By Sandesh Trivedi, sandeshtrivedi@gmail.com

For value investors blindly shunning tech stocks they might want to read the book, Information Rules: A Strategic Guide to the Network Economy by Carl Shapiro and Hal Varian. Though the book might not help you catch the next Microsoft or Cisco or Amazon at a very early stage, it puts forth a very compelling argument that traditional economics still applies to the new economy. The book serves as a handbook to analyze the basic economics of tech businesses, and also whether they have any competitive advantages which might enable them to generate above average returns. The book might not make you an expert in the tech industry, but at least help you navigate successfully analyzing tech stocks. As the author mentioned in the beginning of this book, this book is seeking models, concepts, and analysis, which will provide reader with a deeper understanding of the fundamental principles in today’s high-tech industries.

According to the authors the traditional laws of economics are still very much applicable to the tech businesses. To drive home their point, they cite similarities between the evolution of railroads, telephone and tech industries. Essentially the authors try to convey that traditional concepts like economies of scale and network effects are hardly unique to information economy, and fundamental principles of economics are relevant in an information economy too. In fact many information goods businesses have huge fixed costs in such as high R&D, and infrastructure costs in the case of telecommunications systems. Information is costly to produce but inexpensive to reproduce because some tech businesses have high fixed cost and low marginal costs. If a company lays fiber optic cable, buys switches and puts on a telecommunications system which are all fixed costs, after that it costs next to nothing for signals to be sent. One of the properties peculiar to information technology businesses is that they are subject to large increasing returns to scale on both the supply and demand side. Market outcomes in these markets tend to be concentrated and require standardization.

Traditional manufacturing industries had supply side economies of scale but often it ran into natural limits on the supply side, whereas a business like Microsoft not only has supply side economies of scale but it maintains absolute dominance is because of the demand side economies of scale. Microsoft’s customers value its operating systems because they are widely used and are the de facto industry standard. Unlike the supply side economies of scale, demand side economies of scale don’t dissipate when the market gets large enough. In fact it becomes a winner-take-all market. For investors willing to evolve and learn more about the economics of tech business this is a must read book.

To purchase the book on Amazon.com click on the following link Information Rules: A Strategic Guide to the Network Economy

I believe that Short Sellers do better analysis than buyers. The world is biased against them, they’re the market policemen, it’s not in the country’s best interest for short sellers to go away. Short Sellers are more patriotic than the CNBC Perma Bulls. Seth Klarman from an interview with Jason Zweig 5/18/2010

The above quote from one of the greatest investors in history, explains why short sellers are some of the best investors out there. Short sellers( the good ones) do such extensive analysis on companies that they are able to see fraud, or even just troubles brewing before long only investors. Klarman also defends short sellers against the populist argument that they are somehow "unpatriotic".

Klarman's thoughts are detailed in the latest book that I have read , The Art of Short Selling by Kathryn F. Staley. I have never shorted in my life, and would never have considered reading this book had it not been for my friend who strongly suggested it. My friend graduated from Columbia's value investing program, and is now an analyst at a value hedge fund with a spectacular long term record. He strongly convinced me to read the book even though I do not short sell. I am glad I listened to my friend!

Growing up through the tech bubble, I could not understand how anyone could short. There were stocks that were trading at absurd valuations that went up a further 500% in several years, if not several months. How can one short a stock based on valuation after the experience of the late 90s?

I approached the book with great skepticism, but an open mind. I read the book as a guide for a long only investor in finding "financial shenanigans". The book proved quite valuable even if I never short a stock for the rest of my life. The author specifically warns about shorting based on valuation, which was one of my earlier fears.

The task of a short seller is not an easy one. Staley suggests reading the past six 10-qs, the past two 10-ks, and the past several proxies as a starting point. This is all before doing more extensive research on the company and industry! The author also suggests checking company stores, reading competitors' financial statements and reading industry reports. The task of a short seller is definitely not for the lazy person.

The author does a great job of explaining various short situations which include; companies that require endless amounts of new capital to stay afloat, "theme stocks", stocks that have no earnings that are set for failure, companies that make their financial statements confusing to try and make earnings look good, and even cases of outright fraud.

Most of the examples on the balance sheet include receivables and inventories rising much faster than sales. Securities not marketed to market, bad loans, and inventories with obsolete products is something else to look out for (technology companies can have much inventory become obsolete almost overnight due to rapid changes in technology). On the income statement earnings are dramatically inflated due to one time gains, which the management tries to hide deep inside the company fillings. The management might be hiding a clear disclosure of revenue booking practices. These are only a few of the many examples Staley gives. Let us go through a case study to see how the big picture looks.

