How to Read Books in a More Efficient and Effective Way: Get a Kindle

“In the case of good books, the point is not to see how many of them you can get through, but rather how many can get through to you.”

―Mortimer J. Adler

“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. You’d be amazed at how much Warren reads–and at how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.” 

—Charlie Munger

The Knowledge Project: Interview With Professor Sanjay Bakshi

In the third episode of the Knowledge, Shane Parrish talks to Professor Sanjay Bakshi on reading, mental models, worldly wisdom, checklists and investing. The interview starts with a conversation about Professor Bakshi’s reading habits, and how the way he reads has changed, from reading physical books to now reading most books on his Kindle device.

To listen to the interview, click here. To read the transcript, click on the image below or here. Transcripts are provided for all podcast interviews, and available via signing up for a membership over at Farnam Street. This particular transcript was made available to Professor Bakhi’s readers for free to download via his blog Fundoo Professor.

Takeaways: Reading on a Kindle

Here are a few takeaways from the discussion (excerpt below from transcript):

• Start reading books on a Kindle and reduce your physical library and free up space
• Reduce paper waste
• New possibilities with the Kindle, for example search for the books you’ve read and the underlinings made in an easy way
• Underline stuff and write your own notes, and they get synced to the cloud, and once they’re in the cloud you can copy and paste
• Kindle doesn’t have any eye-strain
• Some books not available electronically, so will still have to read them physically

A Discussion About Reading Habits

I appreciate that. I definitely have— my bookshelves are starting to overflow, so it’s getting to be a bit of a problem.

How can I persuade you to get into Kindle then? [laughs]

Actually let’s talk about the Kindle vs the physical book. What do you prefer and why? And how do you use that?

Well, I used to prefer the original one, of course, because you can underline; you love the smell of the paper; and you have nostalgic associations with the physical book, which looks like you have read it, which you lose when you do it on a Kindle. But over time, I realised that these are prejudices that should be let go of, because there are other things that are possible with the Kindle, which are not possible with the physical book. And for me, as a professor, it really helps me to be able to know that I’ve read this somewhere. The kind of associations that occur in memory as you experience something – you know that you have read about this particular aspect in some book, but you don’t know which one. And if this was all with physical books, you would go crazy looking for that book. But if you just do a search for a term across all your books in your Kindle library, it comes up in a flash.

And the interesting thing is that you sometimes discover things that you didn’t know existed – the serendipitous discovery of wonderful words of wisdom about a certain topic in your Kindle library is amazing, and when that happens, I have my eureka moments. And the other reason I love Kindle is that you can underline stuff and write your own notes, and they get synced to the cloud, and once they’re in the cloud you can copy and paste, and use them for your lectures. It’s very helpful, so I’m very grateful to Amazon. And of course it’s environmentally friendly: you don’t have to waste paper.

Do you read exclusively on the Kindle now?

Yes, I like to but only for books. Of course there are annual reports, and there is a lot of wisdom in annual reports of businesses that I like to study, and those you don’t get on Kindle. I don’t like reading on computer monitors – it’s very strenuous to the eye. Kindle, therefore, is much better because it doesn’t have any eye-strain. Then, of course, there are letters written by investors that are not usually available on Kindle. So I read on Kindle any book that it is available on Kindle. Some books are not – then you have to buy the physical ones.

You’re a prolific reader, so do you—

About 5% of what you are!

[laughs] Do you notice a difference in what you retain when you’re reading on the Kindle, or your takeaways from the book, in terms of how your brain is storing or organising? There have been a lot of studies that say that reading on a screen and reading a physical book impacts your memory in different ways and how you make connections and associations.

Sure, that’s true. But I think there’s a trade off here: you might retain more when you read a physical book, and a bit less on the Kindle, but that’s offset by the fact that you are creating a document in the cloud which contains the best things you have read in a book, the ones which influenced you the most; because you have underlined them, and sometimes the underlined portions of a book span many pages. And all of that gets synced to the cloud, and when you work on that particular passage again in the context of something that you’re trying to evaluate, then all of that comes back. So in a sense I think there is a trade off here: while reading in a physical book you get to underline physically, and you may have a moment of reflection and write things on the side, you can do that on a Kindle as well. So net-net, I don’t feel the loss of memory, compared to using a physical book.

