Running Money : Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score

Rating:
Summary: light on testosterone, heavy on ideas
Review: "Running Money" is actually two books entwined. One is a narrative of the late great dot-com boom, told from the perspective of a player at the right place and the right time (with the good sense to walk away at the right time also). The other is sort of an informal investment thesis, a collection of controversial and intriguing ideas that hang together and form an actionable set of guidelines. It's all tied together with a dry (sahara desert dry) sense of humor and a knack for understatement that made me laugh out loud more than once. (Example: when a sarcastic friend says never buy a stock where the name is a target forecast for the price, Kessler makes a mental note to avoid NetZero. Another example: "If you buy a stock at $70 and it goes to $200, it's tough to sell, figuring it might go to $300. If you bought at $3, it's a lot easier to sell.")

The title of the book is fairly misleading. Anyone expecting a testosterone fueled read is bound to be disappointed. Kessler is a cerebral investor, not a hairy chested alpha-male trader, and he makes that abundantly clear (in spite of his zillion-percent-annualized return flipping mp3.com, a sixty second trade worthy of any gunner's respect). The fact that Kessler's outfit is a hedge fund is largely irrelevant to the book, as he doesn't go short and doesn't get fancy. He is snickered at by niche based peers for not doing anything particularly sexy or exotic. And when all is said and done, his +50% average return shows that you don't have to trade like a banshee or be a genius / hero to make a killing. Being in the right place at the right time, and playing it to the hilt, is enough.

The stories are entertaining; far better, the ideas are valuable. (You have to take them with a grain of salt, but that should go without saying.) I appreciated Kessler's concept of "waterfalls," giving a mental picture of technology's promise as an investment vehicle. Pressure builds in some area of inefficiency or untapped opportunity, until finally the barrier breaks, the waterfall bursts forth and innovation cascades outward- first to the early adapters, then to the masses. As prices fall dramatically, unit volume increases far more dramatically and, hopefully, exponential profits are created in the process. Kessler highlights Microsoft as one of the greatest waterfall examples of all time, thanks to the master stroke of tying software to hardware. Every box sold puts another sale in their pocket, and with someone else building the box, they maintain zero replication cost and 99% profit margins. Beautiful.

Kessler also takes us on a tour of the industrial revolution, courtesy of an intellectual exercise spurred by the friendly investor and erstwhile gnome of Zurich Mr. Zed. After following the progress of the steam engine and the Niagara Falls opportunity in textiles, Kessler transitions from old school to new school with his "margin surplus" theory, which seeks to replace yesterday's manufacturing model with an intellectual property one. Along the way he points out how IP (intellectual property) and physical manufacturing have been effectively split up for the first time in history, allowing Intel and Microsoft to make 80-99% margins on products bundled with every Sony laptop sold, while Sony itself sees maybe 1% returns after the hassle of buying materials, paying for labor, assembling the boxes, managing inventory and shipping them out. Thus the United States gets the lion's share of pure profit through intellectual property value add, whereas Asia (or wherever the assembly occurs) gets traditional manufacturing sized margins (5% or less) on assembly and delivery but benefits from mass employment and economic growth. Lots o' jobs is Asia's incentive to keep the high margin / low margin deal going (at least until they finally get innovative too, and start outsourcing to North Africa).

The margin surplus theory is intriguing, and goes far in explaining why our trade deficit may not be as big a deal as some suggest. If Kessler is more or less correct, then a trade deficit is a natural -and even desirable- byproduct of an investment surplus, as the world continues to invest in our high margin IP profit centers, rather than the lower margin process of assembly taking place elsewhere. The theory doesn't address a few key nitpicks though, such as the frighteningly low rate of consumer saving in the United States, or the tendency we have to spend borrowed money on "stuff" rather than putting it back into productive investment, or the propensity of government to cheerfully run spending off the rails while whistlin' Dixie.

