The Real Options Solution: Finding Total Value in a High-Risk World | Book Excerpt

Author: F. Peter Boer
Publisher: Wiley
ISBN-13: 9780471209980

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The Real Options Solution offers a new approach to the valuation of businesses and technologies based on options theory. It provides a quantifiable approach to the problem of the strategic premium — the gap between apparent economic value and actual value as determined by the marketplace. Total value is the sum of economic value and the strategic premium created by real options.

The wild rise of Internet stocks, which peaked shortly after the millennium opened and the severe correction that followed have made clear to everyone what some have known all along — there is a crisis in how companies, especially technology companies, are valued. Accounting systems based on historical costs can’t do it. Discounted cash flow models can’t do it when positive cash flow is nowhere in sight. Dubious comparables, such as “price-to-sales ratios” or “eyeballs,” lose track of value and beg the question of whether the stocks to which one is comparing are correctly priced.

The gap between market value and economic value has been trending upward for some time as the economy becomes increasingly service – and information-based. The gap reached record proportions at the height of the Internet bubble; it is still very substantial after the correction and is likely to grow again. Dismissing the phenomenon as simply the madness of crowds wastes the opportunity to analyze the dynamics of how great value is being created and destroyed by innovation in the modern economy.

THE VALUATION SOLUTION — PLANS ARE OPTIONS

This book is based on a straightforward central idea: plans are options. A plan is unlike the physical or financial asset it is intended to produce because the owner of the plan has freedom to modify the plan as circumstances change. This freedom has value, which can be analyzed quantitatively. The implications of the idea are considerable because options are valued differently than securities. The idea is powerful because it provides a universal valuation method — one that applies equally to the dullest old-economy company and to a wild new Internet start-up. It also creates a framework for the special valuation issues that occur when brilliant innovations are being made within a traditional operating business.

No radical assumptions are required to use this approach. The discounted cash flow (DCF) model is fundamentally sound for operating businesses and is the core first step. And DCF analysis is also the first step in valuing innovative business plans — whether of a new business-to-business (B2B) model, a promising drug in the research pipeline, or a new type of fuel cell. But because these plans are subject to both unique and market risks and because management has considerable flexibility in their execution, such plans are correctly evaluated as real options. The value of such options under the dual conditions of rapid growth and high volatility can be huge — and unquestionably higher than one might intuitively guess.

Plans are certainly not correctly valued by the prevalent, and seriously flawed, notion that they are future cash flow machines to which an arbitrary risk-weighted hurdle rate can be applied.

Why does this insight make a difference? Simply because DCF analysis alone can lead an investor to pass up a financially attractive opportunity. In the past, executives used the word strategic to label intuitively attractive investments that failed to earn the cost of capital. Options theory allows one to calculate the strategic premium to obtain total value.

WHO SHOULD READ THIS BOOK?

Those who are investing for above-average returns and those who are trying to create these aboveaverage returns should read on. Among the former will be venture investors and those legions of individual investors who are willing to take investment risks to enjoy superior returns. The latter includes executives of New Economy start-ups or of old-economy firms seeking to reinvigorate their companies. The book should be of special interest to those in research and development (R&D).

Potential readers may be frustrated by the mumbo jumbo terminology that aims to justify large premiums based on a “first-mover” principle, impressive intellectual capital, or a supposedly unassailable market position. But just how does one determine what these premiums are worth? If you are willing to think about a new approach, read on.

RISK IS MORE PREVALENT THAN WE GENERALLY REALIZE

I am a high-risk investor and have been in the employ of high-risk investors. But I have not thought about myself this way all along, nor has my new perspective developed by conscious choice. After all, I was for most of my career in the employ of solid Fortune 100 industrial companies. I viewed my personal investments as growth oriented, but reasonably safe. These assumptions proved to be illusions.

The lights came on in the 1980s when a misguided news report temporarily destroyed about 25 percent of my paper net worth. The picture became even clearer when modest investments in new technology grew quickly into major investments, while my “value” investments underperformed for a decade. And it became crystal clear when a young relative with an idea created significant personal wealth in the space of one very wild year.

Investors have become inured to massive changes in market valuation triggered by a single business news item, whether it is an announcement about a deal, an earnings warning, or government intervention. It is similarly common to see daily changes in our personal stock portfolios equivalent to months of salaries earned from solid labor. Nonetheless, many of us, old and young alike, have come to prefer being rewarded with equity, especially stock options, rather than with cash.

