Finance library

While watching a movie I decided to transcribe a bibliography of investing books from the "finance library" list in Qatar Finance [QFinance]: The Ultimate Resource (Bloomsbury, 2009). Every list is idiosyncratic, but you might find something that you meant to read earlier and never got around to.

Belsky & Gilovich. Why Smart People Make Big Money Mistakes and How to Correct Them (1999)

Bernstein, Peter L. Against the Gods: The Remarkable Story of Risk (1996)

Bodie, Kane, and Marcus. Investments (8^th ed. 2008, originally 1989)

Bookstaber, Richard. A Demon of Our Own Design (2007)

Burrough & Helyar. Barbarians at the Gate: The Fall of RJR Nabisco (1990)

Damodaran, Aswath. Damodaran on Valuation: Security Analysis for Investment and Corporate Finance (1994)

Das, Satyajit. Traders, Guns, and Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006)

de la Vega, Joseph. Confusión de Confusiones (1688)

Derman, Emanuel. My Life as a Quant (2004)

Dunbar, Nicholas. Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It (2000)

Fama & Miller. The Theory of Finance (1972)

Fisher, Philip A. Common Stocks and Uncommon Profits (1958)

Getty, J. Paul. How to Be Rich (1965)

Gladwell, Malcolm. Blink: The Power of Thinking without Thinking (2005)

Gladwell, Malcolm. The Tipping Point: How Little Things Can Make a Big Difference (2000)

Graham, Benjamin. The Intelligent Investor (1949)

Greenspan, Alan. The Age of Turbulence: Adventures in a New World (2007)

Hagstrom, Robert G. The Warren Buffett Way (1994)

Hull, John D. Options, Futures, and Other Derivatives (7^th ed. 2008, originally 1989)

Ineichen, Alexander M. Absolute Returns: The Risk and Opportunities of Hedge Fund Investing (2003)

Jorion, Philippe. Value at Risk (1997)

Kolb, Robert W. Futures, Options, and Swaps (1994)

Lefèvre, Edwin. Reminiscences of a Stock Operator (1923)

Levitt & Dubner. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (2005)

Lewis, Michael. Liar’s Poker: Rising through the Wreckage on Wall Street (1989)

Lo & MacKinlay. A Non-Random Walk down Wall Street (1999)

Lowenstein, Roger. When Genius Failed: The Rise and Fall of Long-Term Capital Management (2001)

Lynch, Peter. One Up on Wall Street: How to Use What Your Already Know to Make Money in the Market (1989)

Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds (1841)

Malkiel, Burton G. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (9th ed. 2007, originally 1973)

Mandelbrot & Hudson. The (Mis)behavior of Markets (2004)

Markowitz, Harry. Portfolio Selection: Efficient Diversification of Investments (1959)

Murphy, John J. Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications (1999)

Natenberg, Sheldon. Option Volatility and Pricing: Advanced Trading Strategies and Techniques (1994)

Partnoy, Frank. FIASCO: The Inside Story of a Wall Street Trader (1997)

Rolfe & Troob. Monkey Business: Swinging through the Wall Street Jungle (2000)

Schroeder, Alice. The Snowball: Warren Buffett and the Business of Life (2008)

Schwager, Jack D. Market Wizards: Interviews with Top Traders (1989)

Sharpe, William. Portfolio Theory and Capital Markets (1970)

Shiller, Robert J. Irrational Exuberance (2000)

Shleifer, Andrei. Inefficient Markets: An Introduction to Behavioral Finance (2000)

Siegel, Jeremy J. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies (4th ed. 2008, originally 1994)

Smith, Adam. The Money Game (1976)

Soros, George. The Alchemy of Finance: Reading the Mind of the Market (1987)

Sun Tzu. The Art of War (6th c BC)

Taleb, Nassim Nicholas. Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (2004)

Taleb, Nassim Nicholas. The Black Swan: The Impact of the Highly Improbable (2007)

Tapscott & Williams. Wikinomics: How Mass Collaboration Changes Everything (2006)

Thaler, Richard H., ed. Advances in Behavioral Finance (1993)

Fantasy spring break update

I’m having a blast on my fantasy spring break. I even managed to get a second emergency delivery of 100 gallons of heating oil, so I have another two weeks for Mother Nature to accommodate. By the way, for those of you who don’t deal with the harsh reality of fuel oil prices, my oil company’s current retail price is $4.199 a gallon. I don’t pay retail, but this figure gives some indication of the cruel bite of commodity inflation.

