Investment Strategies Reading List

Event Arbitrage

 

Convertible Arbitrage: Insights and Techniques for Successful Hedging by Nick P. Calamos (Hoboken, NJ: John Wiley & Sons, 2003). Convertible bonds as an event arbitrage strategy.

 

The Mental Strategies of Top Traders: The Psychological Determinants of Trading Success by Ari Kiev (Hoboken, NJ: John Wiley & Sons, 2009). The hedge fund SAC’s fusion of a catalyst approach to event arbitrage with performance / trading psychology.

 

Merger Arbitrage: A Fundamental Approach to Event-Driven Investing by Lionel Melka and Amit Shabi (Hoboken, NJ: John Wiley & Sons, 2014). A contemporary primer on merger arbitrage techniques.

 

Merger Arbitrage: How to Profit from Event-Driven Arbitrage (2nd edition) by Thomas Kirchner (Hoboken, NJ: John Wiley & Sons, 2015). A synthesis of global macro and event arbitrage strategies.

 

Trading Catalysts: How Events Move Markets and Create Trading Opportunities by Robert I. Webb (Upper Saddle River, NJ: FT Press, 2006). Event arbitrage strategies used amidst the early part of the 2003-08 speculative bubble.

 

World Event Trading: How to Analyze and Profit from Today’s Headlines by Andy Busch (Hoboken, NJ: John Wiley & Sons, 2007). Presents a series of frameworks that Busch uses for event arbitrage in currencies and equities markets.

 

Momentum

 

Asset Rotation: The Demise of Modern Portfolio Management and the Birth of an Investment Renaissance by Matthew P. Erickson (Hoboken, NJ: John Wiley & Sons, 2014). How exchange traded funds can be used for a momentum strategy that uses a two-asset portfolio.

 

Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk by Gary Antonacci (New York: McGraw-Hill, 2014). A momentum strategy that combines relative strength and trend-following approaches.

 

Unholy Grails: A New Road to Wealth by Nick Radge (Sydney: Radge Publishing, 2012). Radge’s experience using momentum strategies in Australian financial markets.

 

Trend-Following

 

The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires by Michael W. Covel (New York: HarperBusiness, 2009). The definitive account of the TurtleTraders experiment in rules-based trend-following.

 

Following the Trend: Diversified Managed Futures Trading by Andreas Clenow (Hoboken, NJ: John Wiley & Sons, 2013). How trend-following strategies have been profitable in managed futures.

 

Investing With the Trend: A Rules-Based Approach to Money Management by Gregory L. Morris (Hoboken, NJ: John Wiley & Sons, 2013). A rules-based methodology for trend-following.

 

Trend Following: Learn to Make Millions in Up or Down Markets (rev. edition) by Michael W. Covel (Upper Saddle River, NJ: FT Press, 2009). A popular primer on trend-following strategies.

 

The Trend Following Bible: How Professional Traders Compound Wealth and Manage Risk by Andrew Abraham (Hoboken, NJ: John Wiley & Sons, 2012). How commodities trading advisers use trend-following strategies.

 

Trend Following with Managed Futures: The Search for Crisis Alpha by Alex Greyserman and Kathryn Kaminski (Hoboken, NJ: John Wiley & Sons, 2014). How trend-following traders adapted to the financial market volatility of the 2007-09 global financial crisis.

 

Value

 

Accounting for Value by Stephen Penman (New York: Columbia University Press, 2010). The link between value investment, accounting, and equity valuation.

 

Active Value Investing: Making Money in Range-bound Markets by Vitaliy N. Katsenelson (Hoboken, NJ: John Wiley & Sons, 2007). An adaptation of value investing strategies to the 2003-08 speculative bubble.

 

Applied Value Investing: The Practical Applications of Benjamin Graham and Warren Buffett’s Valuation Principles to Acquisitions, Catastrophe Pricing, and Business Execution by Joseph Calandro, Jr (New York: McGraw-Hill, 2009). Value investing applied during the peak of the 2003-08 speculative bubble and the start of the 2007-09 global financial crisis.