So what’s your process for reading? You purchase a Kindle book, you get it to your Kindle… take me through how you read, in terms of are you reading one book at a time; are you reading multiple; do you put it aside at the end and then go back to it; or do you immediately take your notes out?

Well, I don’t like to read one book— maybe I will read 3 or 4 books at any given point of time, and when I finish them I’ll pick up another 2 or 3 books to read. One reason is you get kind of bored reading the same thing, the same subject. And based on what Charlie [Munger] says, you should have a multidisciplinary mind-set. So it’s good to have different books from different disciplines and read them. And then one of the amazing things that I discovered is that you then associate one thought with another one. And that really is helpful to me. So far as note-taking is concerned: I underline stuff on the fly, as I read it. And once the book is over, I go back on the cloud and take out what I had underlined in that particular book, whatever notes I had, whatever annotations are there. I put them in a different document, and then I let that be.

Because I have already studied the underlined text a second time, in a sense, I have done a second reading of the things that I like the most in that particular book. And then I let that be, to reside in my memory for some time. And then when I experience the world out there and there is a moment when I remember that there is something that relates to something that I read somewhere, then I can always go back to the document and be able to pull out whatever is useful.

So you have a different document for each book?

Not always. But I have a master document because once you have it in the cloud, you can always copy and paste any annotations, any underlined text for that particular book, in a different document. I do that for some books, though not all of them.

That’s a really good way to do it. Do you use Evernote or anything?

I do, I use Evernote; that’s been helpful to me. I use other tools like The Brain, which is a wonderful piece of software available.

What is that?

It kind of replicates what a human brain does. It helps you create thoughts, and it helps you connect different kinds of thoughts. And you can put your emails in it, and you can put your sound files in it, any kind of document in it, and then you can look at any particular topic from the perspective of a thought. So you have all these thoughts which are connected – and this is exactly how the human brain works. New associations are created. So when you’re looking at The Brain screen, and your actual brain is thinking about those associations, new associations get created. So in that sense, it’s an external brain that is working for you, and the size of which keeps on growing – it’s virtually infinite; you can keep on adding stuff to it.

I have been thinking about getting a Kindle for a while now, and also received some great feedback via Twitter on the subject. So, yesterday I ordered my first Kindle, and I hope to get it by next week so I can start trying out whether reading on a Kindle is of any value .

Feel free to share your own experience from reading on a Kindle versus reading physical books, note-taking etc in the comment section below.

Additional Reading

• How to Become a Better Reader, Rational Walk
• Effective Note-Taking, University of Reading

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

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Sanjay Bakshi on Checklists

“Knowledge is power.” —Francis Bacon

Knowledge is Power, and Farnam Street is the Street where Warren Buffett Lives

Farnam Street’s The Knowledge Project is Shane Parrish’s podcast where he “interview[s] people from across the globe to deconstruct how they think, live, and connect ideas. The core themes will seem familiar to Farnam Street readers: Decision Making, Leadership, and Innovation.”

In the third episode of the Knowledge, Shane Parrish talks to Professor Sanjay Bakshi on reading, mental models, worldly wisdom, checklists and investing.

To listen to the interview, click here.

To read the transcript, click on the image below or here.

Transcripts are provided for all podcast interviews, and available via signing up for a membership over at Farnam Street.

Checklists: Sanjay Bakshi’s Wisdom

One of the subjects discussed by Shane and Sanjay in the interview is checklists. In his answer to Shane’s question Sanjay elaborates on how to think about checklists.

[Shane Parrish] And for Charlie, and for you, you can probably just mentally go through this list. How do you feel about checklists, or how do you make sure you have thought about things from— it seems like ever since Atul Gawande’s book The Checklist Manifesto there’s been a movement not only in the value investing community, but a movement in hospitals, a movement to go back to—maybe the airlines are doing something right: maybe the low fatalities and the very methodical approach to things has an advantage. How do you make sure that you’re capturing all the mental models that you have? And bringing them to bear on a particular problem?

[Sanjay Bakshi] When you think about checklists, I think what you’re trying to do is to reduce your rate of error. And there’s a trade-off here. I think what Atul Gawande has done – he’s done a marvellous service to civilisation by giving us a framework for how to reduce error. And it doesn’t have to be domainspecific. It could be flying a plane, as he talks about in Chapter 1 in that book. It could be about running a hospital operation. It could be also be about running an investment operation.

