Monday, July 1, 2019


It was ten years ago that I launched this blog. Nearly 1400 posts (and I can’t fathom how many pages of reading) later, I am calling it a day. The problem is that new books on the financial markets are increasingly rare. Would-be authors have moved to other forms of communication such as podcasts, and publishers have slashed their lists.

As long as Google cooperates, this blog will remain an online resource for traders and investors. It will simply have no updates.

Sunday, June 23, 2019

Ghayur et al., Equity Smart Beta and Factor Investing for Practitioners

Equity Smart Beta and Factor Investing for Practitioners by Khalid Ghayur, Ronan G. Heaney, and Stephen C. Platt (Wiley, 2019) is, according to the publisher, the first full-length book on these topics, although scores of papers have been published on smart beta and equity factors. The named authors are all on the Goldman Sachs Alternative Investment Strategies team within its Asset Management’s Quantitative Investment Strategies platform. Several academics and practitioners contributed chapters to this more than 450-page volume, especially in the parts dealing with asset owner perspectives, consultant perspectives, and retail perspectives.

Retail investors are unlikely to profit from this detailed book since, if they commit a portion of their portfolios to smart beta, they will most likely do so through exchange-traded products. As of June 2017, they would have had a choice of 1,320 ETPS and could have paid fees close to those charged by passive funds.

This book is primarily addressed to institutional investors, fund managers, and wealth managers. It covers the field of smart beta investing with the thoroughness one would expect of a Goldman Sachs team, and it answers questions investors and managers (and their clients) might have—and I’m sure many others that never crossed their minds. For instance, it explains smart beta factor return premia, describes weighting schemes and factor specifications, decomposes the risk of smart beta strategies, looks at the performance characteristics both of individual smart beta factors and of factor diversification strategies, and analyzes how to combine smart beta with smart alpha as well as how to incorporate ESG with smart beta.

At the end of the book the authors respond briefly to skepticism about smart beta investing—e.g., that factors are data mined, that some factors are inconsistent with theory, that smart beta is just active management rebranded and repackaged, that factors can’t persist in efficient markets, and that factor persistence will be challenged by crowding.

Thursday, June 20, 2019

Colonna, Reboot

Wired Magazine called Jerry Colonna, the venture capitalist turned executive coach, “the CEO whisperer.” In Reboot: Leadership and the Art of Growing Up (Harper Business/HarperCollins, 2019) Colonna essentially whispers to himself and to the reader, illustrating and encouraging radical self-inquiry.

The book is nothing like the usual business fare. It is more self-therapy for business leaders who, Colonna contends, can truly lead only if they make peace with their own inner demons. It has such chapter titles as “Standing Still in Empty Time” and “Loving the Crow.”

Colonna bares his own soul in this book. He describes the extreme difficulties he experienced growing up with an alcoholic father and a mentally ill mother and how these difficulties became the baggage he carried with him wherever he went, including to a mental hospital to which he was committed when he was a teenager, and throughout his successful careers. But, he believes, by confronting our baggage and rebooting ourselves, we can become the leaders we were meant to be.

I think the best way to give a sense of this book is to quote its final paragraph in full:

“I will always be haunted by lemon drops, sawdust, and the power of words. I am grateful this is so. Out of such pain, such suffering, and the muck and mud of my ocean bottom, a tall, strong tree of a man has emerged. I overcame the wordlessness of my youth. I became a good man by learning to love words—first, those of others; then, later my own words. I became who I was born to be by learning to read and then, later, to write. I learned that a life well written is a life well led. I became a good leader and I’m still becoming a good man. That is my legacy: the wisdom of knowing that the act of becoming a good man is more important than arriving at that place. With that, I’ve begun mastering the art of growing up.”

I must admit that Reboot does not speak to me, but that may say more about me than about the book.

