Essays in Persuasion

Book Title: Essays in Persuasion

Author(s): John Maynard Keynes

Rating: $$$$

Review:

Of all the economists and economic thoughts that still commands a great deal of respect from the investor community, it’s indisputably Keynes and Keynesian Economics. Though his contribution to investment thought is not widely acknowledged, Keynes was arguably the foremost hedge fund manager. My first attempt at reading Keynes started with his seminal work "The General Theory of Employment, Interest, and Money" and I must admit I could follow very little. “Essays in Persuasion” by contrast is not targeted at the trained economist and is much easier to comprehend.

“Essays in Persuasion” is a collection of Keynes’ writings that argues for an alternative course/remedy for the then prevailing Economic Problems. From a contemporary standpoint, “Inflation and Deflation” (Chapter II) and “The Return To The Gold Standard” (Chapter III) makes a compelling read. It is indeed the genius of his arguments/prescription that makes them equally relevant to our current economic woes.

To give more credence to the contemporary appeal of the book, I leave you with few excerpts from the book:

“To bring up the bogy of inflation as an objection to capital expenditure at the present time is like warning a patient who is wasting away from emaciation of the dangers of excessive corpulence”

“Deflation is even worse than inflation. Both are “unjust” and disappoint reasonable expectation. But whereas inflation, by easing the burden of national debt and stimulating enterprise, has a little to throw into the other side of the balance, deflation has nothing”

“Thus inflation is unjust and deflation is inexpedient. Of the two perhaps Deflation is, if we rule out exaggerated inflation such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier”

“A probable expectation of Deflation is bad enough; a certain expectation is disastrous. For the mechanism of the modern business world is even less adopted to fluctuation in the value of money upwards than it is to fluctuations downwards”

The New Paradigm for Financial Markets

Book Title: The New Paradigm for Financial Markets

Author(s): George Soros

Rating: $

About the Author:

George Soros is chairman of Soros Fund Management and is the founder of a global network of foundations dedicated to supporting open societies. He is the author of several best-selling books, including The Bubble of American Supremacy, Underwriting Democracy, and The Age of Fallibility. He was born in Budapest and lives in New York City.

Review:

For those who expect to gain insights into financial markets and what lies ahead of the current turmoil, be prepared for disappointment. “Self-indulgence of a successful speculator” was what critics had to say about his philosophical moorings in his earlier book The Alchemy of Finance and now holds equally true for this book as well.

To explain what the book is all about and why it’s not great read, consider what Soros has to say about the book in the opening lines of conclusion section of the book:

“My main purpose in writing this book is to demonstrate the validity and importance of reflexivity. The moment is auspicious. Not only has the prevailing paradigm—equilibrium theory, and its political derivative, market fundamentalism — proven itself incapable of explaining the current state of affairs, it can be held responsible for landing us in the mess we are in. We badly need a new paradigm. But the new paradigm I am proposing—the recognition of reflexivity—still has to prove its worth”

Soros’ treatment of the background to the current financial crisis is at the best shallow and his insights into what lies ahead are too general (and rightly so) to serve any purpose.

Apart from the fact the book is one of the most contemporary (went into print sometime after April 2008) and comes from the most successful investor of our times, the book has virtually nothing to offer. Infact, Soros himself admits the case, consider this:

“Unfortunately, the idea that I was a failed philosopher came to be accepted by those who wrote about me, including my biographer, Michael Kaufman. He quoted my son Robert:

My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm, and it’s this early warning sign.
If you’re around him a long time, you realize that to a large extent he is driven by temperament. But he is always trying to rationalize what are basically his emotions. And he is living in a constant state of not exactly denial, but rationalization of his emotional state. And it’s very funny.*”

My recommendation – avoid this one

The Black Swan

Book Title: The Black Swan
Author(s): Nassim Nicholas Taleb (NNT)
Rating: $$$$$
Comment: A book for all, right from members of investment committee to entry-level analysts down the line

Author’s Bio (from the book’s jacket or elsewhere):
Nassim Nicholas Taleb has devoted his life to immersing himself in problems of luck, uncertainty, probability and knowledge. Part literary essayist, part empiricist, part no-nonsense mathematical trader, he is currently taking a break by serving as the Dean’s Professor in the sciences of Uncertainty at the University of Massachusetts at Amherst. His last book, the bestseller Fooled by Randomness, has been published in twenty languages. Taleb lives mostly in New York


Review:
This is the time of the year when every brokerage house, market experts, new media, etc, wipes the dust off their proverbial “crystal ball” and spell out their prediction for the next year. The predictions range from value of various capital market indices to prices of commodities like gold, oil, etc, to various economic statistics, investment strategies and so on. The next in the list of rituals to be performed is the publication of consensus estimates based on the foregoing predictions and finally the consensus are laid on the table of investment committees and all other bodies with similar attributes.

