Posted by IndependentInvestor on April 1, 2010 under Latest Book Reviews | 
This book treats stock trading as an adventure, but it is also a good introduction to the mentality of stock trading.
This autobiography is set in the first half of the twentieth century and stars Jesse Livermore, who was a natural speculator. Jesse Livermore was very much larger than life, even though that is a metaphor that is far too overused generally. He was one of the most influential speculators of the early twentieth century who won and lost fortunes, and often did this on the margin.
Livermore just knew when a market would turn and won his fortune on backing these hunches. He lost his fortune when he did not back these hunches. One of his most famous moves was shorting shares in the company that operated many of California’s railroads – just before the San Francisco earthquake.
The book also offers an insight into the way that some of the less scrupulous “bucket shops” would operate. These were pure gambling operations that tried to look like stockbrokers. Their trick was to trade on an incredible margin (sometimes as little as 1%) and then call in the margin – or liquidate the position without giving any money back – when the stock dipped under 1%. No money ever went on to the stock market. They would also withhold ticker prices from the punters in the shop so that they would be able to deny winning bets.
Livermore could still make enough money off them that he was banned from their premises – which forced him on to the stock market.
There are plenty of lessons in how to follow your hunches with stock trading here and it is written in a very readable format. This book can be downloaded for free as well as bought off Amazon.
Posted by IndependentInvestor on March 25, 2010 under Latest Book Reviews |
Liar’s Poker will not give you many good trading ideas. It will also give a rather out dated view of how the financial markets operate today as it misses out on the computer revolution in the market. However it is useful in setting the rather mad, borderline insane, scene that makes up for many professional financial market operations. And this in itself leads to a very important lesson.
Firstly this is a true story. Michael Lewis was an art history graduate who got a job on Wall Street. In itself this was unusual as the days of a bright graduate from a good university with a good generalist degree getting into Wall Street firms was declining. The age of the specialist was already starting in the 1980s. But what a time the 1980s were!
In the firm that Lewis was in (I won’t spoil this too much by naming the firm) another thing that was dying was the partnership ethos. This was still clinging with the avid loyalty shown by some of the old guard to their firm, one of whom was loyal because when he was a new employee a partner, without question, paid for his wife’s much needed medical expenses. But this was dying and a new breed of money conscious trader was emerging.
Lewis worked on the desk that dealt with mortgage securities. This is not the interesting part – although the idea that mortgage securities is a new thing should be put to rest. What is interesting is the testosterone soaked environment that the traders were playing in. This is the real eye opener of the book. Billions of dollars were governed very directly by greed and fear.
It is often lamented that the amateur investor cannot compete with the resources available to professional investors. This is true to an extent. Arbitrage opportunities will never be available with the growth of superfast computers.
What the small investor has that many professional investors lack is the most valuable commodity. Sanity.
Posted by IndependentInvestor on March 9, 2010 under Latest Book Reviews |
The Zurich Axioms is a classic. In fact it’s the first investment book I ever read from cover to cover. It’s also got a very easy to read style. I was fourteen when I read it. This isn’t as odd as it sounds as Max Gunther claims to have been thirteen when he first made money on the market.
The Zurich Axioms aims to tell a small time investor what they need to do to become rich in the markets by showing them practical behaviours and attitudes that they need to develop in the shape of 12 major and 16 minor axioms.
He has some strong tastes. For example he believes that not risking money on the markets is stupid, over the long run you’ll just get poor. He also compares “Chartism” (what we now call technical investing) to astrology in its predictive power, and I think he favours astrology. Although he doesn’t make it explicit he’s a perfect market follower, thinking that all the information is in the price so the best thing to do is to trade on your gut feeling, limit your losses and ride your wins.
He is a proud contrarian. His tenth axiom is “disregard the majority opinion, it is probably wrong”. He’s also not a fan of any predictive model, not just technical analysis, as the future can’t be predicted. He hates diversification, which he believes to be a bad thing for an investor as it’s a rather expensive way of reducing risk, which is not the point of going into the stock market.
The style is either engaging or unbelievable. It’s written in a way familiar to readers of American self-help books. Its folksy style may very well irritate, but it makes it an easy read, and considering the concepts that he’s dealing with that is quite a feat.
Posted by IndependentInvestor on March 5, 2010 under Latest Book Reviews |
I first read Extraordinary Popular Delusions and the Madness of Crowds during the internet bubble. Although I can’t say it made me rich, it kept me from becoming poor.
It is an evergreen book, having been written more than 150 years ago by the Scottish journalist Charles Mackay. I hate to say it but it only really has three useful chapters, and these are the first three. The rest of the book simply shows the easy prejudices of mid nineteenth century liberalism.
It could be argued that the first three chapters show the easy prejudices of nineteenth century liberalism as well, but the difference is that the easy prejudices of the nineteenth century liberal is fairly commonplace when looking at the crusades, but it seems revolutionary when looking at today’s economics.
The first chapter is on the Mississippi scheme, in which a Scottish adventurer, John Law, somehow managed to persuade the French state to back the national debt on colonial land in North America, and created such a speculative bubble that it bankrupted the state. The second chapter talks about the South Sea bubble in which the British state did something very similar one hundred years before the French. Then there’s a chapter on Tulip mania (although this chapter is often criticised for being altogether too dramatic).
There are two sobering lessons to be learned from these three chapters. The first is that there are periods of time when the conventional wisdom can be very, very unwise. The second is that this can keep going far longer than most people think possible.
Posted by IndependentInvestor on February 22, 2010 under Latest Book Reviews |
Too Big to Fail is an examination of what went on in the insides of Wall Street when it looked like the banks were all going to fold.
In some ways this is a great book. The author, who is a leading American financial journalist, has access to a wide group of the big players and he uses this well with plenty of personal insights into the way some of the most important player were thinking – although sometimes you are reading a passage and you realise that there’s no possible way that the author could know that someone was thinking in that way as the person is alone. The author must have guessed the feelings of anger and relief that seem to infuse this book like sugar in a marble cake.
Another problem with this book is that it concentrates on the personal and institutional almost to the exclusion of everything else. It is certainly true that as investors we can sometimes forget the role that politics plays, but it is not the whole role. The banks collapsed not because the government wanted them to collapse, but they collapsed due to artificially low interest rate environment encouraging some spectacularly stupid investments. You just don’t get the sense of that in this book.
It would be tempting to say that this book merely records a one of instance with an eye to a film script rather than of reportage and so it can be safely ignored by any investor who wants to think to the future. Tempting but wrong. This gives a great insight into the way in which a government reacts to a crisis, something we may find useful with the Euro soon.
The two lessons we picked up were that governments can move mountains when they want to avoid a crash and that governments have very little thought to the long term. In short the government merely plugged the leak in the dam, they’ve not reinforced the dam and the pressure is still building up.