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- Verified Buyer
I wrote this review in late 2007 for a class:Greed. Unparalleled greed. One might assume from the title of his book that Alex Berenson wrote a mathematical treatise. He did not. The Number is a study of how independent, rational investors can and do throw their experience to the wind in a desperate money-grab, couched in business suits and financial statements, but unremoved from a freewheeling gold rush. Berenson writes in a comfortable, easy style refined through editorial experience as an author for [...], a Wall Street financial publication, but he is not measured or sanguine here. In this book, published shortly after the implosive demise of Enron, WorldCom, and hundreds of smaller companies that would not survive the market bust of 2000, Berenson's prose has the cynical, bitter flavor of a man who just cannot believe how far the mighty have fallen.The Number has eleven chapters and crescendos to a peak with a recounting of the end of the bull market of the 1990s. The first four chapters cover the history of the stock market; the crash of 1929, the evolution of investment theory, the rock-and-hard-place alignment of accountants, and the creation of the Securities and Exchange Commission. In part two, Berenson explores 1987's Black Monday, and the conception of a new metric of company performance: earnings per share, the number that entitles this book and that would lead indirectly to financial meltdown in 2000. Short sellers, those that bet that a stock will fall based on flaws in public filings, make an appearance in the later chapters. It's charitable that Berenson gives them the limelight here, because they would be ignored completely from 1995 to 2000. The Number pauses in chapter ten for a breath of air as Alan Greenspan, chairman of the Federal Reserve, ponders how to respond to the failure of the enormous hedge fund Long Term Capital in 1998. The markets were overvalued, but had yet to reach the unrestrained delirium that would envelop them a year later. Should he lower the short-term lending rates to promote investing, or let the market find its own way? Greenspan chose the former, a move that Berenson likens to pouring vodka in the communal punchbowl. The rest of the chapter is a whirlwind, a eulogy to the insane.And then he comes to the aftermath, a survey of the damage wrought. Berenson talks of Enron, Sarbanes-Oxley, and the slow struggle for reform in the SEC. The last chapter is downcast. There is no catharsis. In 2003 at the time of writing, the Bush administration was already trying to reverse the regulations called for by the public just a year prior. The market had rallied as investors turned their attention to the looming specter of the Iraq War. Now in 2007, just five years after two of the largest bankruptcies in corporate history, after accounting fraud on a scale so enormous that it boggles the imagination, the Dow hovers at 13,500, a gain of twenty percent over the peak in April 2000. What have we learned? Apparently, nothing at all. As Berenson concludes, "The buyers remain as blissfully unaware as ever."Berenson's thesis is that investors rely to excess on earnings per share figures. Companies should operate with an eye toward the future, but having stock prices and corporate options tied to quarterly earnings provides a tremendous incentive to cook the books. This seems so obvious in hindsight that Berenson has no trouble deftly illustrating his case. He draws from his own experience with [...], public records of other papers, interviews with prominent members of the financial community, and a vast working knowledge of the history of Wall Street. And he is right, of course, but solutions are slow in coming. The last few pages implore the reader to be skeptical, to keep the market in context; in short, to keep one's head in an atmosphere that smells overwhelmingly of dollar stock. That's all Berenson can offer. The book makes a strong case that the SEC should have more funding and that accountants should be held to higher standards, but he explicitly rejects discarding earnings per share. We need the number, Berenson says. We just don't need so much of it.When he isn't lamenting the obsession with quarterly earnings, Berenson gives a withering indictment of the would-be fiduciaries of the financial community and their contribution to the bull market of the 1990s. The accountants lost their independence and with it their dignity, bedding the corporate executives that provided their fees. The SEC, perennially underfunded and led by men unwilling or unable to stand against the combined interests of their wards, was less a shotgun behind a door than a slingshot with a fractured band. Stock options corrupted company leadership and led to an incestuous relationship with analysts, with financial fraud as the inevitable result. With a market predicated on lies, a collapse was inevitable. Of the investors themselves, Berenson's tone is moderate. He does not chastise, but their behavior seems to baffle him at times. Why, when they discovered that America Online had lied about their profits, did investors continue to drive up AOL stock?A seminal book on trading theory is A Random Walk Down Wall Street, by Princeton economist Burt Mikhael. He proposes that stock prices vary at random in the short term, and that investors would do best to put their money in index funds because it isn't possible to consistently beat the market average. A Random Walk and The Number both explore the efficient market hypothesis, wherein the prices of stocks are assumed to reflect all available information. A market that follows the stronger forms of EMH is difficult or impossible to beat, because historical information, private information, and analysis are reflected instantly in share prices.There is an unstated presumption underlying EMH of a rational entity, of investing decisions that have a logical framework when viewed through the impartial lens of hindsight. After reading The Number, I concluded that the market is efficient in the way that EMH supposes. New, public information does impact share prices immediately. The problem is that it does not do so rationally. The investors, as a group, do not act rationally. Group psychology disproportionately magnifies the market response to small changes, like a trailer swinging behind a truck. Why did the market crumble in 2000? Berenson suggests, "As in 1929, no single profit report or piece of economic data caused the sell-off; investors simply decided en masse they could no longer justify owning stocks that traded at two hundred or three hundred or five hundred times earnings, or had no earnings at all and no prospect of making any." That's his entire explanation. After five years of euphoria on a heroin high, the market became suddenly sane. That Berenson does not explore this psychology is perhaps the only unsatisfying facet of The Number. If there's a lesson here, it's that greed is the universal language, and people never, ever, change. There is nothing more galvanizing to the will of an investor than the notion that his neighbor is making money and he is not. This book is a case study of the disastrous consequences of unrestrained capitalism. In such an environment, only the firm hand of the Federal Reserve and the threat of the SEC can hold the corporate machine in line, and prevent investors from losing their confidence, their shirts, and their minds.
