The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters by Gregory Zuckerman [2013]

I picked this up because I heard the author being interviewed on a podcast and I'm interested in US energy independence, which would be globally transformative. 

The book is a history of how independent companies in the US developed and commercialised hydraulic fracturing (fracking) to extract natural gas and oil from rock and in particular shale. The narrative is driven by colourful larger-than-life characters. This is compelling but unsurprising (a quiet and reserved oilman with a passion for the poetry of George Herbert - now that would be truly fascinating...). In fact the mechanics of fracking and the development of the process is interesting enough that I thought that the focus on the founders was not necessary.

Key points that I found interesting:

1    A uniquely American approach to oil exploration and extraction. What's remarkable to this European reader is how little state intervention there appears to be in these new mining techniques. The book makes the point several times that in the USA, citizens own the mining rights associated with their land and have the liberty to do what they want with it, including leasing it to mining companies. At a broader level, I am increasingly drawn to the argument that the absence of excessive governmental regulation is a fundamental driver of economic development. 

2    The importance of real estate acquisition in driving value at publicly-traded fracking firms. Some of the companies profiled in the book (notably Chesapeake Energy) borrow billions in order to acquire hundreds of thousands of square miles of land.  The present value is all about anticipated revenue streams, so it is not necessary to actually work the plots to push up the share price. This almost suggests to me that Chesapeake could do as well as a pure real estate company. As a counter to this, the way that the market has developed is that leasing is on a 'use it or lose it' basis - i.e. the company needs to start drilling within a certain time period or loses the concession.  This leads to a weird data point - Mark Rowland of Chesapeake states in 2010 when gas prices are low and that "at least half and probably two-thirds or three quarters of our gas drilling is what I would call involuntary". 

3    The sensitivity of the industry (particularly the publicly-traded companies) to the market price of energy. It's an obvious point but extracting each unit of gas or oil from a particular field carries a cost (e.g. a cost per barrel in the case of oil). So mining in that area will only be profitable so long as the market price of the energy allows for a profit. What the book makes clear is that the market price changes rapidly, but that tooling up mines to commence extraction takes a lot longer. This is why companies have to landbank. Externally-driven volatility also means that the difference in value of these companies (and therefore their perceived health) will fluctuate wildly without necessarily reflecting the underlying value of the business. I think there is a deeper point here that I have yet to work out.

4    Co-investment by founders.  I had not realized that it used to be market for founders to purchase individual stakes in wells alongside their companies (even after they went public), and to take a personal share of the profits on each. 

The argument in favour of this sort of arrangement is that co-investing by management aligns their interest with the investors. I would counter this as follows: (i) this is only the case if management are obliged to participate in every deal (and is arguably the reverse if they are allowed to cherry-pick deals); and (ii) in the case of Aubrey McClendon of Chesapeake, his investments were funded by an ad hoc $75 million bonus paid by the company, and by private loans provided by Chesapeake's lenders. Which at the least is a conflict of interests and at the most seems a little like the casino giving a gambler his stake and allowing him to keep the winnings. This sort of private co-investment right that I used to see private equity general partners (the fund managers) try to negotiate into their partnership agreements and I always thought it strange; it seems even more so when dealing with public companies with retail investors. 

This is a really interesting book which ends with a brief discussion of the global consequences of an energy-independent USA. The author makes the point that increased use of natural gas derived from fracking has led to a diminishing use of dirty coal in the USA, although I probably need to read something from the environmentalist perspective to get a balancing view on the beneficial impact of fracking. I appreciate that there are many opposing views.

Flash Boys: A Wall Street Revolt by Michael Lewis [2014]

Like almost everyone else, I think Michael Lewis is a captivating writer and I downloaded this book within a couple of days of its release.  The first thing to say is that it is a little disappointing in that it is not as compelling as The Big Short.  But this could just be the subject matter.

Key points I took away from this book:

1     The domination of high-frequency trading as a proportion of all share activity. The majority of all share purchases are not made by investors buying a long term share of the company's profits, but short term deals to arbitrage price anomalies. I don't have any sort of moral objection to this, as in itself it is not objectionable (the real problem, as Lewis identifies, is the lack of transparency - a rigged system is only really a problem if people think it's fair). What is interesting is how far removed this sort of trading is from the traditional picture of company investment that is painted by fund manager advertisements and Warren Buffet hagiographies. 

2     The overwhelming sense that finance is an insiders' game and that if you can't tell who the fool is, it's you. The idea that a retail investor can get any sort of edge in this environment is ludicrous. Although the book is about Wall Street, what Lewis actually describes does not seem like capitalism at all.

3     This is a technical point but I did wonder whether high frequency trading would actually be possible in the UK, or whether Stamp Duty payable on each deal would crush the returns, which are after all typically based on making millions of small, profitable deals, each of which would be taxed. I have not seen this argument made very strongly in the public discussions on high frequency trading.

An interesting book that will make you wary of buying anything but the cheapest index fund ever again.

In The Plex: How Google Thinks, Works and Shapes our Lives by Steven Levy [2011]

I picked this up because I saw this really interesting presentation by Rick Klau of Google Ventures on how Google adopted a goal setting and tracking process called OKR in order to monitor progress.  Levy's book talks about OKR (Objective Key Results) planning but it is also a fascinating history of Google.  In addition to OKR, which I think is really cool, the following points remain with me:

1    How Google revolutionized server infrastructure by moving from one big expensive box to series of cheaper lower capacity boxes.  The failure rate for these individual cheap servers was much higher than for bigger more expensive ones, but they overcame this by linking them in series in a way that had apparently not been done at scale before.  

2    The company's vacillations in its approach to China and censorship.  What I found interesting was the negative reaction this approach elicited, when it seemed to me to be pretty standard form by a company trying to do the best for its shareholders.  

The interesting question is why do people expect Google - essentially an advertising company - to act in ways non-aligned with its shareholders' interests? 

Perhaps it is because there is an expectation that the cool services Google provides should somehow be generated from purely altruistic purposes and provided for free; however, one does not need to be a foaming-mouthed Ayn Rand fantasist to see that this expectation is unrealistic.

A great book that made me want to move to California.

The Most Powerful Idea in the World: A Story of Steam, Industry and Invention by William Rosen [2012]

A great book which looks to uncover the reasons why the UK was the crucible of the Industrial Revolution and why it took place when it did.  I picked it up because I saw it recommended by Bill Gates in a blog as one of his books of the year.  I'm really glad I did because this book made me feel really smart. 

One fascinating reason offered by the author is that England had a robust system of intellectual property law protections together with a sufficiently large population to make commercial exploitation of these rights worthwhile (intellectual property being – to all intents and purposes – unenforceable across boundaries at the time).  By contrast, the Netherlands had a similarly well-developed intellectual property framework but a much smaller population and as a result, the incentive to develop innovative products was not as great.

Another driver appears to be the seven year trade apprenticeship system.  This allowed numerous otherwise uneducated inventors (Abraham Darby and John Wilkinson, amongst others) to develop working numeracy and practical engineering skills which provided them with the platform for working on much more complex problems.  

The first book I read this year - a brilliant start.