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Brain Teasers

Greg Spears

I CAN’T CALL THE BOOKS I buy “beach reads” because, honestly, they can get dense. Still, if—like me—you enjoy learning about investing, economics or even the religious overtones of capitalism, here are five books that might make for insightful summer reading or, perhaps, induce napping in the hammock.

The Physics of Wall Street by James Owen Weatherall. This book begins with the assertion that “Warren Buffett isn’t the best money manager in the world” and then spends the next 224 pages introducing us to genius PhDs who’ve whipped the S&P 500 by anticipating the prices of securities.

Doyne Farmer was working on chaos theory at Los Alamos National Laboratory when he realized his understanding of complex systems could be applied to options. With a stake from a Swiss bank, he opens his confidently named Prediction Company. “Over the firm’s first fifteen years, its risk-adjusted return was almost one hundred times larger than the S&P 500 return over the same period,” Weatherall writes.

This book explains why so many physicists have quit academia for huge-paying jobs at hedge funds. Using black-box programs, high-speed trading and scientific breakthroughs hardly anyone else understands, they arbitrage securities in complex trading strategies. When it works, they make billions. When it fails, it sometimes takes a government bailout to prevent widespread economic collapse.

Lights Out: Pride, Delusion, and the Fall of General Electric by Thomas Gryta and Ted Mann. GE went from having the largest stock market value in the world to struggling to make payroll in less than 10 years. In Act One, star CEO Jack Welch massages quarterly earnings so perfectly that GE’s stock rises 40-fold between 1980 and 2000.

In Act Two, Welch’s successor Jeffrey Immelt steers a deflating balloon. He tries to spin the industrial giant as a digital company still worthy of a lofty stock multiple. The Great Recession of 2008 pulls the curtain back on that fiction, with GE Capital requiring a $139 billion government bailout. At the same time, demand stopped for GE’s heavy-industry mainstays: locomotives, CT scanners, jet engines and power turbines.

Act Three, still underway, is the biggest yard sale of all time. The company is selling off everything it can to live another day. Its latest plan—not covered in the book—is to split into three separate companies. GE will slim down to a single division—the aircraft engine manufacturer. All companies have a lifespan. This is what happens when the biggest one enters the nursing home.

The Economists’ Hour by Binyamin Appelbaum. As presidents realize their job renewal depends on delivering prosperity, economic professors are summoned from Chicago or Cambridge to try out their pet theories, often to startling effect.

The biggest trend, championed by the late Milton Friedman of the University of Chicago, was to replace government regulation with free markets. The dollar is taken off the gold standard and allowed to float. Millions more people can afford to fly nowadays because the price of airline tickets was deregulated.

In a lesser-known episode, a blind economist from the University of Rochester, Walter Oi, helps persuade Richard Nixon to end the draft. Oi, accompanied to the Oval Office by his guide dog, argues the draft wastefully interferes with young men’s career choices—at a cost to the economy of $5 billion a year. He recommends raising soldiers’ pay so the Army can compete for volunteers in the job market.

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At a hearing, U.S. Army General William Westmoreland objected, saying, “I do not relish the prospect of commanding an army of mercenaries.” Milton Friedman fired right back: “General, would you rather command an army of slaves?”

Religion and the Rise of Capitalism by Benjamin M. Friedman. The former chair of Harvard’s economics department has written a theological tome showing how religious belief, and Protestantism in particular, is woven through American capitalism.

Under John Calvin’s strict interpretation, who gets into heaven is predestined from birth. No amount of good work can change it. So how might a pious Puritan in Massachusetts signal that he’s in God’s good graces? Simple: Work hard and get wealthy. Over time, Calvin’s cheerless faith has faded. But personal traits like diligence and thrift became secularized, lending a powerful force to capitalism.

Friedman traces the development of Christian thought, and its influence on economic belief, through to the end of the 20th century. A surprising recurring theme is a belief in millennialism—that the end is near. Like Charlie Brown and the football, these end-timers always seem doomed to disappointment.

