Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score [Englisch] [Gebundene Ausgabe]

Running Money, Andy Kessler's new book, is a big disappointment. His first book, Wall Street Meat, was a witty, intelligent and perceptive description of his life as a sell-side analyst. But Running Money, which covers his time co-managing a technology hedge fund from 1996 to 2001, is a let-down. There are three reasons why this book misses the mark:

First, Running Money won't give you any insights into running a hedge fund. Kessler actually ran a sort of hybrid VC fund and mutual fund. He never shorted stocks or used any other hedging mechanism, and his fund was 100% net long at all times. This doesn't mean Kessler was stupid. On the contrary, 1996 to 2000 was a period when you wanted to be 100% net long technology stocks (ideally with leverage...), and when the tech bubble burst in 2001 Kessler was smart enough to liquidate his fund. But don't look for insights into shorting stocks or managing net exposure.

Second, the core discussion about investment strategy is superficial. Kessler outlines his methodology: find companies with large markets, sustainable competitive advantage and lucrative business models. But there's no rigorous analysis of how that methodology really performed, since we don't know whether he outperformed his VC peers (he also invested in private deals) or the semiconductor and hardware indexes (those are where most of his investments seem to have been) on an after-fees, after-tax basis. There's no discussion about whether his methodology is approriate for today's market conditions. There's no discussion of valuation. There's no discussion of portfolio construction or risk management. And there's no analysis of the mistakes he made either. In fact, you get the feeling that Kessler's approach was uniquely suited to the bubble-inflating years - pick tech stocks with the greatest growth prospects relative to expectations, and ignore valuation. Kessler's genius was getting out in time; but that doesn't help us now.

Third, much of the book is devoted to a thoroughly implausible theory of international trade. Kessler suggests that the US trade deficit is partly an illusion, created by the difficulties of tracking intellectual property exports. He ignores basic national accounting relationships such as: if consumers and government aren't saving anything but domestic investment is positive, then the shortfall must be made up by foreign capital inflows. He then argues that the US can sustain indefinite trade deficits because the return on capital is higher in the US than elsewhere, so foreigners will always want to invest in the US. This is not only unconvincing but dangerous. The twin trade and budget deficits are generating currency risks that every professional investor needs to be aware of.

So what's good about it? Well, like Wall Street Meat, Running Money is a lot of fun to read. Kessler's discussions of technology investing are also interesting, if ultimately unsatisfying. And his descriptions of meetings with company managements and sell-side tech conferences are entertaining and witty, though they lack the searing character portraits of Wall Street Meat.

Verdict: if you haven't read Wall Street Meat, buy that instead. If you have, and you want a fun read, go ahead and read Running Money. Just don't expect to learn much about running money.

"Running Money" is not only a great read, it also provides a unique contemporaneous view of the `90s investment market by a talented hedge fund manager who makes no claims to omniscience. He brings us into his struggles, doubts, and mistakes as well as his successes. He shows us how hard it really is to find great investments even in a wild bull market. This is a very different book than "Wall Street Meat". It isn't as wry but I think it offers us more substance along with a lot of fun. However, the fun comes from more sources than just humor.

The book weaves three threads into the final fabric. First, there is the hedge fund narrative. The author provides us with many fun stories about his difficulties in raising money for their fund, the troubles in finding the right investments, and the natural history of his and his partner's successes and failures with the market and private investments.

Among other many things, we learn that the real action at conferences is out in the hall, that it is time to leave when CFOs close the doors to their offices or conference rooms or when the sales executive is the power guy, and the travails of getting an Instinet terminal in your office so you don't have to pay a broker to do the same thing for you. We get to ride with them in their four-door office as the go to meeting after conference after meeting looking for the right investment. Usually they find things to laugh at, run from, or that are jaw droppingly dumb. However, every now and again they find things to buy. Even then, many of them are dogs. But the ones that take off end up paying for everything including their cheap office above an arts supply store.

