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Picks & Pans

The Organized Mind: Thinking Straight in the Age of Information Overload by Daniel J. Levitin (New York: Dutton / Penguin Group, 2014) (TS-1). Levitin is the James McGill Professor of Psychology and Behavioral Neuroscience at McGill University and is dean of the College of Arts and Humanities at the Minerva School at KGI. The Organized Mind synthesises the latest research on attention, memory and neuroscience to offer extensive tips on how to organise your life. An appendix discusses how to use Bayesian probability models for problem-solving. Levitin’s book is a guide to cultivating Dianoia in contemporary life.

 

Young Money: Inside the Hidden World of Wall Street’s Post-Crash Recruits by Kevin Roose (New York: Grand Central Publishing, 2014) (TS-3). Roose spent three years shadowing eight new recruits to United States investment banks – like Goldman Sachs and Bank of America Merrill Lynch – during the aftermath of the 2007-09 global financial crisis. Young Money reveals the rite of passage strategies that Wall Street firms use on their new hires – and the negative life impacts that can occur in winner-takes-all competitive dynamics. Some of Roose’s interviewees manage to reintegrate with their employer investment banks – and some do not. The selection pressures Roose depicts and identifies also function in Silicon Valley entrepreneurship start-ups. Roose’s narrative captures some experiential life challenges that can occur in other life contexts.

 

Vivid Awareness: The Mind Instructions of Khenpo Gangshar by Khenchen Thrangu (Boston, MA: Shambhala, 2011). (TS-3). Khenpo Gangshar was a meditation Teacher who influenced Chogyam Trungpa and others who brought Tibetan Buddhism to the West. Vivid Awareness details Gangshar’s oral instructions in 1957 to the author on how to train the mind and emotions – using analytic meditation – and how to attain the Dharma in contemporary circumstances.  The book also captures how a meditation Teacher adapts his insights with the foreknowledge that socio-political upheavals and other Shocks will affect the Transmission of his Teaching. Thus, this book can also be studied as a manual to achieving the Remanifestation of a Teaching in difficult life circumstances. The specific techniques of analytic meditation taught in this book will be most helpful to the interested practitioner who wants to gain greater control over their mind and emotions.

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2nd July 2013: The Essential Wall Street Summer Reading List

Andrew Ross Sorkin has posted his Essential Wall Street Summer Reading List:

 

This year, however, a reader, an M.B.A. student, asked the question slightly differently. The reader, who approached me on the subway with a copy of “Barbarians at the Gate” in hand, asked, “If you wanted to get smart about business by reading your way through the summer, what would your master reading list look like?”

I had to get off the subway before I was able to answer the question.

 

To Sorkin’s list I would add:

 

● Connie Bruck’s The Predator’s Ball on Michael Milken and Drexel Burnham Lambert.

 

● Roger Lowenstein’s When Genius Failed on the 1998 collapse of the hedge fund Long-Term Capital Management.

 

● Either Bethany McLean and Peter Elkind’s Smartest Guys In The Room or Kurt Eichenwald’s Conspiracy of Fools on Enron’s demise.

 

● Jeff Madrick’s Age of Greed on Wall Street’s financial revolution from 1970 to today.

 

● Aaron C. Brown’s Red-Blooded Risk: how the AQR Capital risk manager views financial markets.

 

● Michael Mauboussin’s More Than You Know on alpha generation and investment idea screening.

 

● On the GFC, Sorkin’s Too Big To Fail; William H. Cohan’s House of Cards and Money & Power; or Lawrence G. McDonald’s A Colossal Failure of Common Sense.

 

The above list is heavily biased toward financial journalist reportage.

 

These books are useful for the self-development of new traders:

 

● Ari Kiev’s The Mental Strategies of Top Traders on trader psychology, leadership, and variant perception.

 

● John Coates’ The Hour Between Dog and Wolf on the neuroscience of trading.

 

● Daniel Kahneman’s Thinking, Fast and Slow on cognitive biases and decision heuristics.

 

● Mihaly Csikzentmihalyi’s Flow: The Psychology of Optimal Experience on ‘flow’ psychological states.

 

In May 2012, I compiled a Wall Street Reading List of books I had read in 2010-12 to understand financial markets.

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25th June 2012: Wall Street 101

Wall Street

 

Goldman Sachs ($GS) and Wall Street 101 (The Minimalist Trader).

 

How to avoid becoming a myopic fund investor (MarketWatch).

 

The new rivalry: Traders versus Macros (The Reformed Broker).