Bad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou. This is the story of the Theranos blood testing company told by the reporter who revealed—on the front page of The Wall Street Journal—that its machines didn’t work. The company soon collapsed, and its two cofounders were convicted of fraud.

How did a Potemkin company get so large? Credit Silicon Valley mythmaking—plus iron-clad nondisclosure agreements. CEO Elizabeth Holmes dropped out of Stanford University and modeled herself after Steve Jobs. Her mesmerizing speeches of a world transformed by health technology fooled even Henry Kissinger and George Schultz, two former secretaries of state who served on the board.

Anyone who had a contrary view of the company came under heavy legal attack. Schultz’s grandson, Tyler, working a summer internship at the company, realized something was rotten. But when he told his grandfather about the problems, they became estranged. Holmes attended Schultz’s 95th birthday party. Tyler wasn’t invited.

Theranos’s largest individual investor at $125 million was Rupert Murdoch, whose News Corporation owns The Wall Street Journal. Four times Holmes asked Murdoch to muzzle the reporter who pulled down the whole rotten façade. Murdoch told Holmes he had trust in the paper’s editors—and lost his investment.

Greg Spears is HumbleDollar’s deputy editor. Earlier in his career, he worked as a reporter for the Knight Ridder Washington Bureau and Kiplinger’s Personal Finance magazine. After leaving journalism, Greg spent 23 years as a senior editor at Vanguard Group on the 401(k) side, where he implored people to save more for retirement. He currently teaches behavioral economics at St. Joseph’s University in Philadelphia as an adjunct professor. The subject helps shed light on why so many Americans save less than they might. Greg is also a Certified Financial Planner certificate holder. Check out his earlier articles.

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Thomas Taylor
Thomas Taylor
1 month ago

I don’t think I’ve ever heard Warren Buffet refer to himself as the best money manager in the world. But to compare Buffet’s career with a complex trading scheme is comparing apples to oranges. I have no doubt these PhD’s have made billions, but do they really produce anything and does this money ever amount to more than a few people’s bigger bank accounts? Maybe it “trickles” down or maybe it doesn’t. I realize the insurance operations have considerable bond and equity exposure and Berkshire Hathaway (BH) has a sizeable equity portfolio apart from that as well, but BH is a vast collection of businesses that make products and employ a great number of people. It has been documented in his letters that he struggled with the decision to exit the textile business for many years because he knew a lot of people in the mills would not be able to find other jobs and/or be retrained for a new job. Yes, he could have exited a long time before and re-directed the capital somewhere else if he simply wanted to improve his returns. I’m sure there are businesses within BH today that struggle, but I guess he has other reasons to keep them. His shareholders seem pretty loyal so I guess they think he’s done ok.

Greg Spears
Greg Spears
1 month ago
Reply to  Thomas Taylor

Hi Thomas,
I admire Mr. Buffett as well, and recently wrote an article extolling the investment advice he gave The Washington Post pension fund. I believe the author was using Buffett’s record as a high bar for performance, and saying some investment managers using different methods are posting extraordinary returns. Mr. Buffett recommended one of them—Edward O. Thorp—to his shareholders when he dissolved his previous investment partnership in 1969, before starting Berkshire Hathaway. It turned out to be a great recommendation, of course.

Thomas Taylor
Thomas Taylor
1 month ago
Reply to  Greg Spears

Yes, I read your previous article on the Washington Post pension fund and found it very interesting. Maybe I should have known the book intro was a good marketing statement and intended to get the reader interested. I’ve not heard of Edward O. Thorpe, but he sounds interesting as well. Thanks.

Guest
Guest
1 month ago

Thank you Mr. Spears. So far I’ve only read “Bad Blood” from your list. A terrific and very well researched book!

Nate Allen
Nate Allen
1 month ago

”The Physics of Wall Street” sounds incredibly interesting. To those that think they can beat the market consistently: these are the smart folks you will have to beat.

On the flip side: it does show that the market can be beat given enough brain power, processing power, and cash backing.

B Carr
B Carr
1 month ago

Mr Spears, you are a wordsmith with few peers. Beautifully written summations with the kind of wry humor I seek out at every turn. Thank you!

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