business. This is a powerful advantage that influences your innovation stack and competitive position.”

Tony Rautava
The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers, Ben Horowitz

The Hard Things About Hard Things is about the journey of Ben Horowitz as he embraced the struggle of building technology companies. He provides the backdrop to how he began partnering with other founders through his VC firm Andreesen Horowitz. This book analyzes war stories and extracts the wisdom and practical takeaways that are applicable to building companies, particularly high growth technology companies which operate in very fast-moving markets. The author shares his lessons learned that differentiate between peacetime leadership where a company is expanding market share and wartime leadership where a company is pivoting for its survival. Insights on organizational design and process are also shared with application being dependent on the stage of the company.

Much of the insight in this book is all about people. Deep respect for the founder CEO role is reinforced throughout the lessons documented in this book. Intelligence, logic and courage are highlighted as qualities of leaders able to make great decisions. The author reflects how his most important decisions as a founder CEO tested his courage. This book highlights how hard and rewarding the company building process can be.

Business Evaluation

Don Walker
Valuation: Measuring and Managing the Value of Companies, by McKinsey & Company Inc., Tim Koller, Marc Goedhart, David Wessels

After reading a couple of other books written by McKinsey consultants, I was waiting for the latest edition that came out in May. Although this book was originally written nearly 30 years ago, the principles of what value creation is and how to measure it remain the same today. The authors do a great job of breaking down where value creation comes from and the rest is just noise. The book takes an academic approach to analyzing a company and its management but presents real life examples which make it relatable and easier to read. It was a great reminder that the business economics need to be there in order to really be adding value. There are so many businesses today being rewarded for getting bigger and, in many cases, they are not really creating a lot of value. I have read many books on this topic before, but this would definitely be the best.

Investing Philosophy, Process & Best Practice 

Felix Narhi
The Essays of Warren Buffett: Lessons for Corporate America, Warren E. Buffett

I often get asked what investing books I might recommend. It is no secret I am a huge admirer of Warren Buffett and his partner, Charlie Munger. Aspiring investors could do worse than trying to learn from two of the world’s most accomplished long-term investors. There are countless book written about Buffett and his investment methodology. But why not just go back to the primary source material instead? Especially when Buffett is widely considered an exceptional writer and communicator? Buffett’s annual letters to Berkshire shareholders are probably the single best primer about sound business and investment principles. Granted, if one has not already done so, it is intimidating to consider reading all of them from 1977 and onward. Besides, plenty of things are irrelevant today, such as some accounting standards that have changed. However, the good news is that Cunningham has compiled a condensed version of his most of the timeless wisdom and rearranged them by important topics in Buffett’s own words. Its like reading the Coles Notes of 50 years of wisdom from Buffett. Most books are not worth reading even once, while some books are worth reading a single time, or in part. However, a few rare books are worth reading and rereading. This is one of them. I highly recommend it if you have not delved a lot into Buffettology. Even if you have, consider giving it another reread from time to time.

A favourite passage: “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find: Most high-return businesses need relatively little capital. Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.”

Human Behavior

Maria Pacella
The Person and the Situation: Perspectives of Social Psychology, Lee Ross and Richard E. Nisbett

Current world events have led me to reflect on human behaviour and how we all, leaders included, are reacting. The Person and the Situation challenges the notion that character traits largely dictate how we react in a given situation. It’s not that simple. In fact, maybe it is a source of our biases. The authors discuss three principles as the foundation of this topic: 1) the power and subtlety of situational influences, 2) the importance of people’s subjective interpretations of the situation, 3) the need to understand both individual psyches and social groups as tension systems or energy “fields” characterized by an equilibrium between impelling and restraining forces. An oldie, but a goody, and Malcolm Gladwell, in the foreword, says helped shape his view of the world. And who doesn’t have time to read a psychology book during a pandemic?

Macro Factors

Kenndal McArdle
Owning the Earth: The Transforming History of Land Ownership, Andro Linklater

This is a simple title and concept: “Owning the Earth”, but we do not often think about the massive effects the concept of land ownership has on the fabric of our society. In this book, Linklater lays out the history of land ownership across multiple civilizations and draws compelling conclusions on how our laws, political systems and social norms are all traced back to this unassuming concept. The conversations around wealth inequality and political division make this a timely read as the majority of North America’s household net worth is tied to land or real estate. Sapiens was the first book to educate me on how influential legal systems are in our society and I hope to further educate myself on this concept this summer.

