February 28, 2010

Who says Elephants can't Dance: Louis V Gerstner, Jr.

I would have laughed at myself a few quarters back if someone told me to read this book. I have never shown any interest to books on consulting, change management, culture etc etc. So books like Blue Ocean Strategy are a strict "no-no" to me. It is difficult to understand and we complicate these issues so easily with charts and theories (for god sake) and importantly have intellectual discussions surrounding the same. I am not in for it and the testimony to it would be me ranked one of the lowest in my class in HR subjects (not that I was a topper in other subjects).

So when I was sitting in the airport having reached few hours earlier than required and having a book which is interesting but long and time consuming, I saught for a change wondered around the three book-stores (next to each other in this airport having near similar books!) and saw this book. Not particularly keen as I knew this book had great reviews but was a stratrgy kind book. Quite recently, I had laughed at my colleagues who reads such book (including this one specially) but can implement very little in his own work sphere. However, the other choices at this book shop was equally poor so I landed up buying it. Not expensive but definitely worth a try.

Two hours into the flight and one hour at the lounge I completed half of this book, totally hooked: damn impressive writing. The late evening nearly full flight was dark inside as there was probably less than 10 lights switched on: one was mine. As I completed my relieving formalities in my old job, I could not complete this for the next few days though I was yearning to have it completed. I completed today and man, was I not impressed.

Honestly, one cant really believe that a company like IBM could be in such a mess. Having worked in three places, one really understands that negative bueracracy exists: it is painful but it is created across time and coming out it is difficult. However, this is IBM and when I came to understand the true value of this company it was in the early 2000, when everything was all right, everything had changed for the better.

The problems that he had faced, the changes he tried to bring (market share and customer focus, defocus the organisation existing internal issues and bring in a totally new culture, and finally the importance of cash flows) is all the book emphasises. Importantly, there are no HR theories or consultancy jargons/flow charts/ diagrams. The focus has been on simpler issues and he addresses them in even simpler language.

I would want everyone to read this book and I have to definitely read this book again probably in a years time from now. I have not written anything serious in this blog as I am still yet to understand the importance of them in full and would want to give sometime before I throw some more light.

I would end this blog with one of his paragraphs asked in his job placement interview from campus when he was deciding between two companies (McKinsey and P&G).

The following question was from P&G:
"Lou (the author), let's suppose it's Friday night and you are about to leave the office when you get the latest Nelson report (market-share data for consumer packaged-goods companies). It indicates that you have lost two-tenths of a point of share in the last month in Kentucky. Would you cancel all of your activities for the next day, Saturday, and come to the office to work the problem?".

What is your answer?

December 28, 2009

Indecent Exposure: A True Story of Hollywood and Wall Street

Well, that is what the heading states and honestly, it is a book that one can skip. Surprisingly, this has a good rating by "amazon.com", something that I truly value. This book is a combination of a board room drama and acts of forgery committed by one person. People who have read 'Barbarians at the Gate' and 'Once in Golconda' should be able to relate the story.

Few comments that I felt making it less inspiring to read that being advertised, my primary reason for purchase.

It has been elaborately written, if anything, much more than required. It was like reading first half of Barbarian at the Gate, which was quite a drag compared to the second. The board room struggle is something that one can really understand. This book, at best differs on one aspect. The management is at the defense unlike most other books where the board is kept in the dark. However, this goes to the other extreme. One does feel that the protagonist deserves some sympathy, after the ordeal he goes through. However, the author painfully reconstructs the scenario, most of which am sure are hard to get, but largely serves little purpose.

The degree of crime involved is hardly anything to speak of: less than 100,000 dollars, largely being petty thefts.

The book finally attempts to tell that it broke a wide spread scandal in Hollywood. However, after having read it, there is nothing substantial that warrants such a claim.

Anyways, my suggestion. Read this book when you are free and you should be able to complete the book in about two days. It is a bit expensive so re-think before buying it.

