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Wall Street Meat
Wall Street Meat is Kessler's story over the past fifteen years, from starting as a junior stock analyst
at Paine Webber, to becoming a well-known technology analyst, to leaving Wall Street and going off
on his own. Along the line, Kessler has bumped into many famous and infamous people, and he is
very candid about what he thinks of these people (hint : it's usually not good).
In fact, one of the main characters
is Frank Quattrone, who was just arrested last week for obstruction of justice and
destroying evidence -- making this book rather timely.
Kessler spends a lot of time illustrating the fact that stock analysts are often clueless (and he should know, having been one for a number of years). To me, that was perhaps the most enlightening aspect of the book : I learned that even (very) highly paid analysts can be stupid, lazy, negligent, incompetent, greedy, and even sometimes dishonest (I know how shocking that might be to most of you, hopefully you can recover from that).
I found it interesting to get a behind-the-scene look at the life of analysts : the trips, the meetings with management, the lies and half-truths, etc... Also the bullshit that goes around, the phony rankings, the uninformed guesses. And of course these people get paid to be confident, so even when you don't know, you have to act like you do know.
If you really make it, you can even become a market-maker : someone whose recommendations actually affect your segment of the market. But Kessler makes it clear that this is a trap, and that many analysts have overestimated their power. After all, these stocks represent real companies, and whether these companies make money or not does eventually affect their stock price. Ah, the painful sting of reality.
Kessler follows the evolution of the profession of analyst from 1985 to the late 1990's, and comments at length on how that role has changed. Back in the old days, the commissions were high, research was a serious business. Interestingly, the Internet changed a lot of that, mostly because it made the commissions practically disappear, going from $0.25/share to less than a penny per share in just over a decade.
Kessler makes some interesting points about the unintended consequences of some of the regulations. For instance, during the 1987 crash, a lot of small investors could not get their trades executed because the traders stopped answering their phones. So the SEC put in a regulation to put a system in place that would execute small trades automatically.
That was the first step towards what we now know is inevitable -- a fully automated marketplace where human traders are used only for large or unusual deals. Therefore, in just 15 years, the world of investment and securities trading has undergone a complete transformation.
Another dramatic change during these years was simply the staggering amount of money that became invested in the market. In 1980, there was about $40 billion invested in professionally managed mutual funds. In 1996, that figure was over $1 trillion.
We are all more or less aware of these changes -- this book brings it all to life.
I found the first third of the book to be absolutely spellbinding, and I would heartily recommend the book just for that. The book opens with a few anecdotes that just made me guffaw aloud as I was reading them. The middle of the book was less exciting. There are lots of names being thrown around, which meant nothing to me. The final part of the book makes up for this, however, with a lot of good stories and observations about the late 90's dotcom boom and bust.
Kessler's style is direct, sometimes almost abrupt. No flourishes for this guy. I particularly appreciated the, how shall I put it, frank and honest evaluation of the many people mentioned in the book. It sometimes feels like target practice, but it's a refreshing break from the mutual admiration society.
The book is often funny, mostly fast-paced. There are a few uninteresting passages, and (much to my surprise) even two pages (1-2) repeated almost verbatim at pages 172-173. At $26, it is a bit steep (it comes out at 12.5 cents/page).
Kessler has written a number of columns for the Wall Street Journal. They are very readable, although some of them are now dated. If you want to get a feel for his style, I recommend reading a couple of these columns before you splurge for the book.
Having read it, I feel a bit more cynical about Wall Street, which is probably a good thing. I also feel like I have gotten a good peek into that universe, and it's not pretty -- no wonder so many things have been hitting the fan over the past couple of years.
Overall, I warmly recommend this book. Unless you're allergic to the world of investment, you should enjoy it and learn quite a bit from it.
You can purchase Wall Street Meat from bn.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.
.. on the top-rated European technology research team. And while I haven't (yet) read the book, the criticisms ring true.
Lets not forget, if an investment bank is hiring someone to analyse - say - the enterprise software sector, they can choose someone just our of business school with an MBA or a seasoned manager from a s/ware company. Because the MBA demands $175,000 starting package against $100,000 for manager, he must be the better analyst.
