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.

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.”

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.

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.

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.

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.

The predator disappointment

Despite a lot of hype surrounding the book, this book fails on all counts. Lets put this in perspective. The two other books I mentioned previously was, which was in the same league as this one was "Barbarians at the Gate" and "Den of Thieves". It discusses the same era but pretty much differentiates the other with the former being a boardroom drama of one specific instance of a LBO while the latter discusses the era of 80's.

Where does this book fit in? NOWHERE should be a good answer.

The book does not have any relation to the title unlike the others where the degree of aptness, if i may use the word, is beyond comparison. Everytime I look at the title of the other two, I only get impressed. Anyways, I was really tempted by the title as it was Michael Milken's era and I hoped that this book would discuss his work life in great detail. The Predators Ball was his annual event. One really wanted to hear more about the event, especially the importance and the drama surrounding the event. This book does nothing. In the entire book, the event is hardly discussed.

Further, this book is more of a collection of LBO's which happened during this era. So, as a reader, you keep wondering why are we discussing them in such detail with a few paragraphs describing Michael Milken's contribution to the deal. Well, everyone did understand that Michael was the best, but, merely accepting in the book by saying "Michael placed the bond in one day" does not give any perspective.

The book is a drag to read. Unlike the earlier two books which becomes fast paced in the last 200-300 pages, this book was a drag even in the last 50 pages. Normally, I like to finish this section in one reading, but this book totally lost me. I really found the last ten pages a bit funny. As the book wanted to complete, the author became a bit philosophical. I thought there was something like an John Galt talking to us. Do not know why. Somehow, it felt like that with a sigh of relief that the book finally completed. It took me a week with atleast ten sittings to finish the final section of the book.

If anyone does want to read this era. Just start with this book. This is like a teaser to what one will experience reading the other two. One may skip it too as one does not become any wiser than before probably with the exception of know the great LBO investors.

Barbarians at the gate

Honestly, when I had attempted reading this book many times in the past, I never knew this book was as exciting as it has been showered with praises. My interest with this book only picked up pace when I read Den of Thieves. After a series of books which tracked market failures in most decades, I did think that the time had come to give this book one more chance. And boy! it surpassed my expectations by a mile. I had to skip my normal working hours to complete this book as the last 200 pages was too exciting to be left unread. What a title... I think the authors of this book and the Den of Thieves could have never got a better title.


I am not writing anything more as I have started reading the third and probably the last of this series...."the Predators Ball". I shall read that and finally conclude which one should be best.

The Smartest Guys in the Room - Definitely smart by any standards

This is a definitely up there with the best of books that chronicles corporate disasters. Comparison with "Barbarians at the Gate" and "Den of Thieves" is fully justified. The best thing that you like in these books is that they rarely offer the authors perspective of the issue, preferring the reader to form his own opinion.



The characters, the plot and the unfolding of events has been well thought by the author. Issues regarding the structures of financial misrepresentation has been well reported. It is a well paced book, giving readers little room to reduce focus from the contents. The last few months of the final debacle has been well reproduced making it nearly impossible for any reader to put the book down and concentrate on anything else.

The book does lack in one key aspect. The attention to numbers / financials. It is very difficult to understand the extent of damage unless readers are continuously informed about the magnitude of damage through the book. EPS and market capitalisation was often used but one did not really know how much was the revenues and how much profits did it actually report. Infact, there would have been fewer than 10 times when the actual revenues and earnings were reported in the entire book. It was probably in the last 100 pages did one actually know the revenue, RoE, networth etc etc.

Overall, it is a wonderful book to read...much better than the earlier book on Enron. Read it...

Well..it is over...Liar's Poker

Well, I should be finally congratulating myself. I finally had the opportunity to finish Liars Poker. In the past five years, I would have at least attempted reading this book over 6-7 times only to finish the first thirty to fifty and dump it for the next time. I have read, albeit one partly, two other books of the same author: Panic, a wonderful book but a jolly evening time read and money culture where I could not understand the head or tail of the book (if there was any sarcasm in that book across chapters which my dear roomate found many, I for sure, did not find any).

Not that Liar's Poker is not interesting. Just that I have a differing opinion of the nature of the job compared to the author and simply cant accept his attempt to trivialize the whole work affair. It was basically this review that prevented me from completing this book.

