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.

Sunday, April 28, 2019

Griffiths, The Creative Thinking Handbook

The Creative Thinking Handbook: Your Step-by-Step Guide to Problem Solving in Business by Chris Griffiths with Melina Costi (Kogan Page, 2019) starts with the bold statement that knowledge is no longer power. So much for you, Francis Bacon (or perhaps Thomas Hobbes) and, much earlier, Imam Ali. Creativity is the new power. The author defines creativity as “the incubator and cultivator of new ideas, which are born from existing knowledge and combined to form a new neural pathway in the brain, leading to a personal original thought.”

Griffiths’ book is divided into three parts: common thinking errors, finding solutions, and “the end of the beginning.”

Common thinking errors are selective thinking, reactive thinking, and assumptive thinking. These are more or less self-explanatory.

The heart of the book is the second part, where the author introduces his Solution Finder. It is based on four simple steps: understanding (define the challenge), ideation (generate ideas), analysis (evaluate ideas), and direction (implement the solution).

Let’s look briefly at ways of generating ideas. (Griffiths focuses on group settings, but with some modifications these methods can be applied to individual idea generation as well.) First, we have the classic rules for brainstorming: go for quantity, welcome wild and unusual ideas, postpone judgment, and combine and build on ideas. Then there is the ideation toolkit, whose tools include the reverse brainstorm canvas, metaphoric thinking canvas, and combinational creativity canvas. With reverse brainstorming, you state the reverse of your problem or challenge, brainstorm ideas to solve the reversed problem, and flip your reversed solutions. In the metaphoric thinking model, you reframe the problem using a metaphor (e.g., “I want more customers” becomes “How to catch a fish”), solve the metaphor (e.g., use correct bait, watch fishing shows on TV), and then map each key idea that you generated to solve the metaphor back to the original problem. The last model, the combinational, starts with sensible ideas, moves on to non-sensible ideas, and then tries to mix and match the sensible and the non-sensible to produce “ideas that are new, functional and unexpected.”

Of course, creative problem-solving endeavors are useless or worse if there is no follow-through. “Persistence is the fuel needed to build upon your best ideas and navigate the highs and lows that accompany implementation. Welcome to the unglamorous side of the creative process!”

Thursday, April 25, 2019

Murphy, Way of the Trader

It’s been a while since a mainstream publisher released a book on trading, especially trading with a human face. Ian Murphy’s Way of the Trader: A Complete Guide to the Art of Financial Trading (Harriman House, 2019) is a welcome addition to the literature. Not only does it offer sound advice, but it does so in a way that does credit to the Irish tradition of great storytelling.

As an active member of, a group of traders led by Alexander Elder and Kerry Lovvorn, Murphy reprises some of the themes in Elder’s works. One is the critical importance of keeping good records. For instance, in delineating some of the differences between traders and gamblers, Murphy writes: “Honest and accurate records are what separate trading from gambling. The floor of a bookmaker’s office is littered with crumpled papers, each one cast aside by an unlucky punter. Every piece of paper is a written record of a financial transaction. This carpet of losses is conveniently trampled underfoot, allowing the customers to ignore the reality of their situation. But the bookmaker doesn’t throw away his records. That in itself speaks volumes.”

The book’s chapter titles show its breadth of coverage: “Is Trading a Job or a Business?,” “A Trader and The Market,” “The Preservation of Capital,” “Keeping It Simple,” “Trend Following, Swing Trading and Day Trading,” “The Attributes Which Support a Successful Trader,” “The Path of a Successful Trader’s Career,” “The Psychological Tools of a Successful Trader,” “A Look at the Records a Trader Should Keep,” “A Comprehensive Pre-Trading Checklist,” “Selecting Which Stocks to Trade Using Filters,” “An Introduction to Technical Indicators and Orders,” and, finally, three trading strategies: “The Tidal Strategy,” “The Wilde Strategy,” and “The Help-Up Strategy.”

Among the book’s nuggets of wisdom, here are a random few.

