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 but is still a fun read:
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.
Here's how to buy the two books from Amazon (same cost, but I get paid if you do it via these links):