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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.
Bah, I was hoping for pictures of high priced New York whores, not a story about boring stock trading.
Trolling is a art,
That's what keeps Hugh Hefner in a very nice lifestyle.
At least now, I'll have a fighting chance.
Heh, if this weren't a book review, I'd... uh...
complete financial boobs
The coolest voice ever.
Always remember: analysts are paid by the bank, not by you. If they're giving out "free information", it's because it helps them. It may or may not help you...
.. 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
would you get the cost per page for a book. I also buy my art by the pound.
is an AI that analyzes the market, predicts the best /safest investments, and buys the shares. Then Sells when it thinks their at their peak, and donates the money it makes to the FSF to fund it's own development.
Theoretically, it could even be reprogrammed to ruin MS share prices... hmmm
Fight or flight its all the same
Live to die another day
--Ryan
A. What you get when traders jump.
0110100100100000011000010110110100100000011000100
It was even funnier with me. Here I am, a software developer for in-house IT applications. I had investment banking friends asking me about software startups etc.
But my answers usually scrutinized the balance sheet, and liabilites. I'd answer with something like... "Hey, sure they have no debt, so bankruptcy isn't in the works... But what the hell do you call the 3 million convertable preferred shares,not to mention the 15Million restricted shares that are a time-bomb for new investors. Who care if they make money. A new investor is guaranteed to lose either way!!!" I was all wallstreet'n their asses because I learned so much on the boards. PLus, 1/2 an MBA.
Here's a timely article from The Onion.
Patrick Doyle
I mod down every jackass who puts his moderation policy in his sig. Oh, wait a sec....
It's exactly like somebody selling a formula for winning the lottery: why doesn't he keeps it for himself????
Yet another book about the scapegoat du jour. We all lost money because Jack Grubman and Henry Blodget gave us bad advice. Widows and orphans losing millions of dollars because of corrupt analysts!
What was it everybody was thinking? Oh, look, the nice analysts are giving us something worth millions of dollars for free! Why are they doing that? I guess investment bankers are just nice guys. You'd have to be stupider than Elliot Spitzer to believe that.
Come on. Analysts were sales shills for IPOs. Anybody who was there knew that... it was admitted in every major business news outlet there is or was, at the time. What is this stupid settlement anyway? Let's call a shovel a shovel, people, It's a shakedown.
The shame of it is, there is good research out there, especially if you ignore the rating and price target and just read the copy. The analyst has the time and opportunity to talk to management, customers and competitors and tell you what they found. It may not be great info, but it's a darn sight better than what you read in friggin Business Week two months later. Read the bond analyst research if you want to see quality (what, you can't get it? That's because you didn't pay for it.) After the settlement this will all disappear. So instead of having something marginally useful for free and let the emptor caveat, we get nothing. A victory for the small investor. Right.
Thanks Elliot. Like Guiliani, maybe we can make you Mayor so you can stop making things worse just to satisfy your ego.
Milo
Hey folks, it wasn't only the "Bad" companies that played the earnings game by beating estimates by a penny. So called "Good" companies do this too, like GE and Cisco. Some truly large US corporations routinely beat estimates by a penny, for several quarters in a row. Now, think about this for a second...GE is larger than many third-world countries and they can beat estimates by a penny over and over? It was pure BS. GE told the analysts what to expect, analysts told GE what they would be looking for, and then GE and other corporations play with the numbers. The US tax code is so full with loopholes, they can OVERPAY taxes in one quarter so that they will have a buffer to help them in a future quarter if business is not so good. Pull enough tricks like this, and you get numbers that beat the street over and over. Just don't look too closely at how they did it, because the world of corporate accounting stinks like a whorehouse next to a hog farm.
The truly amazing thing was how many people fell for this crap. CNBC and the business-oriented media were asleep at the wheel. Nobody really asked tough questions and did independent thinking. And the investors get some blame too: they were making money in a bull market and nobody wanted to be left behind in the go-go dot com bull market.
I was a stockbroker during the 90's bull market. I sold my stocks January 2000, about 2-3 months before Nasdaq hit top and rolled over & played dead. Don't ever believe a CEO interview, they lie shamelessly. Most CEO's have so many stock options that expecting honesty from them is wishful thinking in the extreme. Would you be brutally honest about your company if your golden parachute was hanging in the balance??
Last tip for investors: financial education in general is horrible. People don't know how to invest or save for retirement, and the mutual funds take full advantage of this lack of knowledge. They advertise "Investing is hard, give us your money and we'll do it for you!" Mostly they deliver average and frequently below-average performance and charge their clients for the "service" they provide.
Educate yourself. Read books about investing and trading. Most people here on slashdot would spend
a weekend researching a dvd player or a new fridge, but don't spend time learning about financial markets. I've read well over 200 books on the topic, and some of the best books are from the 1920's!!! Investing really hasn't changed, and I was able to get out of the stock market bubble before it popped. I would suggest a book "Reminiscences of a Stock Market Operator" by Edwin Lefevre. A true classic with commonsense advice that's still good today. Every good Wall Street pro has read this one, and it's written in an easily understandable fashion, it's basically a biography. A classic passage from this book that could have been written about the 1990's, but was about the 1920's bull market:
"In every bull market the public makes big profits on paper. And that's where the profits stay, on paper, because they always forget to sell."
Run to the library or bookstore and get this book. Read it a couple times, someday you'll thank me. This book taught me more that just about anything else in the world of investing & trading. *AND* it's a fun, easy-to-read book, so what are you waiting for??
Buy low, sell high.
If tits were wings it'd be flying around.
A lot of people are furious about losing so much money, and are looking for scapegoats. Everyone is conveniently forgetting just how thoroughly almost everyone believed this stuff, how the Internet was going to change everything, how the New Economy was going to make everyone wealthy overnight.
:) ). They STILL think I'm nuts when I predict that the Nasdaq will see 500 before it sees 5000 again, and that the Dow will see 3000 before 30K.
Thanks to sites like itulip.com (not really being updated any more) and prudentbear.com, I've been highly skeptical of the whole stock market thing since about 1999. (The dotcom I was working for at the time went public and was suddenly worth over a billion dollars; I KNEW this wasn't real, I KNEW something was horribly wrong, and started doing research.) But back in 99, these sites were practically the only source of real, solid information about what was happening, about the sheer insanity of the whole thing.
I'm not saying they were blameless, but it's not easy to dupe intelligent, informed people. Everyone wanted to get rich fast without working, and the madness of crowds is a powerful force. Wall Street alone couldn't possibly be to blame for a bubble of that size. It took the Fed's ridiculous money policies, Wall Street, a "world-changing invention", and lack of fear of debt, all working in combination, to cause the Great Bubble. (which I believe will lead to a Second Great Depression, just like the first one did -- it's just happening slower because the Fed is desperately, desperately trying to pump more greenbacks into the system -- more of the same medicine that got us sick in the first place.)
I can tell you from personal experience that this madness is nearly impossible to overcome. I tried and tried to tell my friends and family about what a dire mess we were getting into, and most of them thought I was nuts (not to mention a crashing bore
Because I was so frustrated then, trying to warn people that this was insanity and couldn't possibly last, I really notice the global shift in thinking. Suddenly, "of course" Wall Street is corrupt, and "of course" we were in a bubble, and obviously it was all those Wall Street guys who were at fault.
It's easy to hold people responsible, retroactively, for not holding an opinion that is now 'obvious'. It's also grossly unfair. But that's how scapegoating works.
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....
In 14 or 28 years it'll fall into the public domain. WSM is one of the first books under the Creative Commons Founders' Copyrght.