In 2009, Atul Gawande published The Checklist Manifesto: How to Get Things Right
I shouldn’t have waited and, if you haven’t read it, neither should you. I knew of Gawande from his articles in The New Yorker, but despite the favorable notices I read when the book was published, I really didn’t expect much. Checklists? OK, right.
ABSTRACT
The author, unlike many others, views Benjamin Graham’s work as the origin of quantitative investing. He reviews the history of quantitative investing and uses Graham’s investment methodology to introduce such concepts as alpha, the Sharpe ratio, and the Fama–French model.
The roots of value investing can be traced back to the 1934 publication of Benjamin Graham and David Dodd’s classic, Security Analysis. Graham later disseminated his views to the general public in the highly regarded book The Intelligent Investor. The influence of Graham’s methodology is indisputable. His disciples represent a virtual who’s who of value investors, including Warren Buffett, Bill Ruane, and Walter Schloss. As a measure of his enduring impact on the field, a search of “Benjamin Graham" on Amazon.com yields more than 900 results concerning Graham’s writings and works about his investment philosophy. Given the success of the master and his students, it is no wonder that Graham remains an investor of immense interest to practitioners.
The title Ben Graham Was a Quant: Raising the IQ of the Intelligent Investor (Wiley Finance)
Throughout the book, Greiner pays homage to Graham, using his investment philosophy as the catalyst for examining quantitative investing. In the early chapters of the book, however, Greiner focuses mostly on his own view of quantitative investing. In spite of his strong quantitative background, he does a good job of making his ideas accessible to readers with a wide variety of backgrounds.
Greiner starts with a review of the history of quantitative investing. In most accounts, the story begins with Harry Markowitz’s seminal work on portfolio theory in 1952. For Greiner, however, the origins of quantitative investing date back earlier, to the work of Benjamin Graham. Greiner points out that Graham’s 1949 classic, The Intelligent Investor, lists seven criteria that defined the “quantitatively tested portfolio." These criteria include such factors as the size of the enterprise, earnings stability, financial condition, dividend record, earnings growth, price-to-earnings ratio, and price-to-book ratio. As Greiner points out, the definition of a quant as someone who designs and implements mathematical models for the pricing of securities does not mention the use of a computer.
As the pages go by, the link between Graham’s methodology and quantitative analysis becomes clearer. Chapters 4–6 begin to delve into the quantitative factors that Graham used in formulating his investment philosophy. Throughout these chapters, Greiner tests the empirical validity of Graham’s factors with a Fama–French type of model. Greiner criticizes the factors used by many MBAs that are linked to academic theories but may have no empirical validity. He writes, “Empiricism suggests the main drivers of stock returns are often market trading forces more than business financials." In testing Graham’s model, Greiner finds that such factors as book-to-price ratio, price-to-earnings ratio, and dividend yield do extremely well in predicting performance.
Using the Graham factors, Greiner goes on to build a factor model for predicting returns. Because he cannot confer with Graham on which factors to include in the model, Greiner does not use stepwise regression to identify the best ones. Rather, he elects to use all the factors in order to remain true to the Graham methodology. Throughout the book, Greiner provides numerous tables and graphs to document the effectiveness of the Graham factors in predicting security returns and to support the fundamental tenet of the book—that empiricism should trump theory in modeling security returns.
Cheap goods from China have benefited millions of Americans, increasing their standard of living, vastly attributing to low inflation. Low-cost production is something we have come to accept, moreover, to expect. But as Shaun Rein's new book, The End of Cheap China: Economic and Cultural Trends that will Disrupt the World
Higher labor costs, shortages of skilled workers, rising commodity and real estate prices are combining to change this happy world for American consumers. It is also changing and disrupting how American companies view and use China. The biggest change according to Rein is that, "Instead of the market to produce in, China has become the market to sell into. China is increasingly becoming the country driven by the "optimistic consumer class."
The reality of the professional world is that unemployment is at an all-time high, career competition is brutal as an increased amount of experience professionals struggle to get interviews, and job stability is becoming a thing of the past. "The career esclator is jammed at every level." A changed financial career world has made adaptation to the future an urgent necessity, both for survival and advancement. Today's career advice is often riddled with sample cover letters and catchy words to use in resumes. Until now.
Zombies are most commonly known as undead, lifeless creatures that usually take hold of a living being through some type of supernatural force. However, as Yalman Onaran graphically illustrates in his new book, zombies can also inhabit the inanimate objects—in this case, banks. “Zombie Banks” are described as “insolvent financial institutions whose equity capital has been wiped out so that the value of their obligations is greater than their assets.” These are banks that have bankrupt balance sheets, and are kept alive by governments in the hope of avoiding financial and economic collapse.
