Sunday, December 10, 2017

Harriman’s New Book of Investing Rules

Harriman’s New Book of Investing Rules: The Do’s & Don’ts of the World’s Best Investors, edited by Christopher Parker, contains over 500 pages of wisdom from 64 noted American and British investors. It’s a smorgasbord of ideas from which the reader can pick and choose. Don’t like Brussel sprouts? Here, have some cheesecake. But, said in a cautionary whisper, you’d be better off with the Brussel sprouts.

I hate to think how many years of successful investing experience are encapsulated in this volume. Probably somewhere in the neighborhood of 2,000. There aren’t too many resources that can claim this much collective experience.

Herewith a tiny sampling of some of the rules, minus the often much more insightful explanation that follows each of them.

Diversify, but not to mediocrity.

Concentrate, but not too much.

Hedge when the market’s expensive and falling.

Unless you are a genius use a system.

Don’t rely too heavily on models.

Beware of geeks bearing formulas.

Demographics are destiny.

Price is the paramount trading signal.

Be happy doing nothing.

Question the persistency of anomalies.

Understand your edge and why it is sustainable.

Review past stupidities, but don’t let them make you timid.

Only bet on one variable at a time.

It’s important that your process does not work in every market environment.

Don’t chop and change too much.

Be patient—fortune sometimes take a while to favor the bold.

Time, not timing, is the key to investment success. The best time to invest, therefore, is now.

Always remember that investing is hard.

Wednesday, December 6, 2017

Best books of 2017

Bowing to reader demand, I'm sharing my personal, idiosyncratic choices for the best books of 2017, with links to my reviews.

Eric Barker, Barking Up the Wrong Tree

Richard Bookstaber, The End of Theory

Robert Carver, Smart Portfolios



Michael W. Covel, Trend Following, 5th ed.

Aswath Damodaran, Narrative and Numbers

Diana B. Henriques, A First-Class Catastrophe



Hari P. Krishnan, The Second Leg Down

Bill Martin, The Smart Financial Advisor

Edward O. Thorp, A Man for All Markets


Sunday, December 3, 2017

Brandimarte, An Introduction to Financial Markets

Paolo Brandimarte’s An Introduction to Financial Markets: A Quantitative Approach (Wiley, 2018) is an imposing 750-page book. It is meant as a textbook for students who want a thorough grounding in the mathematics and statistics of finance. It arose out of courses the author offered at Politecnico di Torino, where he is a professor in the department of mathematical sciences, to graduate students in mathematical engineering. Like most textbooks, at the each of each chapter it has a set of problems (the answers to which can be found on the book’s website) and a bibliography.

After an overview of markets and an outline of basic problems in quantitative finance, the author analyzes fixed-income assets, equity portfolios, derivatives, and advanced optimization models. Devoting nearly 150 pages to optimization models may seem a bit eccentric, but Brandimarte is particularly interested in this topic and has done extensive research on it. For instance, in 1995 he co-authored a book titled Optimization Models and Concepts in Production Management. And in 2013 he co-authored a book on distribution logistics, which is essentially an optimization problem.

Zeroing in on the third part of the book, on equity portfolios, we find four chapters that deal with (1) decision-making under uncertainty: the static case, (2) mean-variance efficient portfolios, (3) factor models, and (4) equilibrium models: CAPM and APT. Here I’ll look very briefly, and somewhat telegraphically, at the first problem—decision-making under uncertainty—to give some sense of the book’s approach.

Brandimarte distinguishes between a static decision model and a multistage decision model. In a static model, we assume that we are not “adjusting our decisions along the way, when we observe the actual unfolding of uncertain risk factors.” In a multistage model, we can update our decisions, “depending on the incoming information flow over time.” He is simplifying his discussion by considering only the static case.

If we are trying to choose among a set of lotteries, let’s say, we might use a utility function. Brandimarte spends ten pages on the math involved in explicating and applying these functions. But utility functions have been severely criticized over the years, most notably for mixing objective risk measurement and subjective risk aversion in decision-making. Therefore, academics and practitioners have proposed mean-risk models, using risk measures such as standard deviation and variance and quantile-based risk measures such as V@R and CV@R. (More math.) These “may provide us with a partial ordering of alternatives, as well as a set of efficient portfolios.”

