The art of profitability

by PlanMaestro

I am a better investor because I am a businessman, and a better businessman because I am an investor – Warren Buffett

This book review is a lot about me, and at the end you will find a book and how it inspired me. I will not try to sell you that nonsense that my story can help others. I just felt that my journey overlaps with the story, and since I know myself pretty well and want to know myself better, I thought they complemented well. So please, if you do not like too many I’s and me’s just skip them and go directly to the book review.

Some of us have followed the roundabout way to become an investor. After three years in the investment department of a small insurance company (two people, the CIO and myself) I decided that it was more fun to learn about good businesses and not just to invest in them. I have had enough of dealing with brokers and their nonsense pitches, fund managers high on themselves while copying each other, and internal politics with a focus on outcomes instead of processes. In summary, I was not learning much.

So enough! Time to know about good businesses and how to run them. So I cashed my investment profits and moved to the US to study an MBA. Some of you will laugh at that thought but it sure started a fun journey.

If I ran a business school there would be only two courses: how to value a business and how to think about markets. No modern portfolio theory, no beta, etc. – Warren Buffett

Most of you will realize that Warren Buffett is clearly thinking on chapters eight (Mr. Market) and twenty (Margin of Safety) of the Intelligent Investor in that quote. It is also clear that he made that comment for effect: his target was the foundations of modern finance.

Having had the fortune and misfortune of also completing an MBA, I think the quote focused so much on that very deserving target that it missed the mark on other aspects of an MBA and of being an investor. First of all, even for an investor I would add at least three courses to that curriculum

  1. How to find good, cheap and safe ideas? (Greenblatt and K. Fisher, also competing for worst book title ever)
  2. How do I manage a portfolio of ideas across the credit cycle? (Lynch and Klarman)
  3. What can we learn from history? (Kindleberger and Livermore)

Because for an investor reaching a certain size or managing other people’s money, net-nets are not enough. The framework stands, but he should also become a good sociologist, risk manager and historian.

But even more, the output of business schools is not supposed to be investors but businessmen (not that they are doing it). These are some of the things a businessman should know:

  1. What is a good business?
  2. How good businesses start, grow and decline?
  3. How do you reinvigorate a business?
  4. What is good management?
  5. How do you manage a portfolio of good businesses?

And of course, negotiation, motivation, networking, all that soft stuff …

This is a different journey, from economist, passing through historian, entrepreneur, sociologist, and finally becoming … an investor. This knowledge is a good fit to the basic investor arsenal, as Buffett hints on that initial quote, and is usually learned over time. Others, like me, decided to learn it at the beginning and realized at the end that there was more about investing that you thought.

So being a sui generis investor let me suggest a book from this other path. A book that I am almost sure you have never heard before. A book that tries to answer that first question: what is a good business?

The Art of Profitability was written by Adrian Slywotzky a management consultant VP of Mercer (firm that I think changed its name to Oliver Wyman after the merger). Maybe for these reasons, the book carries the consultant sins of trying to put new names to known things, being self promotional and somewhat condescending in parts. But if you look beyond those flaws, you will find an honest and inspirational effort on teaching how to learn about profits and good businesses. And if you can believe this former management consultant, Slywotzky is very good.

  • Its focus, while teaching all these business models, is in the process of learning and how to inspire a newcomer.
  • It is not your usual dry checklist of what a good business is, like Porter’s Competitive Advantage, but a list that can be added, combined and transformed.
  • Provides a fantastic list of business cases and books on a wide range of subjects to explore the limits on how to create profits. And I assure you, no matter how experienced you are, you will learn a trick or two.
  • Inspires not only to read a second time Sam Walton’s Made in America, but also a third and a fourth.
  • Made me realize that I may have known pretty well Berkshire Hathaway as a business but that I had missed Warren Buffett the investor. Believe it or not
  • It emphasizes the importance of measuring things while avoiding being more precise than necessary (Cuánto!)
  • Can be a good reference book to be reminded of the simple but not simpler in business, side by side to Updegraff’s Obvious Adams.
  • It asks more good dumb questions than it answers.

In short, it is the sort of book that starts a new learning journey. Go and read those first six pages of the prologue in Amazon. If you get hooked, believe me that the rest of the book is much better. And by the way, the first time I heard about Graham and Dodd was in the The Art of Profitability

You must think independently and you must think correctly – Graham and Dodd