David Barr
The Creative Destruction of Medicine: How the Digital Revolution Will Create Better Health Care, Eric Topol MD

Our investment team has spent a lot of time over the last few months looking at industries that have faced disruption as a result of the global pandemic. We’re not looking for areas where there are new ideas popping up, so much as for companies in existing markets that have been pushed forward or have benefited from a tailwind as a result of the changes we’ve seen. No industry comes to mind more than healthcare and its delivery. I read The Creative Destruction of Medicine a couple of years ago when it first came out. I recently picked it up again to reread it and, interestingly, we have seen increased adoption of a lot of the trends that are discussed and this could potentially lead to some interesting investment opportunities.

Parul Garg
Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable, Mark Gilbert

Complicit helps us as investors better understand leverage crises. The book extensively covers past stories of leverage bubbles that have popped up in many sectors of capital markets. The author, a Bloomberg columnist, showcases some of the symptoms of market activity when credit bubbles grow. In the Lalaland of greedy markets, credit spreads can get stretched tight, covenant quality decreases, every issuance is oversubscribed. Everything circles around income statement projection while totally ignoring the balance sheet. Moreover, rating agencies become reluctant to even provide a negative outlook. But in a crisis, the same participant becomes your worst enemy, and even the most liquid balance sheet is frowned upon as bad credit. The book also highlights the mis-timed measures taken by central banks, which time and again ignored the possibility of asset inflation converting into a bubble. The most interesting part of the book touched base on the Bail Out decisions of the 2008 crisis, and possible outcomes from different permutations and combination scenarios.

Mark Gilbert backs his views in the book with lots of data and facts and highlighted a very detailed understanding of what usually leads to a crisis. Overall, it’s a short, interesting book to read if anyone wants a quick refresher on past crises.

Amar Pandya
The Fifth Risk: Undoing Democracy, Michael Lewis

Michael Lewis is an exceptional storyteller with the gift of taking relevant, interesting but complex stories and simplifying them in an enjoyable, conversational style read without diluting the substance. In his latest book The Fifth Risk, Lewis tackles how the US government, through its various departments whose functions are unknown, underappreciated and misunderstood.  In fact, they protect, maintain and improve their citizens’ way of life. The scope of these departments and agencies; the role they have in the day-to-day lives of Americans and the impact they have had on the developments in science, technology and innovation is substantial. With recent discussions about defunding and eliminating many of these departments, the book highlights their value and the disaster which could occur if these offices did not exist or were not sufficiently resourced to support the government and its people. Lewis explores these issues, not through the ideology that currently plagues our civil discourse between right and left, liberal and conservative, but, rather through the contrasting government departments themselves and their goals of either selflessly serving for the greater good or being self-interested in the pursuit of power. An insightful read in the current pandemic where reliance on government has become critical to navigating the economic, health and social challenges we are facing.

Emily Wheeler
Money of the Mind: Borrowing and Lending in America From the Civil War to Michael Milken, James Grant

James Grant is the Editor of Grant’s Interest Rate Observer – a publication on financial markets that he founded in 1983. On the publication’s website, they mention that they “peer into the future with an historian’s knowledge of the past”. This book invites us to do the same. Written in 1992, it looks at what precipitated the “wild and woolly” days of the 1980s. At the beginning of the book Grant quotes Freeman Tilden whose words summarize the journey as follows: “The whole progress of the legislative attitude toward the debtor, from the Roman republic to the present day, has been steadily, though with occasional backward lapses, toward making debt easier to incur, lightening the burden of carrying and softening the consequences of default”. Tilden however wrote this during the great depression and Grant felt it not only summed up history but prophesied what was to come. “If, in the early decades of the century, it was impossible for a working man or woman to secure a loan from a legitimate lender, in the 1980s he or she could hardly refuse one”. The book takes us through a period when the most conservative banks of the day did not accept accounts under six figures, lent only to strong American corporations (not individuals) and were subject to “double liability” where the bank owners, not the taxpayers were liable for a bank’s failure. According to the book, it wasn’t until the 1920s that City Bank (forerunner to Citigroup’s Citibank) for instance, started to make personal loans. A stark contrast to the period outlined at the end of the book when “every important Texas bank went bankrupt or was merged or required assistance from the federal government” and even an 11 year old named Tommy Mullaney (after having returned home from summer camp in 1990) was issued a MasterCard in his name with a $5,000 line of credit. This latter time period, as James Grant characterized it, was “a bull market in credit, and credit is the money of the mind”.

