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.