Book Reviews – Page 15 – The Aleph Blog

Book Review: The Misbehavior of Markets

Posted on 22 June 201122 June 2011 by David Merkel

I met Benoit Mandelbrot at a conference at Columbia University back in early 2001.? It was a conference on the use of fractals in a wide number of subject areas, very few of which dealt with economics.? Mandelbrot was on of the few panelists to include anything on economics, though a few of the biologists gave me some ideas.

As far as I could tell there were only two economists at the conference, and we went out for Indian food together at lunch.? I met Dr. Mandelbrot at the wine reception where we discussed the state of the markets.? He and his friend, George Soros, both feared that Wall Street was mishedged, and that a crisis was coming.

Bright guy, though the eventual crisis was a liquidity crisis, and not a hedging crisis.? But the diversity of people in terms of field of study at the conference helps to explain what drove Mandelbrot intellectually.? He saw analogies across a wide number of phenomena, connected by one main idea — similar power laws.

The book points out the now-well-known fact that price changes are more volatile than the normal distribution will allow.? That has impacts on option pricing and portfolio management.

The book’s criticism of Modern Portfolio Theory, another idealistic creation of economists that neglects real world data is excellent.? From a misdefinition of risk as being equivalent to volatility springs the monstrosity of MPT.

The book shoes many ways where the received orthodoxy of MPT and the efficient markets hypothesis fails.? The only reason these idea hang around is that they are accepted uncritically, almost like a cult.? The chapter on the “Heresies of Finance” is particularly good, and poses problems for much of academic finance.

I liked the book a lot, and think that most academics and practitioners should read it.? It will broaden your horizons, even if you disagree after you have read it.

Quibbles

The main difficulty is this: just because A follows a similar power law to B, does not mean that A & B have something in common.? There are often spurious correlations.

Who would benefit from this book:

Most serious investors and academics could benefit from the book.? It will challenge your preconceptions.? That doesn’t mean that everything Mandelbrot writes is correct, but most of his criticisms of MPT are correct.? The question becomes what to replace MPT with?

If you want to, you can buy it here:?The Misbehavior of Markets: A Fractal View of Financial Turbulence.

Full disclosure: I bought the book with my own money.

If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.

Book Review: Reckless Endangerment

Posted on 16 June 2011 by David Merkel

This book on the crisis is different for two reasons:

1) It focuses on the causes of the financial failure, and the history behind them.? It spends relatively little time on the failure in 2008.

2) It spends almost all of its time on the GSEs, Fannie Mae and Freddie Mac.? They were big contributors to the crisis, but they weren’t the majority of the crisis.

This book chronicles the growth of the housing bubble, which was a financing bubble, as most bubbles are.? How did financing for housing get so cheap?

Low interest rates from the Fed.
Lower underwriting standards from Fannie, Freddie, and independent lenders.
Trickery from lenders offering a low initial rate.
Pressure from Congress to make more loans to low-income borrowers who should have been renters.
A mistaken idea that more housing owned by residents was good social policy.

It also describes many of the people who disproportionate benefited from the bubble, and what their motives were for helping to expand the bubble.? It also mentions many who tried to fight the bubble unsuccessfully.? It does *not* mention the “Fannie Fraud Patrol,” who helped to uncover Fannie Mae’s errors in 2003-2004.? It was a loose group of analysts who found inconsistencies in Fannie’s financial statements… we fed OFHEO.? I was one of them, and I have the T-shirt to prove it, even though my contributions were the least of the group.

One? more note: consider Walker Todd, reprimanded by the Fed in 1993 for suggesting that the Fed should not be allowed to bail out non-banks.? Prescient guy, punished of course.? He was one of many who took the chance and fought the Fed or the GSEs.? Almost no one comes out the better for that effort.

Quibbles

The authors blame the rating agencies rather than the regulators that demanded that ratings be used, even if the agencies were less than certain about their models.? Real bond investors never look at the ratings, except as investment policy constraints.

