Review of THE WISDOM OF FINANCE: Discovering Humanity in the World of Risk and Return
This is not an oxymoron. It is a startling marriage of ideas.
“Money is a Kind of Poetry”
- Wallace Stevens
This book will leave you believing that one of the great poets of the 20th century was on to something. If you think that is a bit of a stretch, more the reason to read this book. What is Desai trying to do in this short, well-written and entirely accessible “life-changing” book?
Desai wants to illustrate what finance can tell us about ourselves – both good and bad. Finance brings out the best and the worst in us and for the great majority of people, they never get beyond the latter. Desai is adjusting the scale.
Desai wants to show how finance is instructive in coming to terms with the inherent uncertainty and risk of life. So much of what motivates human beings is fear and at the heart of fear is the FACT that all parts of life from the universe to our simplest lives are nestled within a swirling vortex of randomness and risk. Finance is not just about getting rich; it is about creating a way to live with this FACT.
Desai argues that the degree to which you embrace the reality of risk is the degree to which you live a full life and finance provides a remarkably accessible rubric for how to do that.
The structure of the book is brilliant. Desai takes one segment of the financial world like Insurance or Mergers & Acquisitions and in that chapter reveals how this Wall Street fact of life is actually a “fact of life”. The following is a brief and very partial summary of the first chapter (there are 9) followed by a handful of other “bullet points” that I hope will serve as a tease to read the whole book.
CHAPTER ONE: In the late 19th century, America’s greatest pure philosopher, Charles Pierce, argued for the value of insurance. Pierce stated that while we can measure the probability of something happening (he cites the Bell curve as a universal portrait of probability), the problem lies in the uncertainty of where you or an event might land on that curve of probability. An example (my own) … back in the day of sail, shipping was a dangerous but lucrative business, and nobody did it better than the Dutch. The Dutch traders had a problem, however. One out of 20 Dutch ships sunk, taking with them the entire investment. The probability is pretty accurate at 5% but the risk that it is NOT your ship and your investment at the bottom of the ocean is a total uncertainty. Insurance grew from “underwriting” the risk of those ships sinking with a vast number of insurers taking small portions of each ship, collecting premiums for the insurance that allows investors to participate in that risky trade. The underwriters do this with the whole universe of ships, 95% of which will not sink. When a ship then inevitably sinks, the insurers cover the loss, a sum that is manageable because they each have such a small share. It is known as spreading the risk. Desai argues that insurance thus made capitalism feasible and risk bearable. We spread the risk throughout our lives. We diversify portfolios and travel in separate planes. We are only too aware of the wisdom of not putting all your eggs in one basket.
This is just a portion of the first chapter and how Desai then incorporates Wallace Stevens and the art of poetry into the glories of insurance is just too much fun to read. Stevens was almost as brilliant in managing insurance claims as he was as a poet. Insurance makes it possible to own a house or drive a car with peace of mind given the financial uncertainty and peril that can lie behind such ownership. Poetry is the creative effort to manage or contain conscious or unconscious uncertainty through art. Art, in all its forms, thus makes life possible. Both art and insurance matter in a very existential sense. Amitov Ghosh presciently predicted years ago that we will not have begun to honestly acknowledge climate change until it infiltrates the stories we tell each other. Insurance, meanwhile, may be the blunt financial instrument that house by house wakes humanity up to our fear and denial. Insurance, beginning with Dutch ships navigating the dangers of the South China Sea, is a product of living with the potential for catastrophic loss … otherwise known as climate change.
SELECTED “TAKEWAYS”:
Liz Bennett from Pride & Prejudice, Melville’s Bartleby and Aristotle join forces to not only help explain the dizzying world of options in the financial world but why they are an accurate lens with which to examine one’s own life. There is no easy answer which shouldn’t surprise anybody familiar with the options market. Options, however, are what we require to manage life and are, paradoxically, too often the very things that prevent us from living life.
Using the parable of the “talents”. Desai recruits Jesus into the booster section of finance. When we chose to leave Eden and live with knowledge, we embraced an awareness of risk. Jesus’ parable suggests that to approach this assumed risk passively is not only a bad investment but goes against God’s directive to live life.
The uncertainty of life and the inherent randomness of things are such that no matter your efforts or talents, good fortune is mostly influenced by luck. This is a central fact of finance that the Masters of the Universe on Wall Street lose track of at their own peril.
Synergies are overrated and most mergers & acquisitions that are based on this alchemy will fail. The allure of synergies leads to bad due diligence and a rush to “get it done”. The same applies for marriage.
Speaking of marriage, Desai claims that “dynastic wealth” marriages among the 1/10th of 1% in the developed world have done more to raise wealth inequality than just about anything else.
Debt is a good thing. Debt is a bad thing. Like options and so much else in this book, it cuts both ways. Leverage can destroy a company but without it, most companies will fail to grow. Personal debt can crush lives but without it homeownership and much else is out of reach. Debt is the tie that binds.
Desai ends, surprisingly, with Willa Cather’s O Pioneers!. Her female protagonist serves as the literary embodiment of the instructive values inherent in Desai’s financial universe.
Writing this brief review is humbling because his work is much more arresting than my efforts suggest. I cannot stop giving it to people. My edition is a monument to marginalia. The Wisdom of Finance is a metaphysical toolbox. It’s too “wise” a book to provide answers. The uncertainty and risk in life cannot be “fixed”. They can, however, be understood and that understanding, with a little luck, can produce a full and real life. It’s the only investment you are here on earth to make, and Desai’s toolbox is a good place to a start.
The Wisdom of Finance: Discovering Humanity in the World of Risk and Return
By Mihir Desai
2017 178 pages