But all of that is focussing on how to reduce error. But that’s just one aspect of it. Because reducing error is not always the most optimal thing to do. You also have to be creative. If you’re going to be creative, you’re going to make mistakes. If you look at any business which has been innovative, you’ll find that they have made mistakes. So there are two things here: you need to have the framework to create insights, which means you need to have a creative mind-set, which means that you should be willing to experiment, and sometimes make mistakes. At the same time, when you’re actually making big decisions, you also need to have a framework to reduce error. I think Atul Gawande’s work, and the movement that he has created that you are referring to, deals very well with that aspect. It doesn’t deal at all with the idea that you want to be creative. You need both. You need to have the ability to have unique insights. And you also need to have the ability to reduce your error rate.

Relevant Links

• Farnam Street
• The Knowledge Project
• Sanjay Bakshi’s Blog

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Case Study: Accounting vs. Economic Profit at GEICO

“Our calculus is different: We simply measure whether we are creating more than a dollar of value per dollar spent — and if that calculation is favorable, the more dollars we spend the happier I am.” —Warren Buffett

Accounting vs. Economic Profit: Acquisition of New Policy Holders

Sanjay Bakshi has written about Warren Buffett’s views about the decisions relating to customer acquisition costs for GEICO. Bakshi refers to an interview with Tom Russo “where he talked about the logic of Buffett’s decision to lay out large sums of money to acquire new, likely to be profitable customers for GEICO, even though such actions would severely penalise near term earnings.”

In this interview Tom Russo gives some insight as to how to think about the short-term earnings impact from acquiring additional policy holders, versus the change in intrinsic value (emphasis added).

When Warren Buffett bought GEICO, the company had something like two million policyholders, and Berkshire’s belief was that they were the best insurer in the country. So why should they have a bigger than two percent market share? And the answer was that every new policy that they put on the books reported losses to the firm of $250 of operating losses: reported losses at least when they would sign up for those new policies. And of course at the same time because of high persistency and because of the great business model of GEICO the net present value of each new insured was $1500. So when it was a separately run public company, GEICO was constrained by not being able to take the steps to grow the business optimally because they had to report a $250 loss for every new insured and they kind of measured their growth in the modest pace. Once it came inside of Berkshire, Warren who doesn’t really care about reporting profits, he was delighted to take steps that could increase the firm’s net present value by adding new policy holders even if it meant that in the year of acquisition, he showed more losses. And you have seen as anybody who has inhabited the earth over the past two decades would have seen this extraordinary life of lizards and cavemen and other forms of spokespeople for Berkshire’s GEICO division and they cost a lot of money. His advertising budget went from $30 million to $950 million over those years. And yet the number of insured went from two million to 10 and with $1500 NPV for every new insured customer the value was around $15 billion. Berkshire did that in part because they were permitted to suffer the report the losses of the first year of and celebrate the NPV gains that they picked up. That is one example how Berkshire showed the value of this approach.

In the table below, I have visualized the two scenarios that Geico faces when deciding whether or not to acquire an additional policy holder. The short-term effect is an expense of $250, that will lower reported earnings for the fiscal year in wich the policy holder is aquired. The short-term impact is negative when looking at the accounting profit for the year. But, the long-term effect is just the opposite, since in this case adding a new policy holder results in a net present value (NPV) of $1,500, i.e. the economic profit that adds to Geico’s intrinsic value.

First-Level vs. Second-Level Thinking

When I read the text above about the short-term P&L impact from acquiring a new policy holder, versus the long-run value creation that adds to the business’s intrinsic value, I came to think of Howard Marks and his mental models first- and second-level thinking. It looks like the Geico acquisition case above fits right into these models.

Let’s refresh our minds, and start with Howard Marks description, from his book The Most Important Thing, about what separates first-level thinking from second-level thinking.

Howard Marks answers the question “What is second-level thinking?” by giving a few examples, among them this one:

• First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”

Marks then goes on to explain the two different ways of thinking.

First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.”

