8th May 2012: Wall Street Reading List

Wall Street Bull


A selection of what I’ve been reading the past two years about Wall Street, and developing a personal capability in applied finance, investment, money management, and trading.




Emanuel Derman’s My Life As A Quant.

K. Anders Ericsson’s Development of Professional Expertise.

Malcolm Gladwell’s Outliers.

Michael Goodkin’s The Wrong Answer Faster.

Daniel Kahneman’s Thinking, Fast and Slow.

Victor Niederhoffer’s The Education of a Speculator.

George Soros’s The Alchemy of Finance and Soros on Soros.

Josh Waitzkin’s The Art of Learning.




Aaron Beck’s Red-Blooded Risk and The Poker Face of Wall Street.

Peter Bernstein’s Against The Gods.

Andy Busch’s World Event Trading.

Aswath Damodaran’s Strategic Risk Taking.

Satyajit Das’s Traders, Guns and Money and Extreme Money.

Francis X. Diebold, Neil A. Doherty and Richard J. Herring’s The Known, The Unknown, and the Unknowable in Financial Risk Management.

John C. Hull’s Options, Futures, and Other Derivatives (8th edition).

John C. Hull’s Risk Management and Financial Institutions (3rd edition).

Ari Kiev’s The Psychology of Risk.

Roger Lowenstein’s When Genius Failed and The End of Wall Street.

Guy P. Wyser-Pratte’s Risk Arbitrage.

William Poundstone’s Fortune’s Formula.

Andrew Ross Sorkin’s Too Big To Fail.

Nassim Nicholas Taleb’s Fooled By Randomness and The Black Swan.


Corporate Finance: Theory


Peter Bernstein’s Capital Markets and Capital Markets Evolving.

Donald Mackenzie’s An Engine, Not A Camera and Material Markets.

John McMillan’s Reinventing The Bazaar.

Perry Mehrling’s Fischer Black and the Revolutionary Idea of Finance.


Corporate Finance: Praxis


Tanya Beder and Cara Marshall’s Financial Engineering: Evolution of a Profession.

Simon Benninga’s Financial Modeling (3rd edition) and Principles of Finance With Excel (2nd edition).

Randall Billingsley’s Understanding Arbitrage.

Aswath Damodaran’s Applied Corporate Finance.

Martin S. Fridson and Fernando Alvarez’s Financial Statement Analysis: A Practitioner’s Guide.

Tim Koller, Richard Dobbs, and Bill Huyett’s Value: The Four Cornerstones of Finance.

Jeffrey Madrick’s Age of Greed.

Jeff Madura’s International Financial Management (11th edition).

McKinsey & Company, Tim Koller, Marc Goedhart and David Wessel’s Valuation (5th edition).

Jonathan Mun’s Real Options Analysis.

Justin Pettit’s Strategic Corporate Finance.

Simon Woolley’s Sources of Value.


Mergers and Acquisitions


Connie Bruck’s The Predators’ Ball.

Robert F. Bruner’s Deals From Hell.

Robert F. Brunner and Joseph R. Perella’s Applied Mergers and Acquisitions.

Bryan Burrough and John Helyar’s Barbarians At The Gate.

Joshua Rosenbaum, Joshua Pearl, and Joshua R. Perella’s Investment Banking.




Joseph Calandro Jr.’s Applied Value Investing.

William D. Cohan’s Money and Power.

Ken Fisher’s The Only Three Questions That Still Count.

Anti Ilmanen’s Expected Returns.

Alice Schroeder’s The Snowball.

Robert Shiller’s Irrational Exuberance (2nd edition).

Meir Statman’s What Investors Really Want.

Tadas Viskanta’s Abnormal Returns.


Money and Portfolio Management


John Abbink’s Alternative Assets and Strategic Allocation.

Harold Evensky, Stephen Horan, and Thomas Robinson’s The New Wealth Management.

Richard Grinold and Ronald Kahn’s Active Portfolio Management.

Andrew Kumiega and Benjamin Van Vliet’s Quality Money Management.

John Maginn, Donald Tuttle, Dennis McLeavey, and Jerald Pinto’s Managing Investment Portfolios.

