on October 4, 2004
Running Money, Andy Kessler's new book, is a big disappointment. His first book, Wall Street Meat, was a witty, intelligent and perceptive description of his life as a sell-side analyst. But Running Money, which covers his time co-managing a technology hedge fund from 1996 to 2001, is a let-down. There are three reasons why this book misses the mark:
First, Running Money won't give you any insights into running a hedge fund. Kessler actually ran a sort of hybrid VC fund and mutual fund. He never shorted stocks or used any other hedging mechanism, and his fund was 100% net long at all times. This doesn't mean Kessler was stupid. On the contrary, 1996 to 2000 was a period when you wanted to be 100% net long technology stocks (ideally with leverage...), and when the tech bubble burst in 2001 Kessler was smart enough to liquidate his fund. But don't look for insights into shorting stocks or managing net exposure.
Second, the core discussion about investment strategy is superficial. Kessler outlines his methodology: find companies with large markets, sustainable competitive advantage and lucrative business models. But there's no rigorous analysis of how that methodology really performed, since we don't know whether he outperformed his VC peers (he also invested in private deals) or the semiconductor and hardware indexes (those are where most of his investments seem to have been) on an after-fees, after-tax basis. There's no discussion about whether his methodology is approriate for today's market conditions. There's no discussion of valuation. There's no discussion of portfolio construction or risk management. And there's no analysis of the mistakes he made either. In fact, you get the feeling that Kessler's approach was uniquely suited to the bubble-inflating years - pick tech stocks with the greatest growth prospects relative to expectations, and ignore valuation. Kessler's genius was getting out in time; but that doesn't help us now.
Third, much of the book is devoted to a thoroughly implausible theory of international trade. Kessler suggests that the US trade deficit is partly an illusion, created by the difficulties of tracking intellectual property exports. He ignores basic national accounting relationships such as: if consumers and government aren't saving anything but domestic investment is positive, then the shortfall must be made up by foreign capital inflows. He then argues that the US can sustain indefinite trade deficits because the return on capital is higher in the US than elsewhere, so foreigners will always want to invest in the US. This is not only unconvincing but dangerous. The twin trade and budget deficits are generating currency risks that every professional investor needs to be aware of.
So what's good about it? Well, like Wall Street Meat, Running Money is a lot of fun to read. Kessler's discussions of technology investing are also interesting, if ultimately unsatisfying. And his descriptions of meetings with company managements and sell-side tech conferences are entertaining and witty, though they lack the searing character portraits of Wall Street Meat.
Verdict: if you haven't read Wall Street Meat, buy that instead. If you have, and you want a fun read, go ahead and read Running Money. Just don't expect to learn much about running money.
"Running Money" is not only a great read, it also provides a unique contemporaneous view of the `90s investment market by a talented hedge fund manager who makes no claims to omniscience. He brings us into his struggles, doubts, and mistakes as well as his successes. He shows us how hard it really is to find great investments even in a wild bull market. This is a very different book than "Wall Street Meat". It isn't as wry but I think it offers us more substance along with a lot of fun. However, the fun comes from more sources than just humor.
The book weaves three threads into the final fabric. First, there is the hedge fund narrative. The author provides us with many fun stories about his difficulties in raising money for their fund, the troubles in finding the right investments, and the natural history of his and his partner's successes and failures with the market and private investments.
Among other many things, we learn that the real action at conferences is out in the hall, that it is time to leave when CFOs close the doors to their offices or conference rooms or when the sales executive is the power guy, and the travails of getting an Instinet terminal in your office so you don't have to pay a broker to do the same thing for you. We get to ride with them in their four-door office as the go to meeting after conference after meeting looking for the right investment. Usually they find things to laugh at, run from, or that are jaw droppingly dumb. However, every now and again they find things to buy. Even then, many of them are dogs. But the ones that take off end up paying for everything including their cheap office above an arts supply store.
