Monday, December 13, 2010

Book Review: Diary Of A Very Bad Year

(Image courtesy of Encyclopedia Britannica)

I just finished Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager by Keith Gessen of literary website n+1. A friend and fellow industry member CP has already thrown up his review of the book. His review is thoughtful and thorough so I'll try to keep mine short and not retread the same ground he has already covered.

First, I thought the title and cover of the book were very misleading. There is nothing confessionary in nature here and the "very bad year" being referenced mostly pertains to everybody else-- "HFM", the anonymous protagonist, seems to have suffered some nicks and scratches himself but he wasn't reduced to selling apples on the sidewalks of Manhattan. The book is a collection of interviews of HFM that serve merely to provide him with a medium to share his views of what happened in the financial markets, not pour out his grief about being a casualty himself.

Secondly, I found the admitted economic ignorance of the author amusing (he self-identifies as a leftist, little surprise after admitting he knows nothing of economics). The author states at the beginning of the book how fascinating and impressive he finds HFM to be in terms of how his mind works and how he can explain so much about what happened in the financial markets. I found myself wondering how much more impressed the author would've been had he spoken to an Austrian-minded individual, but just as quickly realized that there's a reason why the literary catalog of post-crisis reflections is nothing but a series of concerned but ultimately clueless mainstream perspectives.

Similarly, HFM's understanding of what took place was both expected and unexpected. Expected, because he concludes that the various bailouts and interventions were necessary and beneficial. Unexpected, because despite such beliefs his analysis was faintly reminiscent of Austrian Business Cycle Theory. HFM repeatedly, adamantly and correctly claimed that the financial crisis was a result of misallocations of capital and resources, that the aftermath is simply about allocating losses that actually occurred in the boom time, not preventing the realization of loss now, and that this process is essentially unavoidable if the economy is ever to get onto sound footing again.

As for what caused those misallocations, HFM knows there was too much lending but he isn't sure why (Austrians blame fractional reserve banking and central bank-induced moral hazard).

There are a number of good-to-great quotes in the book related to these topics and HFM himself offers additional perspective on other topics relating to the theory of finance and investing which are valuable to consider. For anyone looking for a "how-to" of the hedge fund world, or who are hoping to become better investors, this book offers very little. I thought one of HFM's best suggestions was taking a "Black Box" approach to examining poor investment decisions, though I wondered if more might be gained by carefully scrutinizing winning, rather than losing, trades. Perhaps it depends on whether you focus on margin of safety or not.

Overall, the book provided the most utility by demonstrating the mainstream intellectual perspective. HFM is knowledgeable, thoughtful and obviously highly-educated, as are most of his competitors. However, this knowledge, thoughtfulness and education ultimately proves to be superficial-- HFM and his brethren are content to stop at "animal spirits" as an explanation for business cycles, they're happy to employ self-contradictory logic in their thinking about the economy (how do misallocations of resources occur in a world where aggregate demand is the ne plus ultra of economic motivation?) and they routinely miss the obvious in their apparent confusion concerning why, post-crisis, financial players seem to have such incredibly short memories of all the pain and anguish they all recently suffered through.

The reason is simple, and HFM is aware of it in some other part of his mind but can not seem to connect the dots: thanks to government intervention, very few of them have yet paid the ultimate costs of their outlandish economic misbehavior.

I'll use CP's 5-point scale and rate this book a 3/5. It was short, enjoyable and informative for the most part, but it didn't live up to my expectations. I'd recommend it to anyone who is curious to relive the last two years of financial crisis from the perspective of someone inside the financial industry, with the caveat that this is a slightly flawed, mainstream interpretation of those events.

You can buy it new from using the link below:


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