Archive for the ‘Book Review’ Category

ECONned by Yves Smith book review

Monday, April 19th, 2010

Yves Smith runs the popular financial blog naked capitalism. This is a review of her first book ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.

It puts forward the case that flawed economic theory, and the influential followers of those theories, have played a large part in the economic crisis which started in 2007, and which is still not over as of 2010.

ECONned book by Yves SmithChapters 1-5 which form the first half of the book, focus on standard economic theories and what is wrong with them. She goes through topics such as supply and demand, neoclassical economics, free markets, and normal distribution. She gives the background and history to these theories, and then picks them apart, with plenty of examples as to why the standard thinking is wrong. I’ve never studied economics but had no problem following the arguments in these chapters.

One example is that the normal distribution (or bell curve), calculated the odds of a 10% move in the Dow Jones as only being possible one in every 73 to 603 billion years. And yet this move happened twice in the same month. Yes – it would be possible in these odds – but much more likely is that the odds were devastatingly wrong due to relying on flawed bell curve assumptions.

If you have read the Fooled by Randomness and Black Swan books by Nassim Nicholas Taleb, you may notice some overlap in the people, stories and opinions in the first 5 chapters. That’s not a bad thing though, as Nassim and Yves both make very good arguments.

Chapters 6 and 7 are different, and tell of financial people and companies making very stupid decisions, and losing a lot of money. I always like reading about people who make massive financial mistakes. It you like these chapters then see Traders, Guns and Money by Satyajit Das for more. Chapter 7 also details the problems with Value at Risk (VaR), and compares the differences in power structures between the banks and the military.

Chapters 8 and 9 get into details as to how the crisis happened. She gives a great explanation as to how risky loans were turned into complex financial instruments with AAA ratings – meaning they should be as secure as government bonds.

Chapter 10 is one of the scariest as it details what happened after the major crashes, when government money was pumped into the worlds banking systems as lightning speed. Rather than going toward propping up the stability of the critical banking elements, much of the money was going straight (or nearly straight) into the pockets of those highly paid bankers who got us into this mess in the first place.

Yves then gives her suggestions for how to make the financial system more stable, and how it can better serve the needs of the general population, rather than only serving the needs of the rich.

This is definitely a recommended book, well written, and with good arguments put forward from someone who clearly knows their subject. I hope that whoever is our next Chancellor of the Exchequer after the May 2010 elections will read a copy.

Book review roundup – Forex, Turtles, LTCM, Stock market and Randomness

Wednesday, December 9th, 2009

I’ve been reading finance and trading books faster that I’ve been able to review them! Here is a roundup of the last five finance and trading related books that I’ve read.

Currency Trading for Dummies by Mark Galant and Brian Dolan

Mark Galan and Brian Dolan both work at which is one of the largest forex retail brokers in the world.

They’ve put their knowledge into this book, packaged in the familiar ‘dummies’ style.

Even though this is marketed as a ‘dummies’ book there is a surprisingly large amount of detail in the book which makes it worth reading even if you have been trading in forex for a while.

They explain the differences between the major currencies. They talk about how the world economies interact. They provide a good slice of standard trading advice (strategies, stops, trade size, etc). And they cover other topics such as technical analysis, trading from the news, and trading do’s and don’ts.

Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders by Curtis Faith

Curtis Faith was one of the original ‘Turtles’. The turtles were ordinary people who were taught how to be professional traders by Richard Dennis as part of a bet as to whether successful traders are made or just born.

Curtis gives a brief account of how he was selected to be a turtle (which to me would seem to invalidate the idea of the bet – it they wanted to see if anyone could become a successful investor then shouldn’t they have randomly selected people?). And he gives a brief account of his time as a turtle trader.

Most of the book is however about writing and testing trading systems. He covers topics such as how to do a good backtest – important to make sure you don’t bias the results. And he talks about rules that a good trading system should use.

If you are interesting in writing trading systems then this book gives plenty to think about. A quick read and very interesting.

When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein

When Genius Failed tells the story of the mighty rise, and then mighty fall of Long Term Capital Management.

This is the account of how ex-Salomon Brothers trader John Meriwether created LTCM and how it became one of the largest arbitrage hedge funds in the world in a few short years.

When Genius Failed continues parts of the events that were covered in the book Liar’s Poker by Michael Lewis – another recommended read.

John Meriwether managed to recruit some of his old team from Salomon Brothers and added two Nobel Prize winners – Robert Merton and Myron Scholes for good measure. To add further credibility to the fund he recruited David Mullins, the ex-Federal Reserve Vice-Chairman.

With his prestigious team in place he was able to obtain billions of dollars of capital, and get highly advantageous terms from the brokers and clients they dealt with.

They thought they were invincible, and for a time they produced amazing returns.