Having completed this book, I should say that I liked the book. It is simple, good read and should take you less than 4 hours to read the book. If you really want to understand what happened at this time, there are definitely better books around : Den of Thieves, Barbarians at the Gate and the Predators' Ball (have not read this one).

There are a couple of things that should probably come as a few key take-aways from the book: the concept of treasury in a bank and its role, especially investment bank and the skepticism surrounding it. It clearly is difficult to understand when a house would actually keep a security in its book or downsell the same to its clients. If a treasury has the opportunity to make an IRR of 15-18% on its book and would need to compare this with a commission revenue of 1-2 bps on a trade, how would it balance the client and company's interest? Where does the company draw a line between the employee's interest and the shareholder as these banks are inherently employee focussed? How are risks/rewards measured?

A book to read during your travel time only.

Unfortunately, this book really showed disappointment beyond expectations. Not a good way to start a review either as you guys should ideally skip reading it beyond this line. If you have, then here is the reason. The book seriously lacks depth. Compared to his earlier work on "Once in Golconda", this book pales in comparison. Incidents, reasons and issues are sporadic across the decade and probably under-researched or there was little to say. The book has a lot of pages, so there is a lot of stuff written in it. However, most of these are issues which one can skip and still be a lot wiser. There is a 30-40 page discussion on churches, employee behavior etc which I failed to understand the significance to the story.

Does this book deserve to be a Wiley Classic? Resounding "Yes" because of only the last 60 pages. If one were to read this book perhaps a few years back, one would have thrown this away and said, "Yeah! those were the bad days unlikely to repeated ever". After being threw one of the toughest crisis, I can comfortably say that this crisis partly a combination of the 60s and the 1925-35 era. Here are probably two key reasons:

1. Capital : The last few chapters discuss the crucial element which went haywire in the 60s. The endless leverage at the broker level. In the 1929-35 era, customers were leveraged at an investment level using margin to finance their endless greed. Banks financed the greed and customers readily accepted the same. In the 1960's brokers were leveraged similar to what we have seen in this crisis. The only good part is that it did not affect the banking system. In the current crisis, everyone was leveraged : customers and brokers. What probably was marginally different was the extent corporate leverage. The 60s similar to the 80s seems to have unrelated mergers driving corporate leverage upwards, with the difference being debt was available much more freely than in the 60s.

2. Merger of entities: For a person who has just entered financial markets, the last year should have been a total surprise. The mergers that we have seen at such rapid pace should have thrown his entire theoretical knowledge out of the window. A regulator / group of financial institutions does not call few related parties over a few days/nights and co-ordinate a merger with whomsoever feasible. Yet, it all looks to have happened. This is nothing new in the U.S. In the 1960's as the book highlights, regulators took active interest in ensuring that systemic collapse does not occur. Hence, they were more than willing to help mergers at a rapid pace. Whether it is good or not, I am not sure. It is important for regulators to police the activities of its participants and prevent disruption of functioning. However, should it be actively engaged to this extent? I don't know if our regulator would ever involve themselves to such a degree.

Interesting, this crisis did not bring out any dubious companies like almost any other crisis seems to have.

The extent of crash and the impact is probably less understood in the 60s than in the period of the great depression or the 1987 crisis. We have well documented history for most of the other crisis barring this one, which is what makes the book interesting.

Dow Jones crisis periods

(Source: www.stockcharts.com)

At best, all these crisis keeps repeating the same problem: greed, leverage for investors and growth for corporates. I am almost famished after reading this book and looking at some of the other classics, I doubt I am going to find anything more interesting. However, it is increasingly getting difficult to get the rest of the books. Not one bookshop seems to have any of these classics, which is a definite read for any person in the capital markets.

Mr. Buffett...how did u survive these periods. Reading them is so exciting that living through them should have a world apart!

Capital raising - an exercise for whom?

I have been tracking stocks for the past few years and should say, through the ups and downs, it has been truly a wonderful experience. As an analyst, reading balance sheets, macro data, quarterly results and corporate actions has always been a delight.

Over the past few months, I have been getting increasingly perturbed with the concept of capital raising. It is a necessary exercise especially for companies that would like to grow beyond their current capacity. Capital is needed for companies for different reasons - funding growth or reduce risk residing in the balance sheet. Few examples

• Construction companies need higher networth to bid for bigger projects and fund their working capital.
• Banks need capital to fund balance sheet growth when internal accruals does not support them. Further, capital is raised when risk was mispriced leading to substantial erosion of profitability and raising threat of survival
  
• Capex driven industry (infrastructure) need higher networth to reduce risk in the balance sheet.