“Some people believe 10,000 hours spent on a topic makes them an expert. That’s not the case in the market. Sooner or later, ‘trading experts’ become complacent and predictable, and that’s when the market snaps them back to reality. The renowned Japanese teacher Shunryu Suzuki-Roshi tells us: ‘In the beginner’s mind there are many possibilities. In the expert’s mind, there are few.’ Anything is possible in the market and every day is essentially the first day—therefore a true market expert always sees themselves as a beginner.” This advice is akin to Jeff Bezos’s passion that Amazon remain a “day one” company.

“Trying to trade someone else’s ideas is like trying to comb our hair while looking at their reflection. Ultimately, we are our own opponent when we trade, so mimicking the actions of others is pointless.”

“For many of us, our smartphone has become a digital pacifier which we instinctively reach for when an anxious thought arises. We don’t need to know every market event as it happens, just as we don’t need to constantly monitor our pulse to know we are still alive. If we’re continually checking the market it can feel like we’re truly on top of things, but we’re just subjecting ourselves to a deluge of distraction and frustration. Considering the temperament of the market, do we really want her whispering in our ear 24/7? Traders need to be smarter than their phone and put a limit on their market interaction.”

Murphy’s book has value both for the beginning trader and the more experienced trader with a day-one mindset. As a bonus, it’s fun to read.

Tuesday, April 23, 2019

Desai, How Finance Works

If you are a burgeoning equity analyst or a self-directed fundamental investor, you will be confronted with reams of corporate financial data, from EBITDA to net present value. Even if you know how to calculate financial formulas, do you know what they are telling you? Can you put them into an appropriate context? Can you use them to make informed decisions?

How Finance Works: The HBR Guide to Thinking Smart about the Numbers (Harvard Business Review Press, 2019) emerged from Mihir A. Desai’s efforts to teach finance to MBA students, law students, executives, and undergraduates at Harvard. It is itself a wonderfully smart introduction to finance, with the only two prerequisites to the book being curiosity and perseverance. It comes complete with tables, figures, and graphs. It also features boxed reflections and analyses from the author and real-world perspectives from two CFOs, two investors, and an equity research analyst. And, of course, there are lots of relevant case studies.

In six chapters Desai covers financial analysis, the finance perspective, the financial ecosystem, creating and measuring value, the art and science of valuation, and capital allocation. At the end of each chapter is a 10-question quiz, with answers at the back of the book.

Any active investor who wants to do more than throw darts at a list of stocks or look at squiggles on stock price charts should read Desai’s book. It’s a gem.

Tuesday, April 16, 2019

Karlgaard, Late Bloomers

In a world that fixates on the achievements of the young, we tend to push our kids too hard and to write off anyone who hasn’t hit his or her stride by some fixed age. To help counter this trend, Rich Karlgaard, the publisher of Forbes magazine who himself took quite a while to find his calling, has written Late Bloomers: The Power of Patience in a World Obsessed with Early Achievement (Currency/Penguin Random House).

The book is part critique, part inspiring stories. Karlgaard takes aim at the ubiquitous tests of intellectual potential, where “success today is represented by the high-IQ, high-SAT wunderkind test takers beloved of Bill Gates and other IQ farms like Goldman Sachs, Google, and Amazon.” Admittedly, high test scores often appear to be predictive of worldly success. After all, Bill Gates, Larry Page, Sergey Brin, Jeff Bezos, Mark Zuckerberg, and Steve Wozniak all scored 800 on the math SAT. But, Karlgaard argues, “this pressure for high test scores and early achievement has created its own perversities” and cites the case of Elizabeth Holmes of Theranos. Moreover, it tends to discard as less talented or lazy those young people who have abilities that can’t be measured by a standardized test.

Although Karlgaard focuses on late bloomers, much of his work has universal applicability. He describes the sometimes destructive power of social norms, the pitfalls of perseverance (sometimes quitting is the right decision), and the positive potential of self-doubt (turn it into information and motivation).