Kessler is confident that the next round of spectacular innovation is likely to occur within the same twenty mile radius as last time, but here I fear he is overly optimistic. Even if margin surplus is more right than wrong, and IP invalidates gaping trade deficits and old economic models, America still has rough waters and real challenges ahead. Just because team USA was the innovation powerhouse of the 20th century doesn't mean we can repeat the feat in round 21. Edges can be dulled and edges can be lost. If innovation is going to keep saving our bacon from the deficit frying pan, someone needs to tell the politicians who are discouraging immigration (choking off our brain gain), letting trial lawyers run amok, and bleeding entrepreneurs with heightening cycles of tax and spend. With the baby boomer generation retiring and major fiscal battles ahead, this is no time to be complacent. If apathy sets in, innovation won't save us from decline- and the next big waterfalls will make a splash elsewhere.

Rating:
Summary: If you're smarter than Kessler, then why aren't you richer?
Review: "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.

Rating:
Summary: Limited insight, single opinion into a large industry
Review: 'Running Money' is about the 8th book i've read on
the 'Insiders Look at Investing'. Overall,
Kessler's book is the shallowest. Kessler gives
summary views on his opinions. It's not deep,
it's flippant.
The book discusses two main topics. The first topic is
Kessler's retelling of a day in the life of a
hedge fund partner. Kessler cofounded a hedge
fund specializing in tech stocks in 1996.
Of course, he did spectacular! It was the hottest
area in the biggest boom of the 20th century.
Right place, right time.
Kessler discusses meeting lots
of different folks. Most of these folks he
doesn't like, and he shares his ridicule.
You get the feeling you're with an over-confident
teenage boy, who has this need to put everyone
down, laugh at every person, twist the words
to make a new meaning. (He often renames companies,
changing the company name with a negative twist.)
This narrative of starting and running the hedge
fund is the better part of the book.
Not because of Kessler's asides.
But because as an investor, i want to
know how these funds operate. Of course, how
Kessler runs his fund doesn't mean that how other
hedgies operate theirs. Kessler's first book,
'Wall Street Meat' was the same narrative book.
The second part of the book is Kessler's views
on Intellectual Property. The author has
convinced himself that he's got the keys to the
economic universe, and intellectual property
is that key. Since Kessler believes the
current US economy is structured to use
intellectual property, the author feels all-is-
well in the US economy. Basically, he's able to pick through
Silicon Valley companies, and find the potential winners.
The problem is, Kessler sees the whole world
economy through the lens of intellectual property.
And he doesn't bother to address any problems of the
US economy that refute his argument.
The author cherry-picks examples to bolster his conclusions.
He writes using a 'heres-my- thinking' approach,
laying out the facts that he
chooses to include, and showing how he
reaches his Viola! moment.
The problem is, his conclusions
are way too neat and perfect. A large part of the
intellectual property argument tells us that
'trade deficits don't matter'. Ok. But, he never
gives us counter-arguments on why other people
feel they do matter. There are many books written
with arguments on the ill-effects of a large trade
deficit. Kessler doesn't bother including these.
And when he does include other arguments, he gives
us a two-dimensional clown to represent the
opposing side. At the end of the book he discusses
a 'Haarvaad' economics professor, who believes
Ghana has the highest quality of life. This
'economics prof' discusses Ghana exporting their
'music'. (The whole argument from the professor is
ludicrous, and the reader is part of Kessler's
dismissive in-crowd ridicule of the professor.)
No one i know would would accept this 'professors' arguments.
Yet, Kessler gives the professor to us as the
reigning example of an economics professor.
And then he generalizes this to show why economics
professors practitioners are fools.
Only 'investors' know whats up.
(We never get a definition for 'Investor'.
I wonder what he'd call an economics professor
who invests.)
This professor's economics argument are not representative
of the discussion of trade imbalances. Kessler
likes to find a fool, and then use that to dismiss
the argument. Kessler likes to think that the thousands
of masters and PhD's and professionals in economics are all wrong,
and he's found the obvious answer to world economics.

Kessler briefly discusses the scandals that have rocked
wall street over the past few years. He
rhetorically asks "Do we need more regulation to
stop this?" The answer is "No. It's up to each
investor to know the industry, the company, and
even meet the management." Hmmmm.
My opinion is that truthful accounting should be regulated, and
those that violate truth-in-accounting should be punished.

