“Monkey Business: Swinging Through The Wall Street Jungle” (Book Review)

Monkey Business: Swinging Through The Wall Street Jungle by John Rolfe & Peter Troob For those interested in what exactly investment bankers do, “Monkey Business” provides a highly readable insider’s account of the industry around 2000. As I read the book, I kept making comparisons to Michael Lewis’s account of Wall Street in the 1980s, “Liar’s Poker.” Book books take the reader inside Wall Street by exploring a specific firm. Interestingly, neither firm of the firms described in these accounts exist today. I found “Monkey Business” to be a highly readable introduction to investment banking, albeit from the pre-financial crisis era.

In reading any biography or autobiography, I’m always fascinated by the question: “How did they get started?” In the case of “Monkey Business,” the story is straightforward – attend a top ranked business school (e.g. Harvard or Wharton) and the investment banks come to campus for recruitment. Even as math and other technical skills continue to rise in importance, investment banking continues to be a personal business and that shines through in the recruitment process, Troob and Rolfe are blunt in describing the strengths and, at times, rather embarrassing character flaws of the bankers who recruited them to Donaldson, Lufkin & Jenrette (DLJ). From what I have read and heard of recruiting elsewhere, campus recruiting remains the most popular way to enter the industry – it’s a high pressure series of interviews where there is fierce competition. That should come as no surprise as bankers are indeed well paid. In February 2013, the New York Times reported that “All told, the average pay package for securities industry employees in New York was $362,900 in 2011″

The day to day work environment at DLJ strikes the reader as a combination of interesting work, long demanding assignments and other assignments. The authors make occasional reference to consulting friends at other friends – such as when they benchmark their compensation – but the book is largely a report of their experience at one firm. I found it interesting to read about the interaction between the different levels of the organization: analysts, associates and firm leadership. Rolfe and Troob also point out that investment banking can be like the army: lots of waiting for action (e.g. at the printing office) between bouts of intense action. Not all work happens at the office – travel is a key part of the “Monkey Business” investment banking business.

When many people think of travel, thoughts of rest and relaxation come to mind. Business travel for bankers is far from that – not only do bankers cope with the pressures of travel itself but there is an expectation that one will keep up with the office back home. As analysts, travel also meant a great deal of logistical work arranging hotels, travel, cars and meetings. Learning how to deliver under such pressure is surely demanding but I expect it is a great way to build one’s discipline.

“Monkey Business” ends with the authors leaving their firm for other opportunities. In different ways, both Troob and Rolfe became disenchanted with various aspects of DLJ. Their decisions were at once personal – a desire to leave the firm for other opportunities and a sense that they did not fit in that world. The book is at once a cautionary tale, a highly entertaining autobiography and a light introduction to the investment banking business.

 

 

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (Book Review)

Income inequality is nothing new but PLUTOCRATS explains how the 21st century rich are impacting society and what their rise tells us about the global economy. As a business journalist who previously penned a book on the rise of Russia’s oligarchs, Chrystia Freeland has been observing these changes for a long time. Don’t let the cover of the book fool you – the book is not simply “lifestyles of the rich and famous.” Freeland uses the rise of the plutocrats as a lens to examine a variety of social and economic developments. If economic trends interest you, I highly recommend the book.

Why has our era seen a rise of plutocrats, an ever increasing number of millionaires and billionaires? The answer varies depending on the person and their social context: Russian and Chinese plutocrats often come into their fortunes through state connections rather than the popular American model of launching businesses that sell popular products (e.g. Microsoft, Apple etc). In Freeland’s view, one of the key traits of the very wealthy is their ability to recognize trends and revolutions and respond to them. For example, the fire sale of state assets in 1990s Russia represented a once in a lifetime opportunity to purchase natural resources, factories and companies. Russians who left for the West missed out on the party, a fact that was difficult to appreciate at the time. Respond to the technology and globalization revolutions successfully requires a certain combination of luck and skill.