China is now the second largest venture market. India is third. Vietnam is quickly expanding. Now more than ever, rather than starting an entrepreneurship in the West, the newest generation of entrepreneurs are looking to the East. Many of the same venture investors that formed the original Silicon Valley are repeating these successful enterprises in Asia. Startup Asia: Top Strategies for Cashing in on Asia's Innovation Boom tells the dramatic story of how business start-ups have developed and boomed in Asia.
If you want the truth about hedge funds and how to invest in them, The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to Be True is a must read. An especially important picture of a major part of financial services, this book provides insight into a field of which little information is publicly available.
Despite the increased fortune hedge funds produce, their investors barely profit. As the book reads, “investors would have made more putting their money into treasury bills instead.” Currently risks and returns favor the hedge fund managers. Of course, this was not always the case. During the 1990s, there were fewer hedge fund investors, which, to some degree, allowed for greater profitability. Owing to this shocking truth, author and hedge fund expert Simon Lack provides an in-depth inside look into the world of hedge funds in an effort to help put the investors back on top.
Ten years ago Jim O'Neill, chairman of Goldman Sachs Asset Management, changed the field of global investing by coining the now iconic phrase, “BRIC”—abbreviated for the four countries that he and his team predicted as the main emerging economies. Brazil, Russia, India, and China—countries that he said would eventually surpass the six largest Western economies, and changed the scope of emerging markets. In his new book, The Growth Map: Economic Opportunity in the BRICs and Beyond, O’Neill provides a firsthand account of the evolution of “BRIC,” and where these countries currently stand. He also introduces a new prediction: the "Next Eleven" countries: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey, and Vietnam. These countries, according to O’Neill’s prediction, will offer great opportunities for investors over the next decade, similar to the BRICs.
An increasingly common company announcement is plans to expand in another part of the world. There are a variety of reasons given, including diversification and the seeking of additional resources. The most common, though, are lower costs and faster growth markets. Major companies like General Electric and Coca Cola are prime examples of successful globalization endeavors.
The announcement that the United States will base 2,500 troops in Australia is a public recognition of the contest between China and the US for power in the Pacific, where the US has long been dominant. For China, the troop deployment increases fears of encirclement. For the US, it reflects fears of being pushed out or neutralized in this key geography. For an in-depth analysis of what will be an increasing contest, Aaron L. Friedberg's new book is a superb resource. Friedberg, a former fellow at the Smithsonian Institution’s Woodrow Wilson International Center for Scholars, the Norwegian Nobel Institute, and Harvard University’s Center for International, took part in a “review of China's economic performance, political stability, strategic intensions, and military power" during the Clinton administration. This review was the start of the research that produced A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia.
The phrase "exorbitant privilege" was created in the 1960s by French Prime Minister Valéry Giscard d'Estaing to express his annoyance at what the U.S. dollar’s strength and role allowed the U.S. to do, owing to its then role as the dominator of international currency. As described by author, Barry Eichengreen, exorbitant privilege gave America "the ability to purchase foreign goods and companies using resources conjured out of air." The dollar’s status allowed the U.S. to "import goods and services amounting to $1 trillion in excess of what we export." As this pattern developed, periodic fears that the dollar would end its role as the international reserve currency emerged. To address this fear, Barry Eichengreen presents Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System, a timely book on monetary economics and currencies that is clear and easy to read, with elements of drama and excitement.
Anglo Republic is the story of the remarkable rise and fall of the Anglo Irish Bank—once one of the fastest growing financial institutions worldwide, an in-depth review of how, "a small Dublin bank became too big to fail and too rotten to save—and how it dragged an entire country to the brink of bankruptcy." Anglo Irish had a spectacular rise on the Irish property boom, and an equally dramatic fall into eventual oblivion in 2008. Along the way, the Irish government and bank regulators, management, and board appear to have been largely oblivious to the bubble they were riding, and its end result. While the cast of characters may be unfamiliar to American readers, the book is a graphic chronological record of a bank failure, authored by journalist Simon Carswell, Finance Correspondent of the Irish Times. Carswell covered the Anglo Irish story throughout its peril.
Jim Collins is considered one of the very top management experts, and has written several books that have gained a wide audience. His new book Great by Choice: Uncertainty, Chaos, and Luck—Why Some Thrive Despite Them All
Trading has become one of the core activities in modern capital markets, and a potentially very rewarding career path. This is evident in the size and growth of hedge funds and proprietary trading. Despite this, there is a scarcity of books on how to become a successful trader. Thus, Michael Martin's new book is especially welcome.