December 24, 2009

A Demon of our Design

My first book after an extended study vacation that probably served no purpose to me. The book essentially tries to answer a simple question: Why is every new crash create larger impacts given that markets attempt to become more complex and strive to become efficient in its attempt to reduce impacts? To answer this, the author discusses many things mentioned below and the role played by hedge funds. He argues that merely blaming these funds as a cause for all disasters do not serve any purpose.

First, He does argue beautifully albeit in an elaborate manner, why added complexity serves no purpose: the possibilities of a mistake, as minor as it can seem, can lead to a big disaster. Adding layers to reduce disasters serves no purpose. The steps that preceded the disaster of Chernobyl and Valujet. I was really wondering why the author was spending such a large amount of time discussing the obvious point. It was an important point anyways.

Second, he argues for simple financial structures given that they have non-linear payoffs, the complexities that gets added due to globalization. He correctly assesses the risks of having MTM instruments, something that we saw in the current crisis.

Third, he advocates low leverage and consequently lower liquidity leading to lesser crash impact

The definition and importance of hedge funds was explained in a fair detail but one can clearly sense a bias on that one. Discussion on reducing inefficiency in the market, playing a vital role of providing liquidity to the market, transferring risk etc.

There is a good discussion on the functioning of a good fund: how much money can be played when information hits the market, importance of understanding how money is moving, continuous flow of information and how they are absorbed in the market, driving factors for investing in a specific stock and more.

There are some discussions for people who are interested in derivatives. However, I found that segment relatively unexciting. Overall I don’t think one really misses too much if one does not read this book. Hence, I would say…read it when you are really short of books on hand.

One of the good lines to take from the book: John Merriweather, “The hurricane is not more or less likely to hit because more insurance has been written. In financial markets, this is not true. The more people write financial insurance, the more likely it is that the disaster will happen because the people who know you have sold the insurance can make it happen.”

October 25, 2009

This is a book that has been written by Philip Fischer, the author of the most famous book, "Common Stocks and Uncommon Profits". I did google at Landmark, where I bought the book, to check if it was worthwhile buying. The reviews were not that great compared to his other book. Took it anyways...and agree with the reviews.

His son, Ken Fischer, has written an awesome "foreword" to the book which summarises his views in a very unbiased manner.
Yet, I took a chance but I should say I am only half satisified with the decision.

The first section of the book is brilliant and the last was a complete disaster. Lets start with the positives. The book was written in the 60's, a time where depth of research was not that advanced as what it is today. Hence, some of his insights have still withstood the strengths of time. The frst half of the book is all about that while the second half discusses some traditional industries where he sees attractiveness and the reasons to invest in the same. This was probably more for a research report being read and I had to run through some of these sections. Finally, some chapters are probably less relevant and explains the nature of the investment industry at that time.

This section highlights some of the few important things that I found interesting. They are mostly known to all of us but one needs to appreciate the times at which these were written.

Inflation: " Because under the economic system we have established, the seeds of inflation sprout not in times of prosperity but in timesof depression. About 80% of our federal revenue is derived from corporate and indicidual income taxes. The basic source of federal funds is notoriously sensitive to the level of general business. It shrinks sharply on even moderal downturns in the general economy." Government supports through anti-cyclical measures at a time when reveneus are down sharply.

Inflation and interest rates: To curb expected inflation and the subsequent measures taken by various participants in market (businessmen, consumers and speculators) interest rates are hiked. This act prevents the act of overstocking, which inturn stokes inflation further. He explains this pretty well under two conditions : when capacity utilisation is nearing 100% and when below 100%. How it impacts inflation differently and how it postpones investment decision leading to further problems. His solutions are pretty weak (giving low interest loans to reduce strain) and probably, at best , a distant dream.

Stock price movement: What does cause stocks to rise in value are two things that are rather closely interrelated: 1) One is the increase in the a strock's earning power. 2) The other, and usually the more important, is the consensus of investment opinion as to the future course of that earnings power.

