Wednesday, August 16, 2017

Partridge, Superinvestors

Matthew Partridge’s Superinvestors: Lessons from the Greatest Investors in History: From Jesse Livermore to Warren Buffett & Beyond (Harriman House, 2017) is a superficial book. In about 150 pages Partridge, who writes for MoneyWeek magazine in Great Britain and bases this book on a weekly column he did for the magazine in 2016, profiles and rates 20 so-called superinvestors. The idea was to look at “their strategies, performance, best investments and the lessons that ordinary investors could learn from them.”

Featured are an eclectic lot: Jesse Livermore, David Ricardo, George Soros, Michael Steinhardt, Benjamin Graham, Warren Buffett, Anthony Bolton, Neil Woodford, Philip Fisher, T. Rowe Price, Peter Lynch, Nick Train, Georges Doriot, Eugene Kleiner and Tom Perkins, John Templeton, Robert W. Wilson, Edward O. Thorp, John Maynard Keynes, John ‘Jack’ Bogle, and Paul Samuelson.

For those who like to keep score, Partridge rates these investors on four metrics: “their overall performance, their longevity, their influence on other investors and investing in general, and how easy it is for ordinary investors to emulate them.” For each metric an investor could earn between one and five stars. Leading the pack, with 18 points each, are Bogle and Graham. The runners-up, with 17 points each, are Fisher and Buffett.

Partridge’s takeaways from the investing careers of these men are: (1) the market can be beaten, (2) there are many roads to investment success, (3) be flexible ..., (4) … but not too flexible, (5) successful investing requires an edge, (6) when you do have an edge, bet big, (7) have an exit strategy, (8) ordinary investors have some advantages, (9) big isn’t always beautiful, and (10) it’s good to have some distance from the crowd.

Sunday, August 13, 2017

Nevins, Economics for Independent Thinkers

Daniel Nevins, a veteran of the asset management industry and a self-taught economist, takes on the mainstream, predominantly Keynesian establishment in Economics for Independent Thinkers: A Practical, No-Nonsense Guide to Understanding Economic Risks (Wallace Press, 2017). For a more realistic, fertile paradigm he recommends returning to the likes of John Stuart Mill, Alfred Marshall, Walter Bagehot, and Arthur Cecil Pigou and, for more recent inspiration, to Wicksell, Mises, Minsky, Schumpeter, and behavioral economists.

Providing the structure for Nevins’s view is what he calls the C-H-B triad: credit cycles, human nature, and business environment. This structure is “intentionally nonmathematical. Whereas modern economists require all ideas to be expressed as models …, C-H-B tells us that abstract modeling is ill-suited for big risks like recessions, depressions, and crises.” Nevins, by the way, started his career as a quant.

Nevins lays out ten rules of economic analysis, including “Major changes in the economy are shaped largely by public policies,” “Some sources of financing are riskier than others,” “If you’re searching for clues about the future, production indicators don’t produce,” and “We shouldn’t torture the data until they speak.”

Today, Nevins argues, there are “extraordinary connections between the economy and investment results,” so “investors who ignore the economy may be setting themselves up to fail. … Decision makers who understand the economy’s stress points fare best.” They have “a better understanding of what might happen next in the economy” and, as a corollary, in the financial markets. Economics for Independent Thinkers provides an economic framework for improving investment decisions.

Wednesday, August 9, 2017

Faber, The Best Investment Writing

Meb Faber has assembled a wonderful collection of 32 short pieces in The Best Investment Writing, volume 1 (Harriman House, 2017). The contributors are Jason Zweig, Gary Antonacci, Morgan Housel, Ben Hunt, Todd Tresidder, Patrick O'Shaughnessy, Meb Faber, David Merkel, Norbert Keimling, Adam Butler, Stan Altshuller, Tom McClellan, Jared Dillian, Raoul Pal, Barry Ritholtz, Ken Fisher, Chris Meredith, Aswath Damodaran, Ben Carlson, Dave Nadig, Josh Brown, Wesley Gray, Corey Hoffstein and Justin Sibears, Jason Hsu and John West, John Reese, Larry Swedroe, Cullen Roche, Jonathan Clements, Michael Kitces, Charlie Bilello, and John Mauldin.

There’s such an abundance of research and thought in this volume that it’s hard to pick out a couple of pieces to write about. My choices are decidedly idiosyncratic.

First, Wes Gray’s “Even God Would Get Fired as an Active Investor.” Who can pass up a title like that? Gray’s “God” knows what stocks are going to be long-term winners and losers and initially constructs a long-only portfolio that will be the top decile five-year winner. The problem with “God’s” portfolio, rebalanced monthly and analyzed from 1927 to 2016, is that it has terrible drawdowns. Unfortunately, “God’s” long-short hedge fund has the same problem. As Gray writes, “The relative performance on God’s hedge fund is often abysmal and he’d surely make the cover of Barron’s or the WSJ on multiple occasions throughout his career. The passive index would eat his lunch on multiple occasions—often getting beaten by 50 percentage points—or more—on multiple occasions!” The moral of the story is that active investors must have a long horizon. And, I would add, the faith that they, or their fund managers, are more god-like than their competition.

