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What Morningstar Fund Analysts Are Reading

Here are a few current recommended readings from Morningstar’s manager research team.

Morningstar manager research analysts form an eclectic bunch, including a world-renowned Shakespeare scholar, a New Testament theologian, and a former Big 10 English professor. They also include momentum junkies, Graham/Dodd devotees, and indexing true believers. Here are a few of their current recommended readings and other picks.

John Rekenthaler, Vice President of Research

  • I, Claudius; Robert Graves
  • Thinking, Fast and Slow; Daniel Kahneman
  • Eichmann in Jerusalem; Hannah Arendt

The first is just for fun. The Daniel Kahneman book is the best behavioral book I have read. Kahneman painstakingly and honestly details how mental errors are made, including plenty of his own. The book is noteworthy for its honesty and willingness to challenge customary authority, if the facts seem to go that way.

Hannah Arendt's book famously challenged customary authority as well. She was supposed to write that Eichmann was a monster--but she did not see it that way. She went with where the facts seemed to take her. She paid an enormous price for that. Many of her friends cut off her for life when the book was published. Never talked to her again. She was publicly vilified for the rest of her life. It can be tough to call 'em as you see 'em.

Ben Johnson, Director, Global ETF Research

  • AQR’s Cliff Asness, Antti Ilmanen, and Thom Maloney tackle the topic of market-timing.
  • A letter from Oaktree Capital Management's chairman Howard Marks. As it turns out, second-level thinking might not only be the key to investment success, but also to being a winner in weekly fantasy football leagues. 
  • Barry Ritholtz’s latest Bloomberg View column is about our collective fondness for stories (most recently the Valeant and Theranos stories) and the trouble this causes us as investors. Per Ritholtz: “Everyone loves a good story. The problem as we have seen time and again is that these stories can kill your portfolio and your returns.”
  • The Motley Fool’s Morgan Housel and his wife have just had a son. Housel shares his financial advice with his little one (which is easily applied to kids of all ages) here.

 Laura Lallos, Senior Analyst, Equity

  • Date-onomics: How Dating Became a Lopsided Numbers Game; Jon Birger

Date-onomics is financial journalist Jon Birger’s investigation into why college-educated women are less likely to marry than they used to be. The sexual revolution and feminism are the kinds of explanations generally offered, but Birger argues that it comes down to basic math: The female/male ratio on the typical college campus is increasingly skewing toward female and now approaches three women for every two men. Birger explores the social ramifications of this shift, such as the demise of dating, now replaced by a “hook-up culture” on many campuses, and the effects among Mormons and Orthodox Jews, where the ratio is similarly skewed. He even offers an appendix of statistics that suggest practical solutions for a young woman who wants to better her chances of marrying a college-educated man--according to the data, attending Rensselaer Polytechnic Institute and moving to Wyoming are both good bets. This is a well-supported, fun read that provokes exploration of other issues, such as whether our education system is somehow shortchanging boys.

Jeff Ptak, Head of Manager Research

  • The Martian; Andy Weir
  • The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment; Guy Spier

One is the story of irrepressible hope, resolve, and ingenuity in the face of daunting obstacles. The other’s a meditation on the paradox of human irrepressibility--how our compulsion to achieve through action can pose the greatest threat to our success. One looks outward--way outward--to the forbidding Martian landscape, on which its science-geek hero finds himself marooned. The other turns deeply inward, exploring the mysteries of cognition and behavior and how we can adapt to make better decisions. Separated by about 140 million miles, The Martian and The Education of a Value Investor improbably share the same fondness for terra incognita, be it the red planet’s arid soil or the brain’s folds. And for all of their metaphorical distance, they’re both gripping tales of duality--mind over matter, impatience and forbearance, panic and calm--that should hold relevance galore to investors.

Few academic concepts in the investing world have been as readily adopted as active share. AQR's Andrea Frazzini and Jacques Friedman take the other side with their piece on Deactivating Active Share.

Vanguard may be best known as an indexing juggernaut, but it also has some of the largest--and most successful--actively managed equity funds in the industry. Here, it discusses some of the keys to that success. Spoiler: Costs still reign supreme.

Kevin McDevitt, Senior Analyst, Equity

  • The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy; James Montier

GMO’s James Montier gives a succinct introduction to some of the major behavioral pitfalls to investing, such as bias, emotion, and overconfidence. Examples throughout the book illustrate how much we rely on our emotions and intuition when trying to predict the future, and how wrong those predictions can be. His tactics to overcome these hazards are practical and worth repeating: Avoid decisions based on emotions. Be as dispassionate as possible. Be skeptical of your abilities.