Who would benefit from this book:

It’s an easy read.? This book benefits from having a good writer, and someone who actually knows that markets.? Great combination.? Most people would benefit from this book, because it would disabuse them of the notion that the actions of the government are for the good of the nation.? Special interests won, and many average people lost.

If you want to, you can buy it here: Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.

Full disclosure: The publisher asked me if I wanted the book and I said “yes.”

Book Review: Enchantment

Posted on 11 June 2011 by David Merkel

How do you get people to like you?? Love you?? Be insanely passionate over you, and what you do, sell, etc?

If the book “Enchantment” is correct, it means you have to become the person that inspires people in what ever you are pursuing.? It means that you have to be:

Likeable
Trustworthy
Prepared
A risk-taker who produces
A salesman (in a good sense — you are out to persuade in a good cause.)
Persistent, and make persuasion stick.

But that must extend to customers, employees, and all influencers.? If you are not your own boss, you must manage up and learn to influence the boss as well.

Beyond that, learn to use both push and pull technologies to make people want to know what you are about.

Finally, as with all marketing texts, the reader becomes educated on techniques.? It helps to inoculate you against others who try to use such techniques on you, particularly those that have nothing to offer.

I enjoyed the book and would recommend it to others.? Guy has a gift for making the complex simple.

Quibbles

I may come off as a prude in saying this, but there is never a? good time to use crude language.? It is a substitution of negative emotion in place of thought.? I have never yet found a situation where one could not use clean words to express the same idea that profanity aims for.? Also, workplaces where profanity is common among leaders spawn it among followers.? Everyone is worse off, and your company will come of as rude or lower-class.

Who would benefit from this book:

Many would benefit from this book.? It has a lot of good ideas that would aid your marketing.

If you want to, you can buy it here: Enchantment: The Art of Changing Hearts, Minds, and Actions.

Full disclosure: I asked the author for the book and he sent it to me, apologizing for the delay.? Guy, thanks for sending it, delay or not.

Book Review: Never Eat Alone

Posted on 8 June 2011 by David Merkel

This is an unusual book for me.? I’m not a natural marketer.? I try to avoid tooting my own horn.

But this book might help me in my weakness.? I try to do it all on my own, when the aid of friends could accomplish so much more.

The author explains how he created and used friends to aid him in his career.? Beyond that, he showed the value of connecting other people, when there was no obvious advantage to him.

This is not a selfish book, though the ideas could be used selfishly.? I have found in my own life that the more I give to aid others, the better I do.? This book is not all that far from that idea.

Quibbles

The author should have spent less time on his own life and in his own current business efforts.

Who would benefit from this book:

Many would benefit from this book.? It has a lot of good ideas that would aid your marketing.

If you want to, you can buy it here: Never Eat Alone: And Other Secrets to Success, One Relationship at a Time.

Full disclosure: I bought this book.

Book Review: Miles Away… Worlds Apart

Posted on 4 June 2011 by David Merkel

This book is unusual.? Let me give you my quick view: this is a book written by an Orthodox Jew regarding an unscrupulous Jew who used his abilities to communicate to swindle others in a Ponzi scheme.? This is a surmise, because of all the ill-will toward Jews created after the scandal broke, the author tries to differentiate between one who is nominally/ethnically a Jew, and one who takes the ethical principles of Rabbinic Judaism seriously.

As such, this is really two books.? One on the author’s congregation, friends, and extended family, and the good things that they have done as Orthodox Jews, and a book on how the author concluded earlier than anyone else that Scott Rothstein was a fraud, and probably running a Ponzi scheme.? (Alternatives were money-laundering, drug transport, etc.)

I appreciate the logic that the author brings to the table in the book.? I myself have uncovered a variety of investment scams from life settlements, collateralized stock loans, Nigerian schemes, and penny stock promoters.? The author zeroed in on the lack of data to verify the cash flows, and the unlikelihood of so many cases being handled by one man, Scott Rothstein.

