So it would seem strange that I would pick up quite a few business books to read next. Well some of them are peripherally related to my job so I thought it was my duty to do it. Some of them I've read before and enjoyed, and some came with extremely high praise and I thought I'd give them a shot.

This is a painfully bad book. Nassim Nicholas Taleb's observations are completely trivial, lacking any depth and conclusion whatsoever, and it takes you a while to understand that this book is not about randomness and the way the human brain is easily fooled when interpreting information.
This book is about Taleb himself - one huge ego trip and at the end impossible to read.



The basic solution is on the cover of the Hitchhikers Guide to the Galaxy. Don't Panic. But there are other nuances; some expected and some surprising. Did you know a 6 year old has a better chance of surviving in the wilderness than a 12 year old? The risky situations presented here are all man against nature. People capsizing in boats, getting stuck on mountain tops, getting lost in the wilderness. But you can see how the same rules apply to any risk situation which is why some view this as a business book. Or specifically a asset management handbook.
I consider myself extremely low risk when it comes to my life. I have no desire to get on a motorcycle. No desire to go skydiving. But having read this book there are a few times where I probably took some unnecessary risk. Mainly involving wilderness outings. Part of the message here is people get into these risky situations very innocently. It's hard to assess the risk of something you are not familiar with. And therefore survivors generally become hyper aware when outside their comfort zone. Recommended reading.

What is particularly interesting about this book is that it is a good primer on what happened recently. In fact both events took place in August. The anatomy of a credit crunch involves a number of ingredients but the events are generally the same. Leverage, a belief that past events foretell future events, and a transition from one market environment to another (in both cases one of low volatility transitioning to one of high volatility). One other ingredient for this kind of failure is the asymmetric rewards offered by Wall Street. If you knock the ball out of the park you can become rich. If you don't you will be viewed as a laggard but you own't lose your own money. It makes sense to go for the home run because even if you eventually go belly up, you've made your money. You get rewarded for good performance but you aren't penalized (monetarily) for bad performance. Even the partners of LTCM quickly created and funded new funds.

The other problem I have is that his approach is 'fundamental' or that it is based on researching the business behind a stock. How it makes money, etc. I find this dangerous compared to the Little Book (above) approach because you can really get hammered using this approach if you are not really really careful. Enron looked like a great stock. Is the average investor savvy enough to go through the 10K to understand what SPEs are? Most of Wall Street wasn't. But some were. What about something as simple as understanding movements in deferred revenue and accounts receivable? Identifying the potential of 'channel stuffing'? Changes in Allowance for Doubtful Accounts? NOLs rolling off which changes the tax structure? If you don't know what I'm talking about then be very skeptical about your ability to pick stocks. The Little Book is prescriptive and intuitively appealing. Ultimately if I wasn't getting free financial planning I would either hire someone or focus purely on allocation and rebalancing via ETFs or index funds.

But the gist of the book is this. To identify a good fund requires time. Because there are so many funds it is highly likely over the course of a short time period that many funds will do better than the market. So you need 10 years or so before you can identify a consistent winner like Peter Lynch. But by the time that has occurred Peter Lynch may not be with the fund anymore. Or other things have changed like the aspect that made the fund successful is copied by many others (this kind of happened with LTCM). Or the market dynamics have changed from a period of growth to a period of value. So by the time you identify a good fund it may be too late.

There's a part of me that refuses to believe this story has an bearing to reality. I just can't believe that many people on Wall Street are that dumb and that driven by ego and emotion. I think people from the outside would expect that behavior from Wall Street but there are clearly smart people here. If this is the way the KKR deal went down I hope that isn't how things happen nowadays. But perhaps it is. Whenever someone out bids someone else for a companym the media portrays that bidder is the 'winner'. Shit I could go buy some piece of junk company right now and pay $100B and I would 'win'. How does that make me a winner? I just lost. And lost big. Maybe this is how deals go down now, but it's scary if it is this way.
The second thing about this book that is slightly annoying is the persistent moral high ground the authors espouse: "deals are bad", "breaking up companies is bad", "LBOs with junk bond financing are sketchy". A lot of weird views that you wouldn't expect from a pair of Wall Street writers. Basically RJR was about as fat as a company could be. Tons of corporate jets and lavish spending on the most ridiculous promotional events. Shareholders were getting hosed. Someone buying them out and firing the workers (especially the CEO) was the best thing to happen to that company. It's amazing they didn't go bankrupt. Good book but scary at the same time.

I was just out in San Francisco and had the opportunity to chat with a guy who worked at Drexel just before they went belly up. He said they each had their own supermodel assistant that would take their dry cleaning in and pay their bills and do their grocery shopping. This was to remove all errands in the average employees day, so they could focus on work. They were writing $1 billion of junk bonds every day and getting paid a huge commissions. Every senior partner in that firm is a billionaire according to him. It was, as he said, "Disneyland for adults".
What isn't good is insider trading. Which is really what the problem with Drexel and Milken is all about. The junk bond business was basically brilliant. For all practical purposes they held a monopoly on junk bond trading. They were smart. But not smart enough to get away with activities the SEC views as criminal.
This is one of the better business books I've read. It doesn't get caught up in emotion or prosthelitizing. It's also interesting to see Rudy Guiliani earn his chops as US Attorney, the prosecutor for Milken and Boesky. I still love this book.
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