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Book report: Running Money
Old 11-05-2005, 09:52 AM   #1
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Book report: Running Money

Andy Kessler wrote "Wall Street Meat" about his days with Meeker, Blodget, Quattrone, & the rest of the indicted. It's a good read, like Michael Lewis' "Liar's Poker", and he does more of the same storytelling about running his own hedge fund.

Between 1996-2001 Andy and his partner ran a hedge fund that eventually reached $1 billion in assets. They finished liquidating just before 9/11, they claim it was in the top ten most-successful hedge funds in history, and they sextupled their investor's money. (Over 40% annual return with breathtaking volatility.) They didn't take any salary for the first two years ("living expenses" only) and they spent most of that living out of their car as they roamed Silicon Valley fielding pitches from various firms. He demystifies every little glamorous detail of managing a hedge fund, from the constant meetings & industry conferences to the "office" space to their home "life". I suspect this is what happens to just about everyone when you decide to leave the big firm and strike out on your own.

The stories are fascinating & funny. If these guys could make money then we can too, as long as we're willing to work like a dog at their lifestyle. The thing that struck me was how thin a margin existed between a blockbuster ten-bagger and the next dot-bomb. Frequently both were the same investment. If you're still buying individual stocks, these stories will give you considerable pause for reflection.

Kessler's most impressive point in the book was "We think, they sweat." Warren Buffett and many economists have been alarmed for years at the U.S. balance of trade (at least Buffett has the grace to admit that he's probably wrong) but Kessler may have deflated this controversy. He claims that economists are tightly focused on the dollars without considering the intellectual property. We actually have an excess of high margins & intellectual property that balances the trade deficit.

Here's an overly simplified example: a U.S. chip engineer finishes his design and e-mails the file to an Asian fabrication plant. It sells for $300 and the profit is about $250. Microsoft finishes designing an operating system and sells it for $50 (with a profit of about $49). The margins are huge, especially when you consider how much of it has been outsourced overseas.

Toshiba puts both products into a laptop and sells it for $1000 all over the U.S. Their profit, if they're very efficient and do a very high volume, is about $50. The margin is tiny.

Kessler's point is that $350 of stuff is exported from the U.S. and a $1000 product is imported, so the trade deficit is $650. Multiply this by about 75 million laptops, as well as a slew of other consumer products designed here & manufactured overseas, and you're talking real money. But the ideas & concepts that created all of these products were Made in America, and that's not accounted for in the trade deficit calculations.

So where does that $650 go? Maybe it buys Japanese real estate or Russian oil shares or Asian semiconductor companies. However, the businesses that have the highest margins aren't in any of those countries-- the highest margins are in the U.S. So some of the trade-deficit money comes back into the stocks of U.S. companies. More of it buys their bonds. But most of the money buys low-risk U.S. Treasuries, and Kessler makes the point that all those T-bills are backed by the tax payments from the high wages that high-margin businesses pay to programmers & engineers instead of to low-salary factory workers.

Some of those treasuries are even used by foreign banks as currency reserves (instead of gold). Other countries are also learning that converting U.S. dollars into their currency drives down the dollar, which makes their companies' products more expensive to sell in the U.S. and hurts their already razor-thin margins. As a result many foreign governments are also buying Treasuries, dollars, & American stocks to keep their own currency & goods more competitive.

But doesn't that mean that the rest of the world will soon own the U.S.? Well, no. I don't know the current number but Kessler claims that foreign countries/investors only account for about 13% of the U.S. stock market. After all, we're highly paid and it's not ALL going to conspicuous consumption. American investors are still getting stock options, earning restricted stock, and buying their own shares. That 13% ratio isn't moving very much and it isn't expected to change as long as the high-margin businesses are created here while the rest of the world enjoys the rest of the Industrial Revolution.

Still on my list is Kessler's new book: "How We Got Here : A Slightly Irreverent History of Technology and Markets"...

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