As an aside, always be wary when you meet someone that wants a lot of information, but is averse to sharing information.? Divide-and-control is an excellent way to gain power in an organization.? Fight it by connecting with others.

Once the author came to a firm conclusion that Scott Rothstein was dishonest, he faced the question of where to take the information.? Because Rothstein had used some of his clients’ money to buy favor with state and local officials, he decided to go to the FBI as the most competent interested federal organization.? After less than two months after talking to the FBI, the Scott Rothstein’s organization collapsed from a lack of cash flow, partly due to the efforts of the author to convince potential investors not to invest.

And now Scott Rothstein and more than a dozen of his associates are doing time in jail, because of a $1.4 billion Ponzi.? Not the hugest, but give the author credit, he kept it from becoming bigger.

One final note: the title of the book is delicious, because the author and the felon were miles away in distance, but worlds apart in what they valued.

Quibbles

There are a few misspellings, but nothing major.

I understand why he brings up the good deeds of Orthodox Jews, but to have it occupy so many pages of a book dealing with financial fraud will leave some cold.

Also, I disagree with the way Rabbinic Orthodox Judaism interprets the Law (Torah).? We are not to create a hedge around the Law, as the author states.? We cannot be holier than God.? To add to God’s Law is to take away from God’s Law and substitute Man’s Law in its place.? Far better to understand the Law the way Y’Shua Ha’Mushiach (commonly called Jesus) did, and understand that it applies to our hearts and actions, as best expressed by the Larger Catechism Questions 91-153.

Who would benefit from this book:

Most people would benefit from this book — it will make you aware of financial fraud on two levels: the way that the finances of a fraud don’t make sense, and the outward aspects of the life of one committing fraud.? If you end up more suspicious of those offering opportunities that are too good to be true, that will be worth more to you than the price of the book 100 times over.

If you want to, you can buy it here: Miles Away… Worlds Apart.

Full disclosure: I asked the author for this book, and he sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.

Book Review: Interest Rate Markets

Posted on 1 June 2011 by David Merkel

I was surprised by this book.? There is very little math in this book, which would make it a popular book for giving someone an introduction the bond markets.

It covers all of the non-credit, non-mortgage markets.? It will not replace Handbook of Fixed Income Securities 7th Edition, but it will supplement it, because this is an easier read on the areas that it covers.

Swaps, futures, rolls, options — this book gives a friendly introduction to all of them.

Quibbles

The flipside of no math is that many things are not explained as well as they should be, or get glossed over.? It would be better to ignore principal components analysis than to mention it and not give much explanation.? (A brief appendix, maybe?? Same for other math topics?)

Who would benefit from this book:

Beginners with a serious interest in the fixed income markets would benefit.? No one else.

If you want to, you can buy it here: Interest Rate Markets: A Practical Approach to Fixed Income (Wiley Trading).

Full disclosure: I asked the publisher for this book, and they sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.

Book Review: Debunkery

Posted on 23 May 2011 by David Merkel

Ken Fisher and Lara Hoffmans write well.? This book is accurate (with a few quibbles), and succinct.? I know these topics well; it took me less than three hours to read it.

There are many half-truths that travel around Wall Street.? There are still more that come from salesmen.? There are those that your investing friends will teach you.

Some come from the idea that the economy affects the markets in the short-run, or that good or bad policy will drive the market higher or lower.

Markets are far less predictable than we imagine.? They abhor simple rules.? Indeed the “rules” created in one cycle may be pure poison in the next one.

Also, absent war on your home soil, pestilence, plague and rampant socialism on a greater level than what Western Europe has seen, equity markets are pretty resilient.? Fisher’s native optimism has served him well in his lifetime.? There are few pessimistic millionaires.

That leads his asset allocation advice to be more geared to stocks, and more than the norm to foreign stocks.? (Which is good so long as the rule of law is maintained.)

In general, Fisher has written a very good book here.? The points are made briefly in an average of four pages each.? For those that want a quick introduction to the many fallacies on Wall Street, this book will do an excellent job.? After that, you can look to other books to fill in the details.