However things went wrong when they got too big and started diversifying into new areas. They were stung by the Asian currency crisis of 1997 and then in 1998 their downfall was cemented when Russia defaulted on its debt.

This is a fascinating read of how huge success can lead to spectacular failure. This book is a warning for anyone who takes on risk beyond his or her means.

How the Stock Market Works: A Beginner’s Guide to Investment by Michael Becket and Yvette Essen

How the Stock Market Works is a small book that does as its title suggests. It tells you in brief how the stock market works.

It tells you what shares are, how you research them, and how you can buy them.

It explains how you can read the financial pages in newspapers and how you can understand a company report. If you want quick descriptions of what all those financial rations mean then this could be the book for you.

It is not what I’d call a ‘fun or interesting’ read, however there is a lot of useful information in here.

This book is pitched towards people who are investing for the long term. It does not cover shorter term trading.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

Fooled by Randomness is a fascinating book that explains how much our lives are affected by pure randomness.

There are a lot of examples of how this relates to the trading world (Nassim is an options trader), but there are plenty of non-trading examples as well.

Fooled by Randomness flits from one topic to another at speed and is one of those books that makes you think.

One of the most important messages that he tries to get across to traders is that just because you win many trades don’t assume you are a good trader. It could just be you are benefiting from random luck. Sample size is all important – winning trades over a number of months or even years may not be enough to tell you anything about your trading skills.

The author is clearly very intelligent and has put together a highly readable and interesting work, but sometimes he does come across as a bit arrogant – he could do with toning some of his personal insults down.

Nether the less – a fun read – and I’ve already got his follow up book The Black Swan: The Impact of the Highly Improbable, on order.

Liar’s Poker by Michael Lewis – book review

Friday, September 18th, 2009

Liar’s Poker is the story of Salomon Brothers as told through Michael Lewis. He joined Salomon in the mid-80’s and went through their training course before becoming a bond salesman.

The story is a mixture of his personal experiences of learning how to sell bonds and a look at the 80’s history of Salomon and their mortgage bond department.

On a personal level he progressed from a clueless beginner into someone who was making multi-million dollar deals. He spent time on both the London and New York trading floors and describes the differences between them.

On a more corporate level Michael gives an account of the company politics at Salomon. He talks about Salomon boss John Gutfreund and other main players such as Lewie Ranieri head of mortgate bonds, Tom Strauss head of government bonds and Bill Voute who was head of corporate bonds.

Later on the competition that Salomon faced from Michael Milken’s Drexel is discussed. Drexel were one of the companies that took a large amount of business away from Salomon.

If you want to learn about life at Salomon brother this is the book for you – it is a good entertaining read.

The Naked Trader by Robbie Burns – book review

Thursday, September 3rd, 2009

Robbie Burns quit his job in 2001 to become a full time trader in the stock market. He has proved to be a very successful trader building up a substantial sum in his ISA pension.

In this very light hearted book he explains how he goes about picking the right shares to invest in. He discusses how to understand company finances, how to choose when to buy and when to sell.

He talks about how to identify problems in annual reports by using his traffic light system, and there is a brief introduction to more advanced topics such as using Level 2 and direct market access.

His strategies are suitable for trading over a medium term period of weeks or months rather than shorter time frames.

There are some fun chapter with reader’s letters and a section on big mistakes that traders have made.

The book is written in a very chatty style. In between the ‘meat’ are references to eating toast and having a nap. The style will appeal to people who like the easy to read nature of the ‘dummies’ series of book.

This is a quick read, but it is highly recommended – especially if you are new to trading and want a simple introduction to playing in the stock market.

Fool’s Gold by Gillian Tett – Book review

Thursday, August 27th, 2009

Fool’s Gold is the story of how mortgaged backed CDOs (collatorised debt obligations) were created and how they played a major role in the bank collapses and recession of 2007-2009.

The book largely focuses on how J.P. Morgan set up the teams of people who created these products and how the products evolved over time. J.P. Morgan created these new financial derivatives as a way to spread risk. They believed that their creations would make the world economy safer by allowing risk to categorised, insured and dispersed.

The author argues that the problem was not so much caused by the creation of these financial derivatives by J.P. Morgan, but by the way they were warped by other profit hungry banks into a tool that allowed huge quantities of sub-prime loans to be handed out and then sold on to other institutions who didn’t fully understand what they were buying.

The first two thirds of the book are largely concerned with how these new financial innovations were created. It follows their gradual evolution from a risk dispersal product, to a product which had the unfortunate side effect of concentrating huge amounts of risk on the balance sheets of companies across the world.

The final third of the book tells the fast paced story of the collapse.The collapse of Bear Stearns and the role that J.P. Morgan played in saving them are covered, as is the collapse of Lehman Brothers and AIG.

If you want to gain a further understanding of the credit crunch – particularly from the perspective of the J.P. Morgan bankers who were watching with horror as the situation developed – then this is a good and easily readable book. The actual bank collapses are covered very quickly so if you want a detailed account of these then you may have to look elsewhere.