Karlgaard concludes that “blooming has no deadline. Our future story is written in pencil, not carved in stone. … Research supports the idea that as we lose some capabilities, we gain others that far outweigh what is lost. Therefore the question we should be asking ourselves is not, what can we accomplish in spite of our nature and life experiences? Instead it should be, what can we accomplish because of them?”

Wednesday, April 10, 2019

Stepek, The Sceptical Investor

John Stepek, executive editor of the UK’s best-selling financial magazine MoneyWeek, has written an astute book for retail investors. The Sceptical Investor: How Contrarians Bet Against the Market and Win—And You Can Too (Harriman House, 2019) suggests that the investor start with the admittedly incorrect premise that the financial markets are always wrong or, less baldly stated, that there are commonly pockets of inefficiency that can be exploited. It’s worth spotting and exploiting contrarian opportunities because, as George Soros wrote, “generally speaking, the more an investment thesis is at odds with the generally prevailing view, the greater the financial rewards one can reap if it turns out to be correct.”

Stepek does not recommend always doing the opposite of what the market is doing since the market often gets things right, which is why he prefers the term “skeptical” to “contrarian.” Skeptical investors consistently question assumptions, both the market’s and their own. They do the difficult work required to “identify when markets are overreacting to the point where the reward on offer for betting on the gap closing between market perception and reality more than justifies the risk of being wrong.”

Those who want to devote at least part of their portfolio to active, skeptical investing must not only resist the urge to run with the crowd but must also “avoid falling prey to the tripwires in [their] own mind[s].” Stepek summarizes some of the key findings of behavioral finance and suggests ways of keeping subversive emotions in check, such as thinking about the downside before committing to an investment, making as many decisions as possible in advance, and keeping a detailed investment journal.

The book has chapters on how to use the media (and not only the magazine cover indicator), the importance of intellectual humility, how to spot bubbles and what to do about them, and the dangerous temptation of making better forecasts. Re the last point, Stepek notes that you want to find situations where you don’t have to predict the future because the downside is pretty much already in the price.

The skeptical investor, Stepek warns, shouldn’t rush to catch falling knives. As he writes, “if you pride yourself on being a sceptical investor, then you should be extra sceptical of any company whose share price has just slid off the edge of a cliff.” He offers practical tips on how not to get suckered into buying stocks that will only continue to go down.

The book concludes with a way out for readers who decide that skeptical investing is more trouble than it’s worth: find a good contrarian fund manager.

Thursday, April 4, 2019

Bond, T. Rowe Price

Cornelius C. Bond spent many years at T. Rowe Price, first as a technology analyst and eventually as president of the T. Rowe Price Growth Stock Fund. For almost ten years he worked directly with T. Rowe Price himself. In writing T. Rowe Price: The Man, the Company, and the Investment Philosophy (Wiley, 2019) he brought to bear the experience of an insider.

I have no space here to summarize Price’s life or the trajectory of his firm. Instead, I will touch on the firm’s fragile beginnings and on Price’s investing philosophy.

In 1937 Price resigned from Mackubin, Legg & Co. (which later evolved into Legg Mason), where he had spent 12 years, because, he wrote, his goals were not in sync with those of the firm. The fact is that his investment management department was losing money. “Because of this (and perhaps Rowe’s personal ‘mannerisms’) he was not being given the financial and personnel support he had requested for his new department.” Moreover, his father-in-law had just died, leaving Price’s wife $130,000 ($2.22 million in 2018 dollars). “Here, suddenly, were the funds that could support the startup of his own company. His wife’s inheritance would allow him to go without a salary during the firm’s early years, as well as funding most of its early losses.” Indeed, the business was slow to take off. Revenues for 1938 were only $6,090, and by December 3, 1941, the firm had a mere $11.07 in the bank. It took a lot of fortitude to keep going.

In the early years of the firm, especially during the war, the market did not reward growth stocks. But Price remained convinced that growth stocks were the way to go. He defined a growth stock as “a share in a business enterprise which has demonstrated long-term growth of earnings, reaching a new high level per share at the peak of each succeeding business cycle, and which gives indications of reaching new high earnings at the peaks of future business cycles.”