For readers with a limited background in economics, Freeland’s discussion of rent seeking will be particularly compelling. As Freeland puts it, “in an age of super-wealth, we need to be constantly alert to efforts by the elite to get rich by using their political muscle to increase their share of the preexisting pie, rather than by adding value to the economy and thus increasing the size of the pie overall.” There’s a fundamental difference between the 19th century American “robber barons” whose efforts resulted in railways – a clear improvement for all of society – and those that simply extract wealth. Most of Freeland’s discussion of rent-seeking focuses on Russia, China and India. For example, close ties to the government are all but essential in China. “China’s rent-seekers prospered through privileged access to the two essential economic goods the state does control” land and capital… More than 90% of loans in the country are still made by state-controlled banks.” Without a very close relationship to the state, business success is all but impossible.

Freeland’s ends her book with a compelling conclusion inspired by the economic downfall of Venice. At one time, Venice prospered from trade and innovative economic structures (i.e. shared ownership of long distance trading voyages). However, “we think of social mobility as entirely good thing, but if you are already on top, mobility can also mean competition from outside entrepreneurs.” In the case of Venice, the state changed the rules of the game to favor the establishment and, in the process, killed the goose that laid the golden egg. The question for our time is whether our plutocrats will be successful in changing the rules of the game to suit their self interest or whether the rest of society will advocate for laws and other structures that foster ongoing growth rather than crystallizing the establishment.

Lessons from Winston Churchill: “Churchill: A Life” by Martin Gilbert

Churchill: A Life by Martin Gilbert (Book Cover)Churchill’s leadership during World War Two made him one of the most remarkable leaders of the twentieth century. Recognition of Churchill’s contributions have also been much promoted by Martin Gilbert’s numerous books on Churchill, the Churchill Society and Churchill’s winning of the Nobel Prize for Literature, a rare honour for a statesman. Apart from a few hints here and there, most popular portraits of Churchill focus exclusively on his war leadership. That focus is natural but there is so much more to Churchill’s story; his military career, his considerable literary output and his inspiring speaking abilities. As I had the pleasure of hearing Martin Gilbert speak several years ago, I decided to brush up on my Churchill with his book, “Churchill: A Life.”

Churchill’s father was a politician by training but that was not Winston’s first profession. Churchill beghan in career was in the Army where he served in a variety of outposts in the British Empire including South Africa and India. Even at an early age, Churchill demonstrated great persistence, a quality that would serve him well throughout his career.  It took him several attempts to win admission to Sandhurst, the leading British military academy but he was eventually successful in his studies. After completing a few tours of duty, Churchill went on a wildly successful speaking tour and began his long career as an author and journalist. Reading about Churchill’s efforts to build his public profile reminded me of Michael Hyatt’s book PLATFORM. Even as a young man, Churchill thought about following his father’s footsteps into politics. With that goal in mind, he made the most of his experience to comment on British military and diplomatic policy.

Churchill’s contributions to politics and leadership outside of the World Wars are discussed in considerable detail in the book. One of the most enduring concepts he advanced was the notion of a minimum income, a cause which has been taken up in Canada by Senator Hugh Segal. Churchills political views were complex and different to classify according to modern categories. On some issues, he was certainly a Conservative in every sense of the word but he sometimes found himself at odds with others in the party. Churchill also understood the value of building and maintaining relationships with those who held different views – in the early 20th century, he founded the “Other Club” where MPs of different parties could meet without public comment. By the 1940s and 1950s, he was an advocate of diplomacy with the Soviet Union. Churchill always looked for ways to engage with his opponents.

Churchill Deserve Victory War PosterWorld War Two may be considered the apex of his political career but one needs to remember he was already in his sixties by the time he became Prime Minister. Gilbert paints a vivid picture of Churchill’s life during the war – constant travel, regular communication with Roosevelt and Stalin and so on. At times, the book provides so much detail that one gets lost in it. I suppose Gilbert found it a challenge to condense his considerable scholarship on Churchill – he has written over a dozen books on the man. That said, reading the details, mode of transport and conditions of every single international trip can be overwhelming. In this great detail, Gilbert reveals plenty of interesting details such as Churchill’s efforts to establish a democratic Poland and subject Russian influence in Europe to certain limits. Unfortunately, many of these strategic efforts were frustrated by Stalin in some cases and disagreements with the Americans in other cases.

