Monkey Business - Investing Lessons from the Investment Banking World
Monkey Business
Monkey Business
Dreaming of magnificent wealth, elite social status, and power, the two graduates decide to become investment banking associates at Donaldson, Lufkin & Jenrette (DLJ), a prestigious New York investment bank. The associates think they will be making important deals, traveling to exotic locations by private jet, and living an extravagant lifestyle paid for by the company.
However, these dreams are quickly destroyed by the realization that investment banking associates will be working 80+ hours per week on somewhat elementary and absurd tasks. Monkey Business presents an uncensored behind the scenes look at the chaotic nature of the Wall Street investment banking world.
Monkey Business Investing Commentary
Although Monkey Business is mostly an account of the absurdities of glorified investment banking position, the book contains some investment insights from the investment banking sales prospective.
Valuation
“In an investment banking, the managing director figures out what reasonable valuation number he is going to need to tell the client in order to win the business. It then becomes the associate’s job to work backward to figure out a way to display analysis that will validate the target value.” - P. 122
Comp Analysis
“In comp analysis the associate identifies a group of companies, the comps, that are similar to the company being valued, then he looks at what prices the comps are trading for in the public market.” - P. 123
“The problem with comp analysis is that most of the time the banker wants to have a group of comps with the highest multiples possible and that, in turn, means that the bank may have to use companies as comps that are completely different from the company being valued. The associate’s job then becomes figuring out a way to make all the companies seem similar, even though they’re not.” - P.123
Discounted Cash Flow Analysis(DCF)
“The DCF is the grand-daddy of all crocks of shit. It’s the technique that makes Linda Lovelace look like a Catholic schoolgirl and Richard Nixon look like Abe Lincoln. In a DCF analysis, the banker projects the company’s cash flow for a bunch of years into the future, then he figures out what all those future cash flows are worth today. The DCF analysis is especially useful for valuing companies with no real business.” - P. 125
“Over and over again associates tweak their DCF models. Over and over again they have models that show the company growing at a rate, if continued, would allow the company being modeled to take over the entire planet within a generation. Over and over again the investors buy securities that are overpriced based on inflated and unrealistic expectations. For some reason, nobody ever learns.” - P. 126
Research Analysts
“In theory, the research analyst is supposed to operate as a check on the overly optimistic bankers and is supposed to bring some incremental level of industry expertise to the entire valuation process. While some of them do, there are plenty of others who aren’t truly independent anymore.” - P. 126
This statement was further demonstrated by inflated and biased banking analyst forecasts during the dot com bubble.
Prospectus Summary
“It’s supposed to tell the reader how the company is going to take over its industry, and then its country, and then the world, so that an investment in the company will eventually represent pro-rata ownership in world domination. This section usually contains more bullshit than any other section.” - P. 186
Risk Factors
“Today, there are maybe one or two risk factors that are relevant, really relevant, for any given deal. The rest is window dressing, but there’s so much of this extraneous window dressing that the relevant risk factors get ignored.” - P. 187
Use of Proceeds
“A careful reading of this section will tell you where the hell all the money from the offering is going. If it’s not going into the company coffers to help grow the company, but instead is going to pay out existing owners and management, then stay away.” - P.187
Selected Financial Data
According to Monkey Business, this section is used to highlight how the specific company is a cash generating machine. The investment bankers and accountants choose the figures, graphs, and charts that make the company look the best, no matter how poor the company’s revenue generating abilities actually are.
Management
“A good way to figure out how likely it is that directors are sucking money out of a company is to draw a chart with each director’s name in a box. Read through the Management section, and each time that they identify a professional or personal connection between two directors, connect their boxes with a line. If you also happen to know about other relationships between directors, for instance one director is married to another director’s daughter, or one director is an old college buddy of another director, you can draw a line in there as well. If, upon completion, the chart looks like a spider web, then hold on to your wallet.” - P. 189
Principle and Selling Stockholders
“If there are relatively few stockholders, each of whom owns a large piece of the company, that’s good because they’re probably going to be just as pissed off as the minority shareholders if the value of their holdings starts going down the toilet. It’s good to have a group of people channeling their fear, frustration, and greed to maximize the value of your investment. If any of the large holders are selling their shares in the offering, stay away.” - P. 189
Conclusion
The book provides interesting insight from the sales prospective of the valuation process and positive and negative characteristics of company’s seeking additional capital. The above excerpts should not be considered a complete analysis of the subjects. For example, many of the valuation techniques have important and practical implementations. Although the book provides a sarcastic and comedic view of the process, the insight into this process is still very interesting.
In addition, although the book presents a cynical view of the investment banking world, many view the job as a great learning opportunity and good experience for future finance and investing jobs. The authors even admitted that they were glad they were investment banking associates in retrospect.
I highly recommend reading Monkey Business for anyone interested in investment banking or looking for an amusing look into the Wall Street banking world. The book is a fast read and very entertaining.
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