So, given this simple broad utilisations of networth, we need to understand the valuation behind raising capital and how should investors look at this exercise. We continue to see a capital raising activity to be extremely favourable to investors. Is there a logic to this argument.

To understand this, we assume that investors value companies in two broad valuation metrics: Price/Earnings and Price/Book.

Price/earnings can be dilutive to some extent to investors depending on the extent and price of dilution as investors play for growth more than return on equity (typically RoE in these industries are much higher than the cost of equity). Hence, I have not looked into this that deeply.

Price/Book
We take four specific illustration to understand this argument:
1. Raising at below book value: The book value per share declines depending on the extent of discount. This will be a poor policy, if implemented and can be done only when the possibility of erosion of networth is possible as the existing shareholders are not adequately compensated with the entry of the new investor.

2. Raising at book value: The book value per share remains constant and the new and old shareholders are not compensated with the change in shareholding structure.

3. Raising at fair book value: This is favorable to existing shareholders as there is an improvement in book value per share. The only assumption made here is that the new investors are bringing equity to the business which can impact the return on equity in the medium term. The reason is as follows.

• If price were to remain constant at the fair book multiple, the expansion in book value per share will depress the new price/book multiple.This is acceptable sometimes as it would take sometime for the company to sweat the new capital raised.
  
• If the price/book ratio were to remain constant, the price increases. However, this increase impacts both the existing shareholder as well as the new shareholder immediately, which should not be the case, as it gives endless arbitrage opportunity to keep raising capital.

4. Raising at exorbitant book value: This is the most puzzling and the most complex form to understand. Why do investors raise capital beyond fair multiple as the only person benefiting from it are existing investors? There are can be very few reasons for this.

Company like raising money by diluting as little as possible. This is not a valid argument as they are transfering risk to new investors. If this is a reason, then investors should be really wary of playing the game. New and old investors are banking on the ability of the existing company to keep bringing in new investor and artificially keeping their stock prices higher than the fundamentals warrant. Stock prices will be inherently volatile in these stocks as raising capital frequently and consistently will be a challenge.

New investors are not given immediate opportunity to play with the old investors. This is a much reasonable investment argument. The bulk of the risk was taken by the old investors and new investors are coming having seen the performance, which implies that new and old investors have two different cost of equity. The promoter and initial investors have borne the brunt of risk when they had invested while the new investors are just playing the final leg of the game. Hence, they are being punished for not entering early.

Investors understand that sustainable RoE can see further expansion but markets are unwilling to look at these factors. Hence the new investors are playing that risk.

There are arguments of scarcity premium, management premium, country premium etc etc but how much premium and where are these getting factored to the price is always the question.

Having written this, I have become no wiser than ever before. If anything, I seem to be as confused as ever.

The road well travelled

Here are two interesting books that one should read .... Once in Golconda by John Brooks and The great Crash of 1929 by John Kenneth Galbraith. Both these books are Wileys Classic. There are a few more books worth reading but it is extremely difficult to get these books. In India, barring the easy book of Common stocks and Uncommon Profits, not many books are easily available. I had to borrow these books who could buy it only outside India.

Coming to the two books. Both these books are set stage in the great depression era. Reading these books back to back makes a lot of sense as they fill vital gaps that is present between the two books. Further, read "The Partnership" discussing the Goldman Sachs era in this period.

The interesting part of these two books is that they give a historian...s perspective rather than an analyst/economist perspective. It is advantageous reading it this way as the bias of the author, whatever it may be, is lost and readers get pretty much what happened as it unfolds in time.

"Once in Golconda" spans the period before and after the crisis while "The great crash of 1929" is fairly elaborate till the start of depression. Both these books discusses in detail of the speculative bubble created by excessive leverage available to investors and the failure to understand that stock market at best can only allocate capital and not support an economy. Further, the insider trading, creating pools to move stock prices and the creation of leveraged investment trusts that is similar to mutual funds today is something that is described well.

