Book Review: Liar's Poker

A few months back I reviewed Michael Lewis' The Big Short. Shortly thereafter, a few friends recommended his earlier work, Liar's Poker. I got around to reading it last week.

Liar's Poker was Lewis' literary debut, and tells the account of his time as a Wall street trader at Salomon Brothers, where he spent several years.

The book talks in detail about the hiring process, culture, and career path at the firm, and in the process paints an accurate picture of the dog-eat-dog harsh culture in these firms. It would strain credibility for me if I didn't have a good friend who worked at such a firm and who has shared countless stories that mirror Lewis' account. It then goes on to talk about the rise and fall of the firm during rushes around gold-rushes in the mortgage security and junk bond markets.

While not as detailed an account of the systemic flaws of modern day markets & market regulation as The Big Short was, it does go into enough detail in the style that Lewis has become famous for. Namely, taking complex and dry topics and making them engaging and digestible.

Where the book shines though, is in the portrayal of the personalities and the culture of trading firms. Characters given pseudonyms such as "The Opportunist" and "The Human Piranha" should give you an idea of why so many who work in this business don't last more than a few years.

Liar's Poker

3 Problems Hiding in Zynga's IPO filing

[I'm not a lawyer nor an accountant. My opinions are mine and not my employers, etc, etc]

Zynga's S-1 filing is really interesting reading. Tech Crunch has a (rather short) post on it here, and VentureBeat has a better post looking at some of the details here. Hit the bullet points on the VB post if you want the TL;DR version, but most of this will leap out at you from the S1 filing anyway. Short version:

• 600M revenue in 2010, almost 4X 2009. $235M revenue Q1 this year alone.
• Profits growing, with revenue (Q1-Q1: 135%), but...
• R&D up sharply (160%)
• marketing costs up (130%)
• but on the plus side, Cost of Revenue (mostly operating costs) up 110%, suggesting they are getting efficient, or benefits of scale, or both

So, all in all they are doing very well, and it certainly looks like a better investment than GroupOn or any of these other crazy IPOs that have people crying bubble.

But hang on a second. It still smells funny. Look at it from 10,000 feet. The company is HIGHLY dependent on one platform/vendor (Facebook), they don't have nearly the revenue or war chest that the incumbent publishers have, etc.

So, I thought I'd read through some of the fine print. I think the S1 doesn't address three important areas:

1. Allocation of R&D costs: Details on R&D are sparse, and the statement just cites increases in headcount, etc. What it doesn't say is whether that's because of a broadening portfolio of games (that would spread risk) or whether individual game title budgets are growing, which would suggest an increase in risk, as each title becomes a bigger gamble.
2. Risks posed by entry of EA and other incumbents: As the major publishers awaken to social games, this could have a three-sided effect on Zynga: (i) R&D costs go up to compete on product quality, (ii) possible loss of MSS as the publishers bring major titles to market, and (iii) user acquisition costs go up as the competition drives CPMs on FB's ad network up.
3. Terms of Facebook credits agreement. To Zynga's credit, they DO call out the move to the Facebook credits system that took place last year, where they went from giving up 2-10% of revenue for payment processing to giving up 30%. However, they didn't just move to Facebook's credit system. They did so after a bit of a fight, and they signed a five year agreement. What are the terms? I'd like to know, for example...

• Do they get preferential ad pricing and/or placement as a result?
• Although signed in July 2010, the S1 states the migration was only completed April 2011, so how much of the revenue from 2010 and 1Q11 was earned at 95 points on the dollar vs 70 points?

With any company, it'd be possible to ask infinite numbers of questions to learn or infer more. In this case though, I think there are at least a couple key things that investors should consider.

Food for thought over your long weekend...

Book Review: Panic!

I really enjoyed Michael Lewis' The Big Short, and so when I saw this previous work at the local library I picked it up.

Panic: The Story of Modern Financial Insanity, is *edited* by Lewis, but is really an anthology of articles from WSJ and other financial news outlets. The book takes a look the last few big financial market panics (the 'black monday' of '87, the Russian crisis, the southeast Asian currency crisis, the dot-com bubble, and the recent real estate crash) and takes select pieces of reporting from before, during, and after each of those panics.

When viewed as whole one is led inevitably conclude three things:

1. That no matter how many instances of "irrational exuberance" we go through, we never learn. We have innate ability to believe that this time it's different. The ability for amateur investors, professional investors, economists and reporters to collectively lose touch with reality and start drinking each other's kool-aid is *amazing*.
2. That after panic hits, after the bomb goes off, and when people finally pop their heads out again, everyone has an equally amazing ability to claim that they knew this was going to occur, and that they called it ahead of time. This level of revisionist history is somewhat akin to how every friend you have that went to Vegas has convinced themselves that they returned "up a couple bucks" (they didn't. Somone is paying for those hotels).
3. That in both the run up to the peak and in the panic afterward, the press is not only not objective, but possibly an even greater contributor to the mob mentality than the investors they later blame for it. Examples from the dot-com era here were an awesome example, buying hook-line-and-sinker the pitch that fundamentals no longer applied and that it was about a land grab now in favor of user revenues later - the press *loved* this story and sang it to whomever would listen.

Some critics of the book claim that the analysis here isn't deep enough, and that solutions to the crisis (or future ones) weren't offered or expanded on. However, I don't think this is the point. I think the book is a valuable one if only to view how important it is to lift your head up from whatever current trending thought there is and ask yourself if there isn't myopic group think happening once again.

In this sense, the book serves it's purpose, and so provides insight as well as a fun little history lesson.

Panic: The Story of Modern Financial Insanity

Book Review: The Ascent of Money

Naill Ferguson's The Ascent of Money is probably best summed as one part history, one part crash course in finance and economics, and one part treatise on the fallibility and hubris of mankind. Another way to describe it might be as a cross of The Big Short with To Engineer Is Human, stretched out over a window of two thousand years.

The book gives a crash course on the history of finance, looking in turn at the advent - and roles of - currency, credit, banking, the bond market, the stock market, insurance, housing, and of course the intersection between all of these in things like derivatives, mortgage backed securities and the like. Each is examined from birth through to current day, as well as looked at in a global context.

Through it all, Ferguson gives a history of bubbles, from the "first bubble" in which an enterprising Scot bankrupted all of France in the early 1700's, through to the mortgage-backed mess the USA finds itself in today. Here is where I found a similarity with To Engineer is Human, in that it is a story of how we inevitably fail to learn from History. Perhaps it's more accurate to say that when we do, time and greed inevitably erode the safeguards we put in place.

This is what the book's closing chapter discusses, is whether such cycles are inevitable, and whether we do as much damage as we protect against, when we mess with the cycle of creative destruction.

While finance in general can be a bit dry, Ferguson does a good job of making this entertaining. The history of finance has no shortage of colorful characters and he introduces the reader to many of them. Even if you are not that enthused about the topic, it nevertheless will give a good overview of it that will entertain. Also, it serves to remind that the "current state of things" (i.e. the last 20 years or so, further back from which people have a tendency to subscribe to different rules) is by no means the way things must remain.

Finally, I'll add that the final chapter's coverage of reasons why people tend to predict the future of financial markets properly applies equally well to the tech industry as well. There are lessons to take away here that have less to do with dollars and more to do with our tendency to believe that "this time is different". If history shows us anything, it's that we repeat it.

The Ascent of Money: A Financial History of the World

Financial Crisis Explained

This is not just a great explanation of the current financial crisis. It's also a great example of how expertise in a subject and a well suited metaphor can make for a powerful presentation.