A third alternative framework is the stochastic dominance framework, “resulting in a partial ordering that may be related to broad families of utility functions.” (Math.) Brandimarte finds stochastic dominance “an interesting concept, allowing us to establish a partial ordering between portfolios, which applies to a large range of sensible utility functions. Unfortunately, it is not quite trivial to translate the concept into computational terms, in order to make it suitable to portfolio optimization. Nevertheless, it is possible to build optimization models using stochastic dominance constraints with respect to a benchmark portfolio.” (Two theorem proofs, problems, bibliography, end of chapter.)

Wednesday, November 29, 2017

Mulgan, Big Mind

Geoff Mulgan’s Big Mind: How Collective Intelligence Can Change Our World (Princeton University Press, 2018) is a thoughtful, quasi-philosophical book on a topic where “the stakes could not be higher. Progressing collective intelligence is in many ways humanity’s grandest challenge since there’s little prospect of solving the other grand challenges of climate, health, prosperity, or war without progress in how we think and act together.”

Collective intelligence requires a diversity of elements and capabilities: a live model of the world, observation, focus, memory, empathy, motor coordination, creativity, judgment, and wisdom. It is supported by infrastructures, such as networks. A general theory of collective intelligence also needs to address the dimensionality of choices—not only the number of variables involved but “cognitive dimensionality (how many different ways of thinking, disciplines, or models are necessary to understand the choice), its social dimensionality (how many people or organizations have some power or influence over the decision, and how much are they in conflict with each other), and its temporal dimensionality (how long are the feedback loops).” And this is just the beginning. The lists and requirements keep multiplying. Collective intelligence is complicated.

Mulgan analyzes how collective intelligence (though, in practice, all too often collective stupidity) functions in everyday life—in meetings, in cities and governments, in economies and firms, in universities.

Big Mind is a call to action, even though the author admits that there’s no single path to success. Because of this, we need to nurture people with skills in “intelligence design.”

Sunday, November 26, 2017

Martin, The Smart Financial Advisor

The subtitle of Bill Martin’s The Smart Financial Advisor (Harriman House, 2017) says it all: How Financial Advisors Can Thrive by Embracing Fintech and Goals-Based Investing. Martin, the chief investment officer at INTRUST Bank, beats the drum for goal-based investing since it has so many benefits, for both advisors and clients. For instance, it enables advisors to manage more of their clients’ wealth, it better matches assets and liabilities, it determines the optimal asset allocation, it minimizes taxes, and it increases an advisor’s value. He also advocates using fintech within a goals-based investing framework to efficiently manage, monitor, and report goal progress.

Most investors fall victim to a bevy of investing hazards. They react to external factors, fail to plan, quarantine their portfolios, mismanage risks, rely on alluring stories, ignore taxes, and focus on past performance. Advisors can address these hazards by adopting goals-based investing, identifying and prioritizing client goals, managing client wealth holistically, assessing risk comprehensively, determining the optimal mix of assets and constructing portfolios intelligently, utilizing tax-smart investment strategies, and tracking goal progress.

Goals-based investing is gaining traction among advisors and “finally appears positioned to become the new industry norm in managing wealth.” Historically, from the 1900s to the 1960s investors held concentrated stock portfolios and evaluated their stocks independently. From the 1960s to the 1980s Markowitz’s theory of portfolio selection became the guiding model, then from the 1980s through the 1990s strategic asset allocation took over. Employing Markowitz's model added value to investors' portfolios; strategic asset allocation added more value. Today, in part as a result of the findings of behavioral finance, goals-based investing is beginning to take center stage, and it is adding yet more value.

Martin explains the ins and outs of goals-based investing, step by step, element by element. Although he is writing for financial advisors, I consider his book a must-read for the DIY investor as well. Admittedly, it’s a lot harder for the individual investor to stay on track without the assistance of an advisor, but it’s virtually impossible without a viable, forward-looking plan. If you’re acting as your own advisor, you couldn’t ask for a clearer, more useful book than The Smart Financial Advisor.