Once in Golconda discusses the stock market (not economic impact) of the crisis. The endless period of denial by all investors, the subsequent gloom and the final acceptance. The part played by the various banks during the crisis. The two big characters of Albert Wiggin, Chase National Bank and Charles E Mitchell of National City Bank and their contribution towards the crash.

Post the crash, the book moves towards the central character played by Richard Whitney, the head of the exchange, his personal life and his imbalance with professional life and the subsequent "Satyam" like saga. The role played by the regulators/politicians/president has been well documented. The book loses out in the end as it focuses largely on Richard Whitney and less on the exchange. It is entirely silent on what was happening to the economy.

The great crash of 1929 discusses the period just before the crisis and discusses the aftermath in a very brief manner. You like this book as it traces the movement of the index and the mania associated to it. The confidence that investors/ would be investors/ company management / policy makers/ bankers show is an eye opener. It attempts to reduce a few myths associated with the level of participation by Americans, the aftermath suicide rates and the simple stuffs of investing. However, one is trully stunned by the level of participation by banks. I use the word stunned is probably because one always assume bankers to be a pessimitic sort of people who can only look at the negative side as they are the one lending the money. However, the level of participation of banks in lending money to investors to speculate and their peddling of securities through their subsidiaries (leading to Glass Steagall Act- seperation of investment banking and lending activities) makes the book an interesting read. Considering the amount of tight leash the regulator has in India, one has to be trully appreciative of their efforts.

You will definitely like both these books as they are easy to read, and what more exciting. As the famous saying goes..."Those who don...t learn from the mistakes of the past are destined to repeat them". I got the "The smartest Guys in the room" finally from the same person who recommended it and have just started. It surely does not look like a fast read seeing the font size. Lets hope it is as good as the readers recommend it to be.

Enron - the anatomy of greed

What happens when you happen to read the wrong book of the company despite the reviews of the book being similar. As expected, disaster.

A book was suggested to me sometime back by a good friend of mine, whose review can be taken for granted. The book he told was "The Smartest Guys in the room: The amazing rise and scandalous fall of Enron". I was at Landmark a week back searching for some good books. However, the collection was pretty disappointing as despite such a large bookstore, he did not have any of the books that I wanted. I stumbled on this book "Enron : Anatomy of Greed" and mistook this book for the other one. A couple of quick checks gave not that bad reviews of the book. Amazon.com gave 4.5 for the smartest guy and 3.5 for anatomy of greed. Hence, I mistook this book for the other one.

Now, that I had purchased the book, I had to finish it as it was pretty expensive (INR 500). The book actually turned to be a disaster and a waste of a week for a few reasons. One this book is about a person, who was at Enron in the final stages of the company and how he felt in those few months he stayed there. It is neither insightful nor is it entertaining by any stretch of imagination.

One does feel sorry for the author to be in a dying company but barring this, I dont know what the author expects the reader to make out of this book of him or the company. Being part of a newly formed division, he is not able to add any insights to the functioning of the old company, which probably would have helped the readers with the fall. It talks of greed, but somehow, I dont think it did not show the greed part that well. Greed, was largely restricted to the ESOPs/bonus given.

Frankly, I dont know what to say more of this book. I shall see if I can get the other book. Skip this book...

A view from the outside

For the first time, I had an opportunity to read a book written by a politician. YES! I could read it and was stunned, stumped and bowled over.

"A view from the outside" is a book written by Mr. P Chidambaram, our very own ex-finance/home minister. I walked into this book on more than a few occasions at Landmark. I read one chapter and was very impressed but was really bothered if the other pages was as good as the one I read. I took the decision to buy considering that the alternatives were poor and the time had come to diversify from business/investments. Partly, I was forced to do because my work takes me a little into politics.


I liked the book for many reasons.