Second-level thinking is deep, complex and convoluted. The second-
level thinker takes a great many things into account:

• What is the range of likely future outcomes?
• Which outcome do I think will occur?
• What’s the probability I’m right?
• What does the consensus think?
• How does my expectation differ from the consensus?
• How does the current price for the asset comport with the consensus view of the future, and with mine?
• Is the consensus psychology that’s incorporated in the price too bullish or bearish?
• What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

Geico: From a Second-Level Thinking Perspective

From the Geico policy holder acquisition case above, we could formulate our own rules as:

• First-level thinking says, “The company’s earnings will fall; don’t acquire any/or too many new policy holders in a certain fiscal year.” Second-level thinking says, “NPV for each new policy holder signed up is $1,500; acquire additional policy holders as long as the NPV for every new policy holder is positive.”

Let’s end this post with another Buffett quote worth remembering.

“Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.” —Warren Buffett

References

What GEICO’s Customer Acquisition and Associated Costs Taught Me about Business Economics, Management Quality, and Valuation (by Sanjay Bakshi)

Guy Spier on Checklists for Investors

“A checklist is a way of managing your own mind and guarding against your own proclivities, so it needs to be based on this kind of self-awareness.” ―Guy Spier, The Education of a Value Investor

Investment Checklists and Surgeons

In The Education of a Value Investor Guy Spier discusses the subject of checklists, and how to develop and use them in investing. This is the main subject of chapter 11―An Investor’s Checklist: Survival Strategies from a Surgeon. Spier shares some of his own insights and his view of checklists as a tool to prevent investors from making mistakes.

What’s the Use in Using an Investment Checklist?

Let’s consider a few points before moving on, to get a quick refresher on the subject of investment checklists, and why a checklist could serve you as an investor good in your investing process.

All quotes below are taken from Guy Spier’s book as referred to above.

Who? An investment checklist for you yourself as an investor.

“…it’s important to recognize that my checklist should not be your checklist.”

What? An investment checklist containing broader categories (“including themes such as leverage and corporate management”) made up of individual checklist items (such as “has this management team previously done anything self-serving that appears dumb?”).

“…design checklist items that would help to prevent us from repeating […] mistakes.”

When? As a tool to be used before we make a final decision to buy or not buy into a certain business.

“Before pulling the trigger on any investment, I pull out the checklist from my computer or the filing cabinet near my desk to see what I might be missing.”

Where? As an integral part of your ongoing investment process, and as a tool in your business analysis and investing.

“The checklist is invaluable because it redirects and challenges the investor’s wandering attention in a systematic manner. I sometimes use my checklist in the middle of the investing process to deepen my understanding of a company, but it’s most useful right at the end as a way of backstopping myself.”

Why? Minimize the probability of permanent loss of capital. Our mind sometimes plays tricks on us and we better watch out and do our best to mitigate these so-called biases (or heuristics) that affects our decision making. As Warren Buffett once said: “Rule No. 1: Never loose money. Rule No. 2: Never forget rule number one.”

“The brain is simply not designed to work with meticulous logic through all of the possible outcomes of our investment decisions.” 

“The goal in creating a checklist is to avoid obvious and predictable errors.”

“…the items on [pilots’] checklists are designed to help them avoid mistakes that have previously led to plane crashes. In investing too, the real purpose of a checklist is to serve as a survival tool based on the haunting remembrance of things past.”

An Investment Checklist as a Way to Avoid “Cocaine Brain”

Spier talks about a certain problem, a mental state that he refers to as the “cocaine brain” and explains as…

“…the intoxicating prospect of making money can arouse the same reward circuits in the brain that are stimulated by drugs, making the rational mind ignore supposedly extraneous details that are actually very relevant. Needless to say, this mental state is not the best condition in which to conduct a cool and dispassionate analysis of investment risk.”

To keep it simple. Each checklist item you chose to put up on your checklist, you include for one reason, and one reason only. That is, to avoid the cocaine brain mental state, and to make your best effort in trying to make sure not to break the two rules mentioned above by Buffett.

Checklist Items: The Warren Buffett Way

The Oxford Dictionaries defines the word “Checklist” as:

A list of items required, things to be done, or points to be considered, used as a reminder. (Source: Oxford Dictionaries) 

As any checklist, an investment checklist is often made up of individual checklist items, that together constitute broader categories, that in turn form the checklist as a whole. Let’s look at an example to see what these broader categories may look like, by looking at a well-known quote from Warren Buffett taken from his 1977 letter to shareholders, where he lays out four things that he looks for in a business (emphasis added).