Victoria Zhang
Digital Transformation: Survive and Thrive in an Era of Mass Extinction, Thomas M. Siebel

This book addresses several of the existential technological threats that all companies face today. This year has been unlike any other, and the world is transforming at an incredible speed. This book is timely reading. In the book, the author describes in detail the four core aspects of digital transformation – cloud computing, big data, artificial intelligence and the internet of things, with concrete examples. What’s interesting about the book is that Thomas compares the business world with the biological world, where bursts of evolutionary change – mass extinction of species – occur from time to time. Mass extinction occurs more frequently with revolution: 2.4 billion years ago, 75% species went extinct; 446 million years ago, 86% species went extinct; 250 million years ago, 96% species went extinct. Similarly, the average life of an S&P 500 company was 60 years in the 1950s and is less than 20 years today. Companies that don’t harness digital transformation will face this existential risk. This book is recommended, especially for the C-suite, as “Get ready, or you’ll miss the boat”.

Lukasz Darowski
Against the Gods: The Remarkable Story of Risk, Peter L. Bernstein

The last six months are characterized by volatility, uncertainty and, as a consequence, risk. This book is an exploration of the role and perception of risk in society, throughout history. The author suggests that our ability to measure and manage risk is key to modern civilization. Our capacity to use probability to predict what may happen in the future gives us an advantage in the face of uncertainty. What I found especially fascinating was the importance that both the introduction of the Hindu-Arabic number system and the concept of zero had on counting and calculating, but more importantly, the abstract modes of thought it cultivated. This book helped me to understand that in the face of uncertainty, it is important, if possible, to use reason, and to replace assumptions with calculations.

Biographies 

Sharon Wang
How to Live: A Life of Montaigne in One Question and Twenty Attempts at an Answer, Sarah Bakewell

Today we are living in a world with unprecedented uncertainties. Questions like “how to get along with people”, “how do we deal with violence”, “how do you adjust to losing someone you love” are all versions of a bigger question, “how to live” and arise more often during these unsettling times. I feel I was lucky to come across this book. It is an unconventional biography of Michel de Montaigne, famous French philosopher and writer most well known for his Essays. The author did a fantastic job of intertwining “historical biography, literary essay and witty self-guide” all together to illustrate Montaigne’s approach to those questions and what we can learn from him. Put into the author’s words “The twenty-first century has everything to gain from a Montaignean sense of life, and, in its most troubled moments so far, it has been sorely in need of Montaignean politics. It could use his sense of moderation, his love of sociability and courtesy, his suspension of judgment, and his subtle understanding of the psychological mechanisms involved in confrontation and conflict.”

Tracy Tidy
The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company, Robert Iger, Joel Lovell

The Ride of a Lifetime, chronicles Robert Iger’s 45 year journey, including his 15 year role as CEO of Disney, where he oversaw Disney during one of the most transformative times in its history.  Early on, he set three strategic priorities which have guided him throughout his tenure as CEO: 1) Create high-quality branded content; 2) Embrace technology; and 3) Become a truly global company. The combination of these three strategic priorities culminated in the Disney Plus platform.  It is a fascinating narrative of the acquisitions of Pixar, Marvel Entertainment, Lucasfilm and 21st Century Fox. It’s interesting because the Investment Team at Pender has recently been discussing the challenges of acquisitions, in particular the difficulty in trying to integrate two very different cultures. Iger however presents a different point of view. Of his acquisition of Pixar he said, “Pixar needs to be Pixar” … “If we don’t protect the culture you’ve created, we’ll be destroying the thing that makes you valuable”.  What Iger imparts on the reader is that it was the personal components in all those deals that was going to make or break them. Throughout his narrative, culture and people are a common thread. From his very first interview with the Board he said, “ … my goal is for Disney to be the most admired company in the world, by our consumers and our shareholders and by our employees. That last part is key.” Iger shares the knowledge and leadership skills he’s gained and reminds us that the tone that is set by the leader has a tremendous effect on the people around them.

