Business Adventures: A Good Economic History Book

Book Review: Business Adventures by David Merkel, CFA of The Aleph Blog.

Do you like economic history?  I do.  I often think that we spend too much time on the numbers in business, and not enough time on the qualitative reasoning that goes into making good business decisions.

This particular book gained some notoriety of late when both Bill Gates and Warren Buffett said they were fans of the book.  Could a book get a more powerful set of recommenders? Unlikely, and as a result, Business Adventures was pulled back into print. [Those reading this review at Amazon, there are links at Aleph Blog to flesh this point, and other points out.]

The stories are taken from articles written in The New Yorker from the 1960s by John Brooks, who wrote what was one of the best summaries of the markets in the ’60s, “The Go-Go Years.”

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If you don’t like economic history, this will not be Business Adventures for you, because the old stories will not resonate, and say to you, “We never learn.”

Consider the wealth of situations covered in Business Adventures:

1) There was a surprising fall in the market in 1962.  We have experienced much the same with “flash crashes” recently.  They had a hard time figuring it out as well.

2) There was much work put into testing the Edsel, but it was a flop.  Does that never happen today?  What of New Coke? Various Microsoft products?

3) Even in the ’50s and ’60s there were people looking to convert wage income into less-taxed capital gains income.  The tax code was filled with loopholes.  After a brief tax code cleanup in the mid-’80s, we are back to the same problem today.  Is it any surprise corporations do not manage their businesses for pre-tax economic outcomes?

4) Insider trading scandals are nothing new; we just dress them up in new clothes each decade.  Watch the fun as an oil company delays the release of what a gusher they have drilled, while employees/friends take positions.  And, to no surprise, there are different legal results as different parties knew differing amounts on how certain the information was.

5) New technology?  Something so big that the name of the company becomes the generic name for the product?  Where they set up a center for research in areas not directly related to their main business?  Google!  Okay, Xerox…  (At least Google is trying to profit from their innovations.)  How does a company manage to avoid becoming trapped in one area of technology?  Well, it didn’t work for Xerox, but maybe modern companies can avoid the same problem.

6) Can financial companies rescue a fellow company to protect the good reputation of the industry?  In this case they did, but did Wall Street retain the knowledge for the future?  LTCM was saved, though Bear Stearns didn’t do its part.  Wonder if that eventually cost them?  How many companies were rescued by fellow companies during the recent financial crisis?  A bunch, and some that should not have been rescued.  And some like Lehman Brothers, that were too big to be privately rescued…

7) Price fixing?  Collusion?  Management teams that neglect oversight of employees until they are caught doing something wrong, and then cut the employees free [fire them] while management survives with nary a bruise?  This never happens today, right?  If nothing else, companies should have seen that bigness causes its own set of problems — how do you create an ethical culture across a large organization?

8 ) Or consider the story of Piggly-Wiggly, where the founder squeezed the shorts trying to manipulate his company’s stock, only to take on so much debt in the rescue that eventually he had to declare bankruptcy.  Though the occasions are different, think of many companies that took on too much debt to go private over the last 30 years.

9) What does a man do after a long time in public service?  Many go into business, and for a timely example, think of Eric Cantor joining Moelis.  Does it have to corrupt the former politician or bureaucrat?  No, but it will change you at minimum.

10) There were many angling for corporate governance reform in the ’60s.  This is still a live issue today with “say on pay,” voting rules on directors, shareholder proposals, splitting the role of CEO and Chairman, etc.  Corporate power is undiminished.  Do shareholders own the company, or does management?  Who do the directors care about more?

11) A clever knowledge worker knows a great deal about how a given product is made.  Can he take work at a competing firm?  There are many today who fight back against employment agreements, alleging “restraint of trade.”  This is not a new problem.

12) How do central banks preserve the value of the currency?  Do they work together or separately?  They work together if the cost isn’t high, and separately when the cost is high?  It seems not that much changes over time, aside from the fact that our currency doesn’t have gold backing, or any other kind of anchor for value.  Okay, I guess some things *do* change.

All that said, in short, every chapter of the twelve in Business Adventures has relevance to the modern era.  The real question to the reader is whether you want to think about how these stories relate to the present day.  I think the effort is worthwhile, and the engaged reader will benefit from the effort.

Quibbles

Summary

This book is good for those who like economic history, and want to learn from the lessons of the past.  If you require immediate and obvious relevance, look elsewhere.  If you still want to buy it, you can buy it here: Business Adventures: Twelve Classic Tales from the World of Wall Street.

Full disclosure: I looked to get a copy via interlibrary loan.  That failed.  Then I noticed that it was digitally available on a preview website for book reviewers.  That’s where I found it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

 

 

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.