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The Attain Alternative Investing Crash Course

June 18, 2012

 

It is a common lament in financial circles of late- the apparent lack of quality alternative invesment educational materials. Don't get us wrong- we KNOW managed futures certainly doesn't have a representative body of literature dedicated to it (aside from ours)- but in the wider world of alternative investments, and investing in general, there actually are a fair amount of books that are not only worthy of your attention, but may help you to better understand the decisions ahead of you. Or, at least, laugh a little bit along the way.

So here we break down the financial missives and exposes that  our office has been reading and highly recommends. Or, as we jokingly refer to it around the office, a Master's degree in "Alternative Investment history, operation, and marketing" from the University of Malec.

Time to hit the books:

When Genius Failed, the Rise and Fall of Long Term Capital Management by Roger Lowenstein

We’ve all heard in one form or another that growing as a person (or investor) how critical it is to learn from one's mistakes. Well, this book details the very large mistakes that were made by one of the biggest (and supposedly smartest) hedge funds ever, Long Term Capital Management and their pair of Economics Nobel Prize Laureates. Their collapse nearly crippled the financial system, resulting in an unprecedented bailout from the US fed (sound familiar to current times). Just how such smart people who literally wrote the book on risk got it so wrong is truly an intriguing story which helps the everyday investor understand there is much more to risk than meets the eye. The sheer size of the numbers of dollars being made or lost in this book make it a compelling read.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Nicholas Taleb

One of our personal favorites, this book  stands a lot of conventional wisdom on its head by questioning the very fabric of skill and success. Are traders/investment managers actually good? Or just lucky? Mr. Taleb would have you believe there is a lot more luck to it than one would think, and not really even luck as you or I would think about it, but luck in terms of not yet having experienced an outlier event such as a 1 in 100 year storm or "black swan", as he would call it. The end result for Mr. Taleb is a market that is much more random and crazy than can be modeled or predicted, leading those who believe it can be modeled or predicted down a dangerous path. Warning for option sellers - Mr. Taleb is wholeheartedly against option selling, and in fact runs his own hedge fund which specializes in option buying in hopes of profiting from the impending outliers he believes the rest of us aren't thinking about.

The Black Swan by Nassim Nicholas Taleb

Continuing on with his theories from his first book - Mr. Taleb's follow up book gets into a few more specifics about how the world (and especially the financial world) is comprised of rare events he calls "black swans", which are so rare as to not even be considered as a risk. The tragedy on 9/11 is a prime example of a Black Swan. The stock market crash in October 1987 is another. This book quickly became his most famous work due mostly to its timing, coming out in early 2007 (just monthly before the real life black swan of the credit crisis started to show), and some passages blasting bankers as little more than lemmings following the herd without a clue as to the risk and leverage they are employing.

The Predictors : How a Band of Maverick Physicists Used Chaos Theory to Trade Their Way to a Fortune on Wall Street by Thomas A. Bass

Quite the opposite of the book above, this book details the trials and tribulations of a group who actually did believe the markets could be modeled and profitably predicted. If you have ever thought of writing your own trading system - these guys sure did, and took it to a whole new level. The title is a little misleading, as they were mainly dealing with derivatives markets, not Wall St. stocks and bonds - but it is an interesting read on just how far some will go to "beat" the market. And just how much big money or banks are willing to believe that such "beating" of the market is possible, even if the proof isn't exactly there. The beginning of this book paints a great picture of the now nearly defunct, controlled chaos that is/was futures trading pits in Chicago, and is worth the price of admission just for those few dozen pages.

Handbook of Alternative Assets by Mark J. P. Anson

While this is more of a textbook than a narrative like the other books listed here, and rather statistically heavy, this is a great book for learning the different types of alternative investments, along with the benefits and dangers of each. The many different types of hedge funds, commodity and managed futures, private equity, credit derivatives, and corporate governance are all covered. Anson is the former Chief Investment Officer of CalPERS, the huge California Pension which is the largest Pension fund in the US with nearly $250 Billion in assets, and as such one of the largest investors into alternative investments. With that type of experience, it is worth hearing what he has to say.

The Prize : The Epic Quest for Oil, Money & Power by Daniel Yergin

For anyone who gets excited whenever the prices at the pump go up and down, or takes a peek at the news or online to see what Crude Oil prices did each day - this book is for you. It is the history of the modern world, in a way, told through the eyes of the oil industry. Did you know the first oil wells in the world were in Pennsylvania, that the rights to Saudi Arabia's oil was first secured for just $175,000, or where the name Shell Oil came from. The Prize is a Pulitzer Prize winning must read that puts you behind the scenes at important cross roads in history where oil was often the main character. With the current state of affairs in the world regarding oil, seeing how we got there is a great exercise.

Little Book of Trading by Michael Covel 

Forget about the little book of drink recipes or the little book of pick-up lines- what you really need is the Little Book of Trading. Michael Covel is well-established in the managed futures space when it comes to trend following, and this little text provides the basics needed to really understand the strategy. Think of it as a primer for the core of a managed futures portfolio.

Reminiscences of a Stock Operator by Edward Levre

Guess what? Perhaps one of the most classic investing guides in history was not written by a hedge fund guru or stock picking phenomenon- it was penned in the 1920’s as a series of articles in the Saturday Evening Post. The fictionalized account winds up holding more truth than some of the non-fiction options  you’ll find floating around your local Barnes & Noble, giving you the basis you need to efficiently expand your investing prowess 

Hedge Fund Market Wizards by Jack Schwager

What book is almost 600 pages long and worth a 45 minute interview? Oh right, this book, written by the man who pulled back the curtains on pro traders in the 1980s. Learn about discipline and technique from some of the most successful hedge fund managers in the world. As Barry Ritholtz described it, “Schwager explores the differences between great traders and everyone else who thinks they can trade."

Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes and Real Money by Steven Dronby

This book’s title promises to reveal the secrets and profile of hedge funds, but for us, the more interesting part is the time spent explaining who needs alternative investments, how they’re getting them, and what it means for their portfolios. In particular, it glances at some of the larger institutional players, and how their bets on liquidity paid off and didn’t.

Backstage Wall Street: An Insider’s Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments by Josh Brown

It’s no secret that we’re fans of Josh Brown over at The Reformed Broker. He tells it like it is with a sense of humor and humility, and that same refreshing writing style has transferred over to his new book.  If you’re looking for a roadmap to building the perfect portfolio, look elsewhere. This isn’t a sleazy salespitch for a strategy or a dry encyclopedia entry of investment vehicles. Instead, Brown writes candidly about his life in the brokerage world, going so far as to outline the Straight Line Pitch word for word- a pitch that elicited more than handful of chuckles in how familiar it is.  Peppered with both industry and personal history for flavor, the book was entrancing, entertaining and informative. If you’re a fan of his blog, or just trying to learn about how to protect yourself from the “sharks” and “whales” of the investing sea, it’s definitely a highly recommended read. 

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That should keep you busy for a while. What’s your favorite investing book?