Wednesday, November 22, 2017

Bernstein, Secrecy World

Jake Bernstein’s Secrecy World: Inside the Panama Papers Investigation of Illicit Money Networks and the Global Elite (Henry Holt, 2017) is both riveting and dispiriting. Bernstein, a Pulitzer Prize-winning journalist, knows whereof he writes because he was a senior reporter on the International Consortium of Investigative Journalists team that broke the Panama Papers story.

Data siphoned off from the law firm of Mossack Fonseca in Panama “afforded an unprecedented look into the operations of an underground economy through which trillions of dollars flow annually. This river of cash exists in a largely unregulated place known as the secrecy world. It’s an alternate reality available only to those who can afford the trip. In the secrecy world, wealth is largely untouchable by government tax authorities and hidden from the view of criminal investigators. Through the secrecy world, family dynasties are nurtured, their fortunes—often acquired illicitly—laundered and passed on to heirs. It’s a place where capital always triumphs over labor and the well-to-do are free to ignore the laws that govern their fellow citizens.” That’s dispiriting.

But Bernstein’s account of who hid money and how they did it is fascinating. From Vladimir Putin, whose name of course never appeared in the files, only the names of his oldest and most loyal friends, to Donald Trump’s partners and customers, to brashly overconfident Icelanders—people created thousands of shell companies with Mossfon. Some were trying to keep their wealth secret from their spouses, others trying to avoid the tax man, still others were buying and selling art, often to move it to freeports.

Secrecy World is a must-read book for anyone with an interest in, and perhaps a sense of outrage over, how the rich protect their wealth. And, I should note, it’s not just through secret offshore accounts. Delaware and Nevada allow incorporations with virtually no due diligence.

Sunday, November 19, 2017

Arnold, The Deals of Warren Buffett, vol. 1

Glen Arnold, a former academic (professor of investment and professor of corporate finance) turned more or less fulltime investor as well as a prolific author of books on finance, is an unabashed fan of Warren Buffett. He is a Berkshire Hathaway shareholder and regularly travels from England to Omaha for the Berkshire annual meetings.

Arnold set out to discover why Buffett chose the companies he invested in and what lessons individual investors can learn from Buffett’s decisions. Volume 1 of The Deals of Warren Buffett (Harriman House, 2017) covers the period leading to Buffett’s first $100 million in net worth, which he reached in 1978 at the age of 48.

Contrary to myth, Buffett didn’t always have a Midas touch. Apart from his most notable failure, Berkshire Hathaway the textile company, he lost money when he was in his early 20s on Cleveland Worsted Mills and an Omaha gas station he bought together with a friend.

But many of his investments were staggeringly successful, certainly dwarfing the $2,000 he lost on the gas station. Arnold goes through Buffett’s early investments one by one, from lesser known companies such as Rockwood & Co., Sanborn Maps, Dempster Mill, Hochschild-Kohn, and Associated Cotton Shops to such Berkshire staples as American Express, Disney, See’s Candies, and the Washington Post.

Throughout, Arnold stresses Buffett’s investing principles, exemplified in each of these deals, that can withstand the test of time. Among them: Grand principles are more important than a grand plan. Market moods can be incomprehensible to value investors, but stick with sound investing principles in good times and bad. And, re managers, good jockeys will do well on good horses, but not on broken-down nags. And so, in general it’s important to avoid businesses with problems.

Buffett followers will welcome this addition to the already huge Buffett bibliography. Arnold’s book will be even more illuminating to investors who are in search of an overarching rationale for their investing decisions. Why not learn from the best?

Wednesday, November 15, 2017

Vermeulen, Breaking Bad Habits

Many of the principles articulated in Freek Vermeulen’s excellent book Breaking Bad Habits: Defy Industry Norms and Reinvigorate Your Business (Harvard Business Review Press, 2017) can easily be extended beyond the confines of business organizations. So even if you aren’t a business executive (but of course especially if you are), you can profit from the book’s antidotes to bad practices.

Bad practices thrive on inertia. To overcome this inertia and reinvigorate the organization one should implement “complementary processes that foster ongoing creation and renewal.” For instance, embrace change for change’s sake, make your life difficult, balance exploration with exploitation, be varied and selective. Here I’ll skip over the first recommendation, which, when “Change for Change’s Sake” appeared in HBR in 2010, prompted a spate of hate mail and emails where Vermeulen was addressed as “You Idiot.” To do justice to the nuanced concept would require too much space.

