Let’s expand our horizons

A host of publishers have banded together to lend digital galleys of forthcoming books to qualified reviewers. I have already taken advantage of this service to bring you reviews of the following titles: Who Stole the American Dream?, The Power of Habit, Makers, and Practice Perfect. Among the coming attractions are The Logician and the Engineer (How George Boole and Claude Shannon Created the Information Age), Mastery, and The Secret Financial Life of Food. I don’t review a book before its official publication date, so not all of the coming attractions are imminent.

This venture is a win-win for both publishers and readers. Since publishers don’t have to ship hard copies, they are more generous with their new releases. It gives them greater exposure for presumably much less money. And it means I can review books I think would (or should) be interesting to traders and investors even though few have financial keywords in their titles.

Naturally, it’s more work for me since I will also keep up my reviews of financial titles, but I like expanding my horizons and I trust you do as well. I promise no Harlequin romances.

Singer, Trade the Congressional Effect

Congress, Eric T. Singer argues, is bad for your portfolio’s health. And he’s not referring to just the current dysfunctional Congress. “[C]ongressional dysfunction is the norm and … is likely to be permanent.” (p. 58)

In an article he wrote for Barron’s in 1992 Singer introduced the notion of the Congressional effect—that equities earn less when Congress is in session than when it is not. Trade the Congressional Effect: How to Profit from Congress’s Impact on the Stock Market (Wiley, 2012) updates and elaborates on this notion. For starters, and most compellingly, “from 1965 through 2011, measuring each of the 11,832 trading days during that period, the price of the Standard & Poor’s (S&P) 500 Index rose at an annualized rate of less than 1 percent on days Congress was in session, but over 16 percent on days they were out of session.” (p. 13) Moreover, “the Congressional Effect is growing as government grows and investors become more wary about its impact on the market.” (p. 39)

Singer, who is on the right on the political spectrum, subscribes to Thomas Paine’s advice that “that government is best that governs least.” As a result, he sometimes ascribes to Congress more damaging power than it probably has. For instance, he argues that “the proximate cause of the Crash of 1987 was the inexplicably casual trial balloon of eliminating interest deductions for junk bonds if they were used for acquisitions.” (p. 38) Well, perhaps, and I certainly can’t take the other side of the argument, but on the surface the claim seems a bit exaggerated.

Congressmen are, in the words of one of their own, “issues entrepreneurs.” They look for issues they can use as leverage to gain campaign dollars and voter support. And at least until the passage of the Stop Trading on Congressional Knowledge Act (the STOCK Act) this past March, they were also remarkably good investors, consistently beating the market in a way that only people trading on inside information can. Moreover, “public servants enter Congress from all walks of life, but they almost all emerge rich, and the implication is that they all used their influence to feather their nests." (p. 55)

Congressmen become rich even as their constituents’ equity portfolios languish. So how can you dodge Congress’s bullets? One obvious way is to hold some S&P 500 analog on the days when Congress is out of session and be in cash otherwise. Singer manages the Congressional Effect Fund, which has slightly underperformed the S&P 500 since its inception in 2008 but with much less volatility.

Otherwise, investors can look to value funds, international markets, and gold to help preserve their wealth. Active investors can track proposed regulatory legislation since it “usually has unintended consequences that adversely affect that industry and the sectors of the economy that industry serves.” (p. 110)

Among the highlights of this book are data on the election cycle and lame duck sessions as well as an analysis of Congress’s approach to behavioral finance.

Trading the Congressional Effect is a timely, provocative book. It also illustrates how difficult it is to capitalize on a clearly defined trading edge.

Lemov, Practice Perfect

Although the authors of Practice Perfect: 42 Rules for Getting Better at Getting Better (Jossey-Bass/Wiley, 2012)-- Doug Lemov, Erica Woolway, and Katie Yezzi—are teachers and focus on how to coach teachers to do a better job, the book has lessons for everyone who wants to coach himself to improve his game.

By now I assume nearly everybody has heard about the 10,000 hour rule, detailed among other places in Malcolm Gladwell’s Outliers. That is, it takes 10,000 hours of practice to become an expert. But what kind of practice? To borrow (and recast) a 2008 Republican campaign slogan, “Drill, baby, drill!” Practice should focus on drills rather than on scrimmages. “A drill deliberately distorts the setting in which participants will ultimately perform in order to focus on a specific skill under maximum concentration and to refine that skill intentionally. Drills … increase density, the number of productive iterations of a skill per minute of practice. … A scrimmage, by contrast, is designed not to distort the game but to replicate its complexity and uncertainty.” (pp. 49-50) Scrimmages should be used to evaluate one’s readiness for performance: “success in scrimmage is the best indicator of true mastery—participants can perform a skill when the time and place of its application is unpredictable.” (p. 51)

Okay, we should drill. The trader could, for instance, practice the physical act of trade entry (and drill in a variety of conditions—entering via a limit order or a buy stop, reacting to a partial fill, canceling a trade) until he can do it quickly and virtually automatically, preferably without a fat finger. It makes no sense to spend an inordinate amount of time figuring out entry rules only to stumble when actually placing the trade. Even algo traders need to know how to override their systems manually.