In sum, I would recommend the book for someone with an interest in Churchill’s contribution to British life. There is much to be learned from Churchill’s flexibility, his incredible energy in many different projects and his reasoned attitude to his foes. If you have an interest in the defining conflicts of the twentieth century, it would be hard to do better by reading about a man who lived through, led and wrote about those epoch defining times.

Book Review: The Profession by Steven Pressfield

The Profession by Steven PressfieldI first heard of Steven Pressfield through Seth Godin who periodically mentions Pressfield’s book The War of Art. In looking through Pressfield’s work, I decided on The Profession. The back blurb of the novel was excellent:

The year is 2032. The third Iran-Iraq war is over; the 11/11 dirty-bomb attack on the port of Long Beach, California is receding into memory; Saudi Arabia has recently quelled a coup; Russians and Turks are clashing in the Caspian Basin. Everywhere military force is for hire. Oil companies, multinational corporations and banks employ powerful, cutting-edge mercenary armies to control global chaos and protect their riches.

Energy and energy politics has been an interest of mine since I read “The Quest: Energy, Security, and the Remaking of the Modern World” by Daniel Yergin. Unlike some other near future authors, Pressfield assumes that oil will continue to be of vital importance in the twenty first century. The fight for oil wealth ultimately founds the backdrop for the stories of mercenaries who start out defending the security interests of their clients only to seize power for themselves.

As a long time science fiction aficionado, I found Pressfield’s speculation on the near future interesting. Pressfield’s future combines highly advanced communications on the one hand and legacy technologies on the other hand. The long legacy of the Cold War, Gulf War and Iraq War are still felt in the novel in the form of old Soviet aircraft, aging firearms and other equipment. The Profession also contains interesting speculations on the future of blogs, media companies and the news media. By mixing the past and speculations on the future, Pressfield creates a believable and unsettling world.

The military and the profession of arms are the starring concepts of The Profession and several of Pressfield’s other novels. The novel paints a complex picture of the military; a community defined by its own language, training and traditions. Pressfield also does well in getting inside the mind of a mercenary. In both the novel and our world, few people start their careers as mercenaries – most start in traditional armed forces and later transition to mercenaries for one reason or another. The prospect of a highly successful and capable figure like the novel’s General Salter becoming a mercenary is disquieting. After reading the novel, one thinks about civilian oversight and control of the armed forces in a different light.

The future of the American republic is the final theme I will consider. The novel has a pessimistic perspective on the question. General Salter serves as the novel’s Julius Caesar whose actions change the republic beyond all recognition. In suggesting martial law and suspension of constitutional government, the novel reaffirms that old expression, “Eternal vigilance is the price of liberty.” Democracy does not preserve itself – it needs constant reinforcement and support to thrive.

For my next book, I will be returning to the world of biography. I will be reading “Churchill: A Biography” by Martin Gilbert. I have been looking forward to reading the book for some time. The book is over nine hundred pages in length so it may take some time before I complete it.

Book Review: The Effective Executive by Peter Drucker

Peter Drucker is one of the most widely read and followed management thinkers. In light of his impact on the business world, I thought it was time to read one of his books. I choose, “The Effective Executive” based on the recommendation of Mark Horstman at Manager Tools who argues that professionals ought to,  “Read this book once a year.” It’s a short book but well worth reading, especially for knowledge workers in large organizations. Even though the book was written in 1967, the core lessons of the book continue to resonate. One world on terminology – Drucker uses the word “executive” to mean knowledge worker or professional, not only those with executive job titles (e.g. Vice-President, CFO, CEO etc) or executive responsibilities. In this review, I will explore Drucker’s comments on time management, contribution and decision making.

There’s an old saying that what gets measured gets managed. The second chapter of the book has the simple title “Know Thy Time.” Drucker bluntly argues that time-wasting activities and bureaucratic activity are all but impossible to escape in organizations. Simply tracking how time is used can yield significant benefits. To go a level deeper, Drucker recommends, “The first task here is to identify time-wasters which follow from lack of system or foresight… A crisis that recurs a second time is a crisis that must not occur again.” After all, solving a crisis situation is usually stressful and is rarely the most productive way to work. The book has much more to say on time management but time tracking and crisis prevention are two critical insights that I found particularly valuable.