The Wizard of Lies
Is the love of money in fact the root of all evil? Perhaps. It was overwhelming greed and overreaching ambition that led to one of the greatest economic downturns of our time, the 2008 Recession, also dubbed the "Great Recession".
This recent financial crisis resulted in a mass demand for literature which details the facts surrounding the financial meltdown. Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led To Economic Armageddon is the best book on the roles of major mortgage companies, Fannie Mae and Freddie Mac, who intensified the housing boom through the pursuit of loans and agressive lobbying.
The financial crisis that began in 2008 continues to produce aftershocks, and the way in which the current troubles will be resolved remains unclear. The impact of liquidity shock in today’s Great Recession, as well as in the Great Depression and Japan’s Lost Decade, is the subject of a new book by George Chacko, Carolyn L. Evans, Hans Gunawan, and Anders Sjöman. In The Global Economic System: How Liquidity Shocks Affect Financial Institutions and Lead to Economic Crises
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Howard Marks is chairman and co-founder of Oaktree Capital Management, which has over $80 billion in assets under management. His book The Most Important Thing: Uncommon Sense for the Thoughtful Investor
In his new book, What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age
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The tumultuous life of Wall Street has always fascinated American novelists, often (though not always) emerging from their pens in the form of potboilers, or pulp fiction—thrillers, murder mysteries, or hardboiled noir. And despite the fact that this literary subgenre has been alive and well for more than a century, the depiction of the hero (or antihero) has changed little in that time. In the popular imagination, the analyst or investment banker is rarely harried or cowed, drab or meek. Whether the protagonists of these novels are idealistic crusaders for free markets and fair play, or the scheming, sneering villains of insider deals and underhanded intrigue, they almost always embody American finance as a figure of daring—glamorous, breakneck, and dangerous!
China moves the markets. The world’s second largest economy, biggest source of growth, and most important consumer of commodities is an increasing focus of attention for investors.
But answering even simple questions about the size and growth of the Chinese economy is not straightforward. The official data is haunted by controversy, with widespread doubts about its accuracy.
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These days, it is hard to find investments with the potential to generate attractive returns without taking on too much risk. At the conservative end of the spectrum, bond yields are well below historical norms. The average bond now yields just 2.5%/year, below the typical rate of inflation. If interest rates should recover to more normal levels, today’s bond investors would have locked in at paltry yields and may also suffer big losses in the value of their investments (particularly if they have invested in bond mutual funds as opposed to individual bonds). But, on the other hand, the stock market appears very risky after losing more than 50% from the top in 2007 to the bottom in March 2009 and after falling 16% from April-July in 2010 in response to the European debtcrisis.
THE STRUGGLE TO GO GLOBAL
Going global as an investor is conspicuously problematic—particularly for the value crowd. When we dig into the public markets in places like China and India, we find that corporate behavior is far different from what we have learned to expect in the United States and Europe. The companies just don’t appear to be very stable, making calculations of a useful intrinsic value difficult. In fact, the economies themselves appear to be changing rapidly (that is, developing). Additionally, information, even in published financial reports, appears questionable. Unless you’re investing short-term, it’s a struggle to invest in changing companies in changing environments with limited and/or incorrect information.
The purpose of this essay is to improve your ability to trade iron condor option spreads. Iron condors have become a very popular spread type among active options traders, but there is little detailed or quantitative information available about the best way to employ these spreads. As participants in the crash of 2008 and the intense bull market of 2010 can attest, the static “set-it-and-forget-it” method with which some novice traders approach iron condors does not produce ideal results. In the following, I will consider the circumstances in which it is appropriate to enter a condor spread, key techniques and considerations when structuring spreads, and will present some backtested historical returns for a few strategy variations.
Managing the China Challenge: How to Achieve Corporate Success in the People's Republic
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The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth
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In August 2010, Cisco stock (ticker: CSCO) hovered just a few cents below $25. Several analysts identified the stock as a strong buy. They pointed to the rising demand for network infrastructure that, among other things, was being driven by explosive growth in online video gaming and Internet television. Cisco, they believed, would continue to dominate the consumer market while benefiting from a weak dollar and low manufacturing costs. They must have been wrong because the stock fell 15% when earnings were released on August 11. The price continued to decline until August 31, when it bottomed out at $19—24% below its previous high. About the time that everyone had given up and turned bearish, the stock began to rally. On November 10 the price was, once again, back up to $24.50. Then came another earnings report and another sharp decline. The price immediately fell 16% and continued plunging until, on December 3, it once again bottomed out at $19. These bizarre dynamics played out a third time, with the stock rallying steadily to $22 on February 9, 2011, before falling back to $18.92 the very next day after earnings were released—another 14% decline. Figure P.1 displays Cisco closing prices from June 1, 2010, to February 11, 2011.