In other words "Why does a stock sell at a certain price at a certain time? It is not because of what it is doing, has done or will do. It is because what the mojority of those investors who are actually or potentially interesed in this stock think it will do".

Selling an overpriced longterm stock:
Any possibility that the really unusual stock may be temporarily overpriced should not be the least inducement towards causing an invesor to sell that type of security. There are just too many changes that 1) the expected price reaction will not occur 2) if it does, the investor will wait for still lower pricesand will not get back until the stock has again climved to even higher levels 3) by the time the reaction does come the stock will have continued to climb so much that at its coming bottom it willbe still be above current prices.

Psychology and economic forecasts: The author makes an interesting comment on investors who rely heavily on economic forecasts to fall in two buckets. Cautious and eternal optimists. Cautious rarely take advantage of opportunities while eternal optimists who can always find a favorable forecast to satisfy themselves always.

"The are of common-stock investment has changed radically over the past fifty years. However, human nature en masse in relation to its attempt to make profits through buying capital assets does not change at all."

Metgers and acquisitions
The author dwelves in depth on mergers highlighting the following important facts on the same.
  • Three main sources of dangers for management and shareholders: 1) Struggle for top management 2) Top management getting involved in new problems previously not encountered reducing their efficiency 3) Buyers is less aware of the problems than the seller
  • Backward integration rarely involves a sizeable risk (cost reduction and efficiency programs) compared to a forward integration as the latter will start competing with its own customers and the loss benefit ratio can be skewed.
  • Small acquisition may not be value destructive but can be extremely value accretive
  • Acquisition of similar lines of companies is more attractive and companies should selectively acquire and not be in the business of acquisition
Management: If a poor management has long been in control, the greatest attrition is usually in the junior executive ranks. Younger men of ability will drift away to places where opportunity for promotion is greater and where new ideas and suggestions for doing things better will be welcomed rather than frowned upon.

Overall, the book has its own strengths and weakness. It is lengthy discussing sectors, impact of government decisions, impact of institutional investors, choosing investment managers, most of which were attempts to address the issues of that time.

I would say it is an excellent book with a few disappointments.

October 19, 2009

Manias, Panics and Crashes

After two very good books over the last two months, this one came as a disappointment relative to the ones read earlier. Written by Charles Kindleberger and Robert Z Aliber (for the latest edition), this is the fifth edition for the book.

The premise of the book revolves around examining the causes, impact and timing of past manias, panics and crashes. The book gives an exemplary analysis till World War II taking history back to 1700's to produce his point. Having first published in 1970's, the latter editions of the book looks at the Asian and Japanese crisis and to some extent on the tech crisis. Overall, the author gives a commanding and documted explanation to such events and how they tend to repeat themselves across crisis. The author has documented the crisis pretty well and has more importanly linked them impressively: expansion of credit, onset of crisis, burst, international ramifications and policy responses.

If anything, I like this one the best when he explains crisis:
"There was a dramatic increase in the flow of funds from these countries (Asian crisis countries) to the United States that contributed significantly to the increases in the prices of US securities; US residents who sold secutiries to foreign residents then used a very large part of their sales receipts to buy other securities from other US residents. The prices of these US securities increased further; in turn the sellers of these securities used most of their sales receipts to buy other securities from other US residents. The money became like the proverbial 'hot potato', passed from investor to investor at ever-increasing prices."

The book has its flaws too. 1) There is excessive repition in the book which kind of overemphasises the point and kind of gives a feeling that the author is thrusting his opinion upon you, which you have to accept. 2) Since the world has changed a lot, I kind of got lost of the relevance of many things. I do understand that crisis happens every time mostly with the same reasons but in different forms. However, the world has undergone significant change pre and post world war. 3) The book is very slow and is definitely not a page-turner. The layout of the entire book is well done but it could have been shortened much more.

Overall, this book too is Wiley's classic. Has its own merits and flaws. I dont think one would be lost by not reading this book and hence one can definitely skip it.