And despite our anxiety about this irrational and high-risk world, on the whole we are more prosperous than ever. It seems we must live with risk; and if we must, it’s best to enjoy the ride.

ORIGINS OF THE BOOK

This book is an outgrowth of two major influences. The first was my earlier book, The Valuation of Technology, which was conceived in 1997 and published in 1999. Broadly speaking, that work aimed to bridge the communications gap between scientists and engineers and the business and financial community through the concept of valuation. More narrowly, the book linked the familiar algorithms used by the R&D community, where I spent much of my professional career, with the algorithms used by those more directly concerned with shareholder value: investors, senior executives, and board members.

The Valuation of Technology is a quantitative book, replete with graphs, tables, equations, and detailed examples. It is aimed at practitioners of and investors in technology. I came away from the task of writing it with the conviction that some of its key concepts had broad usefulness and could eventually be the core of a book aimed at a wider audience. In particular, I recognized that the techniques used to manage the extraordinarily high-risk world of R&D were applicable to other important problems in the business world.

The second influence for this book has been my exploration of the concept of real options. I have been exposed to the general concept of R&D as a form of real option for over a decade. My initial reaction as a practitioner was that the idea had conceptual merit but was too abstract to use as an effective communications tool in a real company (and I was a senior executive of a real company at the time). Nevertheless, I included the basics of options analysis in my original book, included a number of quantitative cases to show why the idea could be important, and referenced some of the current thinking in the field.

The epiphany about the consequences of options thinking came in a classroom situation, when, in the role of a professor, I was trying to explain the value of embedded options in a business proposal, using a case taken from a corporate finance textbook. The example described a proposal to make a new computer product, which implied the further option to introduce a second-generation computer three years later. Coincidentally, the talk of the business community at the time was about the extraordinary and seemingly irrational valuations being placed on Internet stocks. The fact that my young relative was deeply involved in a dot-com compounded my interest. I decided to plug typical Internet growth rates and volatilities into the textbook case. These new conditions produced some extraordinarily high valuations, yet the results all were derived using standard financial theory.

While these results demonstrated a very plausible linkage of market valuation to embedded options, the most important message was that the options were visible to some and invisible to others. In the original textbook case, the chief executive officer (CEO) had rejected a proposal to make the new computer because it failed to meet his hurdle rate. But an analyst pointed out that making a firstgeneration machine carried with it an option to build a second-generation machine a few years later. In other words, she had identified and valued a strategic premium that reversed a flawed decision derived from economic value alone. How to identify, structure, and exploit such hidden options is one of the ambitions of this book.

FIVE KEYS TO A LOCK

The immediately following paragraphs offer a crisp summary of the book’s five premises and how they can unlock the mystery of value. The book will explore a wide range of cases that illustrate the consequences of these ideas.

The first key to the lock is the concept of value, that new capital is created in direct proportion to the degree to which returns on capital exceed the cost of capital. This idea is widely accepted today, but hardly universally understood. It needs development.

The second key is that value creation cannot occur in the absence of risk and, indeed, is dependent on the assumption of risk and its intelligent management. These general ideas are not really original, but the actual algorithms linking risk and value for the innovation process may be novel and are central elements in The Valuation of Technology.

The third key is that human capital and intellectual capital are important, and sometimes dominant, parts of the valuation of modern companies. The idea of intangible capital assets has a reasonably long history, and its extension as “intellectual capital” to explain the gap between accounting and marketplace values has gained adherents during the past decade. Nevertheless, there is considerable confusion about just how intellectual capital is converted into shareholder value. This book outlines a solution.

The fourth key is that strategic capital resides in an organization’s plans and options for future actions. The implications of this fact are largely unexplored. Previous approaches tended to look at intellectual capital as an extension of quantifiable intellectual property, such as patents, trademarks, and copyrights. To these were added more subjective forms of intellectual capital, such as learning and knowledge, business processes, and technical know-how. However, the weakness of this approach is that it is not intellectual capital itself but the ability to translate it into business plans that creates value in the marketplace. There is no other way to determine which patent, which ad campaign, or which employee will add the most value.

The fifth key — perhaps the missing key — is that plans begin as real options and are transformed into tangible capital when the options are exercised. This idea is new, particularly in the context of the fourth premise, and is a promising approach to the valuation of strategic capital.

An important consequence is that to value the opportunity (and therefore the strategic premium), the analyst must carefully separate unique risk from systematic risk. This technique for evaluating options is not new to options theorists, but it is only just beginning to be understood and applied in the world of real business and investment.

