Thursday, July 11, 2013

Book Review - Supermoney by Adam Smith

I came across Supermoney in a list of investment books.  I forget whose list recommended it, but suspect it was more than one.   So I'm now guilty for not giving credit to the site and peerson(s) who turned me onto the book, as I thoroughly enjoyed it.

Published 41 years ago (1972), I was surprised by how much the investment world today is similar to the one described. In 1972 the US equity indexes were not doing well after the market boom of early-and mid-1960s.  The Dow fell some 35% between 1968 and mid-1970 when I image the bulk of the writing was done. It was not until 1985 that a sustained bull market started.

The book highlights deals gone bad, investment managers overpaying for growth, and the rejection of hedge funds and finance as a career by university graduates.

Despite the plethora of investment books, academic papers, investor newsletters, magazine articles, and blogs that highlight the fallacy of accounting; market booms and busts, under and overvaluation of asset prices, financial crisis, etc., our basic greed and fear mentality remain intact.

I found Supermoney to be relevant to Asia today.  This is because the equity markets and ownership pattern in my part of the world seem to be very similar his description of America 40-60 years ago. (I live in Hong Kong).

Below are some observations linked to quotations from the book.  I've added comments and examples

More regulation after a downturn
"The involvement of Congress in passing the Securities Investor Protection Act means a continuing involvement of Congress; the government rarely leaves any endeavor where it has created additional staff". 

MM comment: think about the rapid increase in financial regulation after 2008's crash.

Currency debasing as cause of national decline
Quoting The International Harry Schultz Letter: "A people can only sink lower without a dependable store of value.  Currency debauchery is the sole source of US decline and decadence - just as it has been in every society of recorded history." 

MM comment: think of most macro-economic commentators now

Giving Investors What They Want
"The supply of growth companies grew to meet the demand." 

MM Comment: think about the large increase in US listed Chinese companies

Fallacy of Nicely Growing Earnings 
"Everywhere you looked, there was a company with a neat stepladder of growing earnings.  Some kept the stepladder right up to the day they filed for bankruptcy." 

MM comment: think about Worldcom and Bernie Madoff

Fallacy of Corporate Accounts
"What did it mean to have distinguished accounting name on reports?", "'Nothing,' said Thornton O'Glove, an accountant who writes a newsletter on accounting for a Wall Street firm, 'The signature is worthless.'"

Quoting Leonard Spacek, then a senior partner and chairman emeritus of Arthur Anderson & Company, one of America's Big Eight accountanting firms at the time: "How my profession can tolerate such fiction and look the public in the eye is beyond my understanding.  I suppose the answer lies in the fact that if your living depends on playing poker, you can easily develop a poker face.  My profession appears to regard a set of financial statements as a roulette while to the public investor - and it is his tough luck if he doesn't understand the risks that we inject into accounting reports."

MM comment: I continue to hear about accounting frauds and accountants on the take in Mainland China.

Hedge Funds Attracting the Greedy
Quoting a former dean of Harvard Business School admissions,"'Last year,' I said,' my classes all wanted to go right to work for a hedge fund.  You couldn't even offer them twenty thousand a year, because they were going to run five million into ten in a year and take twenty percent of the gain. I used to say, 'Good morning, greedy little bastards.'"

MM comment: reminds me of last few years in the US

On Malthus and the futility of making forecasts (my favorite quote so far)
"If you had assumed our population growth in 1880 without the automobile, you could have assumed asphyxiation by horse manure".  

MM comment: most forecasts just don't work (i.e. The Signal and the Noise by Nate Sliver)


The author sounds a bit like the Michael Lewis of the late-60s to early-90s.  'Adam Smith' is actually George Goodman, a Rhodes Scholar.  According to Wikipedia he was in the US Army Special Forces' intelligence group concentrating on psychological warfare.  In the mid-80s he started Adam Smith's Money World which ran on America's respectable Public Broadcasting System (PBS). The program won five Emmy Awards. He also wrote three novels and spent time in Hollywood writing screen plays.

No comments:

Post a Comment