Contribution – what can I contribute to the organization? – is a theme that Drucker explores in a thoughtful way. As he puts early in the chapter, “… the man who focuses on contribution and who takes responsibility for results, no matter how junior, is in the most literal sense of the phrase, ‘top management.’” The most important actionable recommendation in this section is directly at knowledge workers who are invariably experts in a specific domain of knowledge. The effective knowledge worker must know their domain but also make the effort to connect to the broader organization. Drucker illustrates the principle using an accountant example:

“If cost accountants, for example, asked these questions, they would soon find out which of their assumptions – obvious to them – are totally unfamiliar to the managers who are to use the figures. They would soon find out which of the figures that to them are important are irrelevant to the operating people and which figures, barely seen by them and rarely reported, are the ones the operating people really need every day.”

Knowing one’s profession is necessary but not sufficient to be effective in Drucker’s view.

The final chapters of the book explore decision making, an important aspect of leadership. Reading this section reminded me of President Obama’s comments on decision-making in a 2012 article in Vanity Fair:

Nothing comes to my desk that is perfectly solvable,” Obama said at one point. “Otherwise, someone else would have solved it. So you wind up dealing with probabilities. Any given decision you make you’ll wind up with a 30 to 40 percent chance that it isn’t going to work. You have to own that and feel comfortable with the way you made the decision. You can’t be paralyzed by the fact that it might not work out.

The thought of operating in such a probabilistic environment may be daunting to those accustomed to simpler decisions but it is not impossible. Drucker’s decision making advice can make a great deal of difference. For example, Drucker recommends looking for the generic rather than the symptomatic in decision making. If one can address fundamental problems with decisions, the impact of each decision will be much greater and the effective executive will have far fewer fires to put out. Drucker also points out that threats can worsen and opportunities decay when no decision is made – it is important to recall that circumstances can continue to change even while one works through the decision making process. Drucker’s decision making process deserves further exploration than I can provide here but it is certainly valuable.

This is the second book I finished in 2013 as part of my goal to read 25 books by the end of the year. Since I have a tendency to focus on non-fiction reading, my next book will be a novel: “The Profession” by Steven Pressfield.

Book Review: Benjamin Franklin: An American Life by Walter Issacson

I finished reading “Benjamin Franklin: An American Life” by Walter Issacson today – it was an engaging read that informs the reader on Franklin’s life and times. My first encounter with Franklin was reading his Autobiography a few years ago and I’ve been meaning to learn more about the Founding Fathers and their struggles. In the fall of 2012, Tim Ferris recommended Benjamin Franklin: An American Life in a webcast. I should note that Franklin’s personal and family life is far from admirable but I don’t think that should cause a reader to ignore his other achievements. To my delight, I received the book for Christmas (thanks Mary!) and much enjoyed reading it over the holidays.

Unlike some of the other Founding Fathers, Franklin was a keen businessman. Despite his identification as a middle class shop keeper, Franklin actually built up a substantial publishing empire with affiliates and relationships across the colonies. Issacson describes in vivid detail how Franklin learned the technology of printing and the challenges of the trade. While Franklin was more than happy to challenge the establishment in print, he understood that radical publishing alone could not sustain his business. Franklin was enthusiastic in seeking printing business from the government and printing popular texts with a strong demand. In his 40s, Franklin decides to retire from business (though he establishes a partnership agreement that effectively yielded him a +$100,000 income for close to 20 years) and pursue public life.

In reading Franklin’s Autobiography and Issacson’s biography, I was struck by Franklin’s varied civic interests. As a young man, he establishes a reading and debating club called the Junto:

I should have mentioned before, that, in the autumn of the preceding year, [1727] I had form’d most of my ingenious acquaintance into a club of mutual improvement, which we called the Junto; we met on Friday evenings. The rules that I drew up required that every member, in his turn, should produce one or more queries on any point of Morals, Politics, or Natural Philosophy, to be discuss’d by the company; and once in three months produce and read an essay of his own writing, on any subject he pleased.
Our debates were to be under the direction of a president, and to be conducted in the sincere spirit of inquiry after truth, without fondness for dispute or desire of victory; and to prevent warmth, all expressions of positiveness in opinions, or direct contradiction, were after some time made contraband, and prohibited under small pecuniary penalties.