 

The Art of Company Valuation and Financial Statement Analysis: A Value Investor’s Guide with Real-Life Case Studies by Nicolas Schmidlin (Hoboken, NJ: John Wiley & Sons, 2014). Contemporary fundamental analysis for value investors.

 

The Art of Value Investing: How the World’s Best Investors Beat the Market by John Heins and Whitney Tilson (Hoboken, NJ: John Wiley & Sons, 2013). A collection of interviews with successful fund managers who are value investors.

 

Brandes on Value: The Independent Investor by Charles Brandes (New York: McGraw-Hill, 2014). Brandes’ value investment experiences at Brandes Investment Partners LP.

 

Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations by Tobias E. Carlisle (Hoboken, NJ: John Wiley & Sons, 2014). A quantitative analysis of how activist investors use value investment strategies in the market for corporate control.

 

The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment (New York: Palgrave Macmillan, 2014). Value investment as a framework for cultivating character and personal growth.

 

Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World by Ronald D. Orol (Hoboken, NJ: John Wiley & Sons, 2008). The experiences of value-oriented hedge fund managers during the 2003-08 speculative bubble.

 

Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market by Meb Faber (The Idea Farm, 2014). A synthesis of value investing and global macro approaches.

 

The Investment Checklist: The Art of In-Depth Research by Michael Shearn (Hoboken, NJ: John Wiley & Sons, 2011). How value investors undertake fundamental research.

 

The Manual of Ideas: The Proven Framework for Finding the Best Value Investments by John Mihaljevic (Hoboken, NJ: John Wiley & Sons, 2013). Presents the value investing framework of the Value Investors Club.

 

Modern Security Analysis: Understanding Wall Street Fundamentals by Martin J. Whitman and Fernando Diz (Hoboken, NJ: John Wiley & Sons, 2013). The link between fundamental security analysis and value investing.

 

The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks (New York: Columbia University Press, 2013). The value investment philosophy that Marks implements at Oaktree Capital Management.

 

The Nature of Value: How to Invest in an Adaptive Economy by Nick Gogerty (New York: Columbia University Press, 2014). Presents a value creation model used by the hedge fund Bridgewater.

 

The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success by William N. Thorndike (Boston, MA: Harvard Business School Press, 2012). Effective capital allocation as a key value investment strategy.

 

Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors by Wesley R. Gray and Tobias E. Carlisle (Hoboken, NJ: John Wiley & Sons, 2012). A synthesis of value investing, behavioural finance, and quantitative finance.

 

Security Analysis (6th edition) by Benjamin Graham and David Dodd (New York: McGraw-Hill, 2008). The influential primer on value investing.

 

Security Analysis and Business Valuation on Wall Street: A Comprehensive Guide to Today’s Valuation Methods (2nd edition) by Jeffrey C. Hooke (Hoboken, NJ: John Wiley & Sons, 2010). How Wall Street uses fundamental security analysis to value companies.

 

Security Valuation and Risk Analysis: Assessing Value in Investment Decision Making by Kenneth S. Hackel (New York: McGraw-Hill, 2011). The link between the investment process, risk management, and fundamental security valuation.

 

The Snowball: Warren Buffet and the Business of Life by Alice Schroeder (New York: Bantam Books, 2008). The authorised biography of value investor Warren Buffett.

 

Sources of Value: A Practical Guide to the Art and Science of Valuation by Simon Woolley (Cambridge: Cambridge University Press, 2009). BP’s valuation framework for analysing the economic value of companies.

 

Strategic Value Investing: Practical Techniques of Leading Value Investors by Stephen M. Horan, Robert R. Johnson, and Thomas R. Robinson (New York: McGraw-Hill, 2014). A contemporary primer on value investing and its link to corporate strategy.

 

Valuation: The Market Approach by Seth Bernstrom (Hoboken, NJ: John Wiley & Sons, 2014). Valuing firms through comparison with stock exchange and comparator company transactions.