Other

Felix Narhi
Dignity: Seeking Respect in Back Row America, Chris Arnade

David Barr recommended this book to me as we were packing up our offices to work from home due to the pandemic. Arnade was a successful Wall Street trader who became disillusioned with his profession and decided to try to better understand the issues of those hit hardest by the great recession of 2009. He recounts his first-hand conversations and experiences across America on his journey of learning and self-discovery. The book is also filled with vivid photography of the wide variety of people he meets along the way. He paints an empathetic portrait of America’s poor, drug-addicted, and forgotten – both urban and rural, blue state and red state, black and white and everyone in between. The view from the “back row” is much more different than those of us living on the “front row” can imagine. It is jarring and not for those faint of heart. There are no answers here. As someone who has lived life from a relatively privileged “front row” perspective, it became clear I knew much less about this topic than I previously thought. Some sensible sounding solutions from the “front row” that I would have supported (prior to reading this book) would have almost completely missed the mark. On the other hand, there are good support networks and organizations that really make a difference, which were counter intuitive to me. It’s not a book I would have naturally gravitated to, but I am thankful Dave suggested it because it really made me re-examine my thinking about this important structural issue. It seems particularly timely given the recent unrest around racial inequality in the US (and much of the rest of the world).

A favourite passage: “The walks, the portraits, the stories I heard, the places they took me, became a process of learning in a different kind of way. Not from textbooks, or statistics, or spreadsheets, or PowerPoint presentations, or classrooms, or speeches, or documentaries – but from people. What I started seeing, and learning, was just how cloistered and privileged my world was and how narrow and selfish I was. Not just in how I lived but in what and how thought. This was a slow and shocking revelation to me, one I kept trying to fight.”

Geoff Castle
The Plague, Albert Camus

Recently I reread my copy of Albert Camus’ The Plague that I received as a gift from my delightful, bohemian aunt, Sarah. Auntie Sarah, rest her soul, reveled in shocking the family by such exploits as growing marijuana in her Hammersmith back garden and once married a young Turkish artist who was half her age in order to prevent his deportation. Given the recent events, Camus’ classic novel underscores the timelessness of the challenge that now exists with COVID-19. Camus, an Algerian ex-pat in France, writing in the 1940s, probes human emotion and explores the range of reactions to an outbreak of a bubonic plague like illness that sweeps a North African city. From the selflessness of the doctor and volunteers fighting the plague, to the crass profiteering of the smugglers, the inhabitants of the town produce the wide range of reactions to crises that we see today. Also considered an allegory for the experience of France under Nazi occupation in WWII, The Plague is at the intersection of philosophical thought and historical interest, while at the same time telling a story that relates directly to many of our current struggles.

Rolf Dekleer
Rebooting AI: Building Artificial Intelligence We Can Trust, Gary Markus and Ernest Davis

There is a lot of hype about Artificial Intelligence (AI). This book unpacks what’s real and what’s aspirational. The authors are two highly regarded AI experts. Gary Markus was previously Director of AI Labs at Uber (he has a PhD in cognitive science). Ernest Davis is a professor of computer science at New York University and one of the leading scientists on common-sense reasoning for AI. In spite of the authors academic credentials, this is a very readable book and highly recommended for anyone interested in the field.

Rebooting AI explains why computers can win games like Jeopardy!, chess and Go – the ability to  process massive amounts of training data. The use of AI in medicine is a good example of what AI is well suited to. AI systems for radiologists have access to databases of millions of chest x-rays and patient outcomes. An AI database doesn’t forget anything, so a diagnosis made from an x-ray decades ago will be as fresh in the AI’s memory as one taken yesterday. Radiologists are humans and humans forget things. Databases don’t. There is a quote that’s worth repeating: “AI will not replace radiologists, however, radiologists that use AI will replace radiologists that don’t use AI”.