Instead, let me start with the second recommendation: make your life difficult. The author suggests undertaking a challenging variant on one’s existing product or service. For instance, a fertility clinic might treat a 49-year-old woman with one ovary; a law firm might take on a difficult legal case that no one else wants to touch. “It needs to be a challenge, but … one from which you could see or at least feasibly suspect that its learnings will spill over into your normal-day stuff.”

The third recommendation, balance exploration with exploitation, means that a business should try new things but at the same time focus on profiting from existing competitive advantages.

And, the last recommendation: be varied and selective. Essentially this calls for letting a thousand flowers bloom but allowing 999 of them to die.

On another front, this one complete with an investing tip, Vermeulen cites a study on employee satisfaction. The share price of companies that made it onto Fortune magazine’s list of best companies to work for “rose about 3.5 percent faster than others’ did.” The stock market, however, underestimates the effect of happy employees. Investors did not factor employee satisfaction into their valuation of the company. “Only when—inevitably—the employees’ happiness started to bear fruit in terms of the company’s profits did the share price make a happy jump in surprise.”

Sunday, November 12, 2017

Diaconis & Skyrms, Ten Great Ideas about Chance

Ten Great Ideas about Chance by Persi Diaconis and Brian Skyrms (Princeton University Press, 2018) grew out of a course that the authors team-taught at Stanford, which had as a prerequisite one undergraduate course in probability or statistics. It is, as the authors describe it, “a history book, a probability book, and a philosophy book.” In writing about the ten great ideas—measurement, judgment, psychology, frequency, mathematics, inverse inference, unification, algorithmic randomness, physical chance, and induction—they proceed more or less chronologically within each topic, starting with Cardano and Galileo and the notion that chance can be measured.

The second idea, that judgments can be measured and that coherent judgments are probabilities, is the one most obviously relevant to finance. Here, as clearly seen in prediction markets, “the probability of A is just the expected value of a wager that pays off 1 if A and 0 if not. If you pay a price equal to P(a) for such a wager, you believe that you have traded equals for equals. For a lesser price you would prefer to buy the wager; for a greater price you would prefer not to buy it. So the balance point, where you are indifferent between buying the wager or not, measures your judgmental probability for A.” In this idealized model “an individual acts like a bookie—or perhaps like a derivatives trader—and buys and sells bets. … She buys fair or favorable bets and sells fair or disadvantageous bets, doing business with all comers. A Dutch book can be made against her if there is some finite set of transactions acceptable to her such that she suffers a net loss in every possible situation. We will say that she is coherent if she is not susceptible to a Dutch book.” Over time, given a change in evidence, she will revise her probabilities using the “unique coherent rule,” Bayesian updating. “Any other rule leaves one open to a Dutch book against the rule—a Dutch book across time, a diachronic Dutch book.” Market makers, beware the diachronic Dutch book!

Ten Great Ideas about Chance takes intrinsically difficult notions that great minds struggled with over the centuries (I personally would put induction at the top of the list) and makes them accessible to anyone with a basic grasp of probability.

Sunday, November 5, 2017

Johnson, Derivatives Markets and Analysis

R. Stafford Johnson’s Derivatives Markets and Analysis (Bloomberg/Wiley, 2017) is part of the Bloomberg Financial Series. As such, the Bloomberg terminal, and how to use it, plays a central role in the text.

The book is a wonderful resource, however, even for the financial professional or student without access to a Bloomberg terminal. Johnson, a professor of finance at Xavier University, has put together more than 750 pages of information about and case studies involving futures and forwards, options, and financial swaps. He includes problems and questions, along with Bloomberg exercises.

Although Johnson starts with the basics, quickly enough he takes the reader into the complexities of hedging. For instance, in the case of options, in one chapter he explains the standard strategies and some defensive follow-up strategies. In the next chapter he discusses ways to hedge stock portfolio positions—by creating a floor or a cap for a stock portfolio using index options and by using range forward contracts. He also discusses hedging currency, commodity, and fixed-income positions with options.

The book has a section on option pricing, with chapters on option boundary conditions and fundamental price relations, the binomial pricing model, the Black-Scholes pricing model, pricing non-stock options and futures options, and pricing bond and interest rate options.