Case study: Crazy Eddie

Sately states that Crazy Eddie makes the all-star list of short stocks; "sophisticated bubbles, Wall Street icons, and greed" all come together in the case of Crazy Eddie.

In June 1986 Crazy Eddie owner 24 retail consumer electronic stores in the New York metropolitan area. By this time the company was trading at 39x "earnings". "Crazy" Eddie Antar (the CEO) hired several family members his brother, uncle, cousins etc. to be top managers in the company. Eddie, and another insider crony had sold $71.5 million of stock by June 1986.

The company engaged in several odd dealings with another corporation Benel Distribution, which was owned by Eddie's sister and brother-in-law. The transactions included inventory sales, leases and joint advertising expenses. Crazy Eddie also conducted many transactions with family owned entities, which at the very least should have raised some red flags. The company also made interest free loans to Eddie and other family members! As ridiculous as this sounds, it gets worse as the company could not determine the amount lent out to Eddie and his family members!

Wall Street liked Crazy Eddie because their sale of VCRs was increasing rapidly in the mid 1980s. Conventional Wall Street wisdom was that every home in America would soon have a VCR. Wall Street also liked Crazy Eddie because the store had a reputation for low prices. Drexel was predicting $1 billion of total sales by 1990.

Wall Street seemed unconcerned that after-tax margins for the company were only 5%. The only way the company was able to compete was by achieving quick inventory turnover. Wall Street also got very excited by the fact that Crazy Eddie decided to enter the Home Shopping Network. Eddie assured the public that his company would be a massive seller om the Home Shopping Network, and that it would soon contribute $65 million a year to revenue.

In the middle of October 1986, Eddie announced third revenue earnings might be slightly lower than Wall Street estimates, the stock immediately dropped 15%. The 10q released in October 1987 showed sales up 42%, with inventories up a whopping a 142%. In November 1986, Eddie reduced his stake in the company by nearly 40%. However, in December of 1986 management announced the repurchase of three million shares stating "that the shares were undervalued". Between December 1986 and October 1987, the stock had only decreased in price!

The 1987 10K revealed that sales were up by 42%, while inventories were up over triple that amount. Same store sales were down 19%, while Wall Street was expecting a 50% increase. Earnings for Q4 1987 were only $.02 a share, and gross margins were sliding downward.

In June of 1987 the SEC declared an investigation of the company, Chemical Bank cut off it's $52 million line of credit, and a member of the board resigned. However, Eddie's salaried doubled over the past year! Shareholders started taking note and so did Wall Street. Many shareholder suits were filled against management, and analysts who had previously recommended the stock only several months ago were now downgrading the company.

The final straw came in November 1987, Eddie was rumored to be seriously ill.The escalating of the previous year were finally explained. New management said they were missing $45 million of inventory. The company charged that Eddie falsified "inventory and profit reports, created phantom inventory, and destroyed the records in a cover-up". Eddie was also accused of falsifying same store sales, by including wholesale sales in revenue figures. Eddie was accused of looting the company, and selling on insider information. In June 1989 Crazy Eddie filled for bankruptcy. Eddie surrendered to US marshals in February 1990.

To read the rest of this review on GuruFocus.com click here .

To purchase this book on Amazon.com click on the following link The Art of Short Selling.

Disclosure: I receive free books from book publishers asking me to review them. In addition I sometimes request specific books that look interesting. I try to review the books that I think will be the most interesting. I have a material connection because I received a free copy of this book from the publisher. In addition I receive a small commission if you click on the above link and buy the book (or anything else) from Amazon.com It does not cost you a penny more. So I get a commission, Amazon gets a sale, and you get your book so it is a win for everyone.

While America Aged by Roger Lowenstein is a tale of one industry and two cities brought to their knees by underfunded pension plans. The industry discussed is the auto industry and the cities are New York City, and San Diego.

The book I am reviewing is a few years old but is more relevant than ever. The Pension Benefit Guaranty Corporation announced in November 2009 that its annual deficit grew from $11.2 billion in fiscal 2008 to $22 billion in fiscal 2009. According to a recent study by the Manhattan Institute 59 pension funds which cover teachers in all 50 states have unfunded liabilities total about $933 billion! Clearly pension funds are a big problem both in the private and public sector. This makes Lowenstein’s in-depth study of three cases of underfunded pensions vital to understanding and hopefully solving this problem.

The problem might be as large as three trillion dollars as I detailed in a previous article underfunded pensions by state

Roger Lowenstein is the author of two bestselling books, Buffett: The Making of an American Capitalist and When Genius Failed. A reporter and columnist for the Wall Street Journal for more than a decade, Lowenstein is currently a columnist for SmartMoney magazine and a contributor to The New York Times Magazine and the Wall Street Journal, among other publications.

