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originally posted elsewhere: January 1, 2005
tl;dr: If you're smarter than Kessler, then why aren't you richer?...
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.