Johnson’s book is not for the average retail investor. But, with its mix of theory and practice, it is exceedingly useful both as a textbook and as a reference book.

Sunday, October 29, 2017

Hirsch, Stock Trader’s Almanac 2018

The Stock Trader’s Almanac is now in its fifty-first edition. It remains a must for traders who use seasonal factors to time the market.

The spiral bound, navy-covered almanac opens flat for easy access to its data or for jotting down notes. The format remains essentially the same as in previous years, with a calendar section, a directory of trading patterns and databank, and a strategy planning and record keeping section. The calendar section has on facing pages historical data on market performance (verso) and a week’s worth of calendar entries (recto). January’s verso pages, for example, give the month’s vital statistics, January’s first five days as an early warning system, the January barometer (which has had only nine significant errors in 67 years, including 2009, 2010, 2014, and 2016, so it may be losing some of its predictive power), and the January barometer in graphic form since 1950. Each trading day’s entry on the recto pages includes the probability, based on a 21-year lookback period, that the Dow, S&P, and Nasdaq will rise. Particularly favorable days (based on the performance of the S&P) are flagged with a bull icon; particularly unfavorable trading days get a bear icon. A witch icon appears on monthly option expiration days. At the bottom of each entry is an apt quotation. There’s about a five-square-inch space in which to write.

The Stock Trader’s Almanac pays particular attention to the presidential cycle, and the prospect for 2018 is mixed. “Midterm election years have been the second worst year of the four-year cycle, while eighth years of decades have been the second best, so 2018 promises to be laced with cross-currents.” On the negative side, “in the last 14 midterm election years, bear markets began or were in progress nine times.” But if the market sinks in 2018, it might provide an excellent buying opportunity because, ”from the midterm low to the pre-election year high, the Dow has gained nearly 50% on average since 1914.”

What other seasonals are powerful? The best six months strategy has a good track record. “Investing in the Dow Jones Industrial Average between November 1st and April 30th each year and then switching into fixed income for the other six months has produced reliable returns with reduced risk since 1950.”

The first trading day of the month is uncommonly strong (save in 2014). Beginning in 1997, the Dow gained a total of 6352 points in 238 first days, for an average daily point gain of 26.69. The other 4733 days gained 7232 points, only 1.53 on average.

This almanac is chock full of data that will delight those traders who believe that past is prologue. Even those who are skeptical have to pay attention to data that seasonal traders rely on and that therefore tend to move markets.

Wednesday, October 25, 2017

Bayoumi, Unfinished Business

Do we need yet another book on the financial crisis? For those who take banking regulation in the European Union and the United States seriously, the answer is yes. In Unfinished Business (Yale University Press, 2017) Tamim Bayoumi, a deputy director at the IMF, delves into, in the words of the subtitle, “the unexplored causes of the financial crisis and the lessons yet to be learned.” He shows that the Euro crisis and the U.S. housing crash were “parasitically intertwined.”

Policymakers were deluded by the efficient markets hypothesis into thinking that financial markets were largely self-regulating. And they were overconfident in the effectiveness of monetary policy. For instance, after the 1980s, when the U.S. experienced a noticeable decrease in the volatility of output (the “great moderation”), conventional wisdom attributed most of this moderation to better monetary policy. And after the technology bubble popped in 2001, the Federal Reserve “ascribed the limited impact on the US economy to its swift monetary response.” So why, if there was a major downturn in house prices, wouldn’t the Fed be able to do the same thing again?

Policymakers in the U.S. and Europe were not only overconfident in their ability to contain crises. They also adopted a stance of benign neglect, “the view that countries should look after their own internal affairs and that the benefits from cooperating with other countries are too small to be worth the trouble.” They were convinced that financial market spillovers between countries were small. “Across the North Atlantic, the main consequence of benign neglect was that policymakers missed the implications of increasing external financing of the US and Euro area periphery housing booms.”

Bayoumi extends his analysis by offering a history of the international monetary system in five crises: the collapse of the Bretton Woods fixed exchange rate system, the Latin American debt crisis, the European exchange rate mechanism crisis, the Asian crisis, and the North Atlantic crisis (which in many respects was “an amalgam of these earlier experiences”).