Are these “crystal balls” for real and if yes, then what are they made of, and finally, are they any good at doing their job – to learn more, pick up a copy of “Black Swan” today.

As the title of the book suggests, “Black Swan” is built around “improbable events” that tends to have huge impact and remains largely unpredictable. The central argument of the book is that though we humans fare miserably in predicting events that have a material impact on our lives (one facet or other), we still joyfully (or rather erroneously) continue to predict them and more hazardously, use these predictions in our planning, decision making, etc.

Along with a long list of examples he cites to prove human failure at predicting (and that too by huge margin), NNT also analyses the process of predicting and points out the apparently ordinary looking mistakes, which costs us big. For instance, consider his take on the limitation of induction process in making use of past data for predicting future:

“Consider a turkey that is fed every day. Every single feeding will firm up the bird’s belief that it is the general rule of life to be fed every day by friendly members of the human race “looking out for its best interest,” as a politician would say. On the afternoon of the Wednesday before thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief – adaptation of Bertrand Russell’s original example using chicken. What can a turkey learn about what is in store for it tomorrow from the events of yesterday? A lot, perhaps, but certainly a little less than it thinks, and it is just that “little less” that may make all the difference – the history of a process over a thousand days tells you nothing about what is happening next. The naïve projection of the future from the past can be applied to anything.”

“Consider that the feeling of safety reached at its maximum when the risk was at the highest! But the problem is even more general than that; it strikes at the nature of empirical knowledge itself. Something has worked in the past, until well, it unexpectedly no longer does, and what we have learned from the past turns out to be at best irrelevant, at worst viciously misleading.”

“Well, the problem in projecting from the past can be even worse than what we have already leaned, because the same past data can confirm a theory and also its exact opposite! If you survive until tomorrow, it could mean that either a) you are more likely to be immortal or b) that you are closer to death. Both conclusions rely on the exact same data. If you are turkey being fed for a long period of time, you can either naively assume that feeding confirms your safety or be shrewd and consider that it considers the danger of being turned into supper.”

NNT also discusses at length the common mistake of “anchoring” we all commit at one time or other. Consider this:

“We cannot work without a point of reference. This is no different from a starting point in a bargaining episode: you open with a high number (“I want a million for this house”); the bidder will answer “only eight-fifty” – the discussion will be determined by that initial level”

Another aspect dealt extensively is the assumption of normal distribution (or Gaussian distribution) in the world of finance, which he, like any other sane human disapproves vehemently. Empirically, assumption of Gaussian Distribution holds no water when it comes to matters like currency, stocks, commodities, or for that matter any article that is traded. Consider this shocking example:

“The Reichsmark (as the German currency was previously called) went from four per dollar to four trillion per dollar in the space of a few years during the 1920s, an outcome that tells you that bell curve is meaningless as a description of the randomness in currency fluctuations”

One can cite n number of events where the assumption of normal distribution has been proved wrong, time and again. Be it crash of 87, LTCM, subprime, etc. and still SD, with its underlying assumption of Gaussian distribution, has not been discarded as a measure of calibrating financial risk.

And his final advice:

“What you should avoid is unnecessary dependence on large-scale harmful predictions – those and only those. Avoid the big subjects that may hurt your future: be fooled in small matters, not in the large. Do not listen to economic forecasters (they are mere entertainers), but do make your own forecast for the picnic. By all means, demand certainty for the next picnic; but avoid government social security forecasts for the year 2040”

The book deals in a lot of other interesting subjects that I have not covered in my review – like our faith in experts, sanctity we attach to financial theory and also, unwarranted rumination into history, philosophy, etc. The initial chapters are a bit drab and possible turn-off but the latter chapters are extremely indulging and will make up for the initial pain.

A book not to be missed!

Where are the Customer’s Yachts?

Book Title: Where are the Customer’s Yachts?
Author(s): Fred Schwed Jr.
Rating: $$$
Comment: A humorous (very funny) account of Wall Street and its deeds



Author’s Bio (from the book’s jacket or elsewhere):
Fred Schwed Jr. was a professional trader who got out of the market after losing a bundle in the 1929 stock market crash. Years later, he published a bestselling children’s book entitled “Wacky, the Small Boy”, and then went on to write “Where are the Customer’s Yachts?”

Review:
Ever wondered what misfortune makes out of a man – a wonderful writer with an exceptionally great sense of humor – atleast in the case of Fred Schwed Jr., the author of this book. As the title of the book suggests, “Where are the Customer’s Yachts?” is a satirical take on Wall Street and its inhabitants for amassing fortunes at the cost of not so fortunate customers. Though the book is not period or event(s) specific (one reason why it still holds water and helps the reader identify with the existing times), it primarily relates to 1920s and 30s as the first edition of the book went into publication in 1940 and the author got associated with Wall Street in early 1920s

Do not look for any great insights or wisdom here, a good hearty is laugh is all that you will get. I am not suggesting that there are no lessons to be learnt, but the scope of the message is limited to a mere caveat emptor for ordinary investors. Nonetheless, there are few observations so profound that it makes me wonder why Nobel laureate economists (of the “efficient market” school) never get it. Consider this:

“Let us consider what would happen if on some miraculous dawn the entire investing public woke up to find itself “completely informed.” That would certainly be the end of an orderly market, for a panic, either bull or bear, would ensue. Everybody would know whether to buy or sell, and whichever it was, everybody would try to do the same thing at once. And there would be no one to complete the other side of the trade! Orderly markets, like horse races, exist on difference of opinion.”