Throughout his life, Franklin was a keen founder of civic organizations. Whether it was scientific inquiry -  it is easy to forget that Franklin’s reputation as one of the foremost scientists and inventors of his time – , organizing a militia or promoting education, Franklin was happy to get involved. Issacson points out that Franklin loved to craft details, create rules and generally leave nothing to chance in his schemes. Franklin’s success in civic organizing stands in stark contrast to Robert Putnam‘s thesis in Bowling Alone that found 21st century civic engagement is declining. Franklin’s organizational genius in establishing public organizations inspires me to renew my engagement in volunteering.

The final section of the Issacson’s book considers how Franklin’s image has changed and evolved over American history. His reputation in the 19th century suffered significantly as the Romantics were not impressed by Franklin’s pragmatic views, toleration and middle class views. My own view is that Franklin speaks to people in different ways. His rise to diplomatic and business success through hard work, connections and some measure of luck is sure to inspire. His measured approach in diplomacy and politics – he favored stories that gently made his points rather than harsh personal attacks – is something badly needed today.

Note: this is the first of 25 book reviews I plan to publish on this blog in 2013. I am declaring my 2013 goal to read (and post reviews) of 25 books in 2013 by December 31.

What You Need To Know If You Use Excel All Day

Today, I used Excel for almost the entire work day. There were a few trips over to Outlook to reply to emails, but it was basically a solid day spent in the land of spreadsheets. When you use Excel this much, you start to pick up a few things. When you first get started in Excel, you might think of it as nothing more than digital grid paper. Of course, it’s much much more than that. In this post, I’ll share some of the things I’ve learned about Excel that make using this workhorse much faster and pleasant.

I) The Mouse Only Slows You Down (i.e. learn keyboard shortcuts)

The mouse is helpful but it really slows you down when you have a large spreadsheet to work with. Once you learn a few basic keyboard shortcuts, your Excel experience will be much better. Here are some basic shortcuts to get you started:

Select the current row: Shift+Spacebar

Select the current column: Ctrl+Spacebar

Select a contiguous set of cells: Crtl+Arrow Key (e.g. if you want to select a set of 100 cells of data, A1 to A100, then select A1 and then Crtl+Arrow Down to select the whole range. This is a huge time saver if you have hundreds or thousands of rows of data)

F4: cycles through the absolute reference and relative referene options in a formula. This is incredibly helpful if you work with formulas. (If those terms mean nothing to you, here is a short references tutorial).

II) Learn Some Basic Formulas

Learning Excel’s formulas starts to unlock the application’s true powers. There are quite a variety of formulas to choose from including many financial formulas. Here are three simple formulas that tend to come in handy in many situations. Using functions to manipulate

SUM: this function adds a range of cells.

MEDIAN and AVERAGE: it’s a great idea to use both of these functions together especially if you’re working with a complex data set.

VLOOKUP: The VLOOKUP function is considerably more complex than the plain math functions above. It is a great way to hunt for information or even reorganize information. Getting a VLOOKUP to perform reliably often takes some practice though.

III) Elite Excel Users Program – Learn To Use VBA

Visual Basic for Applications (VBA) is a Microsoft programming language that can be used to program Excel (and other Microsoft Office applications) to perform tasks. The major benefit here is Excel can execute a task programmed through VBA much, much faster than you ever could. If you are ever performing a task over and over again in Excel, this may be a good candidate for automating in VBA. The disadvantage is that VBA takes longer to learn (especially if you lack a programming and/or computer science background) and get to work so it is often only worthwhile for larger projects.

CMA Accelerated Program

This fall, I will be taking the CMA Ontario Accelerated Program (AP). It is an intense program that runs from September to March. In additional to accounting, the program covers a number of other topics. Beyond the obvious professional reasons for pursuing the program, I also think It will serve as an introduction to other parts of the business world that I have never studied before.

In advance of the program starting, I have been assigned a substantial refresher textbook. Coming in the form of a 140 page PDF, the Introductory Financial Accounting Review book will come in very helpful. Despite being a small book, it comes packed with problem sets and illustrations. Some of the details have faded since I last studied these topics, so I appreciate the refresher. It reminds me, in a good way, of those MBA programs that assign pre-degree work to help students boost their technical skills and knowledge.