The rise of China and the potential economic and political decline of the United States is a concern for many Americans. In When China Rules the World: The End of the Western World and the Birth of a New Global Order
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Joel Greenblatt is a master of succinct and humorous writing about investment. He is also the founder and portfolio manager of hedge fund firm Gotham Capital and an adjunct professor at Columbia University’s Graduate School of Business, where he teaches courses in value investing. His latest work, the smart and simple The Big Secret for the Small Investor: A New Route to Long-Term Investment Success
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In The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy
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In today’s volatile financial markets, many investors are having a hard time deciding whether or not to be invested in equities and/or bonds. After the stock market turbulence and two severe bear markets of the past decade, as well as the uncertainty about the future, you are probably more cautious than ever about your investments. You might have moved to bonds, relied on mutual funds, followed the broker-friendly “buy and hold” strategy, or deposited your funds in a money market fund (“cash”). You might have made your decisions based on emotion, rather than discipline and fact. You are not happy with the results. So, how can you do better?
Continue reading "Profiting from ETF Rotation Strategies in Turbulent Markets" »
In his New York Times bestsellers The Last Tycoons and House of Cards, William D. Cohan showed how the history and culture of Lazard Frères and Bear Stearns, respectively, led to the firms’ ultimate fates. He applies the same historical approach in his new book Money and Power: How Goldman Sachs Came to Rule the World
Goldman Sachs is known for its strong corporate culture. Corporate cultures were typical of outstanding companies in the past and are seen in newer companies like Google, but are not very common in the contemporary financial industry. In contrast, culture continues to be at the heart of Goldman’s business. Cohan takes up a key issue that has been raised by the media and federal investigations—namely, whether the firm’s mission statement and guiding principles were eroded or ignored in the push for big, fast profits.
There’ s no shortage of Buffett books out there. For insight into his strategy, McGraw–Hill’ s 2008 edition of Benjamin Graham’ s classic Security Analysis, which features an introduction by Buffett, is the way to go. For behind-the-curtain revelations about Berkshire Hathaway’ s annual meetings, nothing beats Jeff Matthews’ s Pilgrimage to Warren Buffett’ s Omaha. But Alice Schroeder’ s The Snowball: Warren Buffett and the Business of Life gives the fullest, most nuanced picture of both the personal and professional man.
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You don’t have to be a Harvard graduate to glean wisdom from The Intelligent Entrepreneur: How Three Harvard Business School Graduates Learned the 10 Rules of Successful Entrepreneurship. Author Bill Murphy Jr. relates his 10 rules—including “find a problem, then solve it”; “think big, think new, think again”; and “persist, persevere, prevail” —to the stories of three HBS alumni who launched successful start-ups within 10 years of their graduation in 1998. However, anyone wishing to start a business can, and should, put these rules into practice.
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Throughout my years in the futures industry, I have come to a conclusion in regards to the difference between winning and losing as a trader. In my opinion, the primary characteristic of successful traders is the ability to stay calm through thick and thin. This means avoiding the panic feeling that overcomes logic when trades are going against the speculation, and resisting the over-confidence that can come with a few winning endeavors. Each of these symptoms can have a severely negative impact on future trading decisions and profitability.
Michael Lewis’s anthology Panic: The Story of Modern Financial Insanity
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King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone
Picking out a single stock for one’s portfolio had become a mug’s game, the equivalent of buying a lottery ticket. So, too, had long-term investing. Investors who had lost their shirts in 2007 and 2008 now held onto their investments for shorter periods. They had been badly scalded by following the conventional wisdom about stocks being the superior investment over the long term. Like sage cats, they’d never again jump on that stove top. The game now was to make 15% to 20% in a few weeks like the big boys at the hedge funds.
Fraud is an occupational hazard for even the most scrupulous financial professionals and their firms. Cases of fraud typically come to light during a financial collapse. The Madoff scandal is the most infamous case of financial fraud in our time, but it is just one case. If history is any guide, more schemes will be perpetrated, and exposed, in the years ahead.
In addition to the monetary cost, fraud takes a huge huge toll on the reputations of companies and their employees. The innocent as well as the guilty can get swept up in the intense media coverage, government investigation, and litigation that ensue from a scandal. Kenneth S. Springer and Joelle Scott’s new book, Digging for Disclosure: Tactics for Protecting Your Firm's Assets from Swindlers, Scammers, and Imposters
After Lehman fell, the scope of the financial crisis became so great that the fiscal and monetary authorities throughout the world possessed the only balance sheets large enough to resolve the crisis. In essence, the ills of the private sector were set to shift to the public sector. The sense at the time was that it would work; after all, the borrowing ability of the United States and the rest of the developed world were proven, and the ability of central banks to print money was and remains indisputable. Nevertheless, there was a sense of discomfort in the supposed solution.