• Clarity of thought: While being a minister in various capacity has definetely helped him in writing, it still is difficult to pen one's thought with such openess discussing drawbacks and future aspirations of respective areas. His view that India would soon (next decade or two) see a two party system (coaliation led ofcourse, but essentially on two frame of thoughts led by two important parties with a lot of allies between them) is interesting considering that most of us have a lot of parties to choose but little interest in doing it. His explanation of the problem which the leading parties have is a true eye opener for anyone reading politics for the first time. India is seeing coaliation politics due to the inherent strength of regional politics in West Bengal, Uttar Pradesh, Bihar, and Tamilnadu is simple and straightforward. His discussion on India living in rural India is simply brilliant.It is the same old story of 70% rural population contributing less than 20% of India's output. The only difference is the way it is presented.
• Passion that seems to be driving his work immensely. I clearly will not be able to tell this if all MP's and MLA's are of the same cadre but this author has shown a genuine desire to move India into the next growth trajectory, whether in opposition or not. Whether, it is the issue on addressing taxation, creating investment opportunities that can drive growth and stimulate demand, the genuine need of creation of new states to improve governance, the idea of an ideal election manifesto (though it did not show in their recently released party manifesto), the importance of younger minds to enter into politics or the plight of poor people (though exaggerated a bit beyond necessary) his thoughts comes with such passion that it is difficult to accept him as a politican who has represented his constituency, Sivaganga, since 1984.
• Consistency: this book is essentially a collection of his writings during the NDA regime. The period of writing is between 2002-04 and by and large, I have not seen too much deviation in his thoughts in these collection of articles. Considering that our regular thought is that a politican knows to praise the side where the butter is, this book atleast shows that he has not deviated much from his earlier ideas/goals.
  
• Honesty: There is a genuine concern to move India to its next growth path. His expertise in Law, economics and management is shown with the way he writes. His discussion on elections in India is a wonderful insight thought not as complete as one would have expected. The problem plaguing Indian politics having nexus with members having questionable past, the discussion on money in politics and candidates.
  
• Unbiased on mostly discussion areas: He is a lot unbiased than I thought he could be. He showers praises and throws brickbats at Congress, BJP, and the left on their various policies. For a person in the opposition, the favorite past time would be to take a pick at the policies of the ruling party. Surprisingly and unlike most other politicians, he is willing to appreciate few policies executed by the BJP/NDA. He appreciated the Left for the way they handled their internal working specificially on organisation structure.
  We know that he had the opportunity to pick at Congress as he was part of Tamil Maanila Congress (Moopanar) which later merged with Congress.
  

I can go on and on on praising this book but there are a few drawbacks in this book.

• There are two pieces on International politics or rather India and its neighbours and some general discussions which could not be classified anywhere. These two sections does not seem to be very convincing as the author might have wanted. His discussion on health, girl child, education seems to be a bit hollow.
  
• I was a bit disappointed was that he seemed to be to show too much praise for Rajiv Gandhi. A little study of his life shows that there is a history why he is a big follower of Rajiv Gandhi.
  
• At times, you see a politician side of him. He has picked his oppositiong posting a few numbers where the difference though appears wide seems disappointing small compared to the overall context. For example, he picks up an issue on under utilising the expenditure on various heads (critical ones of course) by the NDA. However, the difference is so small (though appears) compared to the overall expenditure of the government that the topic loses its relevance.
• On a lighter vein, I have paid around INR 395 for this book for about 85-90 articles. This would have come at a much lower cost had I bought the papers.
  

There is a piece written on India Shining where you see the humourous side of him. It is a well written article and he takes the case of everyone in it.

This is the first time I have read any politician from his own words. I do hope that I would be able to read a few more as the years progress. I was tempted to buy a book by Arun Shourie, who Mr Chidambaram sincerely appreciates (except when he was in office as a minister), but wanted to wait to see if I am able to complete this one. This book has given me confidence that India has politicians that we can trust however: scattered and few they may be.

And yes...read this book ...it is a simple yet a powerful one.

Unemployment benefits

What more, this seems to be the right time to look at unemployment benefits.

I have made some simplistic analysis of the entire thing and looked at unemployed and those who are married or where the best information was available and converted them to US dollars to make comparison easier.

Ireland - USD 1100 / month (increases with dependents)
Sweden - USD 1220 / month (after taxes)
England - USD 540 / month
New Zealand - USD 400 /month
Australia - USD 577 / month

US seemed to be pretty complicated, so have not included in this.

Most of these benefits range for atleast 6 months.

Though they are strictly not comparable, the basic idea is to give an idea on how developed countries have established social security net for individuals. In India, while there is Rural employment guarantee scheme, the rest are pretty much left in the lurch.

Wonder when we can have such a benefit. It is going to raise the cost of salary (more taxes) and also will result in more delay in employing anyone as unemployed will not mind waiting for more time to get a better job and this disconnect will raise the cost for the employer as hiring is going to take time and employers will have to raise salary to attract employees.