Patricia Oey, Senior Analyst, Equity

  • The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention; William Rosen

I picked up this book from the Morningstar library because I enjoy learning about turning points in history. While the book is about the industrial revolution, the key point William Rosen makes is that England became the birthplace of machines thanks in part to its laws and institutions, which allowed individuals to own their ideas (as property), and profit from them. As a manager research analyst, I cover many emerging-markets funds. Many of the ideas from this book--the importance of rule of law and strong institutions as a foundation for a dynamic economy--provide some context from which to understand why certain emerging markets are able to move in a general upward direction, while others continue to struggle decade after decade. 

Linda Abu Mushrefova, Analyst, Alternatives

  • Superforecasting: The Art and Science of Prediction; Phillip Tetlock and Dan Gardner

Phillip Tetlock is renowned for introducing the idea of dart-throwing chimpanzees beating the experts, and he makes the key point that no innate skills separate the “superforecasters” from just average forecasters. Ultimately, he believes anyone can improve their skills given enough practice. Tetlock postulates that, while we cannot predict the future with certainty, we can improve our accuracy quite substantially.

Alec Lucas, Analyst, Equity

  • Capital Ideas: The Improbable Origins of Modern Wall Street; Peter Bernstein
  • Capital Ideas Evolving; Peter Bernstein

In his tribute to the late Peter Bernstein (1919-2009), The Wall Street Journal’s Jason Zweig said: “I regarded Peter as the philosopher-king of Wall Street, the man who had read everything, knew everyone, and had thought longer and deeper about the hardest puzzles than anyone else.” Capital Ideas and Capital Ideas Evolving trace the intellectual origins and history of Wall Street’s most important concepts and influential thinkers from the late 19th century up to the global financial crisis. The books are both accessible and engaging. Without drowning readers in mathematical formulae, Bernstein treats numerous topics central to investing: the predictability of stock prices, Modern Portfolio Theory, efficient markets, option pricing, derivatives, and behavioral finance. In each case, Bernstein grounds his discussion in the development and implementation of these ideas. For example, he describes how Harry Markowitz’s 14-page article “Portfolio Selection,” published in 1952, gave birth to Modern Portfolio Theory and related notions, like William Sharpe’s Capital Asset Pricing Model in 1964, but that these breakthroughs were confined mostly to academia until the 1973-74 bear market caused Wall Street practitioners to begin taking notice. Attentive readers will also see how Bernstein’s thinking evolves on issues like the advisability of tailoring portfolios for different types of investors as well as the viability of rational models to describe investor behavior. In the end, though, one’s own understanding is sure to evolve and be enriched most of all.

Shehryar Khan, Analyst, Canada

  • The Snowball: Warren Buffett and the Business of Life; Alice Schroeder
  • Investing: The Last Liberal Art; Robert Hagstrom

An almost mythical aura surrounds Warren Buffett. The Snowball humanizes him, while at the same time highlights the drive that allowed him to become the world’s greatest investor. The book follows his early years--“the cigar butt phase”--and how building capital and meeting Charlie Munger helped him go from buying mediocre businesses at great prices to buying wonderful businesses at fair prices.

Robert Hagstrom's book tries to answer the question: Is it better to be a one-trick pony or a jack-of-all-trades? The book reinforces the notion that having a good understanding of the world from different perspectives--as opposed to a singular, focused expertise--can help you be a better investor. It is worth the price for the references section alone.

Janet Yang, Director, Multiasset

  • Jiro Dreams of Sushi; David Gelb
  • The Book of My Lives; Aleksandar Hemon
  • On Writing: A Memoir of the Craft; Stephen King

David Gelb’s documentary of Jiro Ono ostensibly covers a three-star, Michelin-rated sushi restaurant located in a Tokyo subway station; it’s a compelling watch on that level. But it’s also a meditation on work, craft, and mastery--topics all very applicable to the research process, and probably lots of other industries as well. An unyielding work ethic and disciplined repetition underlie Jiro’s success--the day that he accepts his Michelin award, for instance, he’s back in his restaurant serving sushi that night.

The day-in and day-out job of manager research analysts is to get the investment call right, but analysts in many ways are also just writers telling the story of an investment. In that sense, I found it useful to read Stephen King and Aleksandar Hemon--arguably masters of very different genres. King gives aspiring writers hope: While he believes good writers can’t be made great, competent writers can be made good. His tips--read a lot, write a lot, use few adverbs--aren’t revolutionary, but they carry weight coming from a writer with hundreds of millions of book sales to his name. Hemon’s autobiographical book doesn’t offer any additional clues for moving from good to great writing. However, his stories show how voracious reading and dogged writing practice allowed him to conquer the improbable task of writing fiction in his non-native English, as well as to earn both MacArthur and Guggenheim fellowships.