One should go to Landmark, Chennai. They have a fabulous offer of hardbound books at paperback prices. I picked up two books though was not keen of reading one of it in the first place "The Age of Turbulence" by Alan Greenspan. The other one is a Wiley's classic "Paths to Wealth through Common Stocks" by Phil Fischer. It has not got great reviews but need to see why is it bad.

October 05, 2009

The Panic of 1907: Lessons learned from the Market's Perfect Storm

Wow! Back to back awesome books. Just a nice little thing about availability of books. This book and the one that I am just reading was something that I have been searching for over a year. I would have atleast asked three bookshops from where I normally buy my books but all replied last year that were no copies available in India and one had to buy them from abroad. However, two weeks back I see a "heaps" lying all over the place at one of these places. Today publishers have become a lot more intelligent willing to give customers books that they need. I should be lucky to see a crash in stock markets and subsequent references made by many leading analysts comparing these crashes from a historical perspective forcing publishers to publish these outdated books. There are a few drawbacks too. The current book is not the exact reproduction of the earlier book. The publisher has comfortably added one chapter to give a newer perspective to the public, which kind of gives a feeling that you are being cheated of given a tampered book and probably overcharged for no reason.
Being a fast reader has its own advantages and disadvantages. There are so many times when I have wished I could slow down my reading to enjoy the few finer moments that the story is evolving into. Alas, it never happens. The same thing happened to me in this book too. This book restricts itself to only that one year "1907" and I was just coming off from reading "The House of Morgan", where surprising this section was dealt in lot less detail but yet discussed. Given the speed at which I normally read, I could not understand how important certain events played out during the crisis of 1907.
Today, I take a lot of things for granted.
Credit and availablity of capital: Today, being in the 21th century, and having witnessed one of the worst credit and liquidity crisis, I was never too concerned of countries falling into this trap for a long time. But imagine in 1907, there is no central bank to direct (barring Mr. Morgan himself). There are so many fall-back mechanisms that central banks have which was not available and importantly no GOLD standard. Honestly, moving out of these standards bring better flexibility on controlling money supply.

Bank falling like nine pins: Again, look back at reactions which we do today compared to what was happening 100 years back. Imagine seeing your bank going bankrupt and along with it goes your life savings. There are no central bank nor any government body that is insuring your services. That was life then. No guarantee on your money. The run on banks are faster leading to complication of an otherwise economic downward spiral. 1907, was a banking crisis and failure of one bank saw the sharp drop in customer confidence leading to sharp runs on banks. Non regulated entities like trust companies might have created the problem, but a lack of central bank was highlighted in this crisis and finally needed the help of Mr Morgan to unlock this crisis.

Promoter holding and control on lending: When I look at RBI and look at the single investor holding norms, voting rights, lending to group companies and more importantly lending to sensitive sectors, we should take our hats off. These were something that experiences tell us are important and critical things to understand else it can create havoc to depositors.

A perspective of any book is that it helps bring the drawback of another book. I thought the "House of Morgam" gave me a lot of insights into the life of Morgans. However, there was very little that was negative in this book. There are times when I saw a few exchanges made by Morgan and his partners, that they were living in darkness, hoping for things to become allright.

I can go on and on... The authors writing is unique, fast paced with little required to imagine/understand. Issues and implications of certain events are not only unfolded well but emphasised with due respect giving readers an opportunity to weigh the importance of these events. Imagine, there was a time when New York city found it difficult to raise ~USD 30 mn.

August 10, 2009

The House of Morgan

I was lucky to have stumbled into this book a couple of months back. The conversation revolved around the new book for "The House of Dimon" and my colleague discussed that the "House of Morgan" is an interesting book that he has heard of. Luckily one of the older and small bookstore near our office had this book. It took me somtime to read this 720 page book that discusses the house of Morgan till 1990. It broadly has been divided into three sections according to time: Baronial, Diplomatic and Casino Age.

