Book Review: The Wisdom of Finance

Money is a kind of poetry – Wallace Stevens, Adagia in Opus Posthumous

The Wisdom of Finance is a brilliant take on the basics of Finance and introduces a fresh new perspective on financial concepts using literature and history to convey ways in which finance can influence and help us in our daily lives. Regardless of your background in finance, I believe this book has something to offer. Those that know nothing can learn about financial concepts without getting bored. Those that are sceptical about the industry will be able to see the value that finance provides to society. And if you study or have studied finance, it will really have an impact on the way you perceive certain situations in your life. Mihir Desai is a genius when it comes to making such a boring and bland topic so interesting so I would highly recommend anyone to read this book.

The Wisdom of Finance was actually recommended by my Finance Professor when he was introducing the concept of Beta. Beta is the number that indicates the relationship between an investment and the market. If the beta is 1, the investment is perfectly correlated to the market. If it is greater than 1, the investment is more volatile than the market and any move the market makes is amplified in the investment. If the beta is less than one, it is less volatile than the market. And if the beta is negative, the investment should move in the opposite direction of the market, so if the market goes up the investment should go down. In relation to the Capital Asset Pricing Model that it is used in, the higher the beta, the lower the value of the asset and the lower the beta the more valuable the investment is.

Mihir ingeniously uses beta to explain relationships in our lives. High Beta friends are like your LinkedIn friends or professional acquaintances. These individuals are likely to show up when you are doing well and disappear when things are going badly. Thus they should be given low values. Low Beta friends are there for you even in bad times are thus more valuable. But negative beta friends with the highest values are those with unconditional love. Mihir likens it to a mothers love where when you stumble the hardest, these people are there for you the most and when you fly too high, they are there to bring you back down to earth.

In the book, he uses many other anecdotes like the one above that explain financial concepts such as insurance, valuation, M&A, leverage, debt and bankruptcy. I loved how he seamlessly fit these dry concepts and topics with many stories about historical individuals from Adam Smith to George Washington and literary characters from the Merchant of Venice to Pride and Prejudice. This was a provocative and witty read that, as its title suggests, provides what I believe to be a lot of wisdom and is also a great place to learn finance for beginners.

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