Eventually Price’s growth strategy paid off handsomely. From its inauspicious beginning in 1934 to the end of 1972, when Price retired, assuming the reinvestment of all dividends, his model portfolio of growth stocks rose more than 2,600 percent in value. The Dow was up 600 percent over the same time frame.

Bond’s book helps flesh out our understanding of the investment management business in the twentieth century. It is a welcome addition to the literature.

Tuesday, April 2, 2019

Buckingham & Goodall, Nine Lies About Work

Okay, let’s cut to the chase. What are the nine lies about work that Marcus Buckingham and Ashley Goodall identify in their book, subtitled A Freethinking Leader’s Guide to the Real World (Harvard Business Review Press, 2019)? They are: (1) people care which company they work for, (2) the best plan wins, (3) the best companies cascade goals, (4) the best people are well-rounded, (5) people need feedback, (6) people can reliably rate other people, (7) people have potential, (8) work-life balance matters most, and (9) leadership is a thing.

On the surface, many of these lies seem like truths. In this brief post I can’t, of course, explain what’s wrong with these statements. That’s what the book is for. But let’s look at a single point and see how the authors expose some of the problems with it. I’ve opted to go with #5: people need feedback.

One of the most extreme examples of a company that seemingly lives and dies by feedback is Bridgewater Associates, the world’s largest hedge fund. At Bridgewater, “employees are expected to rate their peers after calls, meetings, and daily interactions, and all the resultant ratings are analyzed (by the team that created IBM’s Watson, no less), permanently stored, and then displayed on a card that each employee carries with him or her at all times. Bridgewater calls this your ‘baseball card,’ and its intent is to hold you accountable for knowing ‘who you really are,’ and to give everyone else a radically transparent view of what you truly bring to Bridgewater—one of the metrics it displays is your ‘believability score.’” But, despite the millions of data points collected, the authors maintain, “Bridgewater still has no reliable measure of each person’s performance.” Of course, the obvious retort is that Bridgewater has been inordinately successful and that, even though its early turnover rate is high (30% leave in the first 18 months), those who stay must be contributing to the hedge fund’s excellent returns. Still, Bridgewater’s radical transparency is not a model that many firms have rushed to emulate.

The truth, the authors argue, is that people need attention. Even negative feedback is 40 times more effective than ignoring people. “For those employees whose leaders’ attention was focused on fixing their shortcomings, the ratio of engaged to disengaged was two to one.” But “for those employees given mainly positive attention—that is, attention to what they did best, and what was working most powerfully for them—the ratio of engaged to disengaged rose to sixty to one.” Of course, team leaders can’t overlook things their employees do wrong and focus only on the positive, but research indicates a ratio of three to five moments of appreciative feedback to one piece of negative feedback is probably about the right balance.

Nine Lies About Work is a thought-provoking book, well written and well argued. It might just shake up how businesses operate in the future.

Thursday, March 28, 2019

Wooditch, Fail More

Bill Wooditch, the founder and CEO of The Wooditch Group, a risk-management and corporate insurance firm, takes on what has become a staple of commencement speeches in the last few years: failure. In Fail More: Embrace, Learn, and Adapt to Failure as a Way to Success (McGraw-Hill, 2019) Wooditch covers well-trodden ground, but he does so in a commonsensical, straightforward way.

For instance, he discusses one manifestation of fear: procrastination. “It’s the salesperson who, instead of making cold calls, creates files, rearranges the office space daily, takes an hour in the break room before, during, and after lunch, and then performs like a dilettante, not a professional. … Hours go by; momentum is lost. And as the hours sweep by, so goes the day, the month, and the year.”

Failure can be constructive, leaving clues and tools a person can use to forge success. “Failure is simply a small price you must pay to satisfy the burning desire of what you must have.”