Baronial Age:

The life of J P Morgan has always remained a mystery, probably because of very little official records that are online that can be read by all. This book unravels his life remarkably. The origin of the bank, the authority of Junius Morgan (J P Morgan's father) and himself and later, his son has been dwellved in the right depth and detail. The author finally sums up his role in the world of banking very well. His contribution of saving US during the Gold crisis (similar to what happened to India in 1992), his saving of the stock exchange collapse and New York in 1907, and the enormous trusts (Shipping and steel trusts) he created helped him to pretty much rule the world and lend a voice that no country/President could afford not to hear. Here are some interesting titbits / thoughts:
  • It was interesting that "Titanic" had a very remote role in his life

  • His life was similar to Ellsworth Toohey. Enormous power and voice that could help him rule the world beyond ones imagination

  • The introduction of the Federal Reserve Act, though power did not decisively shift from bankers to government; it was nevertheless a move in the right direction

Comparison with "The Partnership", the author has divided the book well making it easier for the reader to know what to expect at every stage. Somehow, I keep coming back to "The Partnership" as I found to be the most absurd way of writing a book splitting the book into sections that are product and people focused forcing readers to get lost in many sections of the book.

I am sure that one should read the book 1907 to get a bit more perspective on what happened exactly during this period.

Diplomatic Age:
The next section is a bit long and the foundation of the story has been slow but yet essential considering that what one has read in the previous section. On the face of it, the first few pages shows nothing great in character of the son. Yet the power to let the decentralize decision making comes through quite well. Having finished the diplomatic age, I probably no longer have the same degree of interest that I carried when I had finished the first part. The book has kept pace but could have been better. As the period symbolizes “Diplomacy”, it can be excruciatingly slow in certain sections which could have been either avoided or probably done in a much more concise manner. This is a period where the role of the bank witnesses a metamorphosis with the gradual decline in the bank’s foothold in the world of finace with events such as New Deal and the Glass-Steagall and the gradual growth in public finance (spending led by government).

What I did like in this book was the additional and probably, the perspective it brought forward which was clearly missing in the other books that I read in this age. When you read books like “Once in Golconda”, “The Great Crash of 1929” and briefly of “The Partnership” it discusses the events unfolding prior to the crisis and the aftermath. However, the view for the reader is restricted to only the common man effect. One really does not get any sense what was happening on the political side which was critical to the crisis. This book, given the role the bank played in government finance across the world beautifully articulates the same.

Most books written on this era maintain one thing. Politics and banking did not go well. Whether its was the impact of Glass Steagall that led to the creation of First Boston (offshoot of Chase National Bank and First Bank of Boston), Morgan Stanley, and Smith Barney or the impact of war there was frequent clash of interest between the two parties.

Casino Age

Honestly, this is the last, longest and probably most extensively covered with little, if any, to takeaway. If anything, this section probably attempts to downplay the steady decline in market share of the bank. Further, this would be my close to fourth book to read on the wonderful 80's after "Predators Ball", "Barbarians at the Gate" and "Den of Thieves" and some through "The Partnership". Fatigue was clearly evident as I was quite desperate to finish this section.

Having completed this section, I was lost on the role of the bank played in this era as the concentration shifted from the bank to Morgan Stanley. There are a few chapters on the bank becoming global (Arab countries and Asia) but this section lacked the pace that kept the book alive in the earlier sections. At sometime, the author could have shortened this section. Industry specific discussion were fewer on the banking side but was somewhat sketchy for the capital market business.

The sad ending of Morgan Grenfell probably moved me a little. Not that their contribution was be deeply missed by the industry but losing history in a very uneventful manner was unfortunate.

Anyways, my closing comments to this book would be simple. I may have sounded a bit negative towards the end of the book. Honestly, given the first two sections I raised my expectations for Ron Chernow, the author beyond reason. My sincere appreciation to the author for the depth of his research and his ability to publish a wonderful history of the company. I think sometime in the future the author should write the next section of the bank living through the 90's, through the fall of Glass-Steagall Act and the bank's ascent to supremacy in 2009, post the world wide economic crisis.

Read it.