PLAN OF THE BOOK

Part One of the book provides a new perspective on value by developing the concepts on which an integrated value model is built. The introductory chapter retells a high-seas adventure story from the viewpoint of a high-risk investor and recapitulates the enormous prosperity (the Total Value) triggered by that investment.

A foundation for a new approach is built in Chapter 2, where the crisis in valuation noted earlier is reviewed, and the differences between book capital, economic capital, and strategic capital are reviewed. This structure is more useful than the notion that the difference between market value and book value is accounted for by “intellectual capital.” Why? Because those intangibles that support the current economic processes of the firm must be distinguished from those other intangibles that create a strategic premium. Without that distinction, valuation of a strategic premium is hopeless. Some recent business cases are used to illustrate the point.

Chapter 3 has two purposes. The first is to review the methods and the limitations of conventional (DCF) economic valuation, which is the foundation on which the Total Value approach is built. The second purpose is to imprint a fundamental understanding of the powerful link between sustainable growth and value creation. Yet, it is easy to go badly astray with DCF analysis, leading to serious undervaluation or, almost as easily, to overvaluation.

The Real Options Solution comes together in Chapter 4. Here, an ambitious, integrated valuation model combines economic valuation based on forecast cash flows with strategic valuation based on option theory. The chapter also discusses how strategic capital can be converted into economic capital, and vice versa. The model has the advantage of universality: It does not require separate yardsticks for established operating companies and innovative new businesses; it can smoothly accommodate a mix of the two — a common situation. And it holds true for both microeconomic and macroeconomic conditions. Chapter 4 reduces the concepts just introduced to a practical, six-step method for determining total value. It begins with a brief summary of the method. It then defines and discusses the underlying concepts in each step, beginning with the core concept of economic value and its relationship to growth rates. To complement theory with a concrete example, the economic value of a very straight-forward business is calculated. This business model then becomes a platform to which a single strategic option is added. The value of the option is calculated, the sum of economic capital and strategic capital is added, and a total value for the business is obtained.

Options are an extremely useful way to manage risk, the subject of Chapter 5. This chapter reviews the basics of financial options and shows why they are closely analogous to business situations that contain what are called real options. (The term real is coming into increasing use, in the titles of books, articles, and management conferences, to distinguish those options that arise in ordinary business from financial options relating to securities or commodities.) It demonstrates why, in situations characterized by a combination of high growth and high volatility, options can take on extraordinary values. Investors need to understand the dynamics by which this remarkable phenomenon occurs. But financial options are risky — they can expire with the full loss of the premiums paid for them — and the wild ride of Nasdaq stocks in 1998 and 2001 amply demonstrates a corresponding risk for real options.

Chapter 6 explores the proposition that strategic capital resides in an organization’s plans and options for future actions. This assertion is the foundation for a quantitative approach to the valuation of strategic capital. However, to make the equation Plans = Options useable, it is important to recognize that plans are neither forecasts nor dreams. In a nutshell, one must realize that Position is a necessary although not sufficient condition for plans to be actionable.

Part Two of the book describes how diminishing returns, risk, and innovation affect the integrated value model introduced in Part One and in particular outlines why the management of risk and innovation is the foundation of modern prosperity.

Chapter 7 deals with the law of diminishing returns and shows how its consequences have driven organizations to stagnation and devolution through value destruction. Investors and executives can be slow to accept the inevitable deterioration of once-successful business models, which leads to serious misallocation of scarce resources.

The acceleration of economic growth and widely spreading prosperity have been the most extraordinary of modern phenomena. Chapter 8 explores the causes. What is different today from the stagnation typical of past eras? I argue that one difference is a far superior understanding of risk, which has led to a new balance between innovation and diminishing returns.

Risk is the subject of Chapters 9 and 10. Traditional risk management (think of a bank or an insurance company) does not translate easily to the high-risk environment of breakthrough innovation. So what is it that we have learned about risk management? We are beginning to understand that the management of systematic (market) risk requires different techniques (and provides different profit opportunities) than the management of unique (private) risk. And we have developed new value-creating management techniques pioneered for a high-risk environment, such as the aggressive use of the option to abandon troubled projects. We are also learning to apply what financial experts have called the “last free lunch,” diversification, to technology and other high-risk portfolios.

Chapter 11 returns to the subject of human and intellectual capital — the key to value creation in a modern economy. It explores the mechanics by which human and intellectual capital are translated into economic capital on the one hand and into strategic capital on the other. After reviewing traditional intellectual property, including patents and copyrights, the chapter turns to the more complex issues of valuing R&D and new business opportunities. The situational nature of intellectual capital valuation is emphasized throughout.

