Running Money: Hedge Fund Honchos, Monster Markets and My Hunt for the Big Score

Running Money is actually two books entwined. One is a narrative of the late great dot-com boom, told from the perspective of a player at the right place and the right time (with the good sense to walk away at the right time also). The other is sort of an informal investment thesis, a collection of controversial and intriguing ideas that hang together and form an actionable set of guidelines.It's all tied together with a dry (Sahara desert dry) sense of humor and a knack for understatement that made me laugh out loud more than once. (Example: when a sarcastic friend says never buy a stock where the name is a target forecast for the price, Kessler makes a mental note: "avoid NetZero." Another example: "If you buy a stock at $70 and it goes to $200, it's tough to sell, figuring it might go to $300. If you bought at $3, it's a lot easier to sell.")The title of the book is fairly misleading. Anyone expecting a testosterone-fueled read is bound to be disappointed. Kessler is a cerebral investor, not a hairy chested alpha-male trader, and he makes that abundantly clear (in spite of his zillion-percent-annualized return gained from flipping mp3.com, a sixty second trade worthy of any gunner's respect).The fact that Kessler's outfit is a hedge fund is largely irrelevant to the book, as he doesn't go short and doesn't get fancy. (In fact he is snickered at by niche-based peers for not doing anything particularly sexy or exotic.) And when all is said and done, his 50%+ average return shows that you don't have to trade like a banshee or be a genius / hero to make a killing. Being in the right place at the right time, and playing it to the hilt, is enough. (Of course, that's also the rub.)The stories are entertaining. Far better, the ideas are valuable. (You have to take them with a grain of salt, but that should go without saying.) I appreciated Kessler's concept of "waterfalls," giving a mental picture of technology's promise as an investment vehicle. Pressure builds in some area of inefficiency or untapped opportunity, creating a pool of latent opportunity. Finally the barrier breaks, the waterfall bursts forth, and innovation cascades outward--first to the early adapters, then the commercial adapters, and then the general masses. As prices fall dramatically, unit volume increases far more dramatically and, hopefully, exponential profits are created in the process. Kessler highlights Microsoft as one of the greatest (and luckiest) waterfall examples of all time, thanks to the master stroke of tying software to hardware. Every box sold puts another sale in their pocket, and with someone else building the box, they maintain zero replication cost and 99% profit margins. Beautiful.Kessler also takes us on a tour of the industrial revolution, courtesy of an intellectual exercise spurred by the friendly investor and erstwhile gnome of Zurich "Mr. Zed." After following the progress of the steam engine and the Niagara Falls opportunity in textiles, Kessler transitions from old school to new school with his "margin surplus" theory, which seeks to replace yesterday's manufacturing model with an intellectual property one.Along the way he points out how IP (intellectual property) and physical manufacturing have been effectively split up for the first time in history, allowing Intel and Microsoft to make 80-99% margins on products bundled with every Sony laptop sold, while Sony itself sees maybe 1% returns after the hassle of buying materials, paying for labor, assembling the boxes, managing inventory and shipping them out.Thus the United States gets the lion's share of pure profit through intellectual property value-add, whereas Asia (or wherever the assembly occurs) gets traditional manufacturing sized margins (5% or less) on assembly and delivery, but benefits from mass employment and economic growth. Lots o' jobs is Asia's incentive to keep the high margin / low margin deal going (at least until they finally get innovative too, and start outsourcing to North Africa or some such place).The margin surplus theory is intriguing, and goes far in explaining why our trade deficit may not be as big a deal as some suggest. If Kessler is more or less correct, then a trade deficit is a natural--and even desirable--byproduct of an investment surplus, as the world continues to invest in our high margin IP profit centers, rather than the lower margin process of assembly taking place elsewhere.The theory doesn't address a few key nitpicks though, such as the frighteningly low rate of consumer saving in the United States... or the tendency we have to spend borrowed money on "stuff" rather than putting it back into productive investment... or the propensity of government to cheerfully run spending off the rails while whistlin' Dixie.Kessler is confident that the next round of spectacular innovation is likely to occur within the same twenty mile radius as last time, but here I fear he is overly optimistic. Even if margin surplus is more right than wrong, and even if IP invalidates gaping trade deficits and old economic models (two big ifs), America still has rough waters and real challenges ahead. Just because team USA was the innovation powerhouse of the 20th century doesn't mean we can `repeat the feat' in round 21.Edges can be dulled and edges can be lost. If innovation is going to keep saving our bacon from the deficit frying pan, someone needs to tell the politicians who are discouraging immigration (choking off our brain gain), letting trial lawyers run amok, and bleeding entrepreneurs with heightening cycles of tax and spend. With the baby boomer generation retiring and major fiscal battles ahead, this is no time to be complacent. If apathy sets in, innovation won't save us from decline... and the next big waterfalls could easily make a splash elsewhere.

