Portfolio manager Cale Smith’s riffs on investing, spoke funds, and Islamorada in the Florida Keys.

For Brandon in Albany, the books I would recommend to an MBA student if he could read only five:

1. The Definitive Drucker. The founding father of modern business management.

2. The Essays of Warren Buffett. To learn how to think independently about business and Wall Street.

3. Competitive Strategy. The book that launched a thousand consultancies. I actually prefer Competition Demystified, but to be fluent in strategy you’ve gotta know Porter’s classic.

4. The E-Myth Revisited. How to optimize the collection of processes that is a business.

5. The Marketing Gurus. Most business schools don’t teach sales, and marketing courses often assume a Fortune 500 sized budget. You may have to teach yourself about both. This book summarizes the classics from Jack Trout to Seth Godin and is a great place to start.

Any other suggestions?

Q. Can you help me win on that Deal or No Deal show?

A. Yes, if winning means maximizing the amount of money you take home, not picking the right suitcases.

Here is my advice: 

Forget about winning the million dollars. The odds say it just won’t happen. The object of the game should be to beat the mysterious Banker, not win the million dollars. To do that, you need to think in terms of expected value.

It makes no difference which suitcase you pick. Each has the same probability of having any one particular number in it. As a contestant, then, you should add up all the dollar amounts on the board at any time and divide by the number of choices left…or in other words, take the average.

The Banker is doing the same thing – figuring out the expected value (or in this case, the average) of all the choices left and then coming up with a number that is higher or lower than that value. If the number he offers to pay you is higher than the expected value (or average) of all the numbers you computed on the board, then you should take his offer. If not, keep playing.

Most people on the show are playing the wrong game – trying to win the million dollars. It’s not going to happen. Beating the Banker is the best you can do.

Try to figure out those expected values the next time you’re watching. You might be surprised how quickly you get the hang of it.

E-mail me if you have a question.

Q. How is this bank rescue plan supposed to work?

A.  The basic idea is that if the big banks can sell off their bad assets, they can function again. The banks have known this but can’t find any buyers. The government is bringing buyers to the table by sweetening the deal.

In one part of the program, big investors can buy toxic assets “legacy loans” with some of their own money and a lot more of the government’s.

In the other part, a handful of really big funds will be allowed to buy “legacy securities” – big bundles of repackaged loans – by putting up $500M each. The government will match that with $1 billion more through a special fund that has been closed to private firms until now.

Some of that $1B would be nonrecourse, meaning the funds are protected if they default. The funds get to cheaply buy just the best assets with borrowed money and no risk of imploding. So, they stand to make an absolute killing. Thus, Wall Street likes the plan.

However, the plan still might not save the banks, which will be left with the assets the funds don’t want. And if the banks ultimately fail while the managers of those big funds clean up…well, start selling pitchforks to the mob, cuz those AIG bonuses will look like change in the sofa cushions.

Have a question?  E-mail me at this address or use this form.