Before one reads the book one must realize that Roger Lowenstein is by no means an ideologue. He is very critical of the unions for creating a crisis in New York City that almost led to its bankruptcy in the 1070s. In addition he blames union tactics for leading to the crisis that led to the downfall of GM( the book was published shortly before GM actually declared bankruptcy). This might give the reader an impression that he is anti-union and leaning more to the right. However, in the last chapter he blasts the Republican leaders of San Diego for severely under-taxing the city and therefore not having enough revenue to cover their debt.

I decided in this book review not to get the main details, but rather explain the general theme of the book. The general theme is that pensions are the perfect tool for employers. They kind of work like a ponzi scheme. Employers promise lavish benefits to workers that they will not have to fork up for decades. GM offered lavish benefits to auto workers at a time when the company dominated the industry. However, when these benefits came due in the 2000s the burden was too much, and they crippled the company. The increasing life expectancy exacerbated this crisis as the pension were promised for life.

The basic theme of the book is powerful unions both in the private sector and public sector that were able to use their muscle to get lavish benefits. Employers were more willing to give in on pension benefits than increase salaries because this was a future expense which would not have to be paid for decades. In the public sector the unions could vote out the politicians if they did not give in, or launch strikes that would devastate the economy. This was the case in New York City. Anyone who lives in the New York area as I do knows that the economy comes to a standstill when the transportation unions go on strike. In the private sector too the auto worker union would launch strikes that would devastate the auto companies ability to do business. This would encourage management and politicians to give in to the unions, especially since the bill would not be do for many years.

Lowenstein does not offer any simple solutions for the pensions problems facing the nation. He tries to split them into two seperate issues; health care and money to retire on. For healthcare Lowenstein thinks the Government should step in. Lowenstein does not go into detail but he believes the Government should provide subsidies for healthcare based on a sliding scale. He does not think a company like GM can compete with companies like Toyota, since GM has to pay billions of dollars in healthcare costs to current and former employees, while Toyota has no such worry. This puts Toyota and other foreign companies at a huge edge over American companies in this global age.

For general retirement savings Lowenstein favors legislation that requires pension funds to stay solvent(the italics is from Lowenstein himself). He thinks the overall system pension is bad and slowly fading in the private sector and that is why new companies like Google and Walmart are refusing to implement pension plans. Lowenstein also favors increasing the payroll tax to keep the Social Security fund solvent. Lowenstein also wants the practice to end of the Government borrowing from the Social Security “surpluses” similar to what President George W. Bush proposed. The Government should also get involved in 401ks and offer matching contributions to lower and middle income Americans. He states that he favors a similar plan to the one Hillary Clinton offered.

I would recommend this book to anyone interested in personal finance and the fiscal mess our country is. This book should appeal to people without a financial background. As long as you know what a pension fund is you will understand all the terms used in the book. In addition, this book will be an eye opener even to the most astute and educated businessman.

Besides the fact that an investor must know basic economics, this book provides valuable insights to investors. GM and Chrysler were crippled by Pension debts which ultimately brought down the companies. Many current companies have underfunded pensions, and have unrealistic expectations for future returns on their pension funds. An investor should approach companies with these unfunded liabilities with great caution. Investors can many times find pension information in a company’s 10-K. I was not surprised when Seth Klarman recently stated that people should read all of Roger Lowenstein’s books if they wish to become better investors. A colleague of mine also told me several months ago that Seth Klarman told him to read all of Roger Lowenstein’s books to become a better investor.

To purchase the book on Amazon.com click on the following link While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis

Roger Lowenstein is one of my favorite authors. When I found out he was coming out with a book on the financial crisis in my mind it was a must read. Readers who have been following my series of book reviews know that I have written many book reviews on the financial crisis. This will likely be my last one.

Roger Lowenstein is the author of some other best selling books. They include When Genius Failed the tale of the collapse of Long Term Capital Management(LTCM), and Buffett: The Making of an American Capitalist. Lowenstein’s most recent book I am reviewing is titled The End of Wall Street. Not surprisingly the book has become a best seller since its release several days ago.

The End of Wall Street is the tale of the collapse of Wall Street from Lowenstein’s perspective. Lowenstein begins the book in 2006 with a description of countrywide, and their efforts to make housing more affordable. The book continues through the fall of Lehman Brothers and the sheer disaster that occurred in the months following it. The book ends off with some criticism of the key government and Wall Street players whose actions caused the crisis.

