How Finance Works: The HBR Guide to Thinking Smart About the Numbers
Mihir Desai
Harvard Business Review Press (April 2019)
An offering of essential financial information on the other side of complexity
Long ago, Oliver Wendell Holmes Sr. said he had no use for simpllcity on this side of complexity but would give his life for simplicity on the other side of complexity. More recently, Albert Einstein suggested that all explanations be “as simple as possible but no simpler.” Holmes and Einstein would heartily applaud what Mehir Desai achieves in How Finance Works.
“This book is for everyone who wants to deepen their understanding of finance. Those new to finance will find material that is accessible and provides core intuitive building blocks and the foundations to start speaking about finance. Those immersed in finance know that it is easier to ‘talk the talk’ than to ‘walk the walk.’ The central intuitions of finance are slippery, and the book will provide an opportunity for them to deepen their understanding beyond the rote application of ideas or terms. Ambitious executives will be able to reflect on the many interactions with financial experts and investors and engage with them more meaningfully.”
These are among the passages of greatest interest and value to me, also listed to suggest the scope of Desai’s coverage:
o Understanding Ratios (Pages 22-46)
o Dimensions of Profitability (24-29)
o ROE: The Most Important Ratio (39-43)
o The Finance Perspective (53-84)
o Finance versus Accounting: Consertvatism and Accrual Accounting (54)
o Capital markets (85-112)
o Is Short Selling Evil? (97)
o Used-Car Markets (104)
o How Is Value Created? (117-123)
o Value Creation or Value Destruction (119)
o A Deeper Dive into Costs of Capital (123-141)
o An Introduction to Risk and Return (124-125)
o Yield Curves (128)
o Debt and Financial Distress (129)
o Capital Structure across Countries (131)
o Myths About Costs of Equity (132)
o Stock buybacks (143-144)
o Valuation (149-185)
o Two Alternative Valuation Methods (152-160)
o Twitter versus Facebook (154)
o Shake Shack’s Valuation (156)
o Valuing an Education
o Capital Allocation (187-221)
o Hdewlett-Packer’s Acquisition of Autonomy (193)
o A Shareholder Revolt Against Apple (216-218)
Mihir Desai brilliantly employs a nomenclature that a laymam such as I can understand with crystal clear explanations of financial concepts that many (too many) wizards in finance treat as privileged information, if not a proprietary asset. There are several reader-friendly devices that I especially appreciate, notably hundreds of “Reflections,” “Real-World Perspectives,” Tables,” and “Figures” as well as a “Summary” of key points at the end of each chapter, Quizes in all chapters (with Answers on Pages 229-241), and a Glossary of key terms and concepts.
Those who share my high regard for this book are urged to check out two others: HBR Guide to Finance Basics for Managers and Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing What the Numbers Really Mean, co-authored by Karen Berman and Joe Knight.