What makes the book a darling is its funny quotient. To give an illustration of the author’s prowess in humor, consider the following paragraphs from the chapter “Puts, Calls, Straddles, and Gabble”

“When the option trader is not engaged in the gabble-gabble of trading on the telephones, he is out getting customers. This means pointing out to possible buyers of options that they are splendid things to buy and pointing out to possible sellers that they are a splendid thing to sell. I have even heard them, when they are excited (and excitement is the normal state of mind of an option broker even when he his home eating his supper) present both viewpoints in the same session. They believe implicitly in this paradox, which is the backbone of their business. Thus the buyer does well, the seller does well, and it is not necessary to stress the point that the broker does well enough.”

“Many examples can be cited showing all three of them emerging from their adventures with a profit. One wonders why the problem of unemployment cannot be solved by having the unemployed buy and sell each other options, instead of mooning around on those park benches.”

There are other very interesting anecdotes and jokes in the book and will delight the reader every now and then. Infact the popular “coin flipping” argument that Buffett presented was borrowed from this book only (I am not suggesting that the author is the original conceiver of the idea)

What a pity, the book remains largely popular with the investment professionals, not investors.

The Dhando Investor

Book Title: The Dhando Investor
Author(s): Mohnish Pabrai
Rating: $$$$





Author’s Bio (from the book’s jacket or elsewhere):

Mohnish Pabrai is the managing partner of Pabrai Investment Funds, an investment group modeled after the original 1950s Buffett Partnerships. Since its inception in 1999, Pabrai Funds have delivered annualized returns of over 28% (net to investors). He has been favorably profiled by Forbes and Barron’s and has made guest appearances on CNBC and Bloomber TV and Radio

Review:

If Buffett were to write a book, it would certainly have themes very similar to that of “The Dhando Investor”. By bringing in Buffett, I have no intentions of suggesting that Mohnish has come up with any masterpiece or classic, on the contrary, Mohnish’s writing lacks flamboyance and is usually devoid of flavor like humor, interesting anecdotes, intellectual musings or philosophical wrapping. The construction and delivery of the message is pretty simple and straightforward. Though not exciting, the book could still be completed in one or few sittings because of its concise form.

The principal argument of the book runs contrary to popular wisdom that one has to assume higher risks to achieve high returns. To make his point, Mohnish has presented case studies of successful businessmen/communities who have generated great returns with minimal risks. His list of businessmen who made it big with the low-risk – high-return strategy includes the Patel community (of Indian origin) who controls a large chunk of the hotel/motel industry in US, steel magnate Lakshmi Mittal, Virgin’s Richard Branson, etc. What’s most refreshing about this book (vis-à-vis any other book from the value investors’ club) is the use of examples from ordinary businesses (read non-investment) to lay emphasis on Graham’s idea of “Margin of Safety”

For those in the Wall Street who misconstrue uncertainty as risk and risk as SD, Mohnish has some very interesting analysis:

“Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The Street just hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business”

The book references some interesting web sites and is replete with Buffett and Graham quotes. In short, the book will help you reinforce your faith in “Value” principles (if you do!) and makes a very light and quick reading.

Liar’s Poker

Book Title: Liar’s Poker
Author(s): Michael Lewis
Rating: $$$$


Author’s Bio (from the book’s jacket or elsewhere):

Michael Lewis was fresh out of Princeton and the London School of Economics when he landed a job at Salomon Brothers, one of Wall Street’s premier investment firms. During the next three years, Lewis rose from callow trainee to New York – and London-based bond salesman, raking in millions for the firm and cashing in on a modern-day gold rush.

Review:

Authors, like sell-side analysts, are always prone to exaggeration and so is Michael Lewis, but then don’t forget that it’s Wall Street, where facts, at times are much stranger than fiction.

Even though the book is set in 80s and is mainly an account of the author’s experience at Salomon Brothers, almost every aspect of the book has great cotemporary value. For instance, the recent sub-prime crises that led to the meltdown of mortgage market could be traced back to the creation of mortgage market by few creative traders at Salomon. Another familiar motif is the rise and fall of Salomon Brothers, which in my opinion is practically the case with most of Wall Street monoliths, which betrays its original character and start behaving like empires.