There is an interesting paragraph in the book, when Kessler
hears of the fall of LTCM. He says "Those guys [LTCM] were buying
bonds, and profiting off the spreads. Is that investing?"
He gives the impression that he didn't understand that model
of hedge fund investing deeply.
Kesslers' is a pure stock-pickers hedge fund,
specializing in high-tech stocks. Contrast that to LTCM,
which made 95% of their s profits from bonds and derivatives.
Two completely different types
of investing, yet both under the SEC categorization of
'Hedge Fund'.

All-in- all, Kessler's book comes across as a diatribe
given by your rich neighbor at a bar-b-q, self-
justifying why the system works. It works because
he's rich. Yet, the reader is left with the feeling
that it succeeded for other reasons than just Kessler's
efforts. I've heard it said that everyone is a genius in a bull market.


For a much more thorough analysis of world economies,
William Bernstein's "The Birth of
Plenty" uses a mature approach of proposition and
argument, with relevant, historical examples that
help prove his points. He's even got strong, relevant
counter-arguments.
For a deep look at a hedge- fund (without the insider's view),
Roger Lowenstein's "When Genius Failed. The Fall of
LTCM" is excellent.
For a deep look at failed investments during the 1990's boom,
try Lowenstein's 'Origins of the Crash'.

Kessler's book helps pull the veil from the mysterious world
of hedge fund investing, and gives some information about
one type of hedge fund inveesting.
However, it doesn't give a thorough overview of the hedge-fund
business, and it's a fairly one-sided, single-company narrative.
Kessler generalizes from a narrow set of situations.
Kesslers' opinions of how world economics works doesn't
fit in with the narrow amount of supporting detail he gives.


Rating:
Summary: A second-rate book with intellectual pretensions
Review: Although "Running Money" is peppered with the same brand of sophomoric humor that permeated Kessler's first book, "Wall Street Meat", this book clearly has intellectual pretensions, with Kessler repeatedly adopting a professorial tone to air his views on America's massive trade deficit, among other things. Sadly, this is the book's major weakness. Kessler's core competency is as a raconteur, not a thinker. When he tries to style himself as a thinker, he inevitably embarrasses himself.

For instance, he contends that America's trade deficit should not be a cause for concern, as it is the natural result of the developing world's competitive advantage as a producer of low-margin goods (which are subsequently imported into America). If the trade deficit is really so worrisome, shouldn't America become a producer of low-margin goods in order to curb its imports?, Kessler asks with a touch of sarcasm. This is patent nonsense, of course. The problem is that, like a spendthrift consumer racking up too much credit card debt, America is importing goods from abroad and incurring alarming amounts of obligations to foreigners in the process. Nobody is suggesting that America take the extreme and atavistic step of nurturing its low-margin industries in order to rectify this problem; rather, America should live within its means. I could go on, but Kessler's gaffes are too numerous to list.

Kessler's self-deprecating style partially redeems his many blunders - but perhaps there is truth in jest. Like many others, he simply went along for the ride during the bull market of the late 1990s, leaving me with the impression that the stellar performance of his fund was nothing more than dumb luck. "Don't confuse brains with the bull market", he admonishes when describing other high-flying but incompetent fund managers who eventually got their comeuppance. Ironically, Kessler would do well to apply those words of wisdom to himself.

Rating:
Summary: Interesting book
Review: Andy Kessler ( the author) gets tired of being an investment banker and with a partner decide to open a hedge fund. With them living in the middle of silicon valley and with there past experience they focus on start up companies and those with cutting edge technology dealing with computers and the industry.

You follow along on many trips while they try to raise a 100 million dollars to start there fund. But with so many funds they have trouble getting the cash. On one of these trips the author happens to be sitting next to a gentleman he ends up calling Mr. Zed that proves to be his guiding light by supplying some of the needed cash and the question to the author on what gives their fund an edge compared to the others. You follow along as they find the niche this provides some interesting history and comparisons between the steam engine and the computer chip and how each improved the more applications they had and as they become cheaper the barriers they breakdown.

If you are a computer novice as myself you may get a little lost in some of the computer jargon. It was amzaing the description of one of the ipo they were involved in and sold the momment the market started to trade it, they sold and in a minute made 300 thousand dollars.

They started the fund at what appears a perfect time between 1996 and 2001 when the tech stocks where booming. The author has some interesing ideas about why he thinks that the U.S. is now done with the industrial age and has moved on to a intellectual property age with some points that really think.


