Friday, May 24, 2019

Book Review: The Wisdom of Finance by Mihir Desai Financial Express 24th March 2019

The subject of finance is interesting as it involves, at the end of the day, dealing with money and making profit irrespective of whether it is an individual or a company. The subject and the terminology could, however, be hard to understand at times. This is so because even though the concepts are plain enough, they are cloaked with a lot of jargon, which is so in any subject. We all know what is ‘risk’ and the dangers of taking too much of it in life; and as a corollary the need to mitigate the same. But as a practitioner, it is a challenge because there is a lot of theory that goes into it and when everyone plays along, all cannot gain. This is what has engendered a lot of interest in the subject. Also, almost any major economic upheaval in the world in the last century has germinated in some aspect of finance that has caused serious disruption through market failure.
There are different ways of approaching the subject, especially for a beginner. Standard books take you through the maze through arithmetic, graphs and all the jazz. When you read Mihir Desai’s book titled The Wisdom of Finance, you would be enthused because the approach is different. It is a storybook-kind of narration, where he takes us through some of the major concepts and relates them to novels, TV shows, movies and political developments. The concept of an ‘option’ in finance is quite rudimentary as it gives the person exercising it the right, but not the obligation, to go ahead and consummate a deal that has been entered into. When the author relates this to marriages in the novel Pride and Prejudice, the comparison looks agreeable as marriages in the western world (though not necessarily in India) would always be guided by this principle. But this is where the analogy ends, as further elaboration is missing.
The parable of ‘Jesus and the talents’ is used to explain what ‘value’ is. If I give you something and you return nothing more after a period of time, then you are a failure and are to be condemned. The same holds when your money is invested by, say, a mutual fund or a PE fund, which does not deliver an acceptable return. The person who you trusted your money with has not created value for you. Hence, investors expect something more than what was initially put on the table to agree that value has been created. Again, this sounds good, but the reader can say, “But, what next?”
Similarly, Desai extends this story to ‘becoming a producer’ where the principal-agent relation is explained well. The owners are seldom the managers, who create conflict of interest, as while the latter are to work for the former, one can never know. He gives the example of a situation where the CEO, who could be Tim Cook, decides to shift his office to the poshest part of Manhattan, which costs a bomb. Is that self-serving or is it for the better image of the company?
Hence, the book picks up some basic, though interesting, concepts in finance and gives interesting stories of how subjects like insurance came into the picture or how leverage is not bad and works well to create value and is, hence, useful. The latter is important because such an act was always historically considered to be perverse and was a hush affair without fair connotations. Shakespeare’s Merchant of Venice example is given to show how this works along with the implications. In fact, there are stories also on bankruptcy and how they are to be resolved, and in this context, Desai shows how Robert Morris, who was to feature on the dollar notes, finally went into oblivion due to bankruptcy!
There is another interesting story woven around the theme of ‘no romance without finance’. For one who has seen Harrison Ford and Melanie Griffith in the film Working Girl, this would appeal. Desai then goes on to explain at a completely different level the relation between the automobile manufacturer Ford, and Firestone, the tyre manufacturer, whose partnership did not last and ended in divorce due to commercial incompatibility, though the marriage in the family was cast in stone and candied with romance.
The book, hence, links common-day occurrences with various concepts of finance, which makes understanding easy. But the complaint could be that the concepts per se are rudimentary and it is only their working or interpretation that has become difficult of late with the complexities of mathematics and modelling that appear to pervade their presentation. Here, the reader would receive little assistance.
Desai, nonetheless, must be complimented for attempting to explain finance in a rather innovative way. The reader should not expect too much detail of how things work as it is the principles that have been linked to everyday instances. A problem with the book could be that the stories narrated resonate well only if the reader is familiar with them. Otherwise, it could mean moving from one dark corner to another searching for the light that is being attempted to be shown. So if you want to know what an option is, this is the place to go. But if one wants to understand the way they work or are priced and how they have failed, then the search for answers would be outside these pages.

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