Financial History Issue 119 (Fall 2016) - Page 40

BOOK REVIEW  BY JAMES P. PROUT Investment: A History By Norton Reamer & Jesse Downing Columbia Business School Publishing, 2016 436 pages with notes, bibliography and index $35.00 The concept of “investment” probably started with the caveman or cavewoman who decided to take a day or two off from hunting with a rock to invent the spear. Today, we talk endlessly about investment—in people, relationships, education, time and emotion. How do we approach putting current resources to work for future benefit? It is human activity that goes on endlessly. It is motivated by the belief that tomorrow should be better than yesterday. In Investment: A History, authors Norton Reamer and Jesse Downing, two money management professionals, acknowledge early on the difficulty in handling such a broad topic in a single book. To help frame the discussion, they set some parameters on their intended treatment. The book is a practical look at “financial investment,” employing monetary rather than other resources. Four guiding principles characterize its history: real ownership, where shareholders must act like they own the company; fundamental value, which separates investment from speculation; financial leverage, where credit can multiply or destroy investment; and resource allocation, where measuring the expected return on capital employed is a key factor in determining present allocation. Having set out the scope of their analysis, Reamer and Downing begin on the banks of the Tigris and Euphrates with the ancient Mesopotamians. They describe a society where land, religion and taxes all came together to create a system where professional managers worked the land for fees or got to keep some part of the excess. Interestingly, most of this asset management in Mesopotamia, and later in Greece and Rome, was done by slaves— quite a difference from the super-rich hedge fund managers who are listed later in the book. As commercial ambitions and surplus assets grew in the Middle Ages, the authors highlight how religious prohibition against loan interest became a source of investment friction. New structures had to be created and old attitudes had to change to allow capital to flow to the most productive investments. Trade expansion, the creation of the joint stock companies and trusts, sped the development of more specialized and active investment across borders. As the narrative shifts to the last 150 years, the focus is placed on “democratization” of finances and investment. Larger pools of assets (insurance companies, charities, retirement plans) created even more surplus capital seeking even greater return. Investment moved from the activity of the few into an industry of the many. How has this changed the concept of investment, and how has society adapted to the change? Preventing and punishing fraud is key to building investment confidence. This is familiar territory to readers of this magazine, and the authors recount some of the 38    FINANCIAL HISTORY  |  Fall 2016  | www.MoAF.org most notorious Ponzi schemes, market corners, market manipulation and insider trading scandals. Cyclical crises like credit and market bubbles or credit or banking recessions can have an even more chilling effect on investment. The book includes useful nutshells on how economic theories have been developed and employed to ameliorate the broader threats of systemic meltdowns. As investment becomes more democratic and industrialized, investment professionals, too, have created theories to provide intellectual underpinnings to their approaches. Three of these are explained in detail: asset pricing, the valuing of risk and the development of measurement and performance tools. This is the heaviest part of the book—but well worth the effort. To conclude the book, the authors bring us to some more recent developments. There is a discussion of investment product expansion. Alternative investments, such as hedge funds and private equity for more sophisticated market participants, and index funds for the more risk-averse, cost conscience consumer are explained. Investment: A History combines characteristics of both a textbook and a popular history. There were some important topics that space made impossible to cover in more depth: Modern European and Asian approaches to the concept, the effect of war on financing and investment and the coming storm between retirement commitments and investment return realities. “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities,” said Warren Buffett. And given the dramatic outflows from hedge funds recently, and the current chilly political climate for markets in general, the authors should get ready to update their worthy and useful book.  Jim Prout is a lawyer and business consultant. He can be reached at jpprout@ gmail.com.