Book Review: The Crisis of Crowding


One of the most striking and important books on investing and risk management appears to be something it is not. Upon first glance of The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal (Bloomberg) (and not being acquainted with Prof. Ludwig Chincarini’s work), I wondered how a bunch of paper flowers on the wall was related to investing. After closer examination, I quickly learned that these were not paper flowers, but a pile of darts all stacked together on the dart board. At that point, I realized that Prof. Chincarini’s book would be essential reading for me. I wanted to learn how investors would pile into—and out of—the next big thing after the mortgage securities debacle of 2008. This informative narrative was an investigative and methodical look into major financial crises and the demise of Wall Street.

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Book Review: Red Ink

Red-InkThe federal budget is one of the key focal points for the presidential election. The candidates have their proposals to reduce the budget deficit, however, political claims seem to make the subject more confusing than clear. In addition, there are increasing worries about the "fiscal cliff, " the tax increases and automatic spending cut coming in January if Congress fails to act. Moody's has just threatened to downgrade the US triple-A rating if Congress doesn't come up with a budget deal. The opposing political parties have indicated little, if any, inclination to compromise. For those seeking an objective picture of the federal budget, David Wessel's new book will be welcome.

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Book Review: The Lost Bank


At the time of its collapse in 2008, Washington Mutual had assets of $307 billion. It was the largest failure in American history. The details of the epic failure have been covered, but never in the humanizing manner we see in The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History. Author Kirsten Grind tells the story in detailed and graphic form, providing what others have described as a “fly-on-the-boardroom account” of what happened, which reads like a novel. The uniquely written narrative will appeal to everyone—despite their professional background. Grind provides the number crunching details for finance professionals, in addition to the touching perspectives of the customers. In retrospect, the story sounds fantastic and bizarre as this more than 100-year-old bank rode the subprime mortgage boom over the edge to disaster. But as the bank hurtled to catastrophe, it seemed a hugely profitable and often admired financial institution.

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Book Review: What Chinese Want


An understanding of the Chinese worldview is essential for anyone doing business or investing in China. We may think that we know what the Chinese want, but our assumptions are often faulty. Tom Doctoroff is well qualified to enlighten us. He is Northeast Asia area director and Greater China CEO at J. Walter Thompson, and has lived and worked in mainland China for 14 years. As an advertising executive, he knows how to hold our attention. He organized his recent book What Chinese Want: Culture, Communism and the Modern Chinese Consumer into short and focused chapters.

China’s primary goal is stability. This reflects a long history of traumatic change, including foreign occupation, famine, and Mao’s Cultural Revolution. The Chinese do not take survival for granted, and personal identity is tied to the family and the nation.

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Book Review: Why Good People Can't Get Jobs


Each day, whether we want to hear it or not, we learn of more colleagues who are being laid off from investment banks, brokers, and even advisors. State unemployment rates in New Jersey and New York are again at or approaching 10 percent. While the climate for employment in our industry has selectively stabilized since 2008, many are being severed as their companies simultaneously search for the “purple squirrel”: the perfectly skilled employee who can fit right into the precise specifications of the company’s posting. “Perfect” skills may betray an “imperfect” age, job title, or current employment situation.

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Book Review: Every Nation for Itself


The daily headlines of financial stress and possible disaster in the eurozone are a graphic scene of a breakdown in the European countries' ability to come together in a solution. Some see the same type of political paralysis and institutional dysfunction in the failure of the US Congress to address our fiscal debt challenge. The full parameters and impact of this increasingly fragmented world is spelled out in Ian Bremmer's new book, Every Nation for Itself: Winners and Losers in a G-Zero World.

The "G-Zero World" that Bremmer describes is "a world order in which no single country or durable alliance of countries can meet the challenge of global leadership." The G7 and G20 groups are viewed as ineffective. We are in a period of uncertain transition, in which "for the first time in several decades, we live in a world without global leadership." The result is more volatility, uncertainty, turbulence, anxiety, and risk for investors.