Overall an enjoyable and informative read.

Review: Cityboy: Beer and Loathing in the Square Mile

Friday, June 26th, 2009

“Cityboy”: Beer and Loathing in the Square Mile is a novel by Geraint Anderson based on the years he spent working as a utilities analyst for a variety of banks in the City of London. Geraint first started writing an anonymous column called ‘Cityboy’, which appeared each week in the free evening paper ‘thelondonpaper’. The column became very popular as he revealed the stories of excess and backstabbing that were an everyday event in the line of work in which he was involved.

In 2008 he decided to reveal his identity and this book was timed to be released soon after. As luck would have it (for him!) he released the book just as the media’s attention was focusing on the finance industry due to the credit crunch and impending recession.

Geraint makes it clear that this book isn’t autobiographical. It is a novel, but he says the characters and events are typical of what he observed whilst working in the square mile. The ‘hero’ of the story is Steve, a bit of a hippy with not much ambition and lacking in a career until his brother arranged an interview with a French bank. Somehow he got the job and was plunged into the exiting world of being a utilities analyst.

Geraint clearly doesn’t think highly of the life of a financial analyst. He describes the job as being about coming up with a vaguely plausible explanation of which way a share price will move and occasionally publishing these findings as a research note. It doesn’t matter if the note is wrong as long as it has been written in a way that covers your back! Once the note is published the analyst will travel round trying to persuade clients of the value of the note, in the hope that they will then place orders and trades with the bank. More trade equals more bonus – and it is bonuses which appear to be the major motivating factor of the people in the book.

Steve doesn’t take the job too seriously until he has an encounter with the number one rated utilities analyst – Hugo Bentley. Hugo is arrogant, successful, rich – everything the young Steve wants to be. He irritates Steve to such an extent that Steve makes it his life’s goal to beat Hugo to the spot of being the number one rated utilities analyst.

To do this he has to attract more and more commission from his clients, and work an every increasing number of hours. Along with the hours comes a whole host of bad behavior. Drug usage and heavy drinking are all in a days work for Steve, as are expensive holidays and even more expensive bets.

This book is a fun and quick read. It will certainly make you more skeptical of what an analyst does for a living, and probably make you jealous that some people can make so much, for doing so little.

Review: Who runs Britain by Robert Peston

Wednesday, June 17th, 2009

Robert Peston is the BBC business editor. You’ll probably know his name because when the credit crunch was making headlines, Robert Peston changed from being someone who just reported the news to someone who was the news. His reports became closely followed by the financial world and what he said could move individual shares and even influenced the events leading to the run on the Northern Rock bank.

Robert Peston’s book was revised and re-launched to capitalise on his new found fame and the ensuing economic crisis.

Peston covers a broad range of topics from private equity, to pension funds, to how the wealthy are using their money to influence political policy.

The private equity boom is explored in detail. Philip Green, Arcadia and Marks and Spencer get plenty of page space. He inter-mingles his commentary with old first hand interviews that he has done with the main players.

He covers how hedge funds and private equity have lead to a huge re-distribution of money from the many to few. This is linked in with the current pension crisis – the crisis being in both the standard government pension and also with private pensions – especially final salary ones.

All in all this is a very interesting read. Peston has a wide breadth of knowledge as well as well as first hand knowledge of the people involved. A good read if you want to understand more about the broader economic and political conditions in Britain that lead to some of the economic problems that we now face.

Review: Diary of a CFD Trader by Catherine Davey

Tuesday, June 9th, 2009

Catherine Davey is a regular writer of trading articles. Perhaps to prove that she could put her money where her mouth is she decided to spend three months (14 weeks) trading CFDs and write a diary of her progress to show that it is possible to make money this way.

As she soon discovers it isn’t as easy as she initially though. Her account decreases at quite a rapid rate and she wonders if she has made a big mistake.

The book contains details of the trades that she makes – most of these are CFD share trades on companies listed on the Australian stock exchange. She does a small amount of commodity trading as well. She mainly uses technical analysis to spot support and resistance patterns and gives tips on how you can use technical analysis to spot these patterns yourself.

The book doesn’t just concentrate on the technical side, she also talks about the emotional side of trading. Throughout the book she had regular sessions with a trading coach who tried to look into her reasoning for trading and make her think like a better trader.

There are a variety of other characters in the book such as a director of a CFD company who she calls for advice and other friends who know about trading.

Although not the most exciting book ever written I do think it is worth reading. She talks frankly about many of the mistakes that she makes. You can often learn a lot more from people’s mistakes than what they do right. She keeps making the same mistakes, often related to bad account management.

I personally don’t intend to trade in the same way that she does but I still found her account useful and have made a note of a whole series of things not to do!

Score: 7/10