Second, we get the author's analysis of what is going on in the market and what he and Fred Kittler are trying to do with Velocity Capital. Mr. Kessler shares with us his metaphors for what he is after - in particular the waterfall and its moment of great power just before it hits the rocks. There are some serious history lessons on the development of the steam engine, railroads, and integrated circuits as vehicles for investment. When would it have been right to get in and to get out? We come to understand that the investments he is after have not just large markets, but mega markets so there are powerful factors of scale. He wants profitability to go up as prices fall towards the rocks below. He wants to see a business plan to leverage that scale. And he wants some kind of unfair competitive advantage. If a competitor can simply build what you have and be your equal, he feels you have a recipe for large losses.
Third, and this seems to be the part of the book that matters most to the author, everything is pulled together to culminate in a philosophical treatise on the future of the American economy as part of the world economy and what we as a country should be focusing on. His view is that the industrial age is ending and that the future economy is based on intellectual capital. He also argues that this kind of benefit can't be measured using our present methods of balance of trade or other economic measures built for the industrial age. Whether you end up agreeing with him or not, his arguments are interesting and worth considering.
A fine book that should be widely read and not just by those interested in finance. This is a fun read that also has several serious payoffs.
on December 31, 2004
"Running Money" picks up where Andy Kessler's previous book, "Wall Street Meat" (which portrays his life as a Wall Street-based semiconductor industry stock analyst and investment banker), left off. Kessler left Wall Street to run a Palo Alto-based hedge fund with one partner, raising money from wealthy individuals and groups, and investing it in latter-stage startup and public technology companies. He had the, in retrospect, incredibly fortuitous timing (as he himself admits) to open a five year fund in 1996, which forced him to liquidate the fund and lock in his profits as the tech bubble was bursting in 2001 (in fact, he disperses his last cash just days before 9/11).
But Kessler's success, as he proves in the highly entertaining and also thought provoking "Running Money", is not merely the product of providential timing. His insider's view of the hedge fund industry shows how many of these funds don't even attempt to do fundamental stock analysis, but instead seek out market distortions that they can profit from (for a while, at least). Kessler, by contrast, stays true to his stock analyst roots and attempts to find great companies possessing a strong economic and technological advantage in a market about to undergo rapid growth. He struggles initially, but eventually uses an interesting combination of old world thinking (by analyzing the history of the steam power-driven Industrial Revolution) and radical new era economics (described below) to identify some winners. His story of the small niche semiconductor company he found which benefited immensely from the MP3 music piracy fad, at the same time that Napster and the record companies were losing their shirts, is a great case study for technology investing.
If "Running Money" were nothing more than a series of case studies and anecdotes about the investments Kessler made, it would be a fairly lightweight book. The anecdotes are indeed amusing, especially Nick Moore's scathing trashtalking of technology companies (Moore has a humorous nickname for every technology company, e.g. "Scam-azon"). But fortunately, in the final section, Kessler ponders the deeper question of what his success means about the current economy. It is here that Kessler voices some fairly radical opinions and theories that certainly deserve to get discussed and tested.
Kessler's radical opinion is that traditional economists, who are very cognizant of and worried about the trade deficit that the United States has been running since the 1970s, are not properly accounting for what truly matters in today's economy: wealth and profits. Because so much US manufacturing has moved abroad, and because the design of those products (i.e. the intellectual property) is still heavily centered in the US, the US does not receive any economic "credit" on the trade balance sheet when those designs are shipped to overseas factories. What is counted, of course, are the manufactured products that come back into this country, and that produces a large deficit. But since manufacturing is such a cutthroat business, whereas companies focused on developing intellectual property (e.g. Microsoft, Intel, pharmaceutical companies, and even Nike) command such high margins (profits) and pay their employees well, the resulting arrangement is highly beneficial to the living standard of the US. "We think, they sweat", sums up Kessler in his typical smart-alecky style. The low-priced products which flow into this country, along with the capital which finances some of our government's budget deficit, are our rewards for this mutually beneficial relationship.
Needless to say, these views are highly controversial. Yet Kessler forcefully states his arguments, and also has more than a little evidence on his side. He deserves credit for formulating these views, and thereby making "Running Money" more than just a breezy rags-to-riches technology boom era story.
on December 13, 2005
Andy Kessler managed a hedge fund from 1996 to 2001 that ranked among the top ten funds in history over a five-year period, in terms of overall return. His fund averaged a ~50% return per year and grew from about $20mm from launch to over $1billion upon closing (which includes additional invested capital). At one point, he turned down $1billion in Saudi Oil money because he wanted to remain faithful to his strategy and not become over extended. Just what was that strategy? Read on...
Before opening a fund, Kessler spent most of his career as a research analyst in the technology sector for Morgan Stanley. That means he made lots of contacts, asked lots of questions, and wrote lots of reports containing investment recommendations. But he found it quite difficult to raise money when he started his fund. In a somewhat self-effacing tone, he remarks that he told prospective funders that his investment thesis was "finding companies with great long-term prospects." Don't we all--seems obvious. But Kessler demonstrates a particularly deep commitment to his philosophy and an incisive intuition when in search of growth.
Dot-Com Craziness and the Need for an "Edge"
Kessler begins by using the story of his fund as a vehicle for relating the fun (and insanity) of the tech boom in Silicon Valley and introducing us to some of its most memorable characters. Kessler provides an account of a host of investment strategies he encountered, ranging from Clark and Doerr's grand slam with Netscape, to the currency arbitrages of the Tiger and Soros funds, to the bond trades of Long Term Capital Management, to the more loony schemes of some of his peers. One investor, for example, claimed to have found a pattern in tech conferences. He went to these conferences, noted the companies presenting to investors, observed their stocks tick up the next 1 - 2 days, then watched them correct back to their previous level the next day. He would long and short the stocks based on this pattern. Similarly, Kessler watched as investment managers interacted with company management at these conferences, gleaned extremely ambiguous insights, then placed a phone calls that resulted in notable changes in the stock price. His point--it's all about an edge. Call it information. And the average Joe and Mary on ETrade don't have a tee-ball kid's chance in hell of hitting one out of Fenway, unless they're lucky. You've got to be plugged in; you've got to know something. So what did Kessler know?
Kessler's Philosophy: Steamships and Microprocessors
Kessler tells the story (and the background leading up to the boom) in parallel with the story of the industrial revolution. He compares steam power technology and its dramatic effect on power availability to the rapid development in computer technology and its effect on knowledge. For instance, he notes how exponential growth in power resources reduced the cost of most labor intensive processes and enabled a host of other key industrial technologies, while noting how the processor has doubled in speed about every 18 months (Moore's law), thus resulting in, for example, the cost of emails declining from a few dollars per email (Carter's presidential campaign), to a few cents per million emails today. Kessler refers to this concept as "scale," and provides several other more nuanced historical comparisons to understand this concept.
Putting It Into Practice: MP3s and the "CFO Closed Door Indicator"
Kessler attempted to find companies that would experience a massive increase in demand as a result of some rapidly scaling phenomenon. For example, you might remember that Napster served as the catalyst for a gluttonous world exchange of mp3s in the late nineties. Investors, of course, wondered how they might monetize this deluge of downloads. Most of them avoided Napster for legal concerns, but eventually other more legitimate services went public, like MP3.com, and investors got on board. Rather than investing in these ludicrously overpriced companies, Kessler put his money in a little-known company, with no competition, producing the $2 laser diodes in CD R/W drives. As the world began burning its MP3s in order to play them on other mediums, Kessler's investment skyrocketed somewhere between 50 and 100x.
To find these companies, Kessler put in some serious work. He conducted interviews tirelessly. He referred to his car as his office as he turned over "every rock in the valley." He typically scheduled interviews with 3 to 5 companies per day. He described various subtle behaviors he became attuned to in his interviews. For example, the "CFO closed door indicator" was one favorite. If a CFO closed the door to his office or conference room, something could be inferred about the state or dynamic of the company. Maybe the CFO didn’t want fellow employees to hear the truth about their company's financial situation, or maybe they knew the truth, and he didn't want them to hear him lying to a prospective investor. Despite interviewing hundreds of companies, Kessler invested in only a few he believed would be winners, or as he called them, 5 or 10-baggers (that is, 5x or 10x expected growth).
Debunking Econ 1: Intellectual Property and the U.S. Trade Deficit
Kessler concludes his book by merging the stories of the industrial revolution and the dot-com era in an economic analysis of the U.S. trade deficit and increasing reliance on intellectual property for growth. He asserts, in a position inconsistent with traditionally accepted economic theory, that the growing U.S. trade deficit is not necessarily detrimental to the U.S. economy. He states that U.S. companies focus on IP, ideas, and innovation and thus achieve superior margins and high growth compared to the rest of the world. The outflow of capital from the trade deficit eventually returns to the United States, he says, because of the attractiveness of U.S. companies with superior returns. This money flows into our stockmarket without the "bean-counting" economists taking note. The result?--a lower cost of capital for U.S. based companies, which means more growth, which means more wealth created for Americans as capital gains.
Even if his analysis is correct, the two flaws I note are 1) foreigners own an increasingly larger stake in U.S. exchange traded securities and 2) the very notion of scale he discusses means that these countries (like China) will eventually match or overtake the United States in IP generation, achieve similar margins, and the U.S. will have neither a competitive advantage in the industrial nor the knowledge based economy. In other words, we can swim upstream for now (i.e. outsource the mundane to the rest of the world), but eventually the other fish, namely asia, will catch up. Just like we did to the European economy a century ago.
What's Next?--You Guessed It
Kessler's book, though it conveys the obvious in some ways, does so in an entertaining and insightful manner. He peels away the ambiguity that often clouds investor judgment and demonstrates how to focus on the essential--growth and scale. In the final pages of his book, Kessler says that he's closed his fund believing that the information cycle has past, but that he'll be back. What's the next big hit? He named a few possibilities, one of them--nanotechnology. Visit [...] to read this review and find more information.
on September 16, 2004
The highest compliment that I can give this book: It was too short, I didn't want Kessler's ideas to "stop." His IP economy, trade deficit analysis is worth the book's price many times over. Plus, it's a very, very funny book. To paraphrase Jim Cramer, this is both a brain and a beach book. One of the best I've read this year about money, investing and the economy.
on August 7, 2005
For sure there's much to learn from a tech growth hedge fund with 377% gain in 1999 (the fourth best hedge fund for the year) and down only 5% in 2000 (then it closed itself as planned five years beforehand), especially when the manager of it, the author himself, seemingly had no reservation to share his experience and insights to whoever believed, in particular the section of the author's unique opinion on the growing US trade deficit, which he deemed that as no problem at all with intellectual property and margin surplus the US is running.
No matter what, if you like Wall Street Meat (the author's first book of his life as an analyst), Liar's Poker, Fiasco, Pit's Bull, Confessions of a Street Addict, Trading with the Enemy..., you must not miss this one. If you had not read anyone of the above, I assure you that you had missed a lot in fun and in knowledge, and you should recover part of the opportunity cost by starting with this one, though I think reading Wall Street Meat first will put you in a better perspective similar to the author's.
on July 24, 2005
You've got to give to Andy Kessler credit, he sprinkles his writings with just enough "Kesslerisms" to keep the reader laughing, which, good or bad, makes the underlying material readable. His first offering, WALL STREET MEAT, was rife with hilarious tales. In this offering, RUNNING MONEY, Kessler takes on the ostensible task of writing about operating a hedge fund, its challenges, and rewards.
Kessler offers many stories of his exploits of attempting to bootstrap this business and the trevails of raising money for hedge funds. A recurring story (theme) revolves around his "mentor," Mr. Zed. Mr. Zed leads Kessler down the path of introspection and discovery, attempting to teach Kessler a valuable lesson with each conversation. Zed will never "give" Kessler the answer he seeks; rather, he asks questions to Kessler's questions. This type of learning is valuable, as Kessler soon discovers. In the end, Kessler's treatise regarding his culmination of learning from Mr. Zed is enlightening.
Now, as I mentioned in my title, this book has the style, which if Kessler is writing, most likely will always be there. However, that said, the overall evaluation of content was borderline. While the reader may expect direction and some detail about actually running a hedge fund, Kessler devotes three chapters on the development of the steam engine (there are a few other inane chapters as well). The purpose of this allocation of chapter material is not historical in nature necessarily (although those totally clueless to the development of the steam engine will learn something), rather, it is an investment lesson. Kessler describes the economic and financial markets (as they were) at the time of this invention, and brings it current by posing the question of investment in the company (Boulton and Watt) who developed and had a 25-year patent on the first steam engine. The story RE: development was monotonous; the overriding question of investment, spot on. Still, in this reviewer's opinion, the gross departure to historical analogies detracted from the content.
Kessler's discussion of scale is fascinating. He tells the story of Elantec, a company making laser diode drivers necessary to the operation of rewritable CDs/DVDs. Kessler surmises this will be huge. As he and his partner begin a series of incremental investments in Elantec between $3 to $5, Kessler awaits the pop he seeks, hopefully to the $10 level, which will "make his month" (hedge fund nomenclature). The stock languishes until one fairly insignificant advent occurs...Napster. While Napster made incredible headlines (not profits), it revolutionized the need for rewritable media,and thus, scaled the market demand from obscure need to viral levels. Net, net, Kessler sold out of Elantec at prices reaching $200 per share.
In the end, RUNNING MONEY is a fascinating book and is well told by Andy Kessler. It has its dead spots, which lend to the concepts Kessler espouses, but tediously so. While the reader will desire more detail of the hedge fund industry and its inner workings, RUNNING MONEY is a solid read.
on September 30, 2004
An easy way to get a lesson in world economics. The trouble is that I'm not so sure the lesson is correct. For instance, we import a laptop computer that's made in the far east. The production of that computer is fiercely competitive, there's almost no margin in its manufacture. But Microsoft gets about $100 for the Windows software that comes with it. And the profit to Intel for making the CPU is significantly higher than the profit on manufacturing the computer. Given a choice we should be far more concerned with getting these high profit components of the computer rather than manufacturing the computer itself.
OK, I agree with that. This is fine if you're a software engineer at Microsoft or a chip designer at Intel. But what if just an ordinary guy, trying to make a living, perhaps at a blue collar job? With the shipment of the manufacturing overseas, a lot of those kinds of jobs have been eliminated. Then again, look at the overall unemployment rate, it's quite low. Obviously the U.S. economy is finding some kinds of jobs for all kinds of people.
In this book, Andy Kessler says that we've moved beyond industrialization into an intellectual property economy. It's a point that needs to be considered, and besides that his book is a delight to read. His comedy like reporting makes the economics lesson go down easily.
on September 28, 2004
With a tasty bite of economic history, Kessler gives us a glimpse of how much we don't know about the origin of our huge wealth. He also points out some of the flaws in our thinking (how many decades have the pundits been warning of our impending doom due to the budget and trade deficits?) and tells an engaging story about his journey through The Valley and The Bubble. I laughed, I learned, I wished it wouldn't end. What more can you ask of a book?
on July 6, 2005
Should be read by anyone interested in the evolution of financial markets especially in the current hedge funds era. Andy writes in a simple, clear and humoristic way. Being simple and clear is not simple. Especially in the financial arena where writers want to sound "encyclopedic" for other reasons rather than being instructive. I learned about the Industrial Revolution, Intellectual Property, the current era of mental misery, horizontality, augmenting humans and so forth. Worthwhile buying it and not lending it...so good you won't get it back for sure. You may also want to read "Wall St Meat."