Expectations Investing: Reading Stock Prices for Better Returns by Alfred Rappaport, Michael J. Mauboussin (2001)

This surely must be an excellent book, as it is endorsed by Jeff Skilling of Enron "fame", and throws in a good word for Enron as the reinventor company. But joke aside, the book starts out with an interesting idea, instead of the usual calculations (read pulling it out of a hat, or maybe from a body part a bit lower) trying to determine a correct valuation of the company, could we go backward from the stock price, as established by the market, to the expected valuation, and make judgement calls on the validity of those expectation. The trouble is that there are a whole lot of assumptions need to be made on the current and future state of the company, and knowing those facts can be very hard even for insiders (if one believes the "they all just did this behind my back" defenses in cases like Enron), and it is definitely even harder for an