Cal Newport, author of the Study Hacks blog and several other books, has inspried me with some very specific advice on studying. I’m looking forward to putting it to good use. Lately, I’m finding that I very much appreciate case study and skill oriented blogs. Perhaps I’ll share more on that front as I continue through the CMA program.

Manufacturing In 2012

On the commute home today, I experienced a moment of podcast heaven. Not only did I learn about a field that I know relatively little about (American manufacturing), but I learned about on an episode of EconTalk (Adam Davidson on Manufacturing) where the guest was Adam Davidson, one of the main reporters from NPR’s Planet Money. If you’re interested in getting some genuinely well informed perspective on the current state of manufacturing, it is well worth a listen. However, I was not content merely to listen to the podcast. I wanted to get some context for the state of manufacturing in Canada.

There’s a well known story in the media that manufacturing (especially manufacturing employment) is disappearing in North America. That story is even more pronounced in Ontario which was historically a major centre of manufacturing activity. If you focus on the percentage of jobs in manufacturing, the trend is clearly going down. Consider the following graph from Statistics Canada from a 2009 report called, Trends in manufacturing employment

Chart B Manufacturing’s share of employment has fallen sharply since the turn of the century

Even as the quantity of manufacturing jobs continue to drop, there are significant opportunities. For example, skilled machinists and technicians who understand CNC programming and other high end manufacturing techniques can find good jobs. Adam Davidson, rapidly becoming one of my favourite economics reporters, has reported on manufacturing jobs that pay “$30/hour” (roughly $60,000 per year) in his excellent article in the Atlantic Making It in America. Davidson comments on one American factory that still has classic lower skilled manufacturing jobs (i.e. annual pay around $27,000 a year). The only reason that category of job continues to exist is the cost of switching to machines is still too high. Manufacturing employment isn’t quite gone but it is rapidly splintering into two categories: higher skilled positions (require several years of technical training, specialized knowledge, etc) and lower skilled positions that will likely continue to decline.

Should You Consider Real Estate Investing?

Last week, I read Tim Cestnick’s article in the Globe & Mail about freezing assets and one aspect of the article has had me thinking. In the article, Cestnick refers an interesting way of holding real estate:

Paul owns the shares of a corporation that holds rental properties that he’s been accumulating over the years. The value of these properties is about $5-million today (net of any mortgages). He expects these properties to continue to grow in value in the future. Paul doesn’t need the income from these properties to support his lifestyle.

This strikes me as interesting way to overcome a long standing problem with real estate. Even though it does has some promising aspects, I do not think it is a good way to hold a significant portion of one’s assets. Despite its flaws, I think real estate has a valid place in our lives.

Here are the five significant disadvantages I see with real estate investing. For purposes of this analysis, I will focus on residential rental properties specifically:

  • Illiquid: how easy is it to sell real estate? Selling a condo unit in Vancouver might not take long but you can’t always count on such a hot market.
  • Non-divisable: if you own 1000 shares of a stock (or a mutual fund or an ETF), you can sell part of that holding and retain the rest. Partial selling in real estate is much, much more difficult.
  • Transaction costs: one can sell shares and ETF units through a discount broker for a $10 commission. What are the transaction costs to sell a $500,000 property? When you factor in commissions, legal fees and the like, it’s easily 5% of the purchase price. For more background on this, read Toronto real estate lawyer Stanley Clapp comments on some of the hidden costs of buying real estate.
  • Risk: If you are running rental properties, you take the risk of evaluating tenants. Tenants also pose the risk of property damage though that can partially mitigated through insurance and a well written lease (and damage deposit).
  • Administration: Landlords have significant legal obligations to their tenants, including requirements to repair properties and attend to tenant requests. One could hire a property management firm to handle the administration but such services are not free.

Given all these flaws, why do many people remain interested and committing to rental property as an investment? There’s rental income, there’s some comfort in owning a physical asset and there’s potentially tax advantages (though one has to be very careful on that front). I wonder if the 2008 crisis has caused many people to reevaluate their views on real estate investing. At the very least, I hope that people will consider other ways to get exposure to real estate (e.g. owning units of RioCan or other real estate investment trusts [REITs] which manage a portfolio of properties).