Tag: review

Book Review: How The Mighty Fall

How The Mighty Fall: And Why Some Companies Never Give In (Amazon,) contrasts companies that survive challenges to their business models with companies that failed to respond. (Excerpts.)

Thoughts

Reading Christensen, one can be lead to believe that a company that doesn’t earmark a large R&D budget is doomed to failure. “Disrupt thyself or have it done onto you.” However, Collins presents a long list of well known companies with huge R&D budgets that did not survive. The key take-away for me was:
“Innovation can fuel growth, but frenetic innovation — growth that erodes consistent tactical excellence — can just as easily send a company cascading through the stages of decline… Catastrophic decline can be brought about by driven, intense, hard-working, and creative people.”

It fits into the ROC world-view of the previous book (Outsiders) where CEOs donned the role of hard-headed investors, leading to an ever-growing cash pile. Cash on hand gives you options while dealing with disruptive innovations. The response to disruption need not always be a panicked acquisition or “ignore it and hope that it goes away.” There are other ways in which an incumbent can strike back, existing regulatory frameworks can be used to put up a long and expensive fight and can be a significant source of their competitive advantage. As long as you have cash, you can survive.

At the same time, where Outsiders’ CEOs were brutal in cutting out businesses that they thought were ‘dogs’, Collins takes a mellower approach: “A core business that meets a fundamental human need — and one at which you’ve become best in the world — rarely becomes obsolete.” But it does: the newspaper business in the US is a recent example (buggy whips, chimney cleaning…) Knowing when to cut your losses is a big part of running a successful business.

The book provides a useful template to identify companies in decline and it is worthwhile reading it for that alone. However, I disagree with its principal worldview that the primary/core business is always worth saving. Sometimes it is not.

Book Review: The Outsiders

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success (Amazon,) tells the story of quantitative CEOs and the effect they hand on their companies and their industries. (Excerpts)

Thoughts

I have always maintained that the only thing that matters is Return on Capital (ROC.) However, most people are focused on ‘busy work’ and playing ‘boss’ that they focus overly on growth, at the expense of returns. It is oftentimes better to be small and enjoy a high level of return on capital than grow and forgo margins.

The book is careful in portraying the CEO’s as ruthless psychopaths but in the words of Stiritz, “Leadership is analysis.” Indeed.

Book Review: The Only Game in Town

The Only Game in Town (Amazon,) walks us through how Central Banks picked up the slack when elected governments dropped the ball after the global financial crisis. Excerpts are here.

Thoughts

Central Banks acted as drug dealers when both banks and governments binged on credit. Greenspan and his Fed were so Randian that they turned a blind eye toward the principal-agent and moral-hazard problems that their endless bailouts and light-tough regulation was stoking. When the system imploded, their actions prevented a much-need rewrite of the status quo. We now have a world economy that is even more deeply hooked on easy credit, thanks to Central Bank interventions. Central Banks continue to enable governments to sweep deep-rooted problems under the rug. They do not deserve credit for “saving” the global economy that they collectively pushed over the cliff.

“I tried to drown my sorrows, but the bastards learned how to swim…” ~ Frida

Book Review: In-N-Out Burger

In-N-Out Burger: A Behind-the-Counter Look at the Fast-Food Chain That Breaks All the Rules (Amazon,) lays out the inside story of the family behind the California-based hamburger chain with a huge cult following. Excerpts are here.

Thoughts

Father starts a business. Son expands it. Grandson destroys it. It is an extremely common story. From the book:

According to the Family Business Forum at the University of North Carolina, only 30 percent of all family businesses are successfully transferred to the second generation, while only 12 percent make it to the third. After that, less than 3 percent make a successful transition to the fourth generation.

The saving grace of the In-N-Out Burger story is that they did not IPO or take in outside capital. Unlike so many of family owned Indian businesses that plough through minority shareholders (United Breweries, the Tata conglomerate, the Congress Party, etc…)

Scions of successful business family should be allowed to cash their trust fund checks while sipping cocktails in the Côte d’Azur. Either leave the business to be run by professions or sell out. Life is too short to be spent in a golden cage.

Book Review: The Dao of Capital

The Dao of Capital: Austrian Investing in a Distorted World (Amazon,) gives an overview of Austrian economics and discusses how one can use that to invest in the markets. Excerpts are here.

Thoughts

The Austrian school of economics is very similar to Ayn Rand’s laissez-faire version of capitalism. Both do not address how the less fortunate among us are supposed to survive in their version of the world. Neither do they discuss the role of policemen in society and how they get paid.

Leaving Rand aside, the biggest beef that the Austrian school has with the current version of capitalism (based on Keynesian economics) is on the role of the central bank. They don’t see a need for it because they believe that interest rates should be set by the market, not by a top-down bureaucracy. Here, I agree with the author that the Austrian school hasn’t been able to garner enough resources to push the philosophy forward in academia. Their philosophy seems frozen in time – stuck in what Mises though in the 40’s/50’s.

Keynesian economics has had the (mis?)fortune of being widely adopted. Anything that is deployed in the real world will necessarily be modified (bastardized?) to fit ground realities. This allows people in the sidelines to profess “purity” while criticizing the mainstream.

The author then proceeds to illustrate how Austrian economic philosophy can be applied to investing, mainly along:

  1. Credit cycles
  2. Buying OTM puts
  3. Value

None of these are particularly “Austrian.” And, I call bull-shit on buying OTM puts.

First, the author’s back-test over 100 years is meaningless. There was no practical way to implement this strategy even 10 years ago, leave alone 100. Until recently, the brokerage along would have eaten away whatever profits one might have had.

Second, it is a costly bet to go long volatility even if the world does blow up. In the low volatility decile, in order to break even on a protective put strategy with 5% out-of-the-money options, a 1987-type black swan would have to occur every 21 years. (AA)

Overall, the book was useful in filling some gaps in my knowledge of economic history. It also highlighted the need to formally keep track of the credit cycle in major economies and our own.