“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term.  In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”

The quote above contains four points (or broader categories): 1) an understandable business, 2) favorable long-term prospect, 3) honest and competent people, and 4) an attractive price. For each one of these points one needs to determine what factors (individual checklist items) to consider to be able to reach a conclusion. Another quote from Buffett could give some advice on what to look for when evaluating management (emphasis added).

“Passion is the number one thing that I look for in a manager. IQ is not really that important. They need to be able to work well with others and the ability to get people to do what you want them to do. I’d say intelligence, energy, integrity. If you don’t have the last one, the first two will kill you. All you have is a crook who works hard. If a person doesn’t have integrity, you want them dumb and lazy.” (Source: Buffett FAQ)

And how could you find the information you need to make a judgement call like this? Again, let’s turn to Buffett for some advice (emphasis added).

“Almost everything we learn is from public documents. I read Jim Clayton’s book, for example. There is adequate information out there to evaluate businesses. We do not find it particularly helpful to talk to managements. Often managements want to come to Omaha to talk, and they come up with all sorts of reasons, but what they really hope is that we become interested in their stock. That never works. The numbers tell us a lot more than the managements. We don’t give a hoot about anyone’s projections. We don’t want even want to hear about it.” (Source: Buffett FAQ)

Checklist Items: A Few Examples from Guy Spier

In the book Spier gives a few examples of different kinds of checklist items in connection to different case studies that he goes though to show the reader the reasoning behind how he derived the items in question.

To put each checklist item below in the proper context, I urge everyone to check out Spier’s book and to read each of the case studies. In this post I will just briefly quote the questions as examples of what a checklist item could look like.

The first case study called “The Man Who Lost His Cool” is about the author’s investments in different for-profit education companies. Here the reader gets two checklist items that seem to belong in the corporate management category.

CHECKLIST ITEMS

“Are any of the key members of the company’s management team going through a difficult personal experience that might radically affect their ability to act for the benefit of their shareholders?”

“Also, has this management team previously done anything self-serving that appears dumb?”

The second case study is called “A Tortuous Tale of Tupperware,” and it’s about the Tupperware Plastics Company. This investment turned out to be a failure, and a failure that failed slowly. The reason? Because “…there was too much competition, and the high price of its products had become a serious obstacle to growth.” In this case, Spier concludes that he “…failed to ask the most obvious question: does this product offer good value for money?” Spier further concludes that “This misadventure taught me an invaluable lesson: I want to invest only in companies that are a win-win for their entire ecosystem.” With ecosystem Spier refers to “the value chains.”

CHECKLIST ITEM

“Is this company providing a win-win for its entire ecosystem?”

In case study number three “What Lies Beneath?” Spier goes on to discuss his investment in CarMax―“the Wal-Mart or Cotsco of secondhand cars.” CarMax business is heavily dependent on the company being able to provide its customers with financing, since without financing customers won’t be able to buy a car. In other words, debt markets was (and is) of utmost importance for CarMax’s business model. So, what happened? The financial crisis happened, and customers were not able to obtain the credit needed to buy a car, and as a result sales dropped and the stock price dropped too.

Spier’s greatest insight from his CarMax investment was that the “…situation taught [him] how critical it is to discern whether a business is overly exposed to parts of the value chain that it can’t control.” 

CHECKLIST ITEM

“How could this business be affected by changes in other parts of the value chain that lie beyond the company’s control? For example, are its revenues perilously dependent on the credit markets or the price of a particular commodity?”

The fourth, and the last, case study is “How I Lost My Balance.” This case study is about a food company called Smart Balance (since renamed Boulder Brands), and about the author’s “narcissistic hubris” that led him to pay too high a price for the business.

CHECKLIST ITEMS

“Is this stock cheap enough (not just in relative terms)?”

“Am I sure that I’m paying for the business as it is today—not for an excessively rosy expectation of where it might be in the future? Does this investment satisfy me psychologically by meeting some unmet personal need? For example, am I keen to buy it because it makes me feel smart?”

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.