 

Valuation: Measuring and Managing the Value of Companies (5th edition) by Tim Killer, Marc Goedhart, and David Wessels (Hoboken, NJ: John Wiley & Sons, 2010). The McKinsey valuation model for companies.

 

Value: The Four Cornerstones of Corporate Finance by Tim Koller, Richard Dobbs, and Bill Huyett (Hoboken, NJ: John Wiley & Sons, 2011). Growth, return on invested capital, and cashflow analysis in corporate finance as the foundations for valuation of companies.

 

Value Investing: From Graham to Buffett and Beyond by Bruce C.N. Greenwald, Judd Kahn, Paul D. Sonkin, and Michael van Biema (Hoboken, NJ: John Wiley & Sons, 2004). Greenwald’s value investing framework taught at the Columbia University Graduate School of Business.

 

The Value Investors: Lessons from the World’s Top Fund Managers by Ronald W. Chan (Hoboken, NJ: John Wiley & Sons, 2012). Profiles of leading fund managers who use value investing.

 

Value Maps: Valuation Tools That Unlock Business Wealth by Warren D. Miller (Hoboken, NJ: John Wiley & Sons, 2010). How tools from strategic management, industrial organisation, organisation theory, evolutionary economics, and Austrian economics can inform contemporary valuation of companies.

 

Valueable: How To Value The Best Stocks and Buy Them for Less Than They’re Worth (2nd edition) by Roger Montgomery (My 2 Cents Worth Publishing, 2010). The investment framework and experiences of Australian value investor Roger Montgomery.

 

Why Moats Matter: The Morningstar Approach to Stock Investing by Heather Brilliant and Elizabeth Collins (Hoboken, NJ: John Wiley & Sons, 2014). Morningstar’s ‘economic moats’ framework for value creation.

Thomas Pynchon’s Bleeding Edge

Thomas Pynchon‘s new September 11 novel Bleeding Edge (London: Jonathan Cape, 2013) is now out and has a subplot featuring the Montauk Project conspiracy theory. The Counterpunch and Atlantic Monthly reviews mention the Montauk allegations. Pynchon likely found out about the conspiracy from an interview that Alexandra ‘Chica’ Bruce and Richard Metzger did for the Disinfo Nation television show (Channel 4, United Kingdom) which was later included on the Disinformation DVD and Disinformation: The Interviews book. (Both were on-sale prominently in St. Marks and other New York City bookshops.) Richard has blogged at his site Dangerous Minds about how the interview came about. Montauk fits Pynchon’s worldview and the themes of earlier, very influential novels like Gravity’s Rainbow and The Crying of Lot 49.

 

For me, Bleeding Edge evokes the period between the 2000 dotcom crash and the September 11 terrorist attacks, when I first edited the Disinformation website. I wrote about both incidents; as well as experiencing others like Enron’s collapse and the 2000 United States election outcome. I visited New York City between 20th and 25th September 2001, in part to visit author Howard Bloom. Pynchon’s subplots involving the darknet DarkArcher and stockmarket speculation echo some PhD-related work I am doing on the strategic subcultures of event arbitrage hedge funds: several ‘shorted’ airline stocks as the September 11 terrorist attacks unfolded.

 

The plausible Montauk-Disinfo-Pynchon connection highlights how subcultural ideas and memes can diffuse into mainstream society. Author Robert Anton Wilson likened this to strange loops. Author Don Webb described it as a fictive arcanum.

5th July 2013: Egypt Event Arbitrage

I have a shelf of international security books I acquired in 2005-11 as I was developing possible PhD topics. When the Egyptian Army deposed President Morsi this week I thought of my secondhand copy of John Samuel Fitch’s The Military Coup d’etat As Political Process: Ecuador, 1948-1966 (Baltimore, MD: John Hopkins University Press, 1977). I thought about a Political Islam course I took with Shahram Akbarzadeh in 2006, and the military’s role in Egypt’s history. Then I looked at the financial markets for event arbitrage opportunities I had missed. Two weeks ago, the Market Vectors Egypt Index ETF (NYSEARCA: EGPT) had predicted a political change, and then rallied after news of the coup d’etat, in a trend-following pattern. The Dow Jones Egypt Total Stock Market Index (EGP) had risen, whilst the Egyptian pound $EGP had fallen against the $US dollar. Someone has read Andrew Busch’s World Event Trading: How to Analyze and Profit from Today’s Headlines (Hoboken, NJ: John Wiley & Sons, 2007) and ‘shorted’ Egypt’s currency cross-rates. Alternatively, this might all be a case of Nassim Nicholas Taleb’s narrative fallacy.