Quibbles

In Chapter 15, he mistakes immediate annuities for fixed annuities.? Immediate annuities are annuities that are paying out now.? Fixed annuities are those that pay interest, whether they are immediate or deferred (not paying out now).

In Chapter 16, he talks about Equity Indexed Annuities.? He misses several things:

1) Growth is more typically guaranteed at 2-3%, not 6%.

2) He misses Asian design contracts, which offer higher participation in exchange for having the option pay out on average returns over a year.? People don’t get what they are giving up there, but it looks better to them.

3) The surrender charges are higher and longer than they are for other deferred annuity designs.

There are other details that I think he mangles, but in his main thrust he is correct in both chapters to steer people away from any annuity aside from immediate annuities for those who need income.? Anything the insurance company can do with annuities, you can do, and cheaper.

But if Mr. Fisher wants to write about life insurance products more, maybe he would like to get a life actuary on staff, or at least someone with the LOMA credential.

Aside from that, Mr. Fisher should read “This Time is Different” by Reinhart and Rogoff.? Government deficit levels are not a thing of indifference, though they will affect stocks less than long bonds.

My penultimate quibble is that many common sayings are true within limits.? The limits imply broader models that might be discovered by multivariate regression.? There is little of that in the book.

Finally, the rule should be sell in April, buy in October.? More at my blog, I have an article to write.

Who would benefit from this book:

Ordinary people who don’t have a lot of time to consider each issue would benefit from this book.? They get a broad amount of protection from a single book.? The lessons come quickly, and immunize investors against a lot of investing mistakes.

If you want to, you can buy it here: Debunkery: Learn It, Do It, and Profit from It-Seeing Through Wall Street’s Money-Killing Myths.

Full disclosure: I asked the publisher for this book, and they sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.

Book Review: The Ivy Portfolio

Posted on 11 May 2011 by David Merkel

This is an unusual book, and a good book.? Unlike the book, “Outperform,” which reviews lesser known endowments, and endowment investing generally, this book reviews the Harvard and Yale endowments, which up until 2008, the year before the book was published, were among the best in terms of performance.

But this book is more than that.? It goes through the strategies of the major endowments, and looks for ways that average people can try to replicate the results.

But average investors don’t have the same set of investments available to them as the large endowments do.? If you aren’t a qualified investor who has access to the full range of investments ordinary mortals are denied — private limited partnerships (hedge? funds, private equity, commodity funds, etc), what can you do?? This book discloses investments that are similar if not equivalent, and versions that are lower cost through ETFs.

After that, the book takes a direction that would initially seem different than endowment investing.? It discusses trend following, which endowments do not in general use as a strategy.? Now, some hedge funds use it, but few endowments actively embrace it.? The book shows how return can be enhanced and volatility reduced by buying investments that are over their 200-day, or 10-month moving averages.? From my own research I can partially validate the approach.? It is a clever way of implementing a form of momentum investing, which may be a cheap way for average investors to mimic hedge funds who follow trends.

Then mimicry moves to a new level as the book goes through the basics of mining data out of 13F filings, where large investors file their long investments with the SEC.? Guess what?? Imitating bright people can help an investor beat the market — it can allow a bright person to mimic the long side of equity investing on the cheap, but with a lot of data analysis (or you can pay up for Alphaclone).

In one sense, the book seems like two books — one on endowment investing, and another on tools for clever investing available to average investors.? My way of reconciling the two is that the authors are clever guys who are trying to give their best ideas to retail investors so that they can do as well as sophisticated institutional investors who have a wider array of investments to choose from.? The retail investors don’t have the same array of investments to choose from, but they have the advantage of flexibility that institutions don’t and can more quickly trade out of investments that may be on the way to underperformance via trend-following.

And so with much effort, if you apply their ideas, you have the potential of doing as well in investing as the major endowments.? Or, absorb one of their passive strategies with little effort, and maybe you will do as well.? Strategies that have done well in the past may not do so in the future.