Wooditch learned in spades about failure in his first job in sales at Liberty Mutual. He made a commitment to himself to make more cold calls than anyone else in the office—350 to 400 calls a day. And he was failing upward of 315 times a day, or 1,575 times per workweek. But he persisted, recognizing that “the only way to move through pain is to partner with it.” He had to habituate himself to rejection and failure if he was ever going to improve.

Although Wooditch draws on his own experiences both as a salesman and as a CEO, he also shares examples from the careers of people like Jack Ma, Gary Cohn, Mark Cuban, David Neeleman, and Steve Harvey. Fail More isn’t going to win kudos from the academic community, but it has enough nuggets of wisdom to be a worthwhile quick read.

Tuesday, March 26, 2019

Mills, Unstoppable Teams

Alden Mills, a former Navy SEAL platoon commander and CEO of the workout equipment company Perfect Fitness, has written a quintessentially human book. Unstoppable Teams: The Four Essential Actions of High-Performance Leadership (Harper Business, 2019) focuses on the soft skills necessary to build and nurture a winning team. At their core is caring. Hence his four-point framework CARE: connect, achieve, respect, empower.

What sets this book apart, however, is not so much the framework as the way in which Mills engages with the reader. He tells stories from his own experiences that resonate. There was the time, for instance, when he was a child, that a doctor diagnosed him with asthma, said that he had smaller than average lungs for his size, and suggested that he live a less active lifestyle and learn chess. Through tears, he exclaimed to his mother: “Mom! Chess? I’m not any good at checkers!” His mother wisely responded that “No one, and I mean no one defines what you can or can’t do. That’s up to you.” And he became a SEAL, despite his “disqualifying” asthma. He writes about the Naval Academy crew program, which accepted men, unlike Mills, who had never rowed before and nonetheless created a nationally competitive boat. He recounts some of his SEAL experiences and the extraordinary challenges his start-up faced. He also recaps other people’s successes, sometimes despite staggering odds, in a range of fields.

If you want to create a winning team, whatever the venue (even marriage), you’ll find this book to be a heartwarming, inspiring read. Perhaps because the author cares about his readers.

Tuesday, March 19, 2019

Bahcall, Loonshots

Safi Bahcall’s Loonshots: How to Nurture the Crazy Ideas That Win Wars, Cure Diseases, and Transform Industries (St. Martin’s Press, 2019) is a terrific book, one I couldn’t put down. And it’s not just for people making business decisions. It’s for anyone who wants to understand the sociology of science and technology. I found it a compelling—and entertaining—update to Thomas Kuhn’s 1962 classic, The Structure of Scientific Revolutions.

Bahcall trained as a physicist (Harvard and Stanford), decamped from science for three years to work as a consultant for McKinsey, and then co-founded the biotechnology company Synta Pharmaceuticals, where he served as CEO for 13 years.

Bahcall’s thesis is as simple as it is brilliant. He expresses it as a three-step argument: (1) “The most important breakthroughs come from loonshots, widely dismissed ideas whose champions are often written off as crazy,” (2) “Large groups of people are needed to translate those breakthroughs into technologies that win wars, products that save lives, or strategies that change industries,” (3) “Applying the science of phase transitions to the behavior of teams, companies, or any group with a mission provides practical rules for nurturing loonshots faster and better.”

He illustrates and explicates his thesis with a wide range of examples of both successes and failures. There is Juan Trippe of PanAm, Edwin Land of Polaroid, Vannevar Bush of the OSRD (the wartime loonshots nursery). He explores why the world speaks English instead of Chinese or Arabic. He debunks Newton’s status as the lone genius who discovered universal gravity, explained the motion of the plants, and invented calculus. Newton was instead the great synthesizer of the ideas of others. Bahcall’s hero is Kepler, who “broke far more violently from the past than Newton” and who was closest in spirit to Einstein.

At the heart of Bahcall’s argument is the notion of phase transitions, when “systems snap—liquids suddenly freeze, traffic suddenly jams, forests or terror networks suddenly erupt—when the tide turns in a microscopic battle.” A phase transition is the sudden change between two emergent behaviors.