In the wake of the financial crisis regulations were imposed on banks in the U.S. and Europe. But “many deeper weaknesses remain.” There is, in the words of the author, “still an awful lot of unfinished business.”

Monday, October 23, 2017

Watkins, The Complete Guide to Successful Financial Markets Trading

For many years Simon Watkins was a senior Forex trader, eventually becoming director of Forex at the Bank of Montreal and head of Forex institutional sales for Credit Lyonnais. His extensive Forex experience informs his markets overview in The Complete Guide to Successful Financial Markets Trading (ADVFN Books, 2017).

Watkins takes the reader through foreign exchange, equities, commodities, and bond trading. He then turns to technical analysis, risk/reward management and hedging, risk-on/risk-off and other correlations, and key risks on the horizon. All this in about 265 pages, including many illustrative charts.

The book’s strength is its top-down and markets correlation analysis. By taking a macro perspective for the most part, it complements most books on trading. And it does this surprisingly well.

The author doesn’t offer an in-depth study of any of the many topics he addresses, but he points to vital connections among them. This is something that most traders and investors ignore, often to their detriment.

Wednesday, October 18, 2017

Crawford, How Not to Get Rich

Let me explain right away what this strangely titled book is about. Its full title and subtitle are How Not to Get Rich: The Financial Misadventures of Mark Twain (Houghton Mifflin Harcourt, 2017). Alan Pell Crawford follows Mark Twain, the consummate investing pechvogel, from one doomed scheme to the next. “Twain’s passion wasn’t to work in a print shop, pilot riverboats, write for newspapers, or even—as he would do in his twenties—prospect for gold and silver out West. Twain’s goal was to make money and then make even more money. Writing books was just a means to an end.”

Twain married well, far above his station, though primarily for love, it would seem. In his thirties, he had nothing to recommend him save a bestselling book he had written (The Innocents Abroad) that “some people found amusing.” But with his marriage he finally “had money to burn.” He lived in a mansion in Buffalo, a wedding present, and was lent $25,000 to buy a third share in the Buffalo Daily Express. With the death of his wife’s father, eight months after the marriage, Twain and his bride inherited $250,000—some $4.4 million today.

Twain and his wife stayed in Buffalo for only about a year before departing for Hartford. The house they built, described as a “brick-kiln gone crazy, the outside ginger-breaded with woodwork, as a baker sugar-ornaments the top and side of a fruit loaf,” was assessed at $1,420,000 in today’s dollars. The Twains entertained lavishly, spending more than $100,000 a year on food and drink.

Twain was productive during the Hartford years, both as a writer and as an inventor. (The penchant for invention seems to have been in the Twain blood; both his father and his brother tried their hand at inventing, unsuccessfully.) His invention was a self-pasting scrapbook, on which he may have made more than a million dollars.

And he started investing, first in the Hartford Accident Insurance Company, which at the end of 18 months “went to pieces.” He passed up the opportunity to invest in the National Bell Telephone Company, whose share price in June was $110 and by December had shot up to $995. But he put money into the New York Vaporizer Company, which was a dud. And he bought four-fifths of the patent for Kaolotype, a process for book illustration that turned out to be a fraud.

Twain poured a lot of money into a publishing company that failed. But by far his worst investment was in the Paige Compositor, a typesetting machine that was “a marvel of complexity” and that was finally abandoned.

As his assets dwindled away and his creditors hovered, Twain paced the floor at night. He said: “I am terribly tired of business, by nature and disposition unfit for it.”

Twain’s good fortune was to meet Henry Huttleston Rogers, “one of the most ruthless tycoons of his day.” “At his peak, Rogers would have been worth $40.9 billion in today’s money, outranking even his contemporary J.P. Morgan.” Rogers had Twain transfer all of his assets to his wife and then steered the publishing company into voluntary bankruptcy. The compositor company was dissolved.

Twain went on an international lecture tour to pay back some of his debts. Rogers handled his money, paying back debts and making savvy investments on Twain’s behalf. When Twain died in 1910, his estate was appraised at more than $11 million in today’s dollars.

Despite all of his business failures, Twain told a group of alumni from Eastern Business College in Poughkeepsie in 1901 that he had been “well served … through the years by his own mad and endless determination to make a great fortune.”