Innovation is our weapon for overcoming the law of diminishing returns and is tied to the ability to frame real options. Innovation is the subject of Chapter 12. The technological S-curve and the appearance of disruptive technologies are two critical features of how innovators create value for themselves and destroy value for others. Innovation itself appears to be in a stage of exponential growth based on the accelerating number of combinatorial possibilities generated by the increasingly frequent emergence of new technologies. One of the most promising investment strategies is to place chips where such combinatorial possibilities are greatest.

Governments have an important role in creating or in destroying prosperity. We examine their role in Chapter 13. Strong governments have historically provided important contributions by enhancing security and reducing risk. Governments also provide services, sometimes efficiently and sometimes less so. They invest in education, infrastructure, health, and technology. But while governments may adopt policies that favor value-creating investments, they are perfectly capable of misguided policies that systematically destroy value. Some examples will be presented.

The Epilogue deals with three of the central issues of our time. The first is the Keynesian nightmare — that we will run out of attractive investment opportunities. The second is the notion that the planet itself imposes serious limits on our future prosperity. The third is that the complexity of modern-day decision making will overwhelm human intellectual limits. However, there is ample reason to believe that our age of prosperity is far from over.

STYLE OF THE BOOK

This book is appearing at what will one day be viewed as the denouement of the Internet gold rush, a very unique time in U.S. economic history. There is an obvious peril in dispensing business wisdom that is the product of a unique era — it may fit the times, but times soon change. So I will mix contemporary examples with historic examples to test whether the central premises are useful in a broader context.

For the contemporary examples, I did not have the full advantage of hindsight. But I did have the advantage of abundant stores of financial and economic data, plus my own direct experience. The historic examples are just the opposite — we know how the story turned out; but there may never be enough data, especially regarding profit margins, to confirm, or possibly disprove, the arguments. Given my seemingly safe position in the latter cases, I can still hope that the readers will gain new insight into the economic forces that have shaped our past and amusement from how classic examples translate into modern business jargon!

To increase the readability of this book, I have also chosen to minimize tables, formulas, and charts.

ACKNOWLEDGMENTS

The development of this book owes much to conversations I have held with members of my classes at the Yale School of Management and with many professional colleagues with whom I have discussed the implications of options theory.

Three people deserve special thanks. Ranch Kimball, formerly a partner at Boston Consulting Group (BCG) and a managing director of Tiger Scientific, Inc., made many contributions to the book in terms of its organization and provided several specific case studies based on his extensive consulting experience. Ranch in particular helped me articulate the notion that position is a prerequisite for plans and was a major contributor to Chapter 6.

Andrew Boer, through our many discussions of real-world situations, deserves the credit for my introduction to the special dynamics of high technology during the Internet bubble. Andrew, after founding in 1997 the Internet nonprofit TRUSTe, which dealt with issues of Internet privacy, moved on to found the distinctly for-profit corporation Emptor in 1998. Emptor was funded by two prominent Silicon Valley venture capital firms, changed its name to Accept.com in 1999, and was sold to Amazon.com for $180 million.

Louis Hegedus of Atofina, a veteran R&D practitioner and my former associate, was kind enough to read the draft in full and provided highly useful critical tests of its assertions and assumptions.

I also wish to thank Richard Luecke for skillful professional assistance in reviewing the book and arranging for its publication. The unstinting support of Jeanne Glasser and the splendid Wiley team, Judy Cardanha, and Jamie Temple is gratefully appreciated. May Adams, my assistant for two decades, has been an invaluable helper, not only in the preparation of some of the materials used in this book, but also in organizing my many activities to ensure that the book stayed on track.

Finally, my wife, Ellen, has undoubtedly wondered why, after one book was completed, I still felt that there was enough left unsaid to justify the time spent on yet another. Surely, I neglected to tell her that, having done one, I might go for another. Her continued support and enthusiasm, and her conversion to the cause, are deeply appreciated. Even more important, since Ellen is an inveterate high-risk investor, I hope she concludes that reading the final version will be another winning investment.

F. PETER BOER
Village of Golf, Florida

» Read an excerpt from book The Business of Options

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The Business of Options – Book Excerpt

Author: Martin P. O’Connell
Publisher: Wiley
ISBN-13: 9780471405573

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Are You Too Anxious to Win?