As applied to the financial markets, Bahcall argues against Alan Greenspan’s view that efficient markets and invisible hands are fundamental laws that are rarely, if ever, violated. “That fallacy is one cause of policy disasters (or investment opportunities, if you are a trader).” Instead, both efficient markets and invisible hands are emergent properties, collective behaviors, “dynamics of the whole that don’t depend on the details of the parts.” And, to repeat, emergent properties can change suddenly.

I have offered here only a glimpse into the richness of Loonshots. Even though it’s early in the year, I can guarantee that it will be on my list of best books of 2019.

Wednesday, March 6, 2019

Webb, The Big Nine

On February 11, President Donald Trump launched the American AI Initiative, directing federal agencies to focus on the technology. The United States was slow to take even this admittedly vague action. At least 18 other countries had already announced national AI strategies. Canada was the first off the blocks, in March 2017, and, most notably, China announced its next generation AI plan in July 2017 and its three-year action plan in December of that year.

The U.S. government may not have a national strategy, but that doesn’t mean that American companies are not shaping the future of artificial intelligence. Amy Webb, a futurist and professor of strategic foresight at the NYU Stern School of Business, claims in The Big Nine: How the Tech Titans and Their Thinking Machines Could Warp Humanity (PublicAffairs/Hachette, 2019) that nine companies now control the future of AI: the G-MAFIA (Google, Microsoft, Amazon, Facebook, IBM, and Apple) in the U.S. and the BAT (Baidu, Alibaba, and Tencent) in China.

Even though Webb does not want to preclude the G-MAFIA from earning revenue and growing, she thinks it is critically important to realize that AI has become a public good, just like our breathable air. “[W]e cannot continue to think of it as a platform built by the Big Nine for digital commerce, communications, and cool apps.”

As AI evolves, becoming an ever more dominant part of our lives, we have a responsibility to steer it in the right direction. Webb outlines three possible scenarios of our future with AI—the optimistic, the pragmatic, and the catastrophic. Only if countries across the globe collaborate on AI standards and best practices and if governments, companies, universities, and individuals change their current practices, she argues, can we avert a potential catastrophe.

The Big Nine is a thought-provoking book, well worth the read.

Tuesday, March 5, 2019

Stevenson & Tuckwell, The Ultimate ETF Guidebook

Trust me, there’s a lot about ETFs that you don’t know. David Stevenson, a columnist at the Financial Times, and David Tuckwell, editor of ETF Stream, set out to remedy that situation. The Ultimate ETF Guidebook (Harriman House, 2019), even though in some of its chapters it tilts toward the European and London markets, should be of value to everyone using, or thinking about using, ETFs in their portfolios.

For those who want a look under the hood, the book explains the different ways in which ETFs can be constructed (physically replicating, synthetically replicating, ETN or ETC), reasons for tracking errors, and how ETF issuers can make money even if their fees are close to zero (lending stock to short sellers).

The book takes aim at the argument that passive investing is taking over and that passive funds will destroy efficient markets. It analyzes the continuum of ETF investing strategies, maintaining that passive and active is not a binary choice. It introduces the reader to factor-based investing, ESG investing, and leveraged ETFs.

Following a detailed laundry list of global asset classes, the book turns to building ETF portfolios as constituents of diversified portfolios. The authors suggest that the ordinary (in reality, the more sophisticated) investor might think about copying some of the strategies of macro hedge funds using ETFs.

The authors then devote a chapter to five model portfolios: adventurous growth, balanced, opportunistic, contrarian, and cautious. And finally, they list what they consider to be the top 75 ETFs in the London market and 26 wild card ETFs.

All in all, The Ultimate ETF Guidebook would be a worthy addition to any investor’s library.

Sunday, March 3, 2019

Updegrove, The Blockchain Revolution

Those who have been following the exploits of cybersecurity expert Frank Adversego will welcome Andrew Updegrove’s fifth novel in the series, The Blockchain Revolution: A Tale of Insanity and Anarchy. This time, Frank is hired by First Manhattan Bank to be its chief risk officer for blockchain technologies. The bank is moving all its financial processes onto a global financial blockchain system, which it refers to as “BankCoin,” and it can’t afford to be hacked. Naturally, the hacker is lying in wait.

