FNArena Book Review: Uncommon Sense

Book Reviews | May 27 2019

FNArena book review: Uncommon Sense. Investment wisdom since the stock market's dawn by Michael Kemp.

By Rudi Filapek-Vandyck

"After reading this book you'll begin to see just how close CNBC is to the Comedy Channel".

The quote is from Scott Pape, otherwise known as The Barefoot Investor, who wrote the foreword to Uncommon Sense. Author Michael Kemp served as a researcher for The Barefoot Investor, hence the connection.

It is clear from the very first pages of the book, author Kemp is a finance nerd, a passionate investor, a driven, meticulous researcher, a scholar of financial history. And he's sharing his knowledge through an abundance of quotes from and references to books he has read, intertwining personal observations and experiences along the way.

The ultimate goal is to show the reader that nothing is flawless when it comes to investing. Whether one tries to calculate a "value" for a stock, or to follow a certain strategy, including practicing technical analysis, ultimately nothing is perfect, no matter how long people have sat on it, tried to fine tune and improve, used it for hundreds of years; it doesn't matter, everything is flawed.

The author's advice is thus to question everything, understand the imperfections, and so become a better investor.

I have to admit, despite the erudite eloquence on display, not to forget the passion for finance and the knowledge of history, it took me quite a while to warm towards the author's intentions in Uncommon Sense. Not in the least because going through all the variations of establishing a stock valuation or a thought-out strategy means there is massive overlap with other books and publications on the subject of investing.

Of course, the flipside is that if you don't read as much as I do, you might find Kemp's book is the ideal encyclopedic reference point for everything that's available in the toolkit of a modern investor today. Apart from questioning everything, including investment gurus and experts like the author himself, the next step would then be to find what suits best and here Uncommon Sense can certainly provide background and context.

Maybe, viewed from this angle, Scott Pape's foreword is right when it suggests reading Uncommon Sense will slim down your future reading list, because you by now realise there is a lot out there that simply is not worth pursuing. This in itself could prove of invaluable value. Go Michael Kemp!

Some readers might find it disheartening to find out that, after reading through four centuries of investment history, the author leads the reader to the conclusion there is no holy grail for successful investing. Learning how to put a value on stocks certainly helps, and so does a thorough understanding of how financial markets operate.

Like so many in the industry, Kemp is a deeply entrenched Warren Buffett admirer and he goes all-in in the final chapter of the book, which -surprise, surprise- leads to the conclusion that placing too much emphasis on trying to calculate the value of a company or its shares is, simply put, grossly overrated.

The idea that value is everything according to the Buffett way of researching companies and making investment decisions at Berkshire Hathaway is a broadly held misunderstanding, it turns out, and backed up by Kemp's own interviews and personal experiences with staff working for Buffett. It leads to the following observation that, no doubt, will upset quite a number of value-oriented investors:

"The simple truth was that he saw my question as placing far too much emphasis on the valuation calculation, as if it were the key to the whole process. It isn't. There's a lot more to the valuation process than the application of a formula. That bit happens right at the end of the process and takes up but a fraction of the time.

"It reinforced that all the books I'd read on stock valuation were nothing more than red herrings. None of them held the key to success. They were overrated and excessively complex."

Post Buffett-revelation, Kemp no longer obsesses about finding the one formula that reveals all in terms of stock specific valuation. But what then does Buffett do? He understands business models, reports Kemp. "Because what else are we buying when we buy shares but businesses?"

Uncommon Sense. Investment wisdom since the stock market's dawn by Michael Kemp, John Wiley & Sons Australia, 348 pages, ISBN 9780730324249 (print) or 9780730324256 (ebook).

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