I do not like to compare books in book reviews, but I think it is necessary in this case. Lowenstein’s book most reminds me of Andrew Ross Sorkin’s Too Big to Fail. Both books contain many of the same facts, and describe the financial crisis in depth, beginning with the housing bubble and ending with TARP and other Government actions taken by both the President and congress, and the Federal Reserve.

While I admit I found Sorkin’s book very riveting (I gave it a very positive review) I was skeptical of the some of the facts written in the book. Sorkin got access to top people in Government and Wall Street firms to get their take on various details. He presented nearly every single major player whether it was Hank Paulson, Dick Fuld, or Ben Bernanke in a positive light. I was informed by an author who wrote a book on the financial crisis that Sorkin was very kind to many of these people to get access to them.

I talked a lot about Sorkin’s book to demonstrate one major contrast with Lowenstein’s book, Roger Lowenstein writes his book with no holds barred. Roger Lowenstein is very critical of many of the major players in the financial crisis. He talks about the Democrats in Congress being more concerned about the 2008 elections than reforming Fannie Mae and Freddie Mac. He also accuses them of caring more about restricting executive pay than making sure the banking system is sound.

To read the rest of the book review on Guru Focus Click here

To purchase the book on Amazon.com click on the following link The End of Wall Street

Disclosure: New FTC rules require me to state that I have a material connection because I received a free copy of this book to review.

Globalization and in particular global trade in balances are probably one of the most important issues facing the world today and America in particular . When the economy is in full recovery, concerns over outsourcing of jobs will likely become the #1 economic issue.

The media seems to be one sided on the issue, globalization is bad for the US economy, it is destroying the domestic manufacturing base, and we need “free trade” not fair trade. I too share this view to a large extent. I am far from even considering myself knowledgeable on the topic. I got a one sided view from a brilliant professor of mine who was very ideologically left wing and opposed to globalization. I did not disagree with him (although we had some debates about US foreign policy, many of which I won). In addition, I read Joseph Stiglitz’s book Globalization and Its Discontents several years ago, and largely reinforced my negative views regarding globalization.

I had been eager to read Bruce Greenwald’s book on globalization for a while and finally got to it recently. I was conflicted before reading the book. On the one hand I have tremendous respect for Bruce Greenwald. He wrote what I consider to be one of the best books on value investing ever Value Investing: From Graham to Buffett and Beyond .  I also conducted a recent interview with Greenwald and he struck me as a sheer genius who thinks rationally about various issues in economics and investing that I was willing to be open minded about the book. On the other hand, I had my preconceived notions about globalization.

To do justice to this book I would really have to write a book review on each of the six chapters separately (Maybe I should not have written such a long introduction but I felt it was important to address those points before addressing the book itself) .The book is not a long read, but it is packed with valuable information and data that each chapter deserves its own review. However, I will try my best to address some of the major points of the book in this review.

Bruce Greenwald sees the decreasing domestic manufacturing base in America as an irreversible situation. He compares this to the decrease in agriculture as a percentage of GDP in the early decades of the 20th century. If one accepts Greenwald’s arguments this has major ramifications for future economic policy. While President Obama’s plans to rebuild the manufacturing sector of the economy and focus less on the service sector according to Greenwald’s thinking this will be highly unsuccessful and counterproductive.

Greenwald believes that America should embrace the service sector taking over for the manufacturing sector, like America accepted the agricultural sector decline in the early part of the 20th century. Greenwald argues that the good news is most of the manufacturing jobs have been lost and likely reached a peak.

Greenwald acknowledges that there are problems with outsourcing jobs in the service sector too. Many jobs in the service sector have been lost due to outsourcing to places like India. However, Greenwald believes that all the jobs that have been outsourced have been and many jobs cannot be outsourced. Many service sector jobs require direct interaction with the other party, and they cannot be accomplished by people several thousand miles away. Housing, medical care, education, legal services, utilities etc. cannot be outsourced. You cannot pay someone in India to build you a house in New York. He also notes that most of the recent employment increases over the past several decade have been in higher level position/ managerial positions these jobs are the least likely to be outsourced.

One point I need to mention is that even though Greenwald has a strong opinion about globalization, he is far from an ideologue. The fact that he co-hosted a class with Joseph Stiglitz on globalization is evidence of that. Bruce Greenwald also analyzes countries that transitioned from more socialized to more capitalistic structures.

To read the rest of my book review on Guru Focus click here

To purchase this book on Amazon.com click on the following link globalization: n. the irrational fear that someone in China will take your job

Disclosure: according to new FTC guidelines I must disclose that I have a material connection because I received a copy of this book to review. In addition I receive a small commission if you buy the book (or anything else from Amazon) from the link above. However, it is the same price to buy the book from the above link as it does to buy the book by going to Amazon.com directly.