Tuesday, June 18, 2019

Lebron, The Laws of Trading

Augustin Lebron, formerly a trader and researcher at Jane Street Capital and now head of a consulting firm on decision-making, has written a refreshingly cerebral book, The Laws of Trading: A Trader’s Guide to Better Decision-making for Everyone (Wiley, 2019). Although the book’s pitch is that “mental tools, forged in the competitive fire of financial markets, help us make good decisions in all other areas of life,” the book is first and foremost about the principles underlying sophisticated, professional trading. A reader who knows nothing about the financial markets, the “everyone” of the subtitle, would be lost in the thicket of options models and hedge optimization. On the other hand, a trader who picks up this book will be drawn into a fascinating meta-analysis of the tools he does or should use and will probably have little interest in applying them to the world outside of trading. This is not a criticism of the book, just of its marketing.

The book is, in fact, terrific. In eleven chapters it covers motivation, adverse selection, risk, liquidity, edge, models, costs and capacity, possibility, alignment, technology, and adaptation.

Take the ever-vexing issue of edge. Lebron sets out the fundamental axiom of edge: “all trades that have edge are profitable because there is some fact about the world that you understand and can act on that the marginal participant in the market doesn’t understand or can’t act on.” The marginal trader is the only one who matters, and he is (if you’re the buyer) “the most aggressive seller who isn’t aggressive enough to hit a bid himself.” So, to do profitable trading, you don’t need to be the best, just better than the trader of the median share. Alas, that trader is both sophisticated and skilled. “In any mature market, the really bad traders have either left or trade very small, and good traders (ones with edge) are everywhere, because they’re the ones that survived.”

What kinds of models should traders build? Should they be “descriptive of a true underlying structure of the world (a generative model)” or is “describing some observed regularity (a phenomenological model)” good enough? Both kinds of models are scary. With generative models, it is all to easy to mistake the map for the territory. With phenomenological models, it’s very difficult to know when the perceived regularity will stop existing.

Lebron also addresses the role of the inductive hypothesis (that if one has seen some regularity in the past, it makes sense that it should continue in the future) in financial markets. Because markets are both stochastic and self-organized feedback systems, relying on the inductive hypothesis is problematic. Which leads to the rule: “Just because something has never happened doesn’t mean it can’t. Corollary: Enough people relying on something being true makes it false.”

The Laws of Trading is, to my mind, essential reading for traders who want not only to survive but to flourish. It certainly won’t guarantee success (or continued success), but it will prompt the trader to reflect on his biases and perhaps even his ignorance. And it will provide him with new ways to think about framing trades.

Wednesday, May 29, 2019

O’Sullivan, The Levelling

To understand the title of Michael O’Sullivan’s book, you must go back to 1647 England and the Putney Debates. A year after King Charles I lost the English Civil War to forces led by Oliver Cromwell, people met to debate the future constitution of England. The Levellers—ordinary people, including some women—were the largest group involved in those debates, crafting arguments for equality and constitutional democracy. “Their achievement was to set out a contract between the people and those who represented and governed them. Today there is little sense that such a contract is in place.”

O’Sullivan, who taught economics at Princeton University and is now the chief investment officer at Credit Suisse, recognizes four challenges facing us today: political discontent, economic growth, world financial risk and debt levels, and geopolitical change. In The Levelling: What’s Next After Globalization (PublicAffairs/Hachette, 2019) he analyzes these challenges and looks for a way forward, calling on the Levellers for inspiration.

Globalization, O’Sullivan believes, is giving way to “a more fractured, multipolar world,” dominated by three Orwellian regions: Oceania (the United States and possibly the United Kingdom), Eurasia (the European Union plus Turkey, eastern Europe, and Israel), and Eastasia (China-centric Asia). As a consequence, many of the institutions set up in the twentieth century, such as the World Bank, IMF, WTO, and NATO, may become defunct. This process of geopolitical change “will involve a decades-long process of … levelling out of power and wealth between countries.” And “it will provoke a swell of nationalism, regionalism, and friction and in turn a great swirling competition of ideas.” It will see the rise of new political parties as well as new rules for the way finance functions.

One indication that globalization is waning is trade. After rebounding from the relative lows of the global financial crisis to the level previously reached in 2008-2009, “from 2016 to today and in the context of an upturn in broad economic activity, the openness of the world economy (ratio of trade to GDP) has fallen sharply,” back down to its 2011 level. Moreover, trade liberalization has been declining since 2009, and protectionism is on the rise. The United States leads in trade-protectionist measures, followed by Russia and India.