Sunday, October 8, 2017

The Crossley ID Guide: Waterfowl

Back in 2011 I reviewed The Crossley ID Guide: Eastern Birds. In that post I suggested some ways in which identifying a bird is similar to identifying a good trading opportunity. It’s not as much of a stretch as you might think.

Richard Crossley has now published his fourth flexibound guide, this one to waterfowl. Like his previous books, it features gorgeous, lifelike compositions that are “painted in pixels.” It shows North American ducks, geese, and swans in their natural seasonal settings (winter/spring and summer/fall) as well as in flight. The illustrations also include juveniles at various stages of development. There are some mystery birds to identify, with answers provided. The second half of the book is text written by Paul Baicich and Jessie Barry, giving a detailed account of each species. All in all, about 500 pages of absolutely wonderful material


If you are a birder or a hunter, this book definitely belongs on your bookshelf. It is available at Crossley’s site.

Wednesday, October 4, 2017

Burchard, High Performance Habits

Most self-help books fail because they offer easy paths to success. Brendon Burchard’s High Performance Habits: How Extraordinary People Became That Way (Hay House, 2017) describes what it takes to become a person who creates ever-increasing levels of both well-being and external success over the long term. And it takes a lot.

Many factors can affect your long-term success—luck and timing, for instance. But Burchard sets out six things that “are under your control and improve your performance more than anything else we’ve measured.” First, seek clarity on who you want to be, how you want to interact with others, what you want, and what will bring you the greatest meaning. Second, generate energy so that you can maintain focus, effort, and well-being. Third, raise the necessity for exceptional performance, tapping into the reasons you absolutely must perform well. Fourth, increase productivity in your primary field of interest, focusing on prolific quality output. Fifth, develop influence with those around you. And sixth, demonstrate courage.

Burchard’s HP6 go beyond the usual nostrums: work hard, be passionate, focus on your strengths, practice a lot, stick to it, and be grateful. You can be a grateful hard worker and still be on the bottom of the pile. Or you can be passionate and practice a lot—and burn out.

Some of Burchard’s suggestions seem hokey, but for the most part they ring true. I, of course, haven’t tried the vast majority of them. I just finished reading the book, after all. But what’s the worst that can happen? That you do nothing, just keep going the way you always have. Unless, of course, you’re already a consistently high performer.

Sunday, October 1, 2017

Carver, Smart Portfolios

Robert Carver, author of Systematic Trading, has turned his attention to the thorny problem of portfolio construction. In Smart Portfolios: A Practical Guide to Building and Maintaining Intelligent Investment Portfolios (Harriman House, 2017) he deals with such topics as how to blend assets with different levels of risk, the reasons that forecasting returns is so difficult, and how to calculate the true costs of your investments.

One problem that investors face is that not only is the future uncertain, the past is as well. This is a point that Carver drives home multiple times. He shows, for instance, that “the uncertainty of the past is largest for risk-adjusted returns. We can be 95% confident that the estimated relative Sharpe Ratio (SR) of the two assets was within a range of around 0.5 SR units. For US stocks and bonds this uncertainty range is -0.16 to 0.36. This is a huge degree of estimation error: our estimates of Sharpe Ratio are effectively worthless.” By contrast, “the uncertainty of standard deviation estimates is much lower than for the Sharpe Ratio,” and “in typical financial data estimates of bond and equity correlations are 95% likely to be within a range of around one-third (actual range -0.12 to 0.21).”

To manage the problem of past parameter uncertainty in portfolio construction, he assumes that risk-adjusted returns are identical for all assets, he uses risk weighting to account for differences in asset volatility, and he employs a technique he calls handcrafting to handle correlations sensibly.

In over 500 pages Carver takes the reader through both theoretical considerations and practical applications. He shows how to build a smart portfolio top-down, contingent on portfolio size, from an institutional investor to a person with $40,000. He introduces two forecasting models (momentum and yield) to aid in the construction of a portfolio. And he addresses the need for maintenance, such as smart rebalancing and portfolio repair.

Smart Portfolios is a sophisticated but not overly technical treatment of a topic that every investor has to come to grips with. As such, it is a recommended read.