Wednesday, December 21, 2005

Financial thrillers are the best way to begin your career in finance

The first time I heard about the name of this book I thought it was some Sydney Sheldon thriller but, "Barbarians at the Gate" was a complete non-fiction thriller. The book takes one back to the early eighties when leveraged buyouts (LBOs) were in rage. Junk bonds found themselves at the centre of financial market. The story is about the hostile takeover by private equity investor - Kohlberg Kravis Roberts (then and still headed by Henry Kravis). The company that was taken over was RJR Nabisco (owner of the famous Oreo cookies, Camel cigarettes, etc.) And the amount involved, hold your breath, USD 23.5 billion. This was a huge amount for the eighties and was by far the largest then.
The takeover was full of thrill and action, something that may put most of the Jeffrey Archer and Syndey Sheldon's books to shame. The book takes you on a mindblowing trip through the jungles of investment banking. A must read for any finance student.
There are two other books of the same period - Den of Thieves and Predator's Ball. While the former gives an account of how Michael Milken (the junk bond machine) and Ivan Boesky (rocking trader) manipulated (or rather used privy information) to their own benefits. These gentlemen led to what we today know as the "Chinese Wall". The first half of the book gives you an account of the misdealings of these two gentlemen whereas the second half is about the "Law of the Land" taking its course and grounding the two. Another amazing trip down the high finance lane. Predator's Ball, by the way, was the name of the annual meetings that Michael Milken used to have with his clients. The clientele included some of the biggest takeover kings (Posner, Kravis, Pickens, etc.) and hundreds of 'wannabe' takeover kings.
What Michael Milken provided was a ready market which would not ask for your rating before loaning you. This ofcourse led to many small - to - medium companies gunning for loans - for takeovers (of the size atleast 5-10 times their own size), buyouts, expansions and a whole lot more.
While I absolutely loved reading these books, there a host of others which I recommend every fresher in a finance class must read. Here is the complete list -
1. Barabarians at the Gate
2. Den of Thieves
3. Predators Ball
4. Scam by Sucheta Dalal (Indian securities scam)
5. Rogue Trader (Nick Leeson story)
6. Crash of 1979 (Paul Erdman - Fiction)
7. Panic of 1989 (Paul Erdman - Fiction)
8. Zero Coupon Bond (Paul Erdman - Fiction)
9. Silver Bears (Paul Erdman - Fiction)
10.The Set-Up (Paul Erdman - Fiction)
11. The Billion Dollar Killing (Paul Erdman - Fiction)
Financial thrillers are a wonderful way of learning of a lot of basic finance. For example, my understanding about the bond markets developed after I read "The Zero Coupon Bond" by Paul Erdman. The advantage these books carry is simple - they are meant to be communicated to people from all areas of life - finance/non-finance. More for non-finance starters like me. So If you are finding it difficult to understand why bond prices go up when interest rates fall or how do commodity futures work, or how does sharp rise in crude oil prices affect prices of precious metals or a host of such questions just grab a Paul Erdman book.
Anything and virtually all of investment banking (M\&A's, LBOs, Hostile Takeovers, Junk bonds, Poison Pill) is present in the first three books. The last one FIASCO will end up teaching you most of the derivative instruments (from options to swaps, from forwards to futures).
Some truly remarkably enjoyable reads.

Friday, December 16, 2005

After Charlie Munger, its The Sage of Omaha himself

This is something that i've copied from another person's blog (Mr. Anand Sridharan, a Venture Capitalist based in Mumbai). But, i think the message put-out by this interview of Warren Buffet makes a lot of sense to me, and will do to hundreds others. Personally, Warren Buffet is someone whom I admire and is someone whom i wish to better in this lifetime. But that is something that will have to wait a few years, till then here is what my dear mentor has to say on careers and investing -

Career Advice

If you want to make money go to the Wall Street. More importantly though, do what you would do for free, having passion for what you do is the most important thing. A few months ago I was talking to another MBA student, a very talented man, about 30 years old from a great school with a great resume. I asked him what he wanted to do for his career, and he replied that he wanted to go into a particular field, but thought he should work for McKinsey for a few years first to add to this resume. To me that's like saving sex for your old age. It makes no sense. Don't pay attention to beginning salaries. My first job with Benjamin Graham I accepted before I even knew what the salary was. Do what you're passionate about.


When making investments, pretend in life you have a punch-card with only 20 boxes, and every time you make an investment you punch a slot. It will discipline you to only make investments you have extreme confidence in. Big money is made by obvious things. If using a discount rate of 8% vs. 10% is going to make or break an investment idea, it's probably not a good idea. Back in 1951 Moody's published thick handbooks by industry of every stock in circulation. I went through all of them, thousands of pages, motivated by the hope that a great idea was just on the next page. I found companies like National American Insurance and Western Insurance Securities Company that nobody was paying attention to that were trading for far less than their intrinsic values. Last year we found a steel company on the Korean Stock Exchange that had no analyst coverage, no research, but was the most profitable steel company in the world.

A very nice piece of advice from the man who made billions out of investing in stocks. Here's the link to the original interview and to the blog from where i got this in first place.

Candid as ever: Charlie Munger, Warren Buffet's partner in Berkshire Hathaway.

Charlie Munger is as candid as ever in this interview of his (given sometime during this week). Some of the highlights of the iview are:

1. Supply of "Cigar Butts (Deep-value stocks)" almost dried.

2. A lot of people with high IQs are terrible investors because they've got terrible temperaments.

3. Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund.

4. On Efficient Market Theory - Markets are efficient enough, so it's hard to have a great investment record. But it's by no means impossible. Nor is it something that only a very few people can do.

5. Investing in Emerging Markets - Different foreign cultures have very different friendliness to the passive shareholder from abroad. Assuming China growslike crazy, how much of the proceeds of that growth are going to flow through to the passive foreign owners of Chinese stock?

6. On US trade & budget deficit - As [economist] Herb Stein said, "If something can't go on forever, it will eventually stop." But knowing just when it's going tostop is a very difficult matter.

7. On bubble in energy stocks - When it gets into these spikes, with shortages and uproar and so forth, people go bananas, but that's capitalism.

8.On Jeremy Siegel - author of "Stocks for the long run" - Jeremy Siegel's numbers are total balderdash. When you go back that long ago, you've got a different bunch of companies. You've got a bunch of railroads. It's a different world. I think it's like extrapolating human development by looking at the evolution of life from the worm on up. He's a nut case. There wasn't enough common stock investment for the ordinary person in 1880 to put in your eye. (Like i said, Candid asever).

For the full interview please see the link -