Book Review - The Snowball: Warren Buffett and the Business of Life

Thanks Brad de Long for highlighting this book review by Michael Lewis. Have read Lowenstein's Buffett: the Making of an American Capitalist and was not keen on reading an other 960 pages on the great investor so this six pages summary comes in handy. A conclusion from the richest man on earth: ""Basically, when you get to my age," she quotes him telling a group of business school students, "you'll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them.""

"Good to Great"

I finally finished "Good to Great" by Jim Collings. The books explains "Why some companies make the leap... and others don't". I was attracted to the book wanting to know more about succesful companies and the key factors that differentiate them from the norm and their competitors.

The author and his research team identified 11 companies that made the leap (measured by stellar stock market performance). They then provide the framework that these companies have gone through to achieve their new status:

Start with a great leader (Level 5 leadership, humble but hardworking)
Get the right people on board
Listen to the facts
Focus on what you can be the best at, what you are passionate about and what drives your economic engine (Hedgehog Concept)
Be disciplined about the concept

Focus and build momentum to achieve breakthrough, The Flywheel (thanks to focus & results, no need for grand programs)

As an investment tool trying to understand the possible Hedgehog Concept of the company you are looking at may be a good start. (Are they the best? Can they be the best? What is their economic engine?) See the diagnostic tool here.

I note however that some of the companies chosen did not survive very long after the book was published in 2001 (Fannie Mae, Circuit City are bust). I could not find any recent update at jimcollins.com or on the web but came across the following comment from Freakonomics author Steven Levitt:
http://freakonomics.blogs.nytimes.com/2008/07/28/from-good-to-great-to-below-average/

The Good to Great companies are listed below. Since the end of 2001 (year-end after the book publication) Nucor has continued to outperform the broader market strongly. CC and FNM went bust, Gillette was acquired. The rest performed roughly in line with the market as this Yahoo chart illustrates (reset the start date at the bottom right to 12/31/2001).
Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreen, Wells Fargo

"Getting Off Track"

Prof John B. Taylor from Stanford University just authored an excellent short new book on the crisis:
Getting Off Track. How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis.

See the author summing up his points in the wsj here. A review of the book by his colleague from the Hoover Institution can be found in Forbes.

Prof. Taylor is the economist who gave his name to the "Taylor Rule" which says "the interest rate should be one-and-a-half times the inflation rate plus one-half times the GDP gap plus one. (The GDP gap measures how far GDP is from its normal trend level)". (Am not sure what the rule says when the result of the above equation is negative!)

The book is a short read and answers the following questions rather convincingly.
What caused the financial crisis?
What prolonged the crisis?
Why the crisis worsened dramatically a year after it began?

What caused the financial crisis?
Too loose monetary policy (interest rates lower than the above rule would have suggested and for longer than necessary) contributed to the housing boom.
"Queen of Spades Problem": complex securitization ensured that people didn't and still don't know where the bad mortgages are.

What prolonged the crisis?
According to the author the problem was at first wrongly diagnosed. The rise in spreads that seized market in August 2007 was first attributed to liquidity problems rather than a counterparty risk problem. The policies that followed were then mistaken and ineffective(TAF, 100bn US$ checks to households, aggressive cut in rates that led to higher oil prices)

Why the crisis worsened dramatically a year after it began?
In this chapter the author questions the conventional wisdom according to which letting Lehman Brother go bust led to a worsening of the crisis. Mr Taylor makes an interesting detailed event study to prove his point (basically the surge in Libor-OIS spread happened more than a week after that event and just after the TARP announcement). For the author the wrong diagnosis and the lack of a predictable framework for intervention were big contributors to the worsening of the situation.

Krugman on the yield curve

Paul Krugman' "the return of depression economics and the crisis of 2008" is an excellent summary explanation of past crises: Mexico '94, Argentina '02, Asia '97, LTCM and Russia in '98, Japan in the 90's as well as the current mess.
Consequently on his blog he warns not to see too much in the currently positively sloping US yield curve.
His stance on the state of the current US real estate bubble, the correction may well continue for a bit. Great quotes as well in the post. Always form your own opinions!