Before about 1979, computers were not in widespread use among professional options traders. In part, this was because of the limited availability of useful hardware and software, but the more important reasons were personal and cultural. Members of the Chicago Board Options Exchange (CBOE) and its competitors usually were not the products of graduate schools or of corporate management development programs. They were more like Wild West characters who wandered into town with no identity, no relevant history, not even much money. Many of them (myself included) had never made a trade on a stock or options exchange. Most had a lot of confidence and tolerance for financial risk. Many had good mathematical instincts, but few had classical mathematical expertise or an aptitude for computer work. Almost all were sole proprietors, trying to learn the business and to find a way to make a few hundred dollars a day. Social graces weren’t required.

In this environment, the potential applications of computers weren’t just ignored, they were scorned. Real men didn’t use mathematical models and they didn’t hedge their positions. A “stand up” market maker was supposed to make a living by making markets for the public in individual options or by taking shots on stock price direction.

Eventually, of course, the power of computerized analysis could not be kept out, and many traders — some looking for magic — gave it a try. They soon learned that their new tools couldn’t protect them from their human weakness and inexperience.

In 1979, it became trendy to have a secret computer program that would calculate the probability of winning on a particular position. These theoretical probabilities were discussed as facts by some of their users. Since many of us thought of ourselves as “born winners,” it made sense to us that we should have large positions that would almost surely be profitable. It was common in 1979 to hear a trader say something like “I did a 99.1 today.” That meant he had put on a position for which his (questionable?) program calculated a 99.1% probability of success.

It doesn’t take much imagination to think up a position (or a bet) that has a very high probability of winning, but, on average, will be a loser. No doubt, many of these 1979 positions fall into that category. In most of them, though, the long-term average result was not the big problem. The big problem was remote risk. It is common sense that, if your sole criterion for a position is that it has a 99.1% chance of winning, then maybe somewhere buried in that other 0.9% is a nuclear bomb. Among the remote nuclear bombs waiting for the 1979 crowd were:

- The Saturday Night Massacre: In October 1979, the Federal Reserve raised the discount rate by 200 basis points on a Saturday night. Markets went crazy during the following week. In some cases, call prices rose as stocks collapsed.

- The Hunt Brothers’ silver disaster: The Hunt Brothers were billionaires who bought a lot of silver in the late 1970s. In late January 1980, silver prices finally peaked at about $50/ounce, and then got ugly. The real panic came two months later when the price collapsed from $22 on March 24 to $12 on March 27. Apparently, silver was big enough to take the stock market with it. The Dow Jones Industrial Average (DJIA) decline was only about 20%, but it seemed like a nuclear bomb to some options traders. Other traders survived the decline, but got caught by the whip at the bottom.

In the options business, there can be a powerful temptation to seek out positions that have high probabilities of success, but that also come with excessive remote risk and/ or negative expected returns. Good dealers, speculators, and hedgers can overcome this temptation, both at the individual level and at the institutional level.

In practice, we often find that option traders think differently from other traders regarding expectations about the probability (or frequency) of winning. For example, if you talk to a foreign exchange spot trader who has just put on a position, you might notice that he really believes he’s going to make some money. He might even have reasons. Then, later, when he talks about the trade, he’s likely to use language that reflects that belief. He might say, “I was right on that position.” This means that the subsequent market action proved that his trade was brilliant. Alternatively, he might say, “I was wrong.” That means that the subsequent market action demonstrated that his trade was stupid.

In contrast, a good option trader can be expected to think quite differently. A good option trader will frequently make a trade even though he thinks it will probably lose money. Sometimes, this is hard to explain to the boss.

“You mean, we make trades, even though we think we’ll lose money on them?”

“Yeah, that’s a basic part of our strategy!”

In the options business, simple statistical concerns are often well clarified through the use of gambling examples. In this case, a dice example helps. Suppose I would like to bet that I can roll a 4 in a single roll of one die. Of course, if you insist on even odds, I’m not going to bet because I know I only have one chance in six of winning. On the other hand, if I can get 10 to 1 odds, I am going to make that bet. I am going to make it fully expecting to lose, and I am still going to think about it as a business.

Notice that the word “expect” might be used here with two different meanings. I expect to lose (meaning I’ll probably lose) but I have a positive expected return in the statistical sense. If I am in the business of trading options to make a profit, it is the statistical expectation that matters most. Usually, the appropriate attitude is to be statistically passive. That is, I don’t care how likely I am to win this time. I want to win on average. This is the attitude of an insurance company or a casino.