The author’s insights are as relevant today as they were 15-20 years back. Consider this excerpt from the book:

“And very generally, the interests of lenders in New York take a back seat to the interests of the corporate borrowers. So, in New York, bond and stock deals are driven not by whether investors (lenders) want to buy them but by whether companies want to raise the money. …….The Wall Street oligopoly that cost lenders so dearly doesn’t seem to affect the borrowers, perhaps because they are smart enough to play the few investment banks off against one other, perhaps because they are less dependent on Wall Street in the first place: after all, if they don’t like the terms on a bond deal, they can always take a loan from a bank”

Does this not remind us of the covenant-lite deals, funding most of the leveraged buyouts in current times. Except for the recent repricing of risk in wake of the sub-prime crises, were we not suffering from what Greenspan used to call “protracted periods of low risk premiums”

The authors also confronts the issue of incentive system in Wall Street, which I believe, everyone thinks it’s loaded against him/her. Not that the author’s criticism is wrong, but one hardly come across an incentive system which is seen as fair by all the parties involved. This is one such aspect which everyone who works on the Street will definitely identify with.

What’s most refreshing about the book is the author’s sense of humor (quite hilarious) and his vivid characterization of groups, individuals and all that he can lay hands on. For example, consider the sketch of Salomon trader that the author has drawn. You will immediately draw a parallel between them and any black neighborhood rapper-gangsters - aggressive, abusive, idiosyncratic, uncouth and most importantly, good at raking in moolah.

The book is as much about markets as it is about people, their emotions, their ambitions, greed and fear. It’s about men who rose to greatness (and fell too) and those who failed to take off.

Liar’s Poker is by far the most fascinating take on Wall Street by an insider. The book deserved a 5$ rating but for the lack of investment insights, which, unfortunately has lot of weightage in my rating criteria.

John Neff on Investing

Book Title: John Neff on Investing
Author(s): John Neff, S. L. Mintz
Rating: $$$

Author’s Bio (from the book’s jacket or elsewhere):

During his thirty-one years as portfolio manager of Vanguard’s Windsor and Gemini Funds, John Neff beat the market twenty two times while posting a fifty-seven fold increase in an initial stake – making Windsor the largest mutual fund in the Unites States in the process.

Now, the “investor’s investor” is ready to share the strategies that earned him international recognition. He delineates, for the first time, the principles of his phenomenally successful low p/e approach to investing, and describes the strategies, techniques, and decisions that earned him a place alongside Warren Buffett and Peter Lynch in the pantheon of modern investment wizards. Packed with advice, guidance, and invaluable lessons in investing, John Neff on investing reveals for the first time the long-heralded investment strategies of a Wall Street genius.

JOHN NEFF, until his retirement in 1995, was Senior Vice President and Managing Partner of the Wellington Management Company, the Windsor Fund’s investment advisor. S. L. Mintz is New York Bureau Chief of CFO magazine, a publication of the Economist Group dedicated to the latest financial thinking and how it is being implemented in today’s markets. His other books include Beyond Wall Street (Wiley) and Five Eminent Contrarians.

Review:

“I attribute success not to genius or blinding insights, but to a frugal nature and lessons we learned. Therein rest my enduring principles, stamped indelibly with the merits of low p/e investing.”

These ending lines from the book very aptly summarizes the investment style and philosophy followed by the legendary investor and celebrated portfolio manager, John Neff. The book however comes as a big disappointment considering the experience and insights that the author commands and could have shared. The reader will find the book as a collection of short case studies, arranged chronologically to demonstrate the power of “low P/E investing” in beating the market. The book resembles to me as an empirical study keen on proving how “low p/e investing” outperforms the benchmark and shares very little insights on understanding company/businesses, industry dynamics, market psychology or the nuances of stock picking, etc. The book is long on examples but too short when it comes to explaining the rationale behind the investment decisions. The book however does mention a few guiding principles in stock selection, which, in my opinion would make a wonderful screen for bottom-up stock pickers.

The book is structured as an autobiography of John Neff, largely covering his professional life and his 31 years at Windsor. The book took me ages to read (or at least it seemed so) and would therefore strongly suggest that you avoid the book if you already believe in “low p/e investing” (also read “value” or “contrarian” investing)

“Value” doesn’t grow OR has “Growth” no value?

Categorizing stocks into “value” and “growth” styles seems to me as the biggest travesty of investment thinking. Had low P/E, P/B stocks been statutorily defined as “value”, life would have been easy, but unfortunately, “value” signifies a much broader concept of buying stocks that are trading at a price below their intrinsic worth, a fairly forward-looking concept where the worth of a company’s assets is evaluated by discounting their anticipated cash flows in future. A process very similar to pricing a bond. But such a broad interpretation of “value” would have necessitated classifying every stock as a “value” stock, unless rejected after a thorough investigation of the stock’s price and value. This certainly would have put academia and fund-of-fund/macro-fund managers in deep trouble and therefore to bail them out, indices were bifurcated into “growth and “value” styles, based on simple but flawed logic.