The beneficiaries of globalization have largely been the lower to middle classes in emerging countries and the wealthier classes in the developed world. This disparity is reflected in a World Economic Forum survey finding that over 70% of respondents in the Philippines, Vietnam, India, and Thailand thought globalization was a force for good, as opposed to only 40% in the U.S. and France. Although inequality in the world’s larger economies has not risen significantly in recent years, “it has been persistently high. This persistence is perhaps the key link to sociopolitical tension in that continued inequality conditions people’s long-term expectations of the world around them. The political consequence is that people form a view that the system is against them and vote against the system.”

To my admittedly prejudiced mind, O’Sullivan is at his most interesting when discussing world economies and financial markets. He offers up a plethora of data to support his view that we are seeing the beginning of a paradigm shift in the world economy. And, unlike most authors, he proposes a possible road map so that our future doesn’t become “a grisly repeat of 1913, the last time globalization came to an end.”

The Levelling is a thoughtful, well-reasoned book that tackles seemingly intractable problems and offers concrete, if often politically difficult, solutions. It’s a must-read for macro investors and public policy makers. It’s also an important book for those who complain about, for instance, government, big banks, inequality, and the state of the world in general but have no meaningful framework in which to ground their complaints.

Tuesday, May 7, 2019

Clifton & Harter, It’s the Manager

From Gallup, based on its gargantuan global study of the future of work (37.2 million people surveyed), comes It’s the Manager by Jim Clifton, Gallup chairman and CEO, and Jim Harter, chief scientist, Workplace for Gallup. The subtitle says it all: “Gallup finds that the quality of managers and team leaders is the single biggest factor in your organization’s long-term success.” And so, in 52 chapters and five appendices, intended as a reference book, “not meant to be read cover to cover on a plane ride from Chicago to Los Angeles,” CEOs, CHROs, and managers can learn how to maximize human potential, which is now the primary purpose of all organizations.

Let me start with the first, nearly 100-page appendix, which describes the 34 CliftonStrengths themes. In the back of the book is a package with a unique access code the reader can use to take the CliftonStrengths assessment. The idea is to learn what your strengths are so you can lead with those strengths. Among the 34 strength themes are (without respect for parallel grammatical construction): achiever, activator, adaptability, analytical, arranger, belief, command, communication, competition, connectedness, consistency, and context. The list ends with woo.

The book covers a range of topics, from organizational culture to coaching to the future of work. Under the heading of the future of work the authors deal with such issues as diversity and inclusion, the gender gap, flextime, gig workers, and artificial intelligence.

It’s the Manager doesn’t break a lot of new ground. What it does is to provide a vast empirical underpinning for many of the management theories that have gained traction recently.

Tuesday, April 30, 2019

Pieri, How We Make Stuff Now

Jules Pieri, the cofounder and CEO of The Grommet, a product launch platform, has written an advice manual for Maker-entrepreneurs, How We Make Stuff Now: Turn Ideas into Products That Build Successful Businesses (McGraw-Hill, 2019). This book should be read by two sorts of people: those who want to become Maker-entrepreneurs and those who love gadgets. I most definitely do not fall into the first category, but I found the case studies in this book fascinating. It’s amazing how many “great idea” products exist. I have no idea whether most of the products profiled here actually work (I looked at Amazon reviews for a few of them and found a lot of dissatisfied customers), but they were intriguing nonetheless.

For those who have a product they’d like to bring to market, Pieri’s book seems incredibly useful. She covers everything from design to funding, manufacturing to packaging, logistics to inventory management. By the way, as far as retail distribution outlets go, Pieri warns Makers to “be very careful about Amazon.” Why? You may never see much volume (Amazon is a site for commodity shopping, serving up the products people are searching for—and, by definition, they are not searching for unknown products), you give it your data, you will expose yourself to counterfeiters and copycats (among whom might be Amazon itself, which uses its data to direct its private label business), you give Amazon control over your pricing, and you have to deal with Amazon chargebacks.

How We Make Stuff Now is both inspiring and daunting. I tip my hat to all those Makers who have gone from idea to successful business. It’s no mean feat.