It is important to practice getting simple things right before adding complexity; that is, we want to encode success. As the authors write, “failure builds character better than it builds skills.” (p. 251) And we should spend most of our time on the skills that matter most—the old 80-20 rule (spend 80% of your time practicing the 20% of skills that are most important).

The best performers continue to drill even after they have attained mastery: “the value of practice begins at mastery!” (p. 32) “Keep going so that what you develop is automaticity, fluidity, and even … creativity.” (p. 30)

Through practice people develop “’economical rote algorithms’ so that ‘in the heat of battle the right maneuvers will come automatically.’ Consider hitting a baseball. It takes about 0.4 seconds for a serious fastball to reach the plate. ‘Conscious awareness takes longer than that: about half a second,’ … so most batters are not consciously aware of the ball’s flight. … Success is based on habits the batter has built but cannot consciously manage in the moment when they are most needed.” (p. 34) Sounds a lot like Curtis Faith’s Trading from Your Gut, which I reviewed almost three years ago.

Since it is geared to teachers, Practice Perfect is not essential reading for traders, but it contains some key lessons—among them, stop scrimmaging so much and start drilling.

Book sale

Once again, I’m offering readers of this blog an opportunity to get books that I’ve reviewed at cut-rate prices.

Here’s the deal. I will sell the books on the first list for half the current official Amazon U.S. price plus the cost of domestic media mail—figure between $3 and $3.50 for a single title, less per book for multiple titles. (I’m willing to ship outside the U.S., but shipping charges can be prohibitive.) Books on the second list I’ll part with for a third of the Amazon price. If outside sellers on Amazon are offering new copies for less than that price, I’ll match them. Orders that total over $100, excluding shipping, will be eligible for an additional 10% discount.

As I’ve written many times before, the books are officially used because, yes, I read them. But I have one of the tiniest “book footprints” on the planet; my used books look better than most new books at the local bookstore. No dog ears, no coffee—or, in my case, tea—stains, no visible fingerprints.

In deference to the publishers who so kindly supply me with review copies, I am not offering anything I have reviewed in the last three months.

If you would like to buy any of these books, please email me at readingthemarkets@gmail.com. My preferred method of payment is PayPal. I’ll fill “orders” on a first come, first served basis and I’ll update the list as I receive payment.

So, here goes with

LIST ONE:

Anson et al., The Handbook of Traditional and Alternative Investment  Vehicles
Bernstein, The Power of Gold (paper)
Byers, Blind Spot (stamped “review copy not for resale” on bottom    edge)
Caliskan, Market Threads (stamped “review copy not for resale” on  bottom edge)
Doty, Bloomberg Visual Guide to Municipal Bonds
Esperti et al., Protect and Enhance Your Estate, 3rd ed. (paper)
Fogarty & Lamb, Investing in the Renewable Power Market
Frush, The Strategic ETF Investor
Klein, Dalko, and Wang, Regulating Competition in Stock Markets
Kolb, Financial Contagion
Malz, Financial Risk Management
Phillipson, Adam Smith
Rahemtulla, Where in the World Should I Invest?
Schneeweis et al., The New Science of Asset Allocation
Sklarew, Techniques of a Professional Commodity Chart Analyst
Standard and Poor’s 500 Guide, 2012 ed. (paper)
Stoken, Survival of the Fittest for Investors
Toma, The Risk of Trading
Wagner, Trading ETFs, 2d ed.
Weiss, The Big Win


LIST TWO:

Au, A Modern Approach to Graham & Dodd Investing
Ayache, The Blank Swan
Bhuyan, Reverse Mortgages and Linked Securities
Biggs, A Hedge Fund Tale of Reach and Grasp
Diacu, Mega Disasters (stamped “review copy not for resale” on top  edge)
Dobson & Reimer, Understanding Spreads (paper)
Fraser, Wall Street: America’s Dream Palace (paper)
Harstad, Live It Up! But Don’t Outlive Your Income (paper)
Isbitts, The Flexible Investing Playbook
Levinson & Horowitz, Guerrilla Marketing Goes Green (paper)
Sorkin, Too Big to Fail
Standard & Poor’s 500 Guide, 2011 ed. (paper)
Triana, The Number That Killed Us
Wasendorf, The Secret Keys to Smart Investing (paper)

Upcoming half-price book sale

Time once again for fall housecleaning so my bookshelves don’t collapse. Tomorrow I’m going to offer some of the books I’ve reviewed in the past three years for half the listed Amazon price and others at an even deeper discount. The post will go up at 9 a.m. EDT. First come, first served. And once you’ve taken what you want, why don’t you share the url with some of your trader/investor friends?

Anderson, Makers

Chris Anderson, editor-in-chief of Wired magazine, best-selling author of The Long Tail, and founder of 3D Robotics, is back with another book, Makers: The New Industrial Revolution (Crown Business, 2012). The basic premise of this book is that micro-manufacturing, where tinkerers use computer resources to make physical things once again, will be the next big movement driving Western economies.