David Smith and Hanny Shawky’s Institutional Money Management.

David Swensen’s Unconventional Success and Pioneering Portfolio Management.

Richard Tortoriello’s Quantitative Strategies for Achieving Alpha.

Ralph Vince’s The Handbook of Portfolio Mathematics.

Leonard Zacks’s The Handbook of Equity Market Anomalies.


Hedge Funds


Maneet Ahuja’s The Alpha Masters.

Steven Drobny’s The Invisible Hands.

David Einhorn’s Fooling Some People All of the Time.

Ari Kiev’s Hedge Fund Masters.

Sebastian Mallaby’s One Market Under God.

Richard C. Wilson’s The Hedge Fund Book.




Mike Bellafiore’s One Good Trade.

Peter L. Brandt’s Diary of a Professional Commodity Trader.

John F. Carter’s Mastering The Trade (2nd edition).

Jared Dillian’s Street Freak.

Robert Edwards, John Magee, and W.H.C. Bassetti’s Technical Analysis of Stock Trends.

Mark Fenton-O’Creevy, Nigel Nicholson, Emma Soane and Paul Willman’s Traders: Risks, Decisions, and Management in Financial Markets.

Ari Kiev’s Trading To Win.

Charles D. Kirkpatrick II and Julie Dahlquist’s Technical Analysis (2nd edition).

Edwin Lefevre’s Reminisces of a Stock Operator.

Michael Lewis’s Liar’s Poker and The Big Short.

John J. Murphy’s Technical Analysis and the Financial Markets.

Brett Penfold’s The Universal Principles of Successful Trading.

Jack D. Schwager’s series (Market Wizards, New Market Wizards, Stock Market Wizards, and the new Hedge Fund Wizards).

Brett N. Steenbarger’s Enhancing Trader Performance and The Daily Trading Coach.


Algorithmic, High-Frequency and Quantitative Trading


Thomas Bass’s The Predictors.

Paolo Brandimarte’s Numerical Methods in Finance and Economics.

Brian Brown’s Chasing The Same Signals.

Barry Johnson’s Algorithmic Trading and DMA.

David Leinweber’s Nerds on Wall Street.

Scott Patterson’s The Quants.

Rishi K. Narang’s Inside the Black Box.

Dessislava Pachamanova and Frank Fabozzi’s Simulation and Optimisation in Finance.

Edgar Perez’s The Speed Traders.


Photo: iHeylen/Flickr.

24th March 2012: European Commission Antitrust Investigation on EMI

Vivendi SA (Universal Music Group)

I’m working on an academic journal article about Terra Firma‘s unsuccessful private equity acquisition of EMI. Terra Firma defaulted to Citigroup, which agreed to sell EMI’s record labels in November 2011 to Universal Music Group (Vivendi SA) and EMI’s publishing to a Sony-led consortium. Now, the European Commission will investigate Universal’s acquisition for antitrust implications, given the planned market size of the combined group. Vivendi SA’s shares traded sideways in a choppy market on Friday, 23rd March 2012, possibly in relation to the antitrust announcement and the possibility of regulatory arbitrage on the Universal-EMI deal.

24th January 2011: Sir James Goldsmith’s Acapulco Strategy

Sources: Geoffrey Wansell’s Tycoon: The Life of James Goldsmith (Grafton, London, 1987) and episodes 3 and 4 of the Adam Curtis documentary series The Mayfair Set (BBC, London, 1999). With thanks to Tara J. Roberts for introducing me to Wansell’s Tycoon and to Goldsmith’s financial strategies.

Wansell’s biography depicts Goldsmith as a private and shy financier, who developed a careful approach to risk playing backgammon and cards (Wansell, 57), and briefly considered joining Melbourne’s fire brigade (Wansell, 60). Curtis focuses on Goldsmith’s time at John Aspinall’s Clermont Club (www.clermontclub.com), the Private Eye lawsuit, and Goldsmith’s status as a 1980s corporate raider financed by ‘junk bond’ market-maker Michael Milken and his firm Drexel Burnham Lambert (Wansell 304-305, 315, 359).