 

US legislators trade in the stocks of companies that they can impact (Washington Post).

 

Academia

 

Why women and foreign policy professionals can’t have it all (The Atlantic; Foreign Policy; The American Spectator).

 

Work

 

What if the Apple Store were the worst job around? (Slate).

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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.

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17th April 2012: Is Wall Street Inefficient?

Wall Street

 

New York University’s Thomas Phillippon has a new paper that reaches counterintuitive conclusions about Wall Street:

 

Historically, the unit cost of intermediation has been somewhere between 1.3% and 2.3% of assets. However, this unit cost has been trending upward since 1970 and is now significantly higher than in the past. In other words, the finance industry of 1900 was just as able as the finance industry of 2010 to produce loans, bonds and stocks, and it was certainly doing it more cheaply. This is counter-intuitive, to say the least. How is it possible for today’s finance industry not to be significantly more efficient than the finance industry of John Pierpont Morgan? [emphasis added]

 

Phillippon’s study of financial intermediation costs emphasises debt growth, hidden systemic risks and the growth in trading as a secondary market activity. The New Republic‘s Timothy Noah also emphasised trading in his write-up of Phillippon’s results. The paper’s problem is Phillippon’s reliance on the “neo-classical growth model” which argues that information technology, trading, and risk management should lead to lower costs and superior information about future prices. A second problem is that Phillippon explains growth in ‘informativeness’ as a key criterion variable but he does not adequately define it. A third problem is that the paper examines two key data points – 1900-1910 and 1980-2011 – without considering how the innovation pathways in financial intermediation have also changed (both in-period and across-period). For instance, Value at Risk looked like a great innovation in 1992 but it was re-evaluated in 2007-08 during the global financial crisis. A fourth problem is that prices in trading are not always about future prices, or even the fair market value of firms, but they can reflect the market-moving tactics of hedge funds and other firms. A fifth problem is that the inefficiencies that Phillippon identifies lie partly in the fees and incentives that the mutual industry charges investors as revenue generation (and Wall Street’s incentivisation through end-of-year bonuses). Thus, any evaluation of financial intermediation efficiencies should take current market practices into account.

 

If Phillippon had used a market microstructure framework then he might have reached different conclusions about the paper’s aggregate data. Specific firms are able to leverage information technology, trading, and risk management to gain an edge on other market participants. They extract alpha (returns made from active management above and beyond the market index returns or beta). This creates a ‘winner takes all’ dynamic in which a small group of efficient firms do exceedingly well. However, the Schumpeterian dynamics of inter-firm competition means that factors like information technology do not simply lead over time to greater efficiencies and lower costs, as they did with Wal-Mart. Quantitative finance firms like Jim Simon’s Renaissance Technologies, Clifford Asness’s AQR Capital and David Shaw’s D.E. Shaw & Company spend millions on infrastructure and proprietary research to outpace their competitors. This creates ‘informativeness’ in the form of private knowledge that Phillippon’s models probably could not measure. Is this really a misallocation of capital?

 

Photo: apertu/Flickr.

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20th February 2012: Wall Street Afterlives

William D. Cohan‘s reportage is insightful about Wall Street culture and transactions. Cohan’s latest Financial Times piece fuses elegaic reflections on his career and interviews with former Masters of the Universe. On his personal experience:

I know these feelings of dislocation, shame and inadequacy intimately. After a 17-year career on Wall Street – where I rose to be head of the highly regarded media and telecoms M&A business at JPMorgan Chase before being slowly stripped of my responsibilities after September 11 – the bank dismissed me in January 2004 as part of an ongoing “reduction in force”. Despite two graduate degrees from an Ivy League university and years of exponentially increasing remuneration, I was left in the unenviable position of caring for a wife and two small children with no hope of finding anything like the work I had been doing at the pay I had been receiving. In the months after my firing, nasty nightmares often startled me awake. Out of desperation and a lingering desire to fulfil my original dream to be a journalist, I began writing my first book – The Last Tycoons: The Secret History of Lazard Frères & Co.

 

Cohan cites Bloomberg data that 200,000 Wall Street people lost their jobs in 2011. The majority were in back-office positions (that have been outsourced), and 40,000 were in trading and transaction roles. Cohan profiles former managing directors who joined boutique firms; IPO specialists who pursued their religious faith; and investment bankers who fell from grace. Many of Cohan’s interviewees refused to go on the record with comments for fear of damaging their job prospects.