Let’s consider the other side of the equation, the “growth” style. If “growth” is not “value”, then by the very definition (the restricted one) of “value”, “growth” style would imply buying stocks with high multiples (P/E, P/B). Therefore anyone who invests in stocks of growing industries/company or companies having higher earning multiples ought to be touted as momentum player or follower of “bigger fool theory” as they seems to have little or no regard for value.

Let us consider what Benjamin Graham, the legendary investor (many prefer calling him father of value investing) has to say on “growth” stocks; “The growth-stock approach may supply as dependable a margin of safety as is found in the ordinary investment – provided the calculation of the future is conservatively made, and provided it shows a satisfactory margin in relation to the price paid.”

“Activist” and “Distressed” form of investing, typically considered as “value” bastions, involves buying large positions in stocks of poorly managed/possible turnaround companies with the purpose of unlocking value either through forcing change or restructuring efforts. But the target company typically trades at very weird multiples, either too high or low and at times negative. Does these high multiples then suggest that they should not be considered as “value” investments.

It would certainly be hard to come across a value investor who would have picked a company without the prospect of its earnings growing. And imagine a “growth” investor who buys stocks at high P/Es without any value proposition. I think the “value-growth” at the best, serves the academia as now they can write papers on subjects other than MPT and asset pricing.

Security Analysis

Book Title: Security Analysis
Author(s): Benjamin Graham, David Dodd
Rating: $$$$$
Comment: An Investment Bible for the uninitiated and initiated alike – need I say more

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. All of the above

Q. Is this book meant for me?
A. Very much if you are in the business of managing money. Also meant for people who do not wish to blow their savings and ruin their retirement

Q. Would it help me become a better investor?
A. Yes, if read wisely and implemented smartly

Q. Is the style of the book dry and boring?
A. Yes, the style is dry and boring, but then you are not reading fiction either

Q. Is it academically bent and laced with jargon?
A. Academia or people with academic bent beware! This book is only for practitioners, not preachers. You cannot find a trace of jargon in this book

The Intelligent Investor

Book Title: The Intelligent Investor
Author(s): Benjamin Graham
Rating: $$$$$
Comment: Another masterpiece from the legendary investor. “By far the best book on investing ever written”, this is what Warren Buffet has to say about the book and I am sure hardly anyone will disagree

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. All of the above

Q. Is this book meant for me?
A. This is all you need for creating a solid foundation in investments. Investors, other than the professional ones, will also do a world of good to their portfolio/savings if they read Intelligent Investor

Q. Would it help me become a better investor?
A. Beyond any doubt

Q. Is the style of the book dry and boring?
A. Quite compelling for serious readers

Q. Is it academically bent and laced with jargon?
A. Jargon free and extremely lucid concepts, implementing however is what it takes to make a great investor

Pioneering Portfolio Management

Book Title: Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment
Author(s): David F. Swensen
Rating: $$$$$
Comment: A definitive book on Portfolio Management that has changed the way institutions managed funds. Benjamin Graham of modern times, David Swensen has packed the book with wisdom and insights on a wide spectrum of investment topics

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Though investment philosophy is the book’s forte, it hardly leaves any area untouched

Q. Is this book meant for me?
A. People, right from the chairman to entry level will benefit

Q. Would it help me become a better investor?
A. Suggest me a better source

Q. Is the style of the book dry and boring?
A. The insights gained more than compensates the pain of reading a dry & long subject. For a professional this book will prove too compelling a read

Q. Is it academically bent and laced with jargon?
A. This book has changed the thinking of practitioners and preachers alike


Author’s Bio (from the book’s jacket or elsewhere):
DAVID F. SWENSEN is Yale University’s Chief Investment Officer and manages the university’s $10 billion dollar endowment as well as several hundreds of millions of dollars in other investment funds. He serves as a trustee of the Carnegie Institution of Washington, Member of the Hopkins Committee of Trustees and Member of the Investment Advisory Committee for the Howard Hughes Medical Institute. He has served as advisory to the Carnegie Corporation, the New York Stock Exchange, the Investment Fund for Foundations, the Edna McConnell Clark Foundation and the States of Connecticut and Massachusetts. Mr. Swensen also teaches classes on portfolio management at Yale in New Haven

Hedge Hogging

Book Title: Hedge Hogging
Author(s): Barton Biggs
Rating: $$$$$
Comment: I am sure when people say learning is fun; they must be referring to “Hedge Hogging”. An exceptionally brilliant take on the inside world of investing by the master investor.

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. This book is as much about people as it is about philosophy and other facets of investing.