I've covered software for almost ten years as an analyst. I've worked in a software company. I've produced some really bad code. But at least I have some idea of how a software company works, and why people buy software.
Anyway: why did the investment banks churn out such sh*t for so long? How come they got away with lying to investors? How come they knew little to nothing about the industries they covered?
1. Knowing your industry could be a real downer for the bank. If you took what CEOs said at face value, and repeated it, with lovely phrases such as "management assured us...", "a recovery looks imminent", "margins are set to improve", and worst of all "top-quality management" the companies would be happy. If companies were happy, then they might use your bank for corporate finance work, where the fees were astronomical. (A small tech IPO could net $7 of fees. According to the Spitzer papers on Grubman, he generated $400m of fees in one year alone.) Good research, on the other hand, doesn't generate much in commissions.
2. Investors weren't much better than brokers. They bought crap knowing it was crap. Many just wanted access to "hot" IPOs - 'cause getting access to these means you outperformed the index. Too many mutual funds were run by "momentum players" who believed in "efficient markets" - if a stock was going up, then business must be good (someone must know something I don't!) therefore the stock must be bought. The more people played this momentum game, the more a rising stock caused a rising stock. Until the end, of course.
3. Most research wasn't worthy of the name. Companies told analysts what their earnings estimates should be through "guidance". They the companies used accounting trickery (see Enron, WorldCom, Lernout & Hauspie, etc.) to beat these estimates "by a penny." Rarely did "analysts" analyse the rising number of obvious red-flags on company balance sheets: rising recievables, intangibles, use of "EBITDA" numbers, and the dread pro-forma etc. On conference calls following results those analysts who were bullish (i.e. most of them) would say - and I kid you not - "great quarter guys". The most insightful question would be "can you give us some guidance on the margins going forward." As recently as last week, an investor told me that I was still practically the only analyst she talked to who read 10Qs!
Anyway. In Dec '99, myself and my colleagues got sick of being asked to do dumb IPOs for shitty companies. We left, and started our own independent research company. We're profitable and having a great time!
Regards,
Robert
--- My dad's political betting
It's exactly like somebody selling a formula for winning the lottery: why doesn't he keeps it for himself????
Absolutely. This is something you learn when you read Warren Buffet -- businesses, by their very nature, have 'lumpy' earnings. Given the choice between a 'smooth' 12% return and a 'lumpy' 15%, he'll go for 15% every time.
The stock market prefers 'smooth', predictable earnings, but they don't often exist in the real business world. A company that has books that are very smooth and predictable, like Cisco, GE, or IBM, is probably doing some serious monkeying with the numbers behind the scenes, and you should look on such companies with great distrust. Healthy companies don't look like that.
Example: Cisco wrote down something like 1.2 BILLION DOLLARS' worth of inventory a year or two ago. They were essentially claiming that this huge amount of inventory was worthless, and they took it off their books. But they still had the inventory, so they can sell this inventory and use it to prop up their numbers in later quarters. The philosophy seems to be 'take all the writedowns at once and then the investors will forget about them' -- investors don't seem to realize that that writedown erased a huge amount of profit that had been previously, and inaccurately, reported. So Cisco got the benefit of saying "We sold X amount this quarter, growing by X percent!" for years -- and then they take all those phantom profits away and admit that they were fake with the writedown, and then they get to inflate their numbers again by selling "worthless" equipment for anything above 0.
Folks, "one-time expenses" COUNT. Pro-forma earnings are utter hogwash and you should ignore them. In the words of Bill Fleckenstein, over at realmoney.com, "Pro-forma earnings should be required to start with 'Once upon a time' and end with the phrase 'and they lived happily ever after.'"
Another aside: "beat the numbers" is BS. The game that's going on now is 'drop estimates about two weeks before earnings, and then we beat the number!'. Doesn't matter whether or not the business is actually profitable, just whether it 'beat expectations.'
Problem is, it's hard to pay creditors with expectations....