29th February 2012: StratCap

Stratfor Logo

 

Strategic foresight practitioner Stephen McGrail pointed me to a Yes Men press release on Stratfor/Wikileaks, where I found this gem:

 

Among the millions of other leaked Stratfor emails are some that reveal dubious financial practices, including an apparent insider trading scheme with Goldman Sachs Managing Director Shea Morenz, who joined Stratfor’s board of directors and invested “substantially” more than $4 million in the scheme, called StratCap. “What StratCap will do is use our Stratfor’s intelligence and analysis to trade in a range of geopolitical instruments,” wrote Stratfor CEO George Friedman in September 2011. StratCap was designed through a complex offshore share structure to appear legally independent, but Friedman assured Stratfor staff otherwise: “Do not think of StratCap as an outside organisation. It will be integral… It will be useful to you… We are already working on mock portfolios and trades.” (StratCap has been due to launch in 2012, though that could now change.) [emphasis added]

 

I wrote about Stratfor/Wikileaks here. The StratCap documents are here. They reveal plans by Stratfor chief executive officer George Friedman and colleagues to establish an event arbitrage and global macro fund that would trade on the basis of Stratfor’s geopolitical and strategic intelligence. Friedman and colleagues envisioned a $US25 million fund with a 10% equity investment from Stratfor: small for global macro but possible for a boutique event arbitrage or special event fund. The emails deal with the fund’s offshore structure; the service agreement; the role and compensation of Shea Morenz; and Stratfor’s role to provide StratCap with actionable intelligence.

 

“From where I sit, this deal is dead,” Friedman wrote on 23rd July 2011. The deal show-stoppers included Friedman’s discontent with attorney Bruce Herzog‘s handling of the service agreement and anger over a $US200,000 fee (“for Bruce’s clumsy attempts to undermine the process”); an immediate tax liability that impacted on the initial investment capital; potentially adverse effects on Stratfor’s publishing business and working capital; and the potential for Shea and StratCap to bankrupt Stratfor through demanding potentially unlimited strategic intelligence. These show-stoppers made the deal non-viable: it exposed Stratfor to credit and transaction risks.

 

Friedman explained in his 23rd July 2011 email to Stratfor colleagues:

 

I can imagine easily a scenario in which StratCap’s demands outstrips Stratfor’s means to the point that StratCap would hold Stratfor in default and even push it into bankruptcy with StratCap the major creditor. Nothing in the course of the negotiations gives me the slightest hope that Bruce would not do this in a heart beat and that Shea wouldn’t let him. I regard the proposed service agreement as a threat to the survival of Stratfor as a company under Don and my control. [emphasis added]

 

Friedman notes: “I have no intention of being the Chairman of a failed investment fund . . . I will not be the public image of StratCap, ridiculed for the failure of an enterprise that was built to fail.” (A reference to Jim Collins and Jerry Porras’s influential management book Built to Last.)

 

StratCap may have run into other problems if the fund had launched. In 2002, Goldman Sachs paid a $US110 million fine to separate its sell-side research from Goldman’s trading activities. So did dotcom era analyst Henry Blodget. Morgan Stanley paid  $US125 million in fines though analyst Mary Meeker escaped prosecution. It’s possible that Friedman and Stratfor may have faced similar fines or regulatory threats if they had proceeded with the StratCap deal.