Q. Is this book meant for me?
A. People, with a few years of experience in the trade will find it more captivating

Q. Would it help me become a better investor?
A. It’s a soft-skills book and it’s indispensable if you are ambitious and wish to move to higher echelons

Q. Is the style of the book dry and boring?
A. It has all the ingredients of a thriller. You rarely come across a book which is scintillating and thought provoking at the same time

Q. Is it academically bent and laced with jargon?
A. Not relevant

Fooled by Randomness

Book Title: Fooled by Randomness: The Hidden Role of Chance in the Markets and Life
Author(s): Nassim Nicholas Taleb
Rating: $$$$



Review:
Key Words: Dentist, Mongolia, Monte Carlo, Swan (both black and white), Probability and also Randomness.

Taleb could have saved hundred of trees and reader’s time, had he avoided much of his intellectual babbling and unnecessary drifting to areas, alien to the theme of the book. The book is pretty erratic, too simple and boring to start with but catches the reader with surprise in the later chapters of the book.

Most refreshing about the book is that Taleb, true to his grain, has shown his irreverence for one and all. To me this comes as the most striking message from the author (can’t say he intended it) as we have developed an unfailing habit of creating Gods out of mortals (of course with great help from the media). For instance, I know many fellow analysts (Buffett worshippers) who refuse to analyze tech stocks as it falls outside their “circle of competence”, even though their understanding of computers and things close to it is awe inspiring (yours truly is also a Buffett follower, but vis-à-vis those mentioned above, I am still at odds to figure out difference between software and application). Taleb has shown courage in being critical to what he don’t subscribe to and will certainly help us if we can follow suit.

Taleb has spent lot of effort in putting Probability in the right perspective and very effectively demonstrates some common flaws (they look pretty obvious in hindsight) in our interpretation of probability and statistics results.

The book also introduces the reader to the assumption of “rational expectation” in normative science and the challenge it faces from behavioral economics / finance, an offshoot of positive science.

Somewhere lost in all these is the main theme of the book which is all about uncertainties and probabilities associated with it. He has used randomness as (read “luck”) an argument to claim that most (read “all”) managers’ (read “money managers”) success is attributed chance / luck, rather than their skills (and no, he doesn’t believe in efficient markets or modern finance theory either). However, to the disappointment of the readers, he doesn’t provide any hard tools to figure out randomness in a manager’s success.

I think what “Fooled by Randomness” gives you is a fresh perspective and the motivation to think critically and unbiased, as Taleb very effectively crushes much cherished and conventional wisdom, ideas, icons and institutions.

Also relevant are:

Do not pay attention to noises in the market
Do not get fooled by randomness (Do not attribute all of your success to your skills and failure to chance)
Emotions plays a large role in decision making, not rationality

One up on Wall Street

Book Title: One up on Wall Street
Author(s): Peter Lynch, John Rothchild
Rating: $$$$
Comment: A stock picker’s handbook. Though prone to exaggeration, the former fidelity fund manager brings great insights on stock picking techniques – A must buy

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Mainly on stock picking and market timing, everything else is related or incidental

Q. Is this book meant for me?
A. For analysts and fund managers alike

Q. Would it help me become a better investor?
A. Yes, if you are in the game of beating market

Q. Is the style of the book dry and boring?
A. Not at all. A welcome break from more serious books on investing

Q. Is it academically bent and laced with jargon?
A. Heard of “multibagger”? It was coined by none other than Peter Lynch. The concepts are explained in very plain and straightforward language

Common Stocks and Uncommon Profits

Book Title: Common Stocks and Uncommon Profits
Author(s): Philip A. Fisher
Rating: $$$$
Comment: One of the authoritative books on stock picking. A must read

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Stock picking lies at the heart of the book and is beautifully interwoven with the overall investing philosophy

Q. Is this book meant for me?
A. Buy-side equity analysts will find it very useful

Q. Would it help me become a better investor?
A. Yes, if picking good stocks is what your objective is

Q. Is the style of the book dry and boring?
A. The dry content is well compensated with lesser number of pages

Q. Is it academically bent and laced with jargon?
A. This is the book which popularized the term “scuttlebutting” with analysts. The concepts are quite simple to understand and comes jargon free

Empire of Debt

Book Title: Empire of Debt – The Rise of an Epic Financial Crisis
Author(s): Bill Bonner and Addison Wiggin
Rating: $$$$
Comment: Very critical (and rightly so) of USA’s economic and foreign policy. Strong proponents of conservative and traditional thinking, which has stood the test of times (centuries). Let this book be your devil’s advocate

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. A big picture book

Q. Is this book meant for me?
A. A must read for everyone

Q. Would it help me become a better investor?
A. If you swear by Keyne’s: “In the long run we are all dead”, this is book is not for you.