One of the books I have here for review is a highly unlikely candidate: The Crossley ID Guide, Eastern Birds. I read the blurb in the Princeton University Press catalogue and decided that traders might learn a lot from the way Crossley approaches bird identification. So while I continue my fantasy spring break, here’s a link to a short video about the book.

Fantasy spring break

In the bleak midwinter with “snow on snow, snow on snow,” and even worse ice on snow, I think it’s time to pause, reassess, perhaps reinvent. Or maybe just vegg. Whatever the case, I’m going to take a mini-break from blogging. My mini-breaks tend to be nano-breaks, two days rather than two weeks. But for however long it lasts, call it my fantasy spring break. Admittedly, it takes a lot of imagination to go from struggling with the cruel Connecticut weather to lying on a warm, sunny beach. And, yes, to looking a lot younger and sexier.

Here’s a shot of part of the snow on the flat area at the bottom of my driveway with the forlorn shed in the background; it took both a plow and a back hoe to amass this mountain.

Despite the effort and the mounting cost, the driveway remains impassable to all but the most intrepid four-wheel-drive vehicles. The man who plows the driveway had to tow the back hoe up the driveway, and it took an ample supply of sand for him to have enough traction to accomplish this task. There’s no way to photograph the full length of the driveway, but this is how it starts out. Trust me, it gets a lot worse.

While I figure out how to re-energize myself, explore the archives. I’ve written over 500 posts, so with any luck you’ll find something of value to you.

And fear not, I already have seven new books waiting to be read (one fished out of a snow bank this morning) and some more in transit.

Glenn Gould's Goldberg Variations

For your weekend listening pleasure, here's a link to WGBH's The Bach Hour, where the most recent episode features Glenn Gould's 1955 performance of the Goldberg Variations.

Kirkpatrick & Dahlquist, Technical Analysis, 2d ed.

Don’t yawn at the prospect of yet another book on technical analysis. This one is far superior to the usual fare. It is also, for those aspiring for credentials, the official companion to the Market Technicians Association CMT program.

Technical Analysis: The Complete Resource for Financial Market Technicians, 2d ed. by Charles D. Kirkpatrick II and Julie Dahlquist (FT Press, 2011) is a hefty 700-page book. Thankfully it is not a compendium of technical indicators. Instead, in 23 chapters it covers such topics as the principle of TA (trend), sentiment, market strength, chart pattern analysis, trend confirmation, system design and testing, and money and risk management. These topics may be time-worn, but the authors approach them with a welcome conceptual freshness and illustrate many of them with data not readily available elsewhere.

The result is a thorough but eminently readable book for those who are learning the art of technical analysis. For those steeped in TA, it provides an opportunity to step back and rethink some assumptions as well as to become acquainted with new metrics.

Today I’ll share an oscillator for market timers and a method that system traders can use to place protective stops.

Ned David Research is well known for its innovative data studies, and the authors include several in their text. Here’s one, using the ratio of the NYSE advance-decline line to its 32-week simple moving average to create an oscillator. “They found that from 1965 to 2010 when the ratio rises above 1.04, the per annum increase in stock prices as measured by the NYSE Composite Index was 19.3%, and when it declined below 0.97, the stock market declined 11.2% per annum.” (p. 139)

As those of you who have followed my blog know, I have written in the past about the difficulties with using protective stops. Kirkpatrick and Dahlquist, relying on John Sweeney’s notion of maximum adverse excursion (see his Campaign Trading [1996] and Maximum Adverse Excursion [1997] as well as my post about the former), explain one method of determining where a protective stop should be placed. Since this stop is designed “to prevent loss if something goes wrong with the system,” we can calculate the maximum heat the system has taken in the past when it was successful. Anything beyond that point can be considered system failure. Sweeney’s maximum adverse excursion, the amount “by which the value of the entered position in each trade goes against the initial value before it is closed at a profit,” is viewed as the tipping point between profit and loss. “It is similar to a drawdown except limited to winning trades. … If the system is trouble free, that price is the level beyond which a profitable trade should not go in the future. A price just beyond that level is where the protective stop should be placed.” (p. 574)

Technical Analysis is a first-rate book that every trader and investor—even those who believe that TA is voodoo—should read. It is a skillful, comprehensive overview of the field.

Koppel, The Intuitive Trader

Having read Kurzban’s Why everyone (else) is a hypocrite, I am convinced that the left brain/right brain split is a gross oversimplification of the brain’s functional organization. Nonetheless, sometimes simplifications work well enough. For today’s post I’m going to share some thoughts from Robert Koppel’s 1996 book The Intuitive Trader: Developing Your Inner Trading Wisdom. It’s an extended argument for and a series of illustrations of using the right hemisphere to expand trading prowess.