Over the past two decades the Web lowered the barriers to entry for would-be entrepreneurs in the digital space; they are now “ankle-high.” But although the Web’s model of democratized innovation spurred entrepreneurship and economic growth and bits forever changed the world, we live “mostly in the world of atoms, also known as the Real World of Places and Stuff. … [T]he world of atoms is at least five times larger than the world of bits.” (pp. 8-9) Today, thanks to a new class of “rapid prototyping” technologies, from 3-D printers to laser cutters, we’re starting to see a democratization of innovation in atoms. Welcome to the Maker Movement.

The Maker Movement shares three transformative characteristics: “1. People using digital desktop tools to create designs for new products and prototype them (‘digital DIY’). 2. A cultural norm to share those designs and collaborate with others in online communities. 3. The use of common design file standards that allow anyone, if they desire, to send their designs to commercial manufacturing services to be produced in any number, just as easily as they can fabricate them on their desktop.” (p. 21)

Once the Maker Movement is firmly entrenched it’s but a short hop to the Third Industrial Revolution. “[T]he Third Industrial Revolution is best seen as the combination of digital manufacturing and personal manufacturing: the industrialization of the Maker Movement.” (p. 41)

Entrepreneurs will produce bespoke products that serve individual needs. These products will increasingly be produced “using digital manufacturing where there is no cost to complexity and no penalty for short production runs.” (p. 68) The Third Industrial Revolution will ratchet up Adam Smith’s notion of specialization as the key to an efficient market.

Anderson describes some of the technology currently available to budding entrepreneurs, fabrication shops, sources of funding, and marketplaces for selling products. He tries to inspire the reader: “what starts as a hobby can become a mini-empire.” For those who do in fact become inspired, he has an appendix listing some main tools in the 21st-century workshop. For the DIYer it’s all really cool stuff. Alas, I know my limitations. I’ll let someone else buy the Picoscope USB oscilloscope and the Saleae USB logic analyzer.

Kelly, The New Tycoons

With Mitt Romney’s presidential bid private equity has been drawn into the limelight. Even so, the public gets only glimpses, often skewed, of this behemoth industry and remains largely ignorant of what it is that private equity really does, whether it is as nefarious as it has often been portrayed, and whether it is a job creator or a job destroyer. Jason Kelly’s The New Tycoons: Inside the Trillion Dollar Private Equity Industry That Owns Everything (Bloomberg/Wiley, 2012) is a refreshingly balanced account.

Kelly interviewed scores of people for this book, including some of the biggest names in private equity. Granting Kelly access, of course, gave these titans the opportunity to shape the story. Naturally, they have—but in the process they have given private equity a human face, undoubtedly touched up a bit here and there with a few virtual botox injections.

Kelly explores the history and strategies of the best-known funds. In the process he tackles some of the issues that have hounded the industry such as excessive leverage, the tax deductibility of debt, financial engineering vs. operational expertise, the calculation of returns (where 66% of funds can justifiably claim to be in the top quartile on some basis or other), dividend recapitalization, and the lavish lifestyles of the super-rich fund managers. (By the way, although Stephen Schwarzman’s sixtieth birthday party was the most notorious example of “post-industrial late capitalism’s gaudy depravity,” as Schwarzman himself was described in Salon, it was “far from the only party of its type in the annals of private equity. TPG’s Bonderman had thrown himself a sixtieth birthday blowout five years earlier, in Las Vegas, with the Rolling Stones as the entertainment. In 2011, Apollo’s Leon Black threw a lavish sixtieth in the Hamptons featuring Elton John.” [p. 173])

Data on private equity firms can be difficult to come by, sometimes justifiably so. Take the question of job creation, for instance. Oliver Gottschalg, a professor at HEC in Paris, criticizes private equity for not providing enough data. This lack of data “points largely to the immaturity, and potentially the arrogance, of the industry and the individual firms. For years they took incoming fire around their activities without responding and developed a reputation as ‘strip and flip’ artists. Yet they never produced any evidence to the contrary, which looked to those on the outside like at best, pleading the Fifth Amendment.” Kelly continues, “The reality in several cases seemed to be that the data didn’t exist, at least in an easily accessible way. There also were questions around what constituted creating a job. Private-equity firms wrestled with whether they could or should count jobs where they were a minority investor, and whether jobs created after they sold their stake in the company should count. Echoing the political calculation used by the Obama administration, they also wondered aloud whether they should get credit for ‘saving’ jobs, that is, employment in cases where they bought a company that was likely to go out of business without their investment.” (p. 130) In recent years some private equity firms have been trying to gather employment information, but without a generally agreed upon benchmark their statistics will likely be viewed as so much fluff.

The New Tycoons is a gentle read even though it is packed with information. I’d wager to say that even private equity insiders will discover things here they didn’t know. For the rest of us with an interest in private equity but without the requisite keys to the kingdom, the book provides a carefully drawn portrait of an important part of our economy.