And it isn’t only the Western banking system that is in potential jeopardy. The Russian government’s cryptocurrency, designed to circumvent Western sanctions, is a second target of the hacker. And, of course, on the radar of the U.S. government. And in the portfolio of a not so upright hedge fund manager.

The Blockchain Revolution is not only a good read as a thriller. It’s also a thoroughly enjoyable way to learn more about blockchain systems and cryptocurrency. And, the kicker, the e-book is currently only $0.99 on Amazon.

Tuesday, February 26, 2019

Collins, Turning the Flywheel

Turning the Flywheel: Why Some Companies Build Momentum … and Others Don’t (HarperBusiness, 2019) is a short (40-page) monograph intended to accompany Jim Collins’s iconic bestseller Good to Great, published back in 2001. I never read Good to Great, so I can attest that Turning the Flywheel stands proudly on its own.

Underlying the success of the flywheel as a business principle are two concepts known to every investor: momentum and compounding. As Collins writes, “Never underestimate the power of a great flywheel, especially when it builds compounding momentum over a very long time.”

What exactly is a business flywheel? In the case of Amazon, it goes something like this (imagine these steps laid out in a circle): lower prices on more offerings, increase customer visits, attract third-party sellers, expand the store and extend distribution, grow revenues per fixed costs. “Push the flywheel; accelerate momentum. Then repeat.” Or, with Vanguard, offer lower-cost mutual funds, deliver superior long-term returns for clients, build strong client loyalty, grow assets under management, generate economies of scale—and repeat. Notice, Collins writes, “how each component in the Vanguard flywheel isn’t merely a ‘next action step on a list’ but almost an inevitable consequence of the step that came before.”

The flywheel isn’t just for CEOs. Anyone can use this model to propel a venture, for example, in education or medicine—or, for that matter, in trading. The point is that once you identify the right components of the flywheel, and once you have all these components performing at a high level, you must then keep cranking. “The big winners are those who take a flywheel from ten turns to a billion turns rather than crank through ten turns, start over with a new flywheel, push it to ten turns, only to divert energy into yet another flywheel, then another and another. When you reach a hundred turns on a flywheel, go for a thousand turns, then ten thousand, then a million, then ten million, and keep going until (and unless) you make a conscious decision to abandon that flywheel. Exit definitively or renew obsessively, but never—ever—neglect your flywheel.”

In 2017, Forbes selected Collins as one of the 100 Greatest Living Business Minds. Turning the Flywheel justifies that accolade.

Sunday, February 17, 2019

Gannon, Tailored Wealth Management

Niall J. Gannon, of the Gannon Group at Morgan Stanley, is a financial advisor for high net worth and ultra high net worth individuals and families. And yet Tailored Wealth Management: Exploring the Cause and Effect of Financial Success (Palgrave Macmillan) is applicable to all investors, at any stage of their lives. It addresses three pillars of wealth: identifying and building it, managing it, and deploying it. As such, the book can be read as a wealth life plan.

Among the most original parts of the book is an updated version of a paper Gannon co-authored with Scott Seibert in 2006. It has been re-titled “Forecasting Long-Term Portfolio Returns: The Efficient Valuation Hypothesis.” The paper’s hypothesis is that “much of the long-term (20-year rolling periods) variability in stocks can be explained by the beginning-of-period earnings yield (the inverse of the starting P/E ratio).” For the 42 rolling 20-year periods beginning on January 1, 1957, with the inception of the S&P 500, the paper shows that the earnings yield accurately predicted the minimum expected return 95% of the time. In the two instances in which the hypothesis failed (1958-1977 and 1989-2008), the disparity was less than 1%. It is noteworthy that the highest observed earnings yield of 13.7%, in 1975, produced a 14.33% annualized return and the lowest earnings yield of 4.54%, in 1998, produced a 7.1% annualized return. Gannon concludes that “the use of earnings yield as a minimum expected return produces a more informed comparison of the future return potential of equities versus fixed income than the application of the theory of mean reversion or the Efficient Market Hypothesis.”