But on the whole, I heartily recommend this book.? There is a lot for investors of all types to learn from it.

Quibbles

Those reading the book should also read my essay, “Alternative Investments, Illiquidity, and Endowment Management. (Google it if there is no link)”? Taking on illiquidity is not a free lunch.? It can impose real costs when there is a need for cash among those endowed.? Personally, I think that ten years from now, illiquid investments will only be taken on by those that can lock them away.

Who would benefit from this book:

Those wanting to potentially mimic the high returns of the Harvard and Yale endowments could benefit from the book, but realize that a lot of the past is an accident, and that it might be difficult to achieve high returns in the future from strategies that worked in the past.? That said, the authors have offered strategies that take some degree of work to apply, so there may be barriers to entry for applying some of the strategies.

If you want to, you can buy it here: The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

Full disclosure: I asked the publisher for this book, and they sent it to me.? I read and review ~80% of the books sent to me, but I never promise a review, or a? favorable review.

Book Review: The Financial Numbers Game

Posted on 25 April 201126 April 2011 by David Merkel

I think that accounting quality is the single most neglected area of investing.? There are few that spend time trying to analyze whether the financial statements are fairly presented.? For value investors like me, that can be the difference between a value investment and a value trap.

Accrual entries on the balance sheet can be true or false, but cash rarely lies.

Are the accounts truly receivable?
Will the inventories sell?
What is the property, plant and equipment truly worth?
Do the goodwill and intangibles have any value?
What are the revenue recognition policies?
Some expenses can be capitalized as assets because of cash flows that are expected in the future.? How reasonable is that expectation?

And with financial companies, the questions are different — what are the nature of the cash flows promised and purchased?? Tough questions for anyone to answer, but at least the questions point us in the correct direction.

There are also the gambits to distract us from whether value is being created or not.? Operating earnings are not wrong, but many companies abuse the concept.? The idea should be to estimate what earnings are repeatable in future quarters/years.

There is a lot to chew on in this book, but it all boils down to:

1) What do we allow to be accrued for cash flows in the future?

2) How do we adjust those accruals as events change?

This is a great book — worthy of being in every person’s library.

Quibbles

None.

Who would benefit from this book:

All individual and institutional investors would benefit from this book, bar none.

If you want to, you can buy it here: The Financial Numbers Game: Detecting Creative Accounting Practices.

Full disclosure: I bought this book with my own money.

Book Review: Dig This Gig

Posted on 20 April 2011 by David Merkel

I liked this book because I am doing this myself.? I am trying to create my own gig.? Let me put it this way: you can try to serve one boss who carefully directs you, or you can try to serve multiple bosses (clients) who may have varying goals for your services.

Unlike most of those featured in the book, I am older, trying to start my own business for the first time at age 50.? It would be nice to be twentysomething, but could I afford to sacrifice the knowledge that I have gained?

I think not.? The book takes an approach of reviewing four young people each in seven areas of employment, followed by an elder statesman who is an exemplar in that area.

The seven areas are:

Healthcare
Entertainment
Doing Good (Nonprofit, Teacher)
Green (Environmental)
News
Government
Unemployed

The book is well-written, and will provide inspiration to those looking to carve out a new niche in the current economy.

Quibbles

I must admit skepticism that a large number of people can “Dig this Gig.”? Most of the needs of mankind are similar, and unless you find a special point of unmet need, unusual gigs are hard to find.? I view much of what is said here as trying to accomplish something difficult.? Most people would be better off trying to do something conventional.? After all, that is why it is conventional.

Who would benefit from this book:

If you have a friend out of work but who is energetic, this book could be valuable.? Or someone competent and employed, but frustrated… this book could be valuable.? But anyone who is not motivated to work hard — sorry, this book will be of no help.

If you want to, you can buy it here: Dig This Gig.

Full disclosure: This book was sent to me after the author asked if I would like to see it.