Monday, March 2, 2009

Book Review: Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street

At the time of his death, J. Paul Getty was living with something like six women. He supposedly said he enjoyed each for a different strength, one for her ability at intellectual debate, one for her appreciation of art, etc.

While not living with six women, Warren Buffett does have a group of women that he seems to enjoy having around him. One of those women is Janet Tavakoli. I'm guessing that if Buffett ranked his women à la Getty, Tavakoli would be ranked number one for brainpower. She is an expert in securitisation, credit derivatives, collateralised debt obligations and the like. Her expertise caught the eye of Buffett and he invited her to lunch in Omaha. The resulting meeting and their growing friendship is the subject of her book, Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street

The book is part a look at her relationship with Buffett and part an examination of the derivatives world.

One gets the sense that Tavakoli doesn't pry into peoples lives, thus one gets a supplemental picture of Buffett that you don't get from Alice Schroeder's definitive Buffett biography, The Snowball: Warren Buffett and the Business of Life . While one gets the sense that being interviewed by Schreoder might be equivalent to having a dentist drill deep into a tooth, she does get all the hard facts. But my guess is that Tavakoli's less probing personality, when it comes to people, probably caused Buffett to relax a bit more around Tavakoli. We learn from Tavakoli that Buffett is something of a gossip. We also see Buffett in something of a mentor role. He clearly has had a significant impact on her. He tells her to ditch difficult clients, and pretty much tells her to get a life outside of work, that love is an important thing to experience.

Which is not to say that Tavakoli doesn't have a dentist's drill of her own. While she doesn't seem to be a people prober, what passes in front of her, she analyzes thoroughly. When she tells us that Buffett is a gossip, she then goes on to tells us in detail, LOL, what makes a good gossip.

But she saves the deep drilling for the serious stuff, her work--derivatives. She knows what's wrong with some of the vehicles that are put together and she knows that many of the quants don't even understand what is behind the equations they design. Being something of an unofficial adviser on derivatives to Buffett, in the book, we also get to see the types of derivatives Buffett writes and what he looks for. It's fascinating stuff.

In short, there are two books here.

There is the personal side of Buffett as mentor to a career woman, and the insights about Buffett that come with being that woman. These are aspects of Buffett's personality that go beyond Snowball. Thus, for anyone truly wanting to get a full understanding of Buffett's personality, Dear Buffett is must reading that supplements Snowball and other Buffett biographies in a way that only Tavakoli could provide, because of her unique relationship with Buffett.

The second book is the derivatives book which is must reading for anyone who wants to understand derivatives, and for derivatives traders. Tavakoli knows her stuff. She knows where the bodies are buried in the complex formulas. At one point she writes:

In finance, we make up a lot of fancy and difficult to pronounce names and create complicated models to erect a barrier to entry that keeps out lay people. High barriers tend to protect high pay. I’ve written about some of these esoteric products: credit derivatives, CDOs, and more, but before I look at the latest hot label dreamt up, I look at the cash to find out what is really going on.
And, almost as a bonus, we get Buffett's views and insights into his derivatives trading.

There's nothing more you could ask for in a financial book in this day and age of financial derivatives meltdown.

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