The major themes of Goldsmith’s life were entrepreneurship, meritocracy and individual initiative as a path to prosperity. He adopted a European, Parisian stance in England that differentiated him from other entrepreneurs (Wansell, 139, 371). Wansell suggests Goldsmith was like a clan leader: focussed on preserving his family name through primogeniture, conservative in outlook, and seeking to sustain his father Frank Goldsmith’s legacy, and the Goldschmidt dynasty. “To me marriage is having a child, not signing a piece of paper,” and “marriage is more than a piece of paper, it means supporting your family,” Goldsmith noted (Wansell 73, 262), in defence of a personal life that involved several marriages and mistresses (including Isabel Patino, Ginette Lery, Sally Crichton-Stuart, Lady Annabel Birley, and Laure Boulaye de la Merthe). “When you’re twenty, a year is a long time,” he remarked on his short, poignant marriage to Isabel Patino, who died of a “massive cerebral haemorrhage” (Wansell,76,  66, 77). “I can imagine circumstances when a man who was much in love with a beautiful mistress would rather see her dead than in the arms of someone else,” he also told Italian business negotiators (Wansell, 16, 92).

For Goldsmith, the experience of near bankruptcy in 1957 was a major learning experience which he survived due to a bank strike (Wansell 16-17, 89-94, 318). Goldmith developed expertise in the wholesale of generic pharmaceuticals as a way out of his early financial difficulties (Wansell, 88). He achieved early cashflow through sublicensing the rights for generics in different European countries and regions, and growing royalty streams (Wansell, 101-102). He negotiated to buy a chemist chain (Wansell, 106-110), confectionary firms (Wansell, 129), and consolidated his expertise in the grocery and food retail industries.

This expertise underpinned his later finance career in asset and change management. His aim after 1957 was to gain financial and family security and not remain a “capitalist without capital” (Wansell, 101). The two deals that Goldsmith felt were major career turning points were Bovril (Wansell, 148-153) and Diamond (Wansell, 286, 299-300), which were “double or quits” strategies (Wansell, 170).”The most important thing is the right place at the right time. You have to be able to see the swings in the market,” Goldmith observed (Wansell, 177), about his investment approach dubed the ‘Acapulco Strategy.

In many respects, Goldsmith’s ‘turnaround’ strategies foreshadowed the later emergence of private equity firms like Blackstone and Kohlberg Kravis Roberts, and the 1990s interest in lean management and business process reengineering. He benefited from Great Britain’s macroeconomic management in the late 1950s the Heath Government’s policies, and the growth of conglomerates during the 1960s ‘go go’ period.

Goldsmith targeted established companies which met the following ‘screening’ criteria:

(i) They were mature firms that had brands and yet via diversification had drifted from their core strategy (Wansell, 163);

(ii) They had cashflow problems and ineffective current management (Wansell, 44, 183, 203, 365, 367), that were often bureaucratic and institutional (Wansell, 155, 370);

(iii) He was able to take a majority shareholding (Wansell, 117)

(iv) They had unused and hidden assets that could be valued higher than their public valuation, and that were only briefly disclosed in annual reports;

(v) They had underperforming assets that could be sold to other parties, in order to liquidate debt; and

(vi) The market momentum of their share price and cost of capital meant that free cash flow and equity for further expansion could be financially engineered.

The media cultivated a public image of Goldsmith as a financier with energy, ambition, and deal momentum. This was in part due to his intensive interview preparation for The Money Programme in October 1977 where he defended his management style and investment track record (Wansell, 258-259). This program and others are available in the new family archive online at SirJamesGoldsmith.com. In reality, Goldsmith focussed on other aspects such as how the share price reflected the underlying asset valuation, and how asset divestment would affect the capital gains tax for shareholders. He maintained control of his companies through a network of family controlled and vertically integrated offshore holding companies in England’s Cavenham Foods (Wansell, 120-121) France, the  Hong Kong firm General Oriental, a  Liechtenstein foundation, and the Cayman Islands (Wansell, 145, 306-307, 360, 365). His economic outlook could be countercyclical and contrarian (Wansell, 302-303). He used local content and ethnie nationalism in European deals, to gain the loyalty of local management teams (Wansell, 169).