Suppose I make the 10-to-1 bet and roll the die and get a 2 instead of a 4. Was I wrong? Of course not. I’m no dumber than before the roll, and also no dumber than if I had rolled a 4. If I had rolled a 4, the result might make me feel brilliant. That feeling would be simple emotional weakness. To be statistically passive is not just to make a trade without thinking I know the result. It also requires ignoring the temptation to think that the result indicates the quality of the trade.

Our business is full of snappy inane slogans. Often these slogans sound clever and insightful. Many of them are stupid–or even dangerous. My candidate for the worst of them is “You’re only as good as your last trade.” Sometimes, traders say it and sometimes the boss says it. Weak bosses often say it indirectly. They can be too quick to praise or reward short-term successes and too punitive about short-term losses. Such bosses eventually get exactly what they deserve–their employees find ways to give 10-to-1 odds that I can’t roll a 4.

I don’t want to be in the kind of business where you’re only as good as your last trade. I can’t “know” what’s going to happen all the time. In the options business, the pros are statistically passive.

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Dan Brown | The Lost Symbol | Book Excerpt

Author: Dan Brown
Publisher: Doubleday
ISBN-13: 9780385504225

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Prologue. House of the Temple – 8:33 P.M.

The secret is how to die. Since the beginning of time, the secret had always been how to die. The thirty-four-year-old initiate gazed down at the human skull cradled in his palms. The skull was hollow, like a bowl, filled with bloodred wine.

Drink it, he told himself. You have nothing to fear.

As was tradition, he had begun this journey adorned in the ritualistic garb of a medieval heretic being led to the gallows, his loose-fitting shirt gaping open to reveal his pale chest, his left pant leg rolled up to the knee, and his right sleeve rolled up to the elbow. Around his neck hung a heavy rope noose – a “cable-tow” as the brethren called it. Tonight, however, like the brethren bearing witness, he was dressed as a master.

The assembly of brothers encircling him all were adorned in their full regalia of lambskin aprons, sashes, and white gloves. Around their necks hung ceremonial jewels that glistened like ghostly eyes in the muted light. Many of these men held powerful stations in life, and yet the initiate knew their worldly ranks meant nothing within these walls. Here all men were equals, sworn brothers sharing a mystical bond.

As he surveyed the daunting assembly, the initiate wondered who on the outside would ever believe that this collection of men would assemble in one place … much less this place. The room looked like a holy sanctuary from the ancient world. The truth, however, was stranger still.

I am just blocks away from the White House.

This colossal edifice, located at 1733 Sixteenth Street NW in Washington, D.C., was a replica of a pre-Christian temple – the temple of King Mausolus, the original mausoleum … a place to be taken after death. Outside the main entrance, two seventeen-ton sphinxes guarded the bronze doors. The interior was an ornate labyrinth of ritualistic chambers, halls, sealed vaults, libraries, and even a hollow wall that held the remains of two human bodies. The initiate had been told every room in this building held a secret, and yet he knew no room held deeper secrets than the gigantic chamber in which he was currently kneeling with a skull cradled in his palms. The Temple Room.

This room was a perfect square. And cavernous. The ceiling soared an astonishing one hundred feet overhead, supported by monolithic columns of green granite. A tiered gallery of dark Russian walnut seats with hand-tooled pigskin encircled the room. A thirty-three-foot-tall throne dominated the western wall, with a concealed pipe organ opposite it. The walls were a kaleidoscope of ancient symbols … Egyptian, Hebraic, astronomical, alchemical, and others yet unknown.

Tonight, the Temple Room was lit by a series of precisely arranged candles. Their dim glow was aided only by a pale shaft of moonlight that filtered down through the expansive oculus in the ceiling and illuminated the room’s most startling feature – an enormous altar hewn from a solid block of polished Belgian black marble, situated dead center of the square chamber.

The secret is how to die, the initiate reminded himself.

“It is time,” a voice whispered.

The initiate let his gaze climb the distinguished white-robed figure standing before him. The Supreme Worshipful Master. The man, in his late fifties, was an American icon, well loved, robust, and incalculably wealthy. His once-dark hair was turning silver, and his famous visage reflected a lifetime of power and a vigorous intellect.

“Take the oath,” the Worshipful Master said, his voice soft like falling snow. “Complete your journey.”

The initiate’s journey, like all such journeys, had begun at the first degree. On that night, in a ritual similar to this one, the Worshipful Master had blindfolded him with a velvet hoodwink and pressed a ceremonial dagger to his bare chest, demanding: “Do you seriously declare on your honor, uninfluenced by mercenary or any other unworthy motive, that you freely and voluntarily offer yourself as a candidate for the mysteries and privileges of this brotherhood?”