Second, we get the author's analysis of what is going on in the market and what he and Fred Kittler are trying to do with Velocity Capital. Mr. Kessler shares with us his metaphors for what he is after - in particular the waterfall and its moment of great power just before it hits the rocks. There are some serious history lessons on the development of the steam engine, railroads, and integrated circuits as vehicles for investment. When would it have been right to get in and to get out? We come to understand that the investments he is after have not just large markets, but mega markets so there are powerful factors of scale. He wants profitability to go up as prices fall towards the rocks below. He wants to see a business plan to leverage that scale. And he wants some kind of unfair competitive advantage. If a competitor can simply build what you have and be your equal, he feels you have a recipe for large losses.

Third, and this seems to be the part of the book that matters most to the author, everything is pulled together to culminate in a philosophical treatise on the future of the American economy as part of the world economy and what we as a country should be focusing on. His view is that the industrial age is ending and that the future economy is based on intellectual capital. He also argues that this kind of benefit can't be measured using our present methods of balance of trade or other economic measures built for the industrial age. Whether you end up agreeing with him or not, his arguments are interesting and worth considering.

A fine book that should be widely read and not just by those interested in finance. This is a fun read that also has several serious payoffs.

"Running Money" picks up where Andy Kessler's previous book, "Wall Street Meat" (which portrays his life as a Wall Street-based semiconductor industry stock analyst and investment banker), left off. Kessler left Wall Street to run a Palo Alto-based hedge fund with one partner, raising money from wealthy individuals and groups, and investing it in latter-stage startup and public technology companies. He had the, in retrospect, incredibly fortuitous timing (as he himself admits) to open a five year fund in 1996, which forced him to liquidate the fund and lock in his profits as the tech bubble was bursting in 2001 (in fact, he disperses his last cash just days before 9/11).

But Kessler's success, as he proves in the highly entertaining and also thought provoking "Running Money", is not merely the product of providential timing. His insider's view of the hedge fund industry shows how many of these funds don't even attempt to do fundamental stock analysis, but instead seek out market distortions that they can profit from (for a while, at least). Kessler, by contrast, stays true to his stock analyst roots and attempts to find great companies possessing a strong economic and technological advantage in a market about to undergo rapid growth. He struggles initially, but eventually uses an interesting combination of old world thinking (by analyzing the history of the steam power-driven Industrial Revolution) and radical new era economics (described below) to identify some winners. His story of the small niche semiconductor company he found which benefited immensely from the MP3 music piracy fad, at the same time that Napster and the record companies were losing their shirts, is a great case study for technology investing.

If "Running Money" were nothing more than a series of case studies and anecdotes about the investments Kessler made, it would be a fairly lightweight book. The anecdotes are indeed amusing, especially Nick Moore's scathing trashtalking of technology companies (Moore has a humorous nickname for every technology company, e.g. "Scam-azon"). But fortunately, in the final section, Kessler ponders the deeper question of what his success means about the current economy. It is here that Kessler voices some fairly radical opinions and theories that certainly deserve to get discussed and tested.

Kessler's radical opinion is that traditional economists, who are very cognizant of and worried about the trade deficit that the United States has been running since the 1970s, are not properly accounting for what truly matters in today's economy: wealth and profits. Because so much US manufacturing has moved abroad, and because the design of those products (i.e. the intellectual property) is still heavily centered in the US, the US does not receive any economic "credit" on the trade balance sheet when those designs are shipped to overseas factories. What is counted, of course, are the manufactured products that come back into this country, and that produces a large deficit. But since manufacturing is such a cutthroat business, whereas companies focused on developing intellectual property (e.g. Microsoft, Intel, pharmaceutical companies, and even Nike) command such high margins (profits) and pay their employees well, the resulting arrangement is highly beneficial to the living standard of the US. "We think, they sweat", sums up Kessler in his typical smart-alecky style. The low-priced products which flow into this country, along with the capital which finances some of our government's budget deficit, are our rewards for this mutually beneficial relationship.

Needless to say, these views are highly controversial. Yet Kessler forcefully states his arguments, and also has more than a little evidence on his side. He deserves credit for formulating these views, and thereby making "Running Money" more than just a breezy rags-to-riches technology boom era story.