Goldsmith’s early experiences in Great Britain and France meant that he gained valuable expertise in foreseeing speculative bubbles and currency arbitrage opportunities. He sold off property assets and went when the 1973 recession loomed in Great Britain (Wansell, 179-179). After the Private Eye libel case in the 1980s, Goldsmith took firms private with shares at low price, due to favourable cross-rates between the English pound and the United States dollar. These experiences informed his 1990s views about the Maastricht Treaty, the European Union, and the international political economy.

His career coincided with the growth of investment banks, and commodities and currency markets. For Goldsmith, these banks, and the financial team he built around himself with Gilberte Beaux and others, were the funding source for the high share prices he used to takeover companies; they also provided due diligence expertise for projects. Goldmsith also used his subsidiaries and brokers to buy shares on the open market, and to approach the major shareholders. His goal was to gain control of the board and proxies, through shares which had voting rights.

Goldsmith’s ‘corporate raider’ phase for Drexel Burnham Lambert used similar tactics to Carl Icahn. He noted that good deal-makers had a “disequilibrium in the personality” (Wansell, 362) which propelled them forward. Deal-making also required the ‘strategic foresight’ ability to perceive changes in macroeconomics and the capital markets before others saw them (Wansell, 177). Elsewhere, he noted, “The secret is to create new ambitions all the time” (Wansell, 336). To signal a potential acquisition Goldsmith would use his subsidiaries to buy small amounts of shares. He used ‘greenmail’ on the St. Regis deal (Wansell, 318-322), standstill agreements, and strategic lawsuits with Crown Zellerbach when necessary to gain board representation (Wansell, 327). He would work around a ‘poison pill’ defence by focussing on the percentage of shares that Goldsmith required to prevent parties from countermoves. Goldsmith’s ‘contrarian’ strategies and their payoffs if correct echoes John Paulson’s ‘put’ option on the United States subprime market, as outlined in Gregory Zuckerberg’s memoir The Greatest Trade Ever Made (Crown Business, New York, 2009).

Goldsmith was also interested to influence events and societal ideas (Wansell, 234), such as through vigorous debate about freedom of the press and journalism standards. He had an early interest in ecology, but not of early ‘green’ environmental politics (Wansell, 197-198, 223).

Goldsmith also understood strategic culture. Der Spiegel v. Goldsmith dealt with claims of Soviet disinformation in media and anti-communism (Wansell, 341-347), during which Goldsmith interviewed Soviet defector networks for intelligence author Chapman Pincher (Wansell, 346). Goldsmith observed, “We seem incapable of understanding Moscow’s way of thinking” (Wansell, 344) in a view that echoed RAND’s Jack Snyder at the time. However, it was Goldsmith’s nuanced understanding of English, French and United States strategic cultures, and business and regulatory environment, which were pivotal to his long-term success as an entrepreneurial deal-maker.

Worth Reading: Stafford Beer-Brian Eno, M&A and R&D

Personal Research Program

The Stafford Beer-Brian Eno Connection: Alex Hough of Manchester Business School mentions how the cybernetics scientist Stafford Beer influenced musician and producer Brian Eno. Beer also influenced a generation of researchers and practitioners in modular organisational design, management, and systems thinking. Eno’s collaborator Robert Fripp was influenced by a precursor, John Godolphin Bennett‘s systematics.

START Bulletin Fall 2009: The US National Consortium for the Study of Terrorism and Responses to Terrorism (START) has just released its Fall 2009 bulletin
on its programs of research and major research reports. I’m always on
the lookout for ‘good practice’ examples of how to communicate the
research results to different audiences.

R&D Management
: Michel Bauwens tipped me off to a special issue on Henry Chesbrough‘s ‘open innovation’ and ‘open R&D': looks very interesting. Journal article idea: Under what conditions might the innovation tournament be a more efficient allocative mechanism for R&D resources, human capital and commercialisation than other institutional structures, such as university-industry consortia and joint ventures?

