Andrew Allentuck

Saturday, February 8, 2003

The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America
by Alex Berenson
274 pages
ISBN 0-375-50880-5

The number is the quarterly earnings figure that CEOs and top managers of public companies die for, at least in the career sense. Mr. Berenson, a leading U.S. business reporter, tells how investors' expectations of rising earnings were fed by the collusion of institutional money managers, accountants, stock analysts and company executives. His story sparkles with good sense, wonderful insights into the corruption of securities markets and good writing.

"The last and greatest bull market of the twentieth century started on a warm and muggy August Tuesday in New the summer of 1982," he writes. "Investors wanted a clear signal that inflation had been beaten.." He traces the market's surge in the remainder of the year to a pronouncement from Henry Kaufman, dubbed Dr. Doom for his persistently pessimistic views, that interest rates would drop below 10 per cent.

Investors' taste for growth was whetted. Through the 1980s and the 1990s, with time out for the crash of Oct. 10, 1987 and a few nasty moments in the Gulf War in 1991 and the Asian currency crisis of 1998, the market steamed ahead, fed by accounts' willingness to collaborate with companies' pumping up their bottom lines. The accountants - and not just the late Arthur Andersen - were usually not indicted coconspirators. It all came to a screeching halt in the three year bear market in which, just as in the 1930s, the wolves of retribution began to haunt Wall Street.

Mr. Berenson parcels out guilt for the fall beyond accountants. He points to investment analysts working for brokers who willingly or stupidly went along with the deceit in exchange for immense investment banking fees. Also guilty were institutional investors who lapped up deceits that fitted nicely with their heavily hyped growth strategies and and private investors who pursued the grail of earnings ignorant of their peril.

Mr. Berenson tells the story of the lust for earnings with scholarship and style. The Number will be one of the best business books and surely the most readable accounting book of the year. For investors who want to know why their Xerox almost went under and why Enron did, this is gripping stuff. For everyone else, just a great read.

Investment performance measurement is supposed to reveal how an asset, typically a portfolio of stocks, has made out when compared with indices, peers, market or sector risk, and standardized statistical tests of volatility. This book, a very readable, low math approach to the subject, is aimed at preparing data for compliance with standards set out in January, 2002 by the Association for Investment Management and Research (AIMR). If a portfolio thrives or withers, Investment Performance Measurement can explain why it has happened.

Mr. Feibel knows the performance measurement field well. Previously a principal with State Street Global Advisors, a major U.S. money management company that managers index funds, he is product manager of performance measurement technology for a company that develops investment management software.

Complex AIMR standards help pension fund administrators understand what their hired investment advisors are doing and how well they are performing. Mr. Feibel presents valuable measuring methods for trading fees generated by funds, alpha measures of relative value added, formulas for estimating volatility, and t-statistics for determining what value managers add to portfolios.

The problem in measuring investment portfolio returns is that the best attempts to quantify and judge managers are just samples. What determines the performance of an ongoing portfolio is not only the wobbles of value of the portfolio and its components, but the measurement periods chosen for evaluation. If one tries to measure hourly performance, one would have nothing of great value. Similarly, for any series of time and value measures over extended periods, say moving 20 year averages over longer periods, there is not much volatility to examine. Any measurement periods in between are arbitrary. Mr. Feibel can't eliminate the arbitrariness of sampling, but in combination with AIMR standards, the problem can be reduced in significance.

For the asset manager whose work will be judged in the light of revised AIMR standards, for the investor who wants tools for analyzing his own performance and that of professional managers, this is a valuable book worth its substantial price.