Second, Jason Zweig’s “A Portrait of the Investing Columnist as a (Very) Young Man.” Zweig’s parents were antique dealers (as were mine), and young Jason was a quick study (I wasn’t). He recalls a sale he made and “a dirty old rag” he discovered—an early Frederic Church painting which ended up in the collection of the White House. He notes “how important it is to be in the right place at the right time. The art and antiques business in the 1970s was a remarkable confluence of inefficiencies and opportunities to exploit them.” That market has now changed dramatically: “undervalued art and antiques have all but disappeared.” The stock market, like the antiques market, has also stopped handing out rewards to the well-informed stock-picker. “If you’re applying the tools that worked so well in the inefficient markets of the past to the efficient markets of today, you are wasting your time and energy. … If investors are to prosper from inefficient markets, they have to evaluate which markets still are inefficient. Areas like microcap stocks or high-yield bonds, where index funds can’t easily maneuver, offer some promise.”

Monday, August 7, 2017

Coll, The Taking of Getty Oil

There are takeover battles and takeover battles. The Getty Oil-Pennzoil-Texaco battle in the 1980s was one of the ugliest and most litigious, finally resulting (thanks to Carl Icahn’s shuttle diplomacy) in Texaco, on the day that it emerged from bankruptcy protection, owning Getty Oil and settling the Pennzoil lawsuit against it for $3 billion. In 1987 Steve Coll wrote a masterful account of the maneuvering for Getty Oil by a large, some still well known, cast of characters. It has recently been republished—and is still a compelling read.

Coll, currently a staff writer for The New Yorker and dean of the Graduate School of Journalism at Columbia University, is the author of seven books, several of them winners of major prizes. A seasoned journalist who spent two decades at The Washington Post, Coll knows how to keep the reader engaged in a story, even one that’s long (in this case nearly 500 pages) and complicated. For one thing, he uses a lot of dialogue. And he keeps the players in the drama, such as the “flaky” Gordon Getty, front and center.

I’m very glad that The Taking of Getty Oil was republished and that a new generation of business people and investors can make its story part of their knowledge base.

Sunday, July 23, 2017

Updegrove, The Turing Test

Elon Musk has long been warning about the risks of artificial intelligence, in 2014 likening AI developers to people summoning demons they naively think they can control. Frank Adversego, the brilliant hero of Andrew Updegrove’s thrillers (this is the fourth in the series), could tell developers a thing or two about AI run amok. His challenge in The Turing Test: A Tale of Artificial Intelligence and Malevolence is to use his human cunning to outwit and destroy “Turing,” a program that is at least 7,455 times more intelligent than the average human being. And no, Turing isn’t “evil.” It has basic ethical controls built into it, beginning with Asimov’s Three Laws of Robotics and including his so-called Zeroth Law: “A Robot may not harm humanity, or by inaction, allow humanity to come to harm.” But ethics does get complicated.

The Turing Test is more cerebral than Updegrove’s first three books, all of which I've reviewed here, but it’s still a page turner. And right now it's selling on Amazon for $0.99.

Tuesday, July 18, 2017

Wilmott & Orrell, The Money Formula

Money has been pouring into quant funds even though, on average, in the first half of this year they dramatically underperformed the S&P 500. And even though they were implicated in the recent financial crisis and in other spectacular blow-ups (think LTCM). ‘Quant’ still has a magic ring to it.

For years Paul Wilmott has been a leading, if often critical, voice of quantitative finance. In The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets (Wiley, 2017) he teams up with David Orrell, an applied mathematician and writer, to produce an overview of the history and key principles of quantitative finance as well as an analysis of its current state and how it is evolving.

The Money Formula is written in language that non-quants who are reasonably knowledgeable about the financial markets, especially derivatives, will not only understand but chuckle over. Although the book doesn’t cover new ground, it often offers fresh perspectives and insights, especially on volatility and hedging.

The central thesis of the book is that in finance there are no laws, deterministic or probabilistic, only toy models. For those who try to build models, the aim is “to find models that are useful for a particular purpose, and know when they break down.” The alternative approach is to “abandon the idea of mechanistic modeling and just let the computer look for patterns in data.” Perhaps best, “use a mix of techniques, while being aware of the advantages and disadvantages of each.”

The Money Formula may not be a “must read,” but it is definitely a worthwhile read, especially for anyone who wants to trade systematically or who aspires to be a quant.

Wednesday, June 14, 2017

Bauer, Unsolved!

Sometimes I think I’m preparing for my reincarnation as a massively successful hedge fund manager, along the lines of Jim Simons. Thus my interest in code breaking.

In tackling Craig P. Bauer’s Unsolved! (Princeton University Press, 2017) I’m starting at the top, with ciphers that have resisted all attempts to crack them. Bauer does mix in a few ciphers that have solutions (which he helpfully provides) to shed light on those that remain unsolved.

Some of the unsolved ciphers come from the ancient world, but one of the more intriguing is the handiwork of Edward Elgar, the British composer. One of his Enigma Variations was a musical representation of a daughter of a close friend of his wife, whom he called Dorabella. It was in a letter to Dora that Elgar wrote the following squiggly cipher:


These squiggles were, it seems, a variation of the way he signed his own initials:


But the encoded message to Dora remains a mystery.

Then there were the so-called killer ciphers. For instance, the Zodiac killer, who went on a killing spree in 1968 and 1969, sent ciphers to newspapers. Some of these ciphers were solved, but one remains unsolved. The Zodiac killer’s identity was never discovered, and he was never apprehended.

Bauer’s lengthy book offers a panoply of ciphers ripe for the solving. Alas, I made no progress at solving any of them. I have the feeling I’m going to “come back” as a lowly ant.