SmartyGrants: An intriguing new package developed by the Australian Institute of Grants Management for grant-makers and grant-writers to manage the end-to-end grant cycle. SmartyGrants uses a subscription-based ‘software as a service’ delivery model, akin to Salesforce.com.

Mergers & Acquisitions

M&A Market Themes: NYT‘s Steven M. Davidoff on the US M&A market and Warren Buffett’s acquisition of the railway Burlington Northern Santa Fe. Davidoff’s new book Gods at War: Shotgun Takeovers, Government by Deal, and the Private Equity Implosion (New York: John Wiley & Sons, 2009) surveys the recent M&A market and deal trends.

‘Sell’ for Research Renegades
: Edward Robinson’s Bloomberg Markets cover-story showcases a group of ‘sell-side’ researchers who have gone solo. Robinson notes the good security analysts have gone to hedge funds whilst others have founded independent research firms. This is a model I suggested the Smart Services CRC look at during its initial planning stages for its lessons on commercially relevant research and human capital management.

The Myer IPO: Fairfax’s Michael West blames Myer for ruining the Australian IPO market for others. Three observations: (i) I agree with West that Myer’s private equity owners were driven by a macroeconomic/monetary policy timing window to cash out after their cost cutting and change management; (ii) Brokerages and commission-based sales provided an ‘echo chamber’ to talk up the Myer IPO so that the underwriter’s market-making activities are supported in the aftermarket; and (iii) always factor in market volatility into daily commentary — an 8% shift is normal in the current market conditions due to buyer-seller resistance, post-IPO speculation and different views of Myer’s fair market value — and the likelihood that the underwriter and other investment banks will attempt to stabilise the stock’s support level.

Noosphere Memes

Vale Claude Levi-Strauss: The anthropologist’s structuralist approach is credited with changing how we perceived primitive societies and their cultural and religious practices. He is probably best known in popular culture for naming the Fine Young Cannibals‘ most successful album.

Worth Reading

Robert Fripp‘s soundscapes for Microsoft’s Vista and Worldwide Telescope software.

Stephen Kinsella‘s Economics for Business lectures.

Carl Jung’s Red Book and The New York Times coverage of the behind-the-scenes battle to get the memoirs published.

Joshua Gans take note: how inventors are using auction theory to protect their patents, via firms including Pluritas, Intellectual Ventures, Allied Security Trust and Rational Patent Exchange.

Christopher Hitchens and The New York Times obituaries of neoconservative ‘godfather’ Irving Kristol.

Foreign affairs maven Robert D. Kaplan on the Al Jazeera network.

Australian Treasury press release and consultation discussion paper on R&D tax incentives.

The merger battle between University of Melbourne and Melbourne Business School.

Duelling Web 2.0 Scenarios: Boom/Bust

Has Tim O’Reilly’s Web 2.0 meme become a high-tech bubble about to burst?

Origins of the Web 2.0 Boom

O’Reilly’s vision of a new Web platform originally fused two developments.

The first development: C, Smalltalk and object oriented programmers devised design patterns in the early 1990s to reuse software code and workaround solutions across projects.  A 1995 catalog catapulted its four authors to software engineering fame.  To capture the rapidly growing number of design patterns programmer Ward Cunningham created the first wiki: the Portland Patterns Repository.

The second development: a re-evaluation of dotcom era business models to encompass new technologies that enhanced the end-user experience including the site interface and information architecture.  Industry buzz around News Corporation’s acquisition of MySpace (18th July 2005), Yahoo!’s purchase of Flickr (21st March 2005) and del.ico.us (9th December 2005), and Google’s stock-for-stock deal for YouTube (9th October 2006) made O’Reilly’s vision the ‘default’ vision for Web pundits and investors.

The media’s buzz cycle soon went into warp speed as Facebook frenzy replaced MySpace mania.  In a move that exemplified the pivotal role of complementors O’Reilly & Associates morphed into the juggernaut O’Reilly Media.  Ajax and Ruby Rails soon replaced Java and C# as the languages for new programmers to learn.  For activists in community-based media, angel investors investing in scalable programming prototypes and international conglomerates seeking to control their industry white-spaces Web 2.0 provided an all-encompassing answer to venture capitalists on how they would change the world.