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Book Review: Private Empire


Oil companies have always been involved with—and connected to—governments. With the increased globalization of business and finance, this is true of most multinational corporations. Steve Coll's new book is an informative record of one of the most prominent of these corporations: Exxon Mobil. As Coll writes, the company is “one of the most powerful businesses ever produced by American capitalism.” Private Empire: ExxonMobil and American Power is an eye-opening and exposing review of the corporation. The research for the book consisted of over 450 interviews and 800 pages of documents predominantly from the State Department (through use of the Freedom of Information Act), in effect providing the first in-depth examination of Exxon Mobil to date.

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Book Review: A Decade of Debt


In the wake of the global financial crisis, mainstream economists have begun to realize that financial markets need to be incorporated into their theoretical frameworks. The traditional view holds that asset prices ultimately reflect underlying economic activity. But it turns out that economic activity is, in turn, directly affected by asset prices, which is why the pathbreaking work of Carmen M. Reinhart and Kenneth S. Rogoff, economics professors at the University of Maryland and Harvard University, respectively, is so valuable. Their research offers a wealth of empirical data concerning the impact of debt on macroeconomic activity, as well as an analysis of the data. Because their analysis tends to be in the form of narration rather than econometric equations, it is highly accessible, even to nonspecialists.

A sequel of sorts to their acclaimed best-seller, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009), A Decade of Debt (Policy Analyses in International Economics) is shorter and summarizes some of the authors’ research that has appeared in academic journals since the publication of This Time Is Different.

In A Decade of Debt, Reinhart and Rogoff document that the public and private debts of industrialized nations have grown to unprecedented levels relative to their GDPs. Historically, high public debt levels have been reduced not through higher macroeconomic growth but, rather, through a combination of austerity measures and default. Default can occur through repudiation and restructuring, which is how debt incurred during World War I and the Great Depression was typically unwound. Default can also occur through what has been called financial repression, which refers to such government-imposed measures as ceilings on interest rates, regulatory requirements that effectively create captive audiences that extend credit to the government, and direct governmental influence on the ownership or management of financial institutions.

Financial repression is how governments of advanced nations dealt with the debt they ran up during World War II. It is likely also—Reinhart and Rogoff hypothesize—how they will deal with the debt incurred in the effort to support national banking sectors during the recent financial crisis. Because historical episodes of delevering have tended to last as long as seven years, the authors suggest that we are currently in the middle of “a decade of debt,” extending from 2008 to 2017.

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Book Review: Breakout Nations

Breakout-NationsInvestors have been drawn to the rapid growth and what some see as "economic miracles" among countries described as the emerging markets. A potentially profitable strategy is to spot the next country growth stock in advance, and to cash out of those countries before their growth peaks. As head of Emerging Market Equities at Morgan Stanley, author Ruchir Sharma is well-qualified to help investors in this process.

What makes Breakout Nations: In Pursuit of the Next Economic Miracles so fascinating is the author's experiences visiting and investing in so many of the emerging markets. He is well-versed in all the relevant economic statistics and financial trends. In addition, he is a writer who knows how to grab the reader's attention and keep the reader engrossed. Most importantly, Sharma challenges the popular consensus on many countries, and presents many observations and conclusions that emerging market investors must consider.

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The Checklist Manifesto


In 2009, Atul Gawande published The Checklist Manifesto: How to Get Things RightThe Checklist Manifesto. Sometime later, a copy arrived at my office, courtesy of a money manager, but it sat unread for many months.

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.

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Book Review: Ben Graham Was a Quant

CFA Institute


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 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.

