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.

 

Learning

 

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.

 

Risk

 

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.

 

Investment

 

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.

 

Trading

 

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 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.