Two Scenarios: Web 2.0 Boom & Bust

For industry pundits Google’s decision in October 2008 not to acquire Digg may signal the Web 2.0 boom has become a bubble.  If true Google’s decision could be the mirror of News Corporation and Yahoo!’s acquisitions in 2005.  Slate‘s Chris Anderson points to several factors: no tech IPOs in the second quarter of 2008, the cyclical nature of the digital consumer market, the exit of Yahoo! as a potential buyer due to internal problems, market noise due to low barriers of entry for startups, and a smaller “window of opportunity in which startups can think of a new neat trick, generate buzz, and cash out.”  YouTube’s co-founder Jawed Karim adamently believes that Silicon Valley is in a bubble.

Twitter is the latest startup in the duelling scenarios of Web 2.0 boom versus bust. New York Times journalist Adam Lashinsky experiences a similar euphoria to Facebook and YouTube when he visits Twitter’s co-founder Jack Dorsey.  Sceptics counter that Facebook and YouTube have not ‘monetised’ their business models into profitable revenues.  Portfolio‘s Sam Gustin raises the ‘monetisation’ problem with Twitter co-founder Biz Stone who believes that service reliability is a priority over the “distraction” of revenue pressures.  In support of Stone’s position Anderson observes that cloud computing and open source software are lowering the operational costs and slowing the burn rates of startups.

Yet monetisation remains a primary concern for Sand Hill Road entrepreneurs and other venture capitalists.  They differ in their decision-making criteria to Web 2.0 pundits and high-tech futurists: for angel investors and first round VC funding the entrepreneurs will demand a solid management team, the execution ability to control an industry whitespace, and viable sources of future revenue growth.  This is the realm of financial ratios and mark-to-market valuation rather than normative beliefs and ideals which probably influenced the acquiring firm’s decisions and valuation models in 2005-06.

Furthermore, if a Web 2.0 bust scenario is in play, the ‘contrarian’ sceptics will look to Charles Mackay, Charles P. Kindleberger, Joseph Stiglitz and other chroniclers of past bubbles, contagion and manias for guidance.  With different frames and time horizons the Web 2.0 pundits, high-tech futurists and venture capitalists will continue to talk past each other, creating still more Twitter microblogging, blog posts and media coverage.

Several preliminary conclusions can be drawn from the Web 2.0 boom/bust debate.  In a powerful case of futures thinking O’Reilly’s original Web 2.0 definition envisioned the conceptual frontier which enabled the social network or user-generated site of your choice to come into being.  The successful Web 2.0 startups in Silicon Valley have a distinctive strategy comparable to their dotcom era counterparts in Los Angeles and New York’s Silicon Alley.  Web 2.0 advocates who justify their stance with MySpace, YouTube and del.icio.us are still vulnerable to hindsight and survivorship biases. There’s a middle ground here to integrate the deep conceptual insights
of high-tech futurists with the quantitative precision of valuation

It’s possible that the high-visibility Web 2.0 acquisitions in 2005-06 were due to a consolidation wave and strategic moves/counter-moves by their acquirers in a larger competitive game.  There are two precedents for this view.  Industry deregulation sparked a mergers and acquisitions boom in Europe’s telecommunications sector in the late 1990s comparable to the mid-1980s leveraged buyout wave in the United States.  Several factors including pension fund managers, day trading culture and the 1999 repeal of the US Glass-Steagall Act combined to accelerate the 1995-2000 dotcom bubble.  Thus, analysts who want to understand the boom/bust dynamics need to combine elements and factors from Web 2.0 pundits, high tech futurists and venture capitalists.

If the Web 2.0 boom has become a bubble then all is not lost.  Future entrepreneurs can take their cue from Newsweek journalist Daniel Gross and his book Pop! Why Bubbles Are Great for the Economy (Collins, New York, 2007): the wreckage from near-future busts may become the foundation of future bubbles.  Web 3.0 debates are already in play and will soon be eclipsed by Ray Kurzweil‘s Transhumanist agenda for Web 23.0.