Ben-Graham-Was-A-QuantThe title Ben Graham Was a Quant: Raising the IQ of the Intelligent Investor (Wiley Finance) will probably cause readers to envision a book that traces Graham’s remarkable life and dissects his use of quantitative techniques that have become prevalent in modern finance. In reality, Steven P. Greiner has written a very different type of book. Greiner, the head of Risk Research for FactSet Research Systems, is the stereotypical Wall Street quant, holding a bachelor’s degree in mathematics and chemistry from the University of Buffalo and a PhD in physical chemistry from the University of Rochester. Greiner’s background in the hard sciences is evident in the quotations from either Albert Einstein or Isaac Newton at the beginning of nearly every chapter and in the author’s extensive use of examples from the hard sciences.

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.

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Book Review: The End of Cheap China


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 concludes, this is about to change.

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."

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Book Review: The Start-up of You


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.

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Book Review: Zombie Banks


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.

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Book Review: Startup Asia


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.

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Book Review: The Hedge Fund Mirage


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.

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Book Review: The Growth Map


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.

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Book Review: Grow Globally


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.

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Book Review: A Contest for Supremacy


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.

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Book Review: Exorbitant Privilege


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.

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Book Review: Anglo Republic


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.

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Book Review: Great by Choice

Great-by-choiceJim 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 AllGreat by Choice follows in this path. It is carefully researched, clearly presented, and studies a timely topic—why some companies are able to move ahead in times of turmoil and trouble, while others fail to do so.

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The Inner Voice of Trading


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.

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Book Review: The Wizard of Lies

The-Wizard-of-LiesThe Wizard of Lies is hard to put down. It reads like a novel. Diana B. Henriques of The New York Times was the go-to reporter for the Bernie Madoff scandal since its beginning in 2008. The first reporter to be granted on-record interviews with Madoff post-arrest, the a recent Times review boasts Henriques “…probably knows more than anyone outside the F.B.I. and Securities and Exchange Commission about the mechanics of the fraud.” She uses that knowledge and resource here to offer an in-depth look into the man behind the $65-billion-dollar Ponzi scheme that rocked the nation.

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Book Review: Reckless Endangerment

Reckless-Endangerment 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.

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Book Review: The Global Economic System

The Global Economic SystemThe 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 , these authors present their analyses and conclusions in a systematic, easily understood fashion, illustrating their points with well-chosen and instructive charts.

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Book Review: The Most Important Thing

The Most Important Thing: Uncommon Sense for Thoughtful InvestorHoward 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 is based on periodic memos sent to customers and serves as a clear presentation of his investment philosophy. Risk—“the most interesting, challenging and essential aspect of investing”—is at the core of his approach. A few years ago, his thinking would have seemed old fashioned; the recent financial crisis has made it relevant again. Marks’ decades of experience lend his book extra credibility.

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Book Review: What Would Ben Graham Do Now?

What Would Ben Graham Do Now?In his new book, What Would Ben Graham Do Now?: A New Value Investing Playbook for a Global Age, Jeffrey Towson offers a unique glimpse into global investing at the very top levels of sophistication. Towson was head of direct investments for the Middle East, North Africa, and Asia Pacific for Prince Waleed, one of the most successful global investors. Towson adapts Benjamin Graham’s value concept to a world that is vastly different from the one Graham knew.

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Pulp Finance

Wall Street StoriesThe 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!

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Understanding China’s Economic Indicators

Understanding-Chinas-Economic-IndicatorsChina 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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Writing Covered Calls

Writing Covered CallsThese 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.

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What Would Ben Graham Do Now?


What Would Ben Graham Do Now?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.

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Iron Condor Spread Strategies: Timing, Structuring, and Managing Profitable Options Trades

Iron Condor Spread StrategiesThe 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.

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Book Review: Managing the China Challenge

Managing the China ChallengeManaging the China Challenge: How to Achieve Corporate Success in the People's Republic is an authoritative guide to China’s intricate political and business structure. Author Kenneth G. Lieberthal is the director of the John L. Thornton China Center at the Brookings Institution and was senior director for Asia on the National Security Council from 1998 to 2000. His new book is essential reading for anyone investing or doing business in China, where “the state is always your partner.”