“I do,” the initiate had lied.

“Then let this be a sting to your consciousness,” the master had warned him, “as well as instant death should you ever betray the secrets to be imparted to you.”

At the time, the initiate had felt no fear. They will never know my true purpose here.

Tonight, however, he sensed a foreboding solemnity in the Temple Room, and his mind began replaying all the dire warnings he had been given on his journey, threats of terrible consequences if he ever shared the ancient secrets he was about to learn: Throat cut from ear to ear … tongue torn out by its roots … bowels taken out and burned … scattered to the four winds of heaven … heart plucked out and given to the beasts of the field.

“Brother,” the gray-eyed master said, placing his left hand on the initiate’s shoulder. “Take the final oath.”

Steeling himself for the last step of his journey, the initiate shifted his muscular frame and turned his attention back to the skull cradled in his palms. The crimson wine looked almost black in the dim candlelight. The chamber had fallen deathly silent, and he could feel all of the witnesses watching him, waiting for him to take his final oath and join their elite ranks.

Tonight, he thought, something is taking place within these walls that has never before occurred in the history of this brotherhood. Not once, in centuries.

He knew it would be the spark … and it would give him unfathomable power. Energized, he drew a breath and spoke aloud the same words that countless men had spoken before him in countries all over the world.

“May this wine I now drink become a deadly poison to me … should I ever knowingly or willfully violate my oath.”

His words echoed in the hollow space.

Then all was quiet.

Steadying his hands, the initiate raised the skull to his mouth and felt his lips touch the dry bone. He closed his eyes and tipped the skull toward his mouth, drinking the wine in long, deep swallows. When the last drop was gone, he lowered the skull.

For an instant, he thought he felt his lungs growing tight, and his heart began to pound wildly. My God, they know! Then, as quickly as it came, the feeling passed.

A pleasant warmth began to stream through his body. The initiate exhaled, smiling inwardly as he gazed up at the unsuspecting gray-eyed man who had foolishly admitted him into this brotherhood’s most secretive ranks.

Soon you will lose everything you hold most dear.

CHAPTER 1

The Otis elevator climbing the south pillar of the Eiffel Tower was overflowing with tourists. Inside the cramped lift, an austere businessman in a pressed suit gazed down at the boy beside him. “You look pale, son. You should have stayed on the ground.”

“I’m okay …” the boy answered, struggling to control his anxiety. “I’ll get out on the next level.” I can’t breathe.

The man leaned closer. “I thought by now you would have gotten over this.” He brushed the child’s cheek affectionately.

The boy felt ashamed to disappoint his father, but he could barely hear through the ringing in his ears. I can’t breathe. I’ve got to get out of this box!

The elevator operator was saying something reassuring about the lift’s articulated pistons and puddled-iron construction. Far beneath them, the streets of Paris stretched out in all directions.

Almost there, the boy told himself, craning his neck and looking up at the unloading platform. Just hold on.

As the lift angled steeply toward the upper viewing deck, the shaft began to narrow, its massive struts contracting into a tight, vertical tunnel.

“Dad, I don’t think—”

Suddenly a staccato crack echoed overhead. The carriage jerked, swaying awkwardly to one side. Frayed cables began whipping around the carriage, thrashing like snakes. The boy reached out for his father.

“Dad!”

Their eyes locked for one terrifying second. Then the bottom dropped out.

Robert Langdon jolted upright in his soft leather seat, startling out of the semiconscious daydream. He was sitting all alone in the enormous cabin of a Falcon 2000EX corporate jet as it bounced its way through turbulence. In the background, the dual Pratt & Whitney engines hummed evenly.

“Mr. Langdon?” The intercom crackled overhead. “We’re on final approach.”

Langdon sat up straight and slid his lecture notes back into his leather daybag. He’d been halfway through reviewing Masonic symbology when his mind had drifted. The daydream about his late father, Langdon suspected, had been stirred by this morning’s unexpected invitation from Langdon’s longtime mentor, Peter Solomon.

The other man I never want to disappoint.

The fifty-eight-year-old philanthropist, historian, and scientist had taken Langdon under his wing nearly thirty years ago, in many ways filling the void left by Langdon’s father’s death. Despite the man’s influential family dynasty and massive wealth, Langdon had found humility and warmth in Solomon’s soft gray eyes.