Surely, it is not going to be easy. First, we need more employees in the tax net to ensure that we can have the scheme going. Almost most of these schemes are driven from employers who charge the insurance cost from the employees salary (~6% in the US). A sizeable employee benefit will ensure that success is attained.

It is only a dream from my side that India can ever have one even in the next decade.

Fiction, at last - Jeffrey Archer

Fiction, at last...and a good one. The latest book of Jeffrey Archer : Paths of Glory. Having not read that many fiction books in the past year, this book comes as a welcome change.

It is not a typical book of Jeffrey Archer. There are no two people fighting to become the best in their chosen careers but one person fighting with a mountain. However, the desire to be the best, the success etc etc is something that we regularly see from any of his books. There is no suspense in the book which was disappointing. The prologue makes it quite clear that the author is not interested in laying down any suspense.

Normally, I do not read any reviews of a fiction book as I normally follow few authors and would read it despite it being a bad book. A bad review can slow my pace of reading a book, which is something I do not like. This time, I did read the review of the book as the book did not look like fiction by any chance. It turned out to be true. This is a true story of the protagonist reaching Mt. Everest first. The book has raised a few brows atleast as it looks like the author is hell bent in proving that the first to reach Everest was an Englishman. However, during the course of the book, the author clearly mentions a few facts like success of any mountain climbing is not only reaching the top but also to come down.

Anyways, there was a few interesting comments in the book. There was a question asked, "Why do you want to climb the Everest". The reply to it..."Because it is there"... One of the best replies I have heard. Sometimes I find it hard when people ask the question, "what makes a person tick?". Maybe this is a good answer to give. There was an interesting comment which was made by the wife of deceased Captain Scott (lost his life reaching South Pole)... I would rather spend two years with one of the most exciting men on Earth, than forty with someone who thought I had prevented him from fulfilling his dream" These may sound like typical bollywood / hollywood statements, but is definetely good in the backdrop under which they were made.

Read the book, one should be able to complete in about one full Sunday.

Definite books to read in 2009

Having read a few market related economic books of the likes of Tim Harford and Joseph Stiglitz, I longed to read some really good investment books. Here are my new definite reads for anyone in 2009


1. Snowball -

It is surely a bible by any measuring scale. Extremely well documented and so well written, that it hardly takes time to complete the book.If anything, one is just disappointed to have completed the book early. I liked the approach of the author to be as unbiased as possible and critical wherever possible. I was quite surprised to read so many new facts in some of his investments which was starkingly different from Warren Buffett says in his annual meetings. Anyways, this is my current best pick. Buy the book: one would never regret this purchase.

2. The Partnership : The Making of Goldman Sachs As a reader, there is every chance of getting irritated with the author for his approach of explaining the history. Ideally, the easiest way to explain would be through dates or periods but the author chose to explain through a mix of periods, people, products and geographies making it difficult to be with the author.

I disliked the way he is trying to set right a few facts straight. He picks up Den of Thieves, (which b.t.w. has been mentioned below as a good read), and tries to prove the point of Goldman Sachs facts being horribly misrepresented. I believe that this part was unnecessarily long, uninteresting and most importantly makes me feel that the author is a bit biased to Goldman Sachs. Anyways, read the book as it offers an amazing insights into the company.

3. Den of Thieves One of the best books of all time. Read this with a few others to offer a much better insight into what happened in the 80s and 90s. Snowball, Den of Thieves, Barbarians at the Gate (somehow could not complete this book despite trying to read it many times), The Partnership, When Genius Failed offer multiple dimensions to the same topic. It is a gripping book, much like a movie. I simply loved the book so much that I would add this as a collectors item.

4. A few other books that I am reading and including as it looks very good from what I have read so far.

Panic: Though not a big fan of Michael Lewis, this is just a collection of articles published in various journals. Considering that so much has been written on every crisis, Michael Lewis has taken a few crisis in the past and looked at how people look at things before, just after and after a crisis. Here, he looks at published journals, which includes a few reputed authors for his reference. Good book, though I don't know why I paid so much to buy this book.




I have just bought this book. Bailouts and Bail-Ins written by Nouriel Roubini, an economist who is credited to have understood the current sub-prime crisis and Brad Setser. I dont know much about this book but hope it is a good one.