"Running Money" picks up where Andy Kessler's previous book, "Wall Street Meat" (which portrays his life as a Wall Street-based semiconductor industry stock analyst and investment banker), left off. Kessler left Wall Street to run a Palo Alto-based hedge fund with one partner, raising money from wealthy individuals and groups, and investing it in latter-stage startup and public technology companies. He had the, in retrospect, incredibly fortuitous timing (as he himself admits) to open a five year fund in 1996, which forced him to liquidate the fund and lock in his profits as the tech bubble was bursting in 2001 (in fact, he disperses his last cash just days before 9/11).But Kessler's success, as he proves in the highly entertaining and also thought provoking "Running Money", is not merely the product of providential timing. His insider's view of the hedge fund industry shows how many of these funds don't even attempt to do fundamental stock analysis, but instead seek out market distortions that they can profit from (for a while, at least). Kessler, by contrast, stays true to his stock analyst roots and attempts to find great companies possessing a strong economic and technological advantage in a market about to undergo rapid growth. He struggles initially, but eventually uses an interesting combination of old world thinking (by analyzing the history of the steam power-driven Industrial Revolution) and radical new era economics (described below) to identify some winners. His story of the small niche semiconductor company he found which benefited immensely from the MP3 music piracy fad, at the same time that Napster and the record companies were losing their shirts, is a great case study for technology investing.If "Running Money" were nothing more than a series of case studies and anecdotes about the investments Kessler made, it would be a fairly lightweight book. The anecdotes are indeed amusing, especially Nick Moore's scathing trashtalking of technology companies (Moore has a humorous nickname for every technology company, e.g. "Scam-azon"). But fortunately, in the final section, Kessler ponders the deeper question of what his success means about the current economy. It is here that Kessler voices some fairly radical opinions and theories that certainly deserve to get discussed and tested.Kessler's radical opinion is that traditional economists, who are very cognizant of and worried about the trade deficit that the United States has been running since the 1970s, are not properly accounting for what truly matters in today's economy: wealth and profits. Because so much US manufacturing has moved abroad, and because the design of those products (i.e. the intellectual property) is still heavily centered in the US, the US does not receive any economic "credit" on the trade balance sheet when those designs are shipped to overseas factories. What is counted, of course, are the manufactured products that come back into this country, and that produces a large deficit. But since manufacturing is such a cutthroat business, whereas companies focused on developing intellectual property (e.g. Microsoft, Intel, pharmaceutical companies, and even Nike) command such high margins (profits) and pay their employees well, the resulting arrangement is highly beneficial to the living standard of the US. "We think, they sweat", sums up Kessler in his typical smart-alecky style. The low-priced products which flow into this country, along with the capital which finances some of our government's budget deficit, are our rewards for this mutually beneficial relationship.Needless to say, these views are highly controversial. Yet Kessler forcefully states his arguments, and also has more than a little evidence on his side. He deserves credit for formulating these views, and thereby making "Running Money" more than just a breezy rags-to-riches technology boom era story.

I read books to learn and to be entertained. What I learned (but already knew) was the history of the tech stock craze in the later 90s. But Kessler also frames this around the Industrial Revolution and the development of the steam engine. That may be the one weakness in the book as an inordinate amount of time is spent on this analogy. It works but takes a while to get there.While he doesn't go in to great depth of the investing strategy, he does go through the general philosophies of what they were looking for and examples when they were successful. And he does it in an entertaining style.What does come through is the unique partnership he had with Fred and how it worked. Particularly at the end when they recognized the money and market were just too hot and they needed to pull back. That sounds easy in hindsight but anyone who was investing or managing money at that time will tell you how difficult it is to turn investors off after the great difficulty in getting their money.Where this book really shines is pure entertainment. With the exception of the steam engine analogy, this is a fast entertaining read written in a very witty style. Kessler is a gifted writer and I wouldn't be surprised to see him move to novels eventually. This book is like a perfect college class: you get entertained but learn something also. I strongly recommend this book to investors or anyone with interest in the history of technology companies.

I like books by Andy Kessler, yet this one took a lot of detours and seemed to have overlaps from another book he wrote. The book was informative and funny and entertaining to read, I just wish it would have followed a more linear path, instead of having all the chapter tangents.