 

Cohan’s article is a powerful corrective to the image of Wall Street that MBA presentations and trading books portray.

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Worth Reading

The Wall Street Journal on the boom in software platforms for open source intelligence in finance, regulatory compliance and intelligence analysis, such as Palantir Technologies.

Search the Global Terrorism Database of the National Consortium for the Study of Terrorism and Responses to Terrorism (START) at the University of Maryland.

Oliver Stone returns to Wall Street with the sequel Money Never Sleeps.

How 9/11 conspiracy theories may have ended Obama’s appointment of ‘green’ expert Van Jones.

Security maven Bruce Schneier on Australian counterinsurgency expert David Kilcullen (with thanks to Barry Saunders).

Chronicle of Higher Education on Facebooking your way out of (academic) tenure.

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Frost/Nixon (2008) & Negotiation Games

Ron Howard’s film adaptation of Frost/Nixon (2008) adopts a thriller format in contrast with the Melbourne Theatre Company’s stage production which I saw several months ago.  Salvatore Totino’s cinematography turns David Frost‘s interview into a claustrophobic tit for tat whilst editors Daniel P. Hanley and Mike Hill linger on the emotional aftermath of Richard Nixon‘s elicited, emotional self-disclosure.

For me the MTC’s version suffered from a first act which established the interview’s circumstances, obscured the dual track negotiations between Frost and Nixon’s advisers, and veered into comedy, before ratcheting up the second act.  Howard avoids this dilemma through taut pacing that has a semi-documentary feel heightened when the characters deliver their monologues straight to the camera.

The cast needs to be stellar for this ensemble film and it delivers.  Frank Langella’s Nixon is a self-tortured leader with feet of clay; I have to now revisit Anthony Hopkins’ portrayal in Oliver Stone’s Nixon (1995) for a comparison.  Michael Sheen’s Frost adopts a chutzpah mask which hides a risk-taking gambit to avoid career demise and the compromises made to financiers.  Kevin Bacon’s Jack Brennan is prepared to take the flak for Nixon.  Sam Rockwell’s James Reston Jr. evokes how research can become an all-consuming quest when your beliefs and passions are on the line, deftly counterpointed by Oliver Platt’s Bob Zelnick who zigs and zags between self-depracating humour and conscientious objector angst.  Matthew Macfayden’s John Birt updates the role he played in Spooks (aka MI5) as a nuanced political operator who must counterbalance Frost’s chutzpah and the resistance it creates for Reston Jr. and Zelnick with keeping the team together, and getting the interview planning, negotiations and logistics done.  Rebecca Hall’s Caroline Cushing and Toby Jones’ Swifty Lazar provide comic relief from the tension and function to advance the film’s plot points.  Langella gets the spotlight for his Nixon portrayal yet the rest of the cast are vital because the plot needs everyone to be a coherent whole.

Playwright and scriptwriter Peter Morgan‘s previous films have explored weighty themes: self-willed blindness to the dark side of charismatic leadership in The Last King of Scotland (2006) and leadership judgment during crisis-driven events in The Queen (2006).  Set after Watergate and Nixon’s presidential pardon, Frost/Nixon explores the commitment costs for a research group that sets out to achieve public justice and the ploys in a complex multi-party negotiation.  There’s far more beyond the heart-to-heart phone call between Nixon and Frost, and Nixon’s final self-disclosure, just as there was more to Oliver Stone’s Wall Street (1987) than Gordon Gecko’s ‘greed is good’ sound-bite.  All sides use psychological tactics to gain momentary bargaining advantages and to leverage power imbalances, from Swifty Lazar’s late night reply on Frost’s opening bid to Birt, Reston Jr. and Brennan’s interruptions of the interview taping at strategic points that are beneficial to their teams.  Frost opts to ‘lure the tiger from the mountain’ (36 Strategies) for Nixon to self-disclose, enraging Reston Jr. and Zelnick who want a front-on attack about Watergate and the Vietnam War.  Nixon uses sleight of mouth patterns to interrupt, stall and throw Frost off guard.  Birt is caught in a position akin to a consultant or line manager: responsible for logistics and having to persuade all parties to move forward.  Anyone who has had to raise money against the odds for a project will wince with familiarity at Frost’s desparate meetings with television network chiefs and advertising agencies.  It’s this pointillism which makes Frost/Nixon even richer than the interview’s climatic revelations and why the film will be perfect for an MBA class on mergers and acquisitions, negotiation and game theory.

Now all I need to see are the Frost/Nixon original interviews . . .