Rating:
Summary: Great Read of a Fascinating Period in American Investing
Review: I read books to learn and to be entertained. What I learned (but already knew) was the history of the tech stock craze in the later 90s. But Kessler also frames this around the Industrial Revolution and the development of the steam engine. That may be the one weakness in the book as an inordinate amount of time is spent on this analogy. It works but takes a while to get there.

While he doesn't go in to great depth of the investing strategy, he does go through the general philosophies of what they were looking for and examples when they were successful. And he does it in an entertaining style.

What does come through is the unique partnership he had with Fred and how it worked. Particularly at the end when they recognized the money and market were just too hot and they needed to pull back. That sounds easy in hindsight but anyone who was investing or managing money at that time will tell you how difficult it is to turn investors off after the great difficulty in getting their money.

Where this book really shines is pure entertainment. With the exception of the steam engine analogy, this is a fast entertaining read written in a very witty style. Kessler is a gifted writer and I wouldn't be surprised to see him move to novels eventually. This book is like a perfect college class: you get entertained but learn something also. I strongly recommend this book to investors or anyone with interest in the history of technology companies.


Rating:
Summary: Very disappointing
Review: I wanted more antedotes about the hedge fund world and the like. Raising capital, dealing with other people, etc. Instead, this guy kept on rambling on with the new economy crap. These growth guys are too much. They don't care about what they pay for a stock as long as it has a good story.

I will admit the guy was very smart in seeing the party was over and closing the fund. He also only lost I think 5% in 2000 and 5% in 2001 which was good considering what was going on in his stocks. So I do give him credit where credit is due there. And he did have a 55% annualized which is great. But I think his genius was in selling and realizing the game was over.

In any event, I read his rambling about how technology is going to change the world, blah, blah. The whole thing sounds quaint considering what has happened. Personally I think NASDAQ will go sub 1108 over the next 9 years and all of these guys will be thoroughly discredited. It took the Nikkei over 13 years to hit its bottom and it had one rally after the initial 2.5 year drop which lasted 3 years 10 months.

Was this a good book? No. There were a few good stories but I will never page thru this again nor would I have read it again.

For good hedge funds stories read Pit Bull or Cramer's book.

Rating:
Summary: Great Book!
Review: Kessler offers a witty and insightful view into wall street, hedge funds and silicon valley. Running Money is a welcome respite from the overplayed sound bites crying about off shoring, deficits and the end of "the west".



Rating:
Summary: Excellent Conceptual Explanation of 21st Century Economics
Review: Mr Kessler has shared his thoughtful analysis of the creation and spread of wealth in an easy to read format. He writes in simple terms, and thus simply communicates some concepts that are truly deep and thoughtful.

He does not feel the need to demonstrate his intelligence (already well proven by his track record in technology as well as investing) to the reader, as many do, and thus communicates effectively.

This is one of my favorite books of all time. A literal "page turner" analyzing and explaining such normally boring topics as wealth creation and investment strategies, with an emphasis on the digital revolution of the late '90's, and suggestions on lessons learned from this time period to aide in 21st century investing.

Great book. Highly recommended.

Rating:
Summary: Making money by turning steam into chips
Review: Running Money was a fun and insightful read. Kessler's story telling is packaged in a witty and intriguing fashion that cuts the fat out and makes the pages breeze by. It provides nuggets of education and information about what it takes to be a successful investor/money manager.

It wasn't quite the in-depth behind the scenes look into running a hedge fund that I was expecting. But I think most of that is due to Kessler's investment style. Instead of being one of the overflow of scalping hedgies, he actually did more homework via visits to conferences and companies than you would typically expect. His fund wasn't a big trader.

As a result he didn't invest in every idea that came down the pike or the latest and hottest craze. No his approach was more novel, find a monster market, do your homework and discover the one or two key companies that will be a rainmaker in that market. With that simple approach he and his partner Fred Kittler were able to rack up a 55% annualize return from 1996-2001.

Kessler was using a road map or blue print developed from knowledge of the industrial revolution. It is hard to make learning about the industrial revolution interesting but Andy has done it. He transferred the knowledge gained to the level where it has a modern day purpose for investing in the technology revolution.

The book is both educational and entertaining in regards to making money and being a smarter investor. Pick it up.