Q. Is the style of the book dry and boring?
A. It’s a fascinating journey

Q. Is it academically bent and laced with jargon?
A. The authors are very critical of Allan Greenspan

Mosaic: Perspectives on Investing

Book Title: Mosaic: Perspectives on Investing
Author(s): Mohnish Pabrai
Rating: $$$$
Comment: An introduction to analysis and valuation of stocks for beginners. The book presents the theory behind stock valuation in the most lucid and simple terms possible. Mohnish brings out the essence of valuation which most text books fail to uncover

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Analysis and valuation of stocks is the overriding theme of the book

Q. Is this book meant for me?
A. Even seasoned investors will get benefited by reading this book

Q. Would it help me become a better investor?
A. Valuation is the cornerstone of any successful investing strategy and this book will help you build the foundation requisite for a successful investor

Q. Is the style of the book dry and boring?
A. Too few pages to consider the style

Q. Is it academically bent and laced with jargon?
A. It de-links valuation from academic jargons

Poor Charlie’s Almanack

Book Title: Poor Charlie’s Almanack
Author(s): Charles T. Munger
Rating: $$$$
Comment: Reflections of Charlie Munger, and to some extent, Warren Buffett. This book will allow you to peek into two of the best minds in the business.

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Charlie has a view and advice on everything. Plus you get a second opinion of Buffett for free

Q. Is this book meant for me?
A. Its an unlearning manual for the newly minted finance graduates

Q. Would it help me become a better investor?
A. Tried, tested and trusted formula for investing

Q. Is the style of the book dry and boring?
A. It’s a motley mix of articles, speeches and other thoughts of the two gentlemen

Q. Is it academically bent and laced with jargon?
A. Its non-academic at its best

Fortune's Formula

Book Title: Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
Author(s): William Poundstone
Rating: $$$
Comment: A formula for fortune – no ways, smart trading/betting strategy – definitely yes

Author’s Bio (from the book’s jacket or elsewhere):
William Poundstone is the bestselling author of nine nonfictions books, two of which (Labyrinths of Reason and The Recursive Universe) were nominated for the Pulitzer Prize.

Review:
There are lots of interesting themes in the book. If the world of crime and gambling, development of information theory, nexus between Wall Street and crime, etc, are something that excites you, this book should make an interesting read. However, the theme suggested by the book’s title gets lost somewhere in all this plot building.

The “Fortune Formula” is built around an apparently simple sounding gambling/trading rule developed by John Kelly, a scientist with Bell Labs. Edward Thorp, an MIT mathematics instructor, applied the rule to trading on Wall Street. Thorp successfully managed millions of dollars through his market neutral (warrants, convertibles, etc) hedge fund and is claimed to have relied on the Kelly’s rule for placing his bets/strategies. As applicable to horse racing, Kelly’s rule, in simple terms, suggests that the bettor should diversify his bet by betting his capital on all the horses based on their probability of winning. The catch in the rule is the estimation of the probabilities, which, of course is totally subjective. The Kelly’s rule do suggest avoiding the game altogether if the bettor does not have a superior assessment of the probabilities vis-à-vis other players.

The author has dedicated a lot of pages to Claude Shannon (another Bell Labs scientist) and information theory, which in my opinion was completely unwarranted and was a big drag. Chapters on LTCM and feud between efficient market economists and Kelly advocates were quite interesting. What makes the book exciting is the surrounding plot of illegal world of gambling and crime.

All in all, the author does very little justice to the main theme and should make an average read. Certainly worth the reader’s dollars but not his time.

Freakonomics

Book Title: Freakonomics
Author(s): Steven D. Levitt, Stephen J. Dubner
Rating: $$$
Comment: If you think your analysis goes against the conventional wisdom/popular beliefs, you have got company.

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. I have not come across an analysis which is this thorough, precise and above all, convincingly invalidates all popular/conventional beliefs. Though no apparent relationship with investments, it will strongly influence your approach to research and analysis

Q. Is this book meant for me?
A. If your job involves a fair amount of analysis, definitely yes

Q. Would it help me become a better investor?
A. A better decision maker, irrespective of your occupation

Q. Is the style of the book dry and boring?
A. Damn exciting, you better read it on uninterrupted weekends

Q. Is it academically bent and laced with jargon?
A. Nothing of this kind


Author’s Bio (from the book’s jacket or elsewhere):
STEVEN D. LEVITT teaches economics at the University of Chicago. His idiosyncratic economics research into areas as varied as guns and game shows has triggered debate in the media and academic circles. He recently received the American Economics Association’s John Bates Clark Medal, awarded every two years to the best American economist under forty.

STEVEN J. DUBNER lives in New York City. He writes for The New York Times and the New Yorker, and is the bestselling author of Turbulent Souls and Confessions of a Hero-Worshipper. In August 2003 Dubner wrote a profile of Levitt in The New York Times magazine. The extraordinary response that article received led to a remarkable collaboration. Freakonomics is the eagerly anticipated result.

The Little Book That Beats The Market

Book Title: The Little Book That Beats The Market
Author(s): Joel GreenBlatt
Rating: $$$

Review:
“Its too simple to present any challenge to the reader” said my learned colleague. No wonder why the magic formula might have worked for long. I am sure investments is the field where talent and superior performance has the lowest correlation (yours truly is truly fortunate to lack in the former). Not only this, GreenBlatt has not hesitated in puncturing egos of practitioners at the very start of his book and any analyst, having tiniest of self respect left, could not have continued to read further.