The bulk of the book is a series of interviews with traders and those who worked with traders, many of whom predate my active involvement in the markets. Among the cast of characters are Bill Williams, Richard McCall, Charles Faulkner, Edward Allan Toppel, Ellen Williams, Linda Leventhal, Howard Abell, Tom Belsanti, and Peter Mulmat.

Here are a few disconnected excerpts that I thought worth passing along.

“[T]he experience of successful trading is subjective, unself-conscious, and intuitive. This state of mind, it seems to me, has more in common with the spirit of jazz—improvisational, automatic, and responsive to the riff—than with a well-articulated and analyzed process of decision making.” (p. 6)

“Some traders are still of the opinion that we ‘make’ profits and ‘take’ losses. The simple answer is: we make both. Loss has to be assumed in trading as inevitable not accidental.” (p. 19)

On the importance of ritual: The author describes one of the most successful CME floor traders who “after completing his trading card, as he puts it in his pocket, … always says, ‘Yeah.’ … [H]e developed this ritual because he sensed the feeling of letting down after he would have a loser. And he had to figure out some way within himself to be able to go on to the next trade with the same level of energy, resolve, and motivation that he would get from one good trade to the next good trade.” (p. 63)

In response to the question “Have you ever figured out what percentage of your trades are profitable?” Peter Mulmat answered: “No, I haven’t. I just look in terms of monthly performance. That’s kind of the criteria I use to gauge my performance. I find to go any shorter period of time is just frustrating for me.” (p. 188)

Sosa, Knowing Full Well

I have thought long, hard, and mostly fruitlessly about whether and in what sense we can be said to go beyond belief and actually know something when we trade. (I’m sure all of you have read ad nauseum that you trade your beliefs, a statement that I have always found shallow at best.)

It turns out that I could have saved myself a great deal of frustration had I read Ernest Sosa’s earlier books on epistemology. But Knowing Full Well (Princeton University Press, 2011), based in part on lectures he gave at Soochow University in Taipei in 2008, provides an overview of his theories. So it’s a perfectly reasonable place to start.

I assume that Sosa doesn’t have a secret life hanging out on prop trading desks. And yet his epistemology seems almost curve-fitted to the trading environment. Today I’m not going to write my usual review but will instead look at some passages from the very beginning of the book to illustrate this point. In a future post (or posts) I’ll milk Sosa’s book for more trading/epistemology insights.

Consider first his central thesis that (1) belief is a kind of performance and that (2) there are levels of performance (what Sosa calls orders of performance normativity), “including a first order where execution competence is in play, and a second order where the performer must assess the risks in first-order performance. This imports a level of reflective knowledge….” (p. 1) The first order is aptness, the second order is meta-aptness. Importantly, either one (aptness or meta-aptness) “can be present without the other.” (p. 8)

An analogy to the performance of the hunter archer (hence Diana on the dust jacket) makes this thesis more comprehensible. Let me quote more extensively than usual.

“A hunter archer’s shot selection and risk taking may be excellent, for example, and in taking a certain shot he may manifest his competence at assessing risk, while the shot itself nevertheless fails, being unsuccessful (inaccurate) and hence inapt. The shot is hence meta-apt without being apt.

“Conversely, the hunter may take excessive risk in shooting at a certain target, given his perceived level of competence (he has been drinking) and the assessed potential for wind (it is stormy). When he shoots, he may still fall just below the level of competence-precluding inebriation, however, and the wind may happen to fall calm, so that his shot is (through that stroke of luck) quite apt. Here the shot is apt without being meta-apt.”

In summary, “A shot is apt iff the success it attains, its hitting the target, manifests the agent’s first-order competence, his skillful marksmanship.

“A shot is meta-apt iff it is well-selected: i.e., iff it takes appropriate risk, and its doing so manifests the agent’s competence for target and shot selection.

“Neither aptness nor meta-aptness is sufficient for the other. They vary independently.” (p. 8)

Feeding into this distinction is the problem of forbearing. When the archer chooses not to take a shot at a high-value target, his forbearing has an aim of its own, avoiding failure. It is thereby apt. But “what if it is a shot that the hunter very obviously should have taken? What if he makes a big mistake forbearing?” In this case, the hunter fails in his performance of forbearing. His “forbearance avoids ground-level failure, but is deplorable nonetheless.” (pp. 5-7)

All I can say is, wow! Epistemologists have every reason to praise this book, but traders with a philosophical bent can do cartwheels.