 

Want to start your own event arbitrage fund? You might start with Robert Webb’s Trading Catalysts (London: FT Books, 2006) and Andy Busch‘s World Event Trading (Hoboken, NJ: John Wiley & Sons, 2007) on event arbitrage and special event strategies. On hedge funds, read Sebastian Mallaby‘s excellent history More Money Than God (London: Penguin, 2011), and for the best academic research, Andrew Lo‘s Hedge Funds: An Analytic Perspective (Princeton: Princeton University Press, 2010).

We Are All Traders Now?

Mark Pesce pointed me to Bernard Lunn’s article which contends netizens now live in a real-time Web. Lunn suggests that journalists and traders are two models for information filtering in this environment, and that potential applications include real-time markets for digital goods, supply chain management and location-based service delivery.

Lunn’s analogy to journalists and traders has interested me for over a decade. In the mid-1990s I read the Australian theorist McKenzie Wark muse about CNN and how coverage of real-time events can reflexively affect the journalists who cover them. As the one-time editor for an Internet news site I wrote an undergraduate essay to reflect on its editorial process for decisions. I then looked at the case studies on analytic misperception during crisis diplomacy, intelligence, and policymaker decisions under uncertainty. For the past year, I’ve read and re-read work in behavioural finance, information markets and the sociology of traders: how the financial media outlets create noise which serious traders do not pay attention to (here and here), what traders actually do (here, here, and perhaps here on the novice-to-journeyman transition), and the information strategies of hedge fund mavens such as George Soros, Victor Niederhoffer, David Einhorn, Paul Tudor Jones II and Barton Biggs. This body of research is not so much about financial trading systems, as it is about the individual routines and strategies which journalists and traders have developed to cope with a real-time world. (Of course, technology can trump judgment, such as Wall Street’s current debate about high-frequency trade systems which leaves many traders’ expertise and strategies redundant.)

Lunn raises an interesting analogy: How are journalists and financial traders the potential models for living in a real-time world? He raises some useful knowledge gaps: “. . . we also need to master the ability to deal with a lot of real-time
information in a mode of relaxed concentration. In other words, we need
to study how great traders work.” The sources cited above indicate how some ‘great traders work’, at least in terms of what they explicitly espouse as their routines. To this body of work, we can add research on human factors and decision environments such as critical infrastructure, disaster and emergency management, and high-stress jobs such as air traffic control.

Making the wrong decisions in a crisis or real-time environment can cost lives.

It would be helpful if Lunn and others who use this analogy are informed about what good journalists and financial traders actually do. As it stands Lunn mixes his analogy with inferences and marketing copy that really do not convey the expertise he is trying to model. For instance, the traders above do not generally rely on Bloomberg or Reuters, which as information sources are more relevant to event-based arbitrage or technical analysts. (They might subscribe to Barron’s or the Wall Street Journal, as although the information in these outlets is public knowledge, there is still an attention-decision premia compared to other outlets.) Some traders don’t ‘turn off’ when they leave the trading room (now actually an electronic communication network), which leaves their spouses and families to question why anyone would want to live in a 24-7 real-time world. Investigative journalists do not generally write their scoops on Twitter. ‘Traditional’ journalists invest significant human capital in sources and confidential relationships which also do not show up on Facebook or Twitter. These are ‘tacit’ knowledge and routines which a Web 2.0 platform or another technology solution will not be the silver bullet for, anytime soon.

You might feel that I’m missing Lunn’s point, and that’s fine. In a way, I’m using his article to raise some more general concerns about sell-side analysts who have a  ‘long’ position on Web 2.0. But if you want to truly understand and model expertise such as that of journalists and financial traders, then a few strategies may prove helpful. Step out of the headspace of advocacy and predetermined solutions — particularly if your analogy relies on a knowledge domain or field of expertise which is not your own. Be more like an anthropologist than a Web 2.0 evangelist or consultant: Understand (verstehen) and have empathy for the people and their expertise on its own terms, not what you may want to portray it as. Otherwise, you may miss the routines and practices which you are trying to model. And, rather than commentary informed by experiential insight, you may end up promoting some myths and hype cycles of your own.