The book is all about a simple but powerful formula of stock selection. The formula incorporates two of the most critical component of any investment decision; the price one pays for the investment and the strength in the stock’s fundamentals. The former is measured by earnings yield (EBIT/EV) and the latter through Return on Capital (EBIT/ (Net Fixed Assets + Net Working Capital))

Stocks are ranked on these two criteria separately and subsequently combined to find the final ranking. Companies having the best combination are then selected as part of the portfolio. The author suggests some adjustments to EBIT. This apparently simple seeming exercise is not so simple after all, as one has to qualitative (subjective) adjust EBIT to reflect earnings in a normal year.

Even if one does believes in the author’s claims on his formula’s superior performance, one cannot ignore other important aspects of stock selection/analysis, unless ofcourse one is running a quant fund.

Go BACKTEST

Beating the Street

Book Title: Beating the Street
Author(s): Peter Lynch, John Rothchild
Rating: $$$
Comment: Another book from the master stock picker.

FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Stock picking, trends and market timing

Q. Is this book meant for me?
A. It always pays listening to a top mind

Q. Would it help me become a better investor?
A. Will help you in stock picking and market timing

Q. Is the style of the book dry and boring?
A. The style is refreshing but drags at times

Q. Is it academically bent and laced with jargon?
A. Peter Lynch is quite prone to fancy terms and analogies

Irrational Exuberance

Book Title: Irrational Exuberance
Author(s): Robert J. Shiller
Rating: $$$
Comment: “History doesn't repeat itself, but it does rhyme”, for those who forgot these golden words of Mark Twain, this book will serve as a good reminder



FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. Largely deals with capital market history and psychology

Q. Is this book meant for me?
A. Must for everyone who thinks “it’s different this time”

Q. Would it help me become a better investor?
A. Yes, if you have not experienced a full market cycle

Q. Is the style of the book dry and boring?
A. The style is quite refreshing but do not expect miracles

Q. Is it academically bent and laced with jargon?
A. It comes from a leading professor in finance. But no need to get skeptical, it has little or no jargon and is not academic in nature either

Bull’s Eye Investing

Book Title: Bull’s Eye Investing
Author(s): John Mauldin
Rating: $$$
Comment: Mauldin’s newsletter is a better alternative




FAQ:

Q. Which of the following areas is the book best geared at; Investment Philosophy, Hands on Stock Picking, Big Picture/Macro Analysis, Fresh Perspective on Investing, etc?
A. The book addresses big picture/macro analysis as Mauldin is in the business of managing managers (FoF)

Q. Is this book meant for me?
A. Would make great sense for people who are in the business of running fund of funds, fund of hedge funds, etc.

Q. Would it help me become a better investor?
A. Will certainly help in selecting a better investor for managing your/your client’s money

Q. Is the style of the book dry and boring?
A. Quite dry, reading will be slow and painful

Q. Is it academically bent and laced with jargon?
A. Not really

Author’s Bio (from the book’s jacket or elsewhere):
JOHN MAULDIN is President of Millennium Wave Investments. Over one million loyal readers receive his weekly views on the economy and the markets (www.johnmauldin.com). He has more than twenty years’ experience in the financial arena and has appeared frequently on CNBC and Bloomberg TV as well as many radio stations throughout the country.

Capital Ideas

Book Title: Capital Ideas: The Improbable Origins of Modern Wall Street
Author(s): Peter L. Bernstein
Rating: $$


Review:
No wonder why my colleague, who happens to be a senior quant analyst was so keen that I read this book, an attempt possibly to make me pay my respects to the high priests of Ivory Towers.

Capital Ideas is a tribute to the academicians who have contributed to the current body of knowledge in the finance discipline. The book will take you to a very familiar journey, reminding you of those interesting days of MBA spent on not so interesting topics such as MPT, MM Theory, Beta and all that academia had to teach us on finance. I think the book would go a long way in developing interest and understanding of finance theory, if it is introduced to the students before they are subjected to plain and boring finance text books.

Capital Ideas chronicles the development of finance theory since its very inception. The book is a beautiful passage on the life of people behind the modern finance theory and takes the reader through the development of idea surrounding these theories. The book ought to be a must for every student of finance who is interested in studying the development of the modern finance theory and take the research forward.

However, investment professionals who find their time precious would do just fine if they could avoid this book. The book is more relevant to the historians than to the practitioners in the field, as the book doesn’t offer any insights on investing (the book doesn’t claim that either). The author could have done more justice to the book by presenting a balanced critique of the theories and their relevance to modern day investing rather than writing a mere eulogy.

As Barton Biggs is quoted in the book on his view on the Modern Portfolio Theory: “I think it’s just a lot of baloney”