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Book Review: The Forbes CFA Institute Investment Course


The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth is a great introduction for the beginner investor as well as a great refresher for seasoned investors and finance practitioners. It explores a myriad of important topics, such as how stocks have historically outperformed cash and fixed-income investments, the various investment asset classes, asset allocation, the pros and cons of active versus passive investing, and how to determine your unique risk profile and investment horizon and how to use both to help define your investment goals. Additionally, the reading provides a strong appreciation for risk management as a counterbalance to the return-seeking attitude that many investors exhibit, as well as an effective comparison and contrast between fundamental and technical analysis.

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Microsoft Excel for Stock and Options Traders: Build Your Own Analytical Tools for Higher Returns

Excel for Stock and Option Traders 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.

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Book Review: When China Rules the World

When China Rules the WorldThe 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, Martin Jacques depicts a world in which Chinese influence is paramount. He challenges the assumption that China will adopt Western values. Chinese modernity, he argues, would be very different from Western modernity, and China would transform the world far more fundamentally than any other global power has done in the last two centuries.

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Book Review: The Big Secret for the Small Investor

The Big Secret for the Small InvestorJoel 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, would have saved me several years of research on the art of investing, had it been part of the CFA curriculum in the 1990s.

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Book Review: The Origin of Financial Crises

The origin of financial crises In The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy, Dr. George Cooper, a former head of fixed income at JPMorgan Chase and currently a principal at Alignment Investors, argues that credit excesses are the wellspring of financial crises. Cooper’s book is a vigorous indictment of the EMH (efficient market hypothesis), in which laissez-faire economic theories are applied to financial markets. He skillfully dismantles the prevailing theoretical paradigm, which has failed to predict or explain the recent carnage in financial markets, and suggests an alternative based on economist Hyman Minsky’s financial instability hypothesis, which Cooper contends better fits recent market facts. Applying Minsky’s theory, Cooper proposes modifications of the mandates of central banks and suggests prescriptions for the current economic malaise. The book is a deftly reasoned contribution to the torrent of criticism surrounding orthodox financial market theories.

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Profiting from ETF Rotation Strategies in Turbulent Markets

Profiting from ETF Rotation Strategies in Turbulent MarketsIn 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?

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Book Review: Money and Power

Money and PowerIn 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.

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Book Review: The Snowball: Warren Buffett and the Business of Life

The Snowball 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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Book Review: The Intelligent Entrepreneur

TheIntelligentEntrepreneur 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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Mental Aspects of Day Trading

Day Trading Commodity Futures 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.

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Book Review: Panic: The Story of Modern Financial Insanity

Michael Lewis Panic Michael Lewis’s anthology Panic: The Story of Modern Financial Insanity examines four events, linked but distinct, that span a period of just over twenty years: the 1987 crash, the Asian crisis, the dot-com bubble, and the subprime crisis. Lewis has collected book, newspaper, and magazine articles written before, during, and shortly after each crisis; the contemporaneity of the analyses with the events precludes any hindsight or backward thinking. Instead, Panic is comprised of unfiltered accounts, admissions of bewilderment, clumsy stabs at solutions, and some examples of far-sighted predictions.

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Book Review: King of Capital

King of CapitalKing of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone, by David Carey and John E. Morris, recounts the history of one of the financial industry’s most successful firms and one of the current generation’s top financiers. It also offers an education in the world of deals, and in coping with management challenges.

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Crapshoot Investing

Crapshoot InvestingPicking 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.

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Book Review: Digging for Disclosure

Digging for Disclosures 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 , teaches you how to spot fraud in advance and avoid becoming another victim.

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The Keynesian Endpoint

The Keynesian EndpointAfter 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.

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Book Review: Hedge Fund Alpha

Hedge fund alpha 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 essays in this book elucidate what the alpha-generation process is, as well as how the outcome of that process is assessed, evaluated, and monitored. While these are separate questions, there is a feedback mechanism between the two, which reinforces the importance of understanding both topics.

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