Gannon looks at the effect of taxes on equity returns and tries to compare stock and bond returns on a net basis. He contends that “the notion that stocks outperform fixed income over time … is false when examining net returns over specific periods.”

Tailored Wealth Management is a valuable book both for financial advisors and DIY investors. Most of it is easy-to-read text, with the occasional case study thrown in to illustrate the pillars of wealth. But it includes just enough quantitative research to whet the appetite of anyone who is trying to plan his or her financial well-being for the long run.

Sunday, January 13, 2019

Zuboff, The Age of Surveillance Capitalism

Shoshana Zuboff, professor emerita at Harvard Business School, has the rare ability to take a subject that has been beaten to death and offer a fresh, provocative take on it. The Age of Surveillance Capitalism: The Fight for a Human Future at the New Frontier of Power (Public Affairs/Hachette, 2019) is such a work.

First, a brief description of surveillance capitalism. It “unilaterally claims human experience as free raw material for translation into behavioral data. Although some of these data are applied to product or service improvement, the rest are declared as a proprietary behavioral surplus, fed into advanced manufacturing processes known as ‘machine intelligence,’ and fabricated into prediction products that anticipate what you will do now, soon, and later. Finally, these prediction products are traded in a new kind of marketplace for behavioral predictions that I call behavioral futures markets.”

Even more dangerously, automated machine processes not only know our behavior but also shape our behavior. “With this reorientation from knowledge to power, it is no longer enough to automate information flows about us; the goal now is to automate us.”

In this nearly 700-page book Zuboff develops her thesis using Google, Facebook, and Microsoft as “the petri dishes in which the DNA of surveillance capitalism is best examined.” Her discussion is wide-ranging, from Giovanni Gentile to B. F. Skinner to Alex Pentland (the MIT applied utopianist).

Zuboff is especially concerned about the damaging social and political ramifications of surveillance capitalism. It is, she writes, a “profoundly antidemocratic social force.” It is a market-driven coup from above, a “form of tyranny that feeds on people but is not of the people. In a surreal paradox, this coup is celebrated as ‘personalization,’ although it defiles, ignores, overrides, and displaces everything about you and me that is personal.”

The Age of Surveillance Capitalism will undoubtedly be a deeply divisive book, somewhat along the lines of Thomas Piketty’s Capital in the Twenty-First Century, which Zuboff cites. But it is an important read, one that makes us rethink our all too easy acquiescence to the siren call of surveillance capitalism.

Wednesday, January 2, 2019

Mackay, Extraordinary Popular Delusions and the Madness of Crowds

When Harriman House announced the publication of the “definitive edition” of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, I wondered what made it stand out from all the other editions of this classic work. I don’t have the definitive answer myself, but I can say that, unlike many other versions, this one is complete. It contains not just the first three chapters, the ones dealing most directly with markets, but the full 15 chapters. Thus you can learn not only about money mania, the South-Sea bubble, and tulipomania, but about, among other things, modern prophecies, the influence of politics and religion on the hair and beard, the witch mania, haunted houses, popular admiration of great thieves, and duels and ordeals.

When I first read the abbreviated version, I thought I had absorbed everything Mackay had written that was relevant to the phenomenon of manias today. But, as Russell Napier notes in his preface to this new edition, “Not only has the world shown no signs of being immune to the errors within this book almost 180 years on, there are a number of trends today that make it even more pressing. The theme that runs through Mackay’s catalogue of follies is a search by reasonable people for an answer to uncertainty—sometimes, if necessary, by disregarding reason.”

Some of the things Mackay wrote about no longer seem especially relevant, although Donald Trump’s preoccupation with the phrase “witch hunt” might belie this point. Still, even though the specific delusions may change, the phenomenon of the madness of crowds remains in full force. And with social media, it may be even greater than it was in Mackay’s time, which makes his classic a must-read book in 2019.