Generating and understanding performance are two distinct processes that often require different skill sets and are typically performed by different arms within a hedge fund organization. The former falls under the realm of the portfolio manager; the latter is often provided by the CFO, COO, or investor-relations functions at the hedge fund. Editor John Longo skillfully combines explanations of both processes in the Hedge Fund Alpha: A Framework for Generating and Understanding Investment Performance
The first decade of the twenty-first century has not been kind to investors. On average, stocks lost about 1% per year over the ten-year period or more than 10% for the entire decade. During the decade we saw the collapse of three bubbles: the dot-com boom came to an end in 2000, the meteoric rise in housing prices in the middle years of the decade reversed sharply in 2007, and then in 2008 the massive over-leveraging of the banking system came home to roost, very nearly destroying the economy.
Any option contract can be replicated with cash and a series of trades in the underlying asset. Given a perfectly priced option, a trader who buys the option and transacts the offsetting trades in the underlying will have no gain or loss at expiration (before transaction costs).
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As the US recovers from its longest and deepest recession since World War II, financial practitioners and economists have varying opinions on the future of the global and American economies. In The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation
In his new book, Bust: Greece, the Euro, and the Sovereign Debt Crisis
The reader will find it astonishing that Greece was ever admitted into the euro and lent money. Rife with economic dysfunction, governmental incompetence, and corruption, Greece has been “stuck in the past, and largely unable to compete in the modern world.” The annual household budget for bribes to get anything done is estimated at 1,500 euro. Lenders were well aware of Greece’s situation.
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Accepting the inevitability of change is the first step to understanding trend following philosophy. One trend follower described it:
“But what won’t change? Change. When a period of difficult performance continues, however, most investors’ natural conclusion is that something must be done to fix the problem. Having been through these draw downs before, we know that they are unpleasant, but they do not signal that something is necessarily wrong with the future. During these periods, almost everyone asks the same question in these exact words: ‘Have the markets changed?’ I always tell them the truth: ‘Yes.’ Not only have they changed, but they will continue to change as they have throughout history and certainly throughout our 19 years. Trend following presupposes change. It is based on change.”
Markets go up, down, and sideways. They trend. They flow. They surprise. No one can forecast a trend’s beginning or end until it becomes a matter of record, just like the weather. However, if your trading strategy is designed to adapt to change, you can take advantage of the changes to make money.
The majority of investors—even those who swear they follow fundamental indicators—tend to act on and react to the market chaos seen in the daily action of the DJIA and stock prices. The short-term price movement in the market is always chaotic and, as confusing as this is, it can become your greatest advantage.
If you pick stocks based on the identification of four key fundamental indicators, you narrow down your list to the best companies. If you then time your entry on the price dips in the market, you can buy those companies at bargain prices. Two key rules should always be kept in mind. First, pick companies and stocks based on sound fundamental analysis. Second, time your purchase based on value and avoid relying on passing fads.
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Though the title would suggest that Fallen Giant dissects the collapse of AIG, nearly two-thirds of this book is given over to a chronological analysis of how AIG became an insurance powerhouse.
Author Ron Shelp, who worked for AIG and served on a number of the company’s boards, does a great job of delving into individual personalities and their motivations, leaving the reader with a front row seat to AIG’s genesis, growth, and fall from grace.
Indexes are probably the best instruments to trade condors, and the SPX, RUT, and NDX are the best of this group. The two main reasons are liquidity and their use of European-style options. The greater the liquidity, the easier it is to execute the trade, and European-style options increase your safety by eliminating the risk of early exercise.
The buying and selling of contracts takes place through an auction process. The bid represents what the buyer wants to pay, and the ask is the price the seller is seeking. There is no right way or wrong way to approach the bid-ask spread, but how you negotiate the price will result in different outcomes in your trading.
All markets are valued by a simple function between supply and demand; or at least that is how it seems throughout the typical economics 101 course. However, in reality, the components of supply and demand are highly complex and, some will argue, might be too overwhelming to effectively use as a speculative tool. Nonetheless, even those looking to trade commodities via technical analysis should have an overall idea of what might be impacting the data displayed on a price chart. It would be impossible to delve into market fundamentals in great depth within the scope of this writing, but I hope that you gain an understanding of price determinants and the ability to prioritize available information.
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