Outside the window the sun had set, but Langdon could still make out the slender silhouette of the world’s largest obelisk, rising on the horizon like the spire of an ancient gnomon. The 555-foot marble-faced obelisk marked this nation’s heart. All around the spire, the meticulous geometry of streets and monuments radiated outward. Even from the air, Washington, D.C., exuded an almost mystical power.

Langdon loved this city, and as the jet touched down, he felt a rising excitement about what lay ahead. The jet taxied to a private terminal somewhere in the vast expanse of Dulles International Airport and came to a stop.

Langdon gathered his things, thanked the pilots, and stepped out of the jet’s luxurious interior onto the foldout staircase. The cold January air felt liberating.

Breathe, Robert, he thought, appreciating the wide-open spaces.

A blanket of white fog crept across the runway, and Langdon had the sensation he was stepping into a marsh as he descended onto the misty tarmac.

“Hello! Hello!” a singsong British voice shouted from across the tarmac. “Professor Langdon?”

Langdon looked up to see a middle-aged woman with a badge and clipboard hurrying toward him, waving happily as he approached. Curly blond hair protruded from under a stylish knit wool hat.

“Welcome to Washington, sir!”

Langdon smiled. “Thank you.”

“My name is Pam, from passenger services.” The woman spoke with an exuberance that was almost unsettling. “If you’ll come with me, sir, your car is waiting.”

Langdon followed her across the runway toward the Signature terminal, which was surrounded by glistening private jets. A taxi stand for the rich and famous.

“I hate to embarrass you, Professor,” the woman said, sounding sheepish, “but you are the Robert Langdon who writes books about symbols and religion, aren’t you?”

Langdon hesitated and then nodded.

“I thought so!” she said, beaming. “My book group read your book about the sacred feminine and the church! What a delicious scandal that one caused! You do enjoy putting the fox in the henhouse!”

Langdon smiled. “Scandal wasn’t really my intention.”

The woman seemed to sense Langdon was not in the mood to discuss his work. “I’m sorry. Listen to me rattling on. I know you probably get tired of being recognized … but it’s your own fault.” She playfully motioned to his clothing. “Your uniform gave you away.”

My uniform? Langdon glanced down at his attire. He was wearing his usual charcoal turtleneck, Harris Tweed jacket, khakis, and collegiate cordovan loafers … his standard attire for the classroom, lecture circuit, author photos, and social events.

The woman laughed. “Those turtlenecks you wear are so dated. You’d look much sharper in a tie!”

No chance, Langdon thought. Little nooses.

Neckties had been required six days a week when Langdon attended Phillips Exeter Academy, and despite the headmaster’s romantic claims that the origin of the cravat went back to the silk fascalia worn by Roman orators to warm their vocal cords, Langdon knew that, etymologically, cravat actually derived from a ruthless band of “Croat” mercenaries who donned knotted neckerchiefs before they stormed into battle. To this day, this ancient battle garb was donned by modern office warriors hoping to intimidate their enemies in daily boardroom battles.

“Thanks for the advice,” Langdon said with a chuckle. “I’ll consider a tie in the future.”

Mercifully, a professional-looking man in a dark suit got out of a sleek Lincoln Town Car parked near the terminal and held up his finger. “Mr. Langdon? I’m Charles with Beltway Limousine.” He opened the passenger door. “Good evening, sir. Welcome to Washington.”

Langdon tipped Pam for her hospitality and then climbed into the plush interior of the Town Car. The driver showed him the temperature controls, the bottled water, and the basket of hot muffins. Seconds later, Langdon was speeding away on a private access road.

So this is how the other half lives.

As the driver gunned the car up Windsock Drive, he consulted his passenger manifest and placed a quick call. “This is Beltway Limousine,” the driver said with professional efficiency. “I was asked to confirm once my passenger had landed.” He paused. “Yes, sir. Your guest, Mr. Langdon, has arrived, and I will deliver him to the Capitol Building by seven P.M. You’re welcome, sir.” He hung up.

Langdon had to smile. No stone left unturned. Peter Solomon’s attention to detail was one of his most potent assets, allowing him to manage his substantial power with apparent ease. A few billion dollars in the bank doesn’t hurt either.

Langdon settled into the plush leather seat and closed his eyes as the noise of the airport faded behind him. The U.S. Capitol was a half hour away, and he appreciated the time alone to gather his thoughts. Everything had happened so quickly today that Langdon only now had begun to think in earnest about the incredible evening that lay ahead.

Arriving under a veil of secrecy, Langdon thought, amused by the prospect.

Ten miles from the Capitol Building, a lone figure was eagerly preparing for Robert Langdon’s arrival.

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