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My Book Reviews

Category: Investor interviews, academic theory
Published: 1997
Read: 1999
Reviewed: Jun 2010

This book has interviews with 18 top money managers and academics. Some high-profile people included are: Mario Gabelli, Peter Lynch, D.E. Shaw, Steve Cohen, William Sharpe, Eugene Fama, and Merton Miller. The author, Peter Tanous, does not manage money and works as an advisor who finds money managers for billion-dollar clients. Like many interview books, a lot of the content is outdated commentary about specific stocks or events (like utility deregulation), but there is enough general discussion so that there is still some good stuff. Here are a few points that I found interesting:

  • John Ballen's Jiffy Lube investment.
  • Michael Price ignoring Hershey's and Wrigley's stocks that are selling for 25 times earnings and buying a Swedish company like Van Melles (maker of Mentos) for 8 or 9 times earnings.
  • Companies with attractive price-to-book values may be under-depreciating their assets.
  • A stock with huge debt and slim equity acts similar to a call option.
  • The way D.E. Shaw stressed that creativity was important to being a successful investor.
  • "I have always come back to something then Graham said to me. He said, "If you give me a reliable estimate of the earnings power of the company, I'll value it on the back of an envelope.""
  • Eric Ryback does a nice job of verbalizing intuition when he says how he holds a stock "until it starts looking at me funny".
  • "From volatility emerges opportunity."
  • "The kind of people who come here [to be traders] must have some frontier spirit."
  • "As with fine cuisine, it is not just the ingredients, but the combination of ingredients."

This book has several unappealing characteristics. First, the author seems in awe of his subjects. At one point, the author actually apologizes to the reader because one of the interviews was not "easy-going".

Second, the author specifically states that he made an effort to make the book relatable by not profiling "money managers who use exotic techniques" that "none of us can hope to emulate", but he failed miserably here. For instance, Michael Price became a shareholder activist with Chase Chemical after taking a huge position. And 40% of his fund was invested in bankruptcy, arbitrage, liquidation deals, and some other unusual securities. Another manager has high-tech satellite data feeds in order to trade off an information advantage. And D.E. Shaw has the smartest people in the world working for him.

The biggest problem, however, has to do with his attempt to tackle the debate about market efficiency. Firstly, the efficient market theory is pretty heavy topic, but the conversations with academics only touch on specific points for a sentence or two before moving on.

Second, the author makes a few casual comments which give the impression that he doesn't even know what he is talking about. When talking to Laura Sloate, he says:

"Your returns are very impressive. Your net returns for the seven years ended in 1995 were 20% per year. That's about five points better than the S&P 500 in an environment where the S&P 500 has been very tough to beat."

He seems to be implying that it is harder to beat the market when the market is doing well, which I don't believe is true. Alpha is just as hard to earn in up markets as down markets. If one wanted to classify certain markets as being harder to earn alpha in, I would say that low-volatility markets would be the best example. Another comment he made was about a money manager's risk profile.

"Yours is a high variance strategy, and your standard deviation is quite high compared to the market as a whole. I was fascinated that the turnover was so low, given the strategy. I still have trouble reconciling that."

Here, he mistakenly equates shorter-term time frames with higher volatility. A portfolio's turnover rate shouldn't affect its volatility. For instance, if an investor buys-and-holds a portfolio of high-beta stocks, his variance will still be high. His comment seems to be a result of a discriminatory mindset against short-term traders. Another not-so-intelligent comment he made was:

"The research budgets at top Wall Street firms exceed 50 million per year, so you'd think they must be doing something right. I wish I could be sure of that, but I'm not, although, some research departments are better than others.

Although he attempts to make himself look savvy by analyzing the connection between Wall Street research budgets and the quality of that research, the very fact that he proposes the idea that Wall Street research is high-quality is embarrassingly naive.

Another problem is the dismissive attitude of the academics. After the author presents Williams Sharpe with evidence that the abnormally-high returns generated from trading positive earnings releases may constitute a hole in the efficient market theory, Sharp reluctantly admits - with an annoyed tone - that it may be true. And on page 174, Eugene Fama offers a pathetically thin opinion on why he thinks that the stock market crash of 87 was not a market inefficiency.

The only dialogue with the academics that was even remotely valuable were the discussion with Rex Sinquefield about why some securities can have higher rates of return while having the same variance as lower-returning securities, and Roger Murray's rebuttals to the efficient market theory were also interesting.

I also disagreed with many of the supporting points that the academics made to defend the efficient market theory, but that is a greater debate which is outside the scope of a book review.

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