Category: Books

Books that we read and our thoughts about them.

Book Review: Den of Thieves

In the Den of Thieves (Amazon,) author James B. Stewart provides a play-by-play of the rise and crash of Wall Street in the 80’s.

The 80’s were a beginning of a new era. The US government/administration was chock full for laissez faire free-marketers. Regan was at the helm and regulations were considered the enemy. Wall Street got punch drunk on junk bonds, leveraged buyouts, insider trading, portfolio insurance and what not. Investment bankers and traders mostly viewed the banks they worked for as a way to get rich personally – damn the “franchise.”

What really got on the SEC’s nerve was insider trading in stocks. For one, it was happening in the market they had total regulatory oversight over. And two, it was eroding the trust of retail investors in the market. So the SEC decided to stake everything on the one thing it could do – bring people who traded on inside information to justice.

And unlike the regulators of today, they did not shy away from sending some of those traders to jail.

Baird was immediately struck by the similarities between the insider-trading investigations and the Mafia cases he’d worked on. Like organized crime, the Wall Street suspects prized silence and loyalty over any duty to tell the truth and root out corruption. He assumed that a Goldman, Sachs partner, for example, would go to jail rather than implicate another partner at the firm. Also, as in organized crime investigations, there were numerous interlocking cases, and not enough investigators to pursue all the leads.

Sadly, nothing much changed. The junk-bond mania was followed by the dot-com bubble followed by the credit crisis. And the number of people who were actually punished for financial crimes kept going down. Rinse, repeat.

The book runs to almost 600 pages and is about the 80’s. So, it is not for everyone.

Recommendation: worth a read.

Book Review: The Discipline of Market Leaders

The Discipline of Market Leaders (Amazon,) is about the importance of focusing on either one of cost, innovation, or service.

A company cannot be everything for everybody. It can be a highly efficient low-cost provider of a utility, or it could be a high-cost provider of innovative products, or it could be so close to its customers that they stick with it for its superior service.

The general message of the book could be useful for investors in old-economy stocks. Figuring out how a company scores along these drivers of value could help in evaluating the robustness of the “moat.”

However, things change. Consider this chart from Understanding Abundance:

Along with cost/innovation/service, in the age of abundance, companies need to also choose between being a “utility” business or a “pointy” business. The drivers of value have shifted.

All said, the book was published in the late-90’s and hasn’t aged well. The examples are dated and some of the exemplar companies have gone bankrupt.

Recommendation: Skip it.

Book Review: A First-Class Catastrophe

A First-Class Catastrophe (Amazon,) is about Black Monday – October 19, 1987 – the worst day in Wall Street history when the market fell 22.6%. The author, Diana B. Henriques, presents a thoroughly researched, yet revetting account of why it happened, the key players and why it will happen again.

The actual lesson is that human beings do not cope well in a crisis when speed, complexity, secrecy, and fear all batter our emotions at the same time. We panic — or, most of us do. We are not the cool, rational investors postulated in academic theories, and we never will be.

The problem is that US regulators continue to approach the markets in a piecemeal manner that make wholesome regulations impossible to achieve. As long as they are more focused on protecting their turf, the markets are stuck in a doom loop.

Recommendation: Worth a read.

Book Review: Bad Blood

In Bad Blood: Secrets and Lies in a Silicon Valley Startup (Amazon,) author John Carreyrou chronicles the fraud that was Theranos.

For those who don’t know about Theranos, it was a Silicon Valley unicorn that claimed to have invented a device that would run over 200 diagnostic tests on single drop of your blood. A pin-prick was all that took. Turned out that they had invented no such device. But that didn’t stop them from selling it to drug chains and supermarket stores and conducting over a million blood tests. The author was instrumental in blowing its cover at the Wall Street Journal. Theranos subsequently recalled the results of all of its tests and has recently decided to dissolve itself after top executives were indicted for defrauding investors.

Hardware is hard. Healthcare is harder still. It takes over 10 years and $2 billion to get a drug to market. There is a reason for that. The first goal is healthcare is to “do no harm.” Trying to mesh this with the Silicon Valley ethos of “build fast and break things” is a recipe for disaster. You cannot code away bottlenecks created by physics, biology and chemistry that easily. To make matters worse, the Theranos CEO seemed to have embraced two other adages – “fake it till you make it” and “better to ask for forgiveness than to wait for permission.” Works fine when you are trying to sell an app.

The Valley is full of stories about how many big software companies that we know today would never have existed if they had played it straight. There is this story about Oracle labeling the buggy first version of its database as “version 2” (because nobody would buy version 1.0) and sending a team of engineers to get it working on the client site (they sold it as a “product” because it would allow them to charge more, but in effect, it was really a service that required an on-site team.) Then there is Uber that brazenly broke taxi regulations everywhere and then hired lobbyists to change them in its favor. However, the stories that are celebrated are that of survivors. Those who couldn’t “make it” or couldn’t successfully get “forgiveness” ended up being shuttered and forgotten.

Key take-ways form the Theranos saga:

  • The board of directors have a duty to keep the CEO on the straight and the narrow.
  • Investors should at least talk to a few of a company’s customers before committing capital to it.
  • High staff turnover is a red flag.
  • Not having a full-time CFO in a large company is another red flag.
  • Deals not turning into revenue and revenue not turning into cash in the bank is the reddest flag.

Recommendation: Read it now!

Book Review: The Fish that Ate the Whale

The Fish that Ate the Whale (Amazon,) is a biography of Sam Zemurray, the Banana Man. The author, Rich Cohen, tracks the rise and fall and rise and fall of the banana company that Sam built through the late 19th and early 20th century.

The sheer magnitude of the rags to riches story that starts with Sam trading discarded bananas and ends with him running the United Fruit Company is completely breathtaking. Oh, and it also involves overthrowing a Latin-American government that was about to turn hostile to the banana trade. Incredible.

The book could easily be about any business in the perishable commodities business. We now take American apples and Australian kiwis in our supermarket for granted. However, there was a time before cool chain and cold storage when most produce had to be sourced within a certain geographic radius. Ships had to be unloaded, by hand, onto steam-powered trains. Most of the produce would rot and go to waste. Hemmed-in by these constraints, businesses had to work with what they had. If it involved bribing bureaucrats or overthrowing governments to ensure zero taxes and union-free labor, then so be it.

The book is also the story about most corporations. Even though, technically, a company could live on forever, most have finite lifespans. Founders who know the business inside-out inevitably age. They are replaced by “professional management” who may keep things going for a while. But eventually, most companies that die end up being run by bureaucrats far removed from the ground with very little of the spirit that shaped the company at the beginning.

Sam Zemurray’s life could very well be an exemplification of the American dream but the banana company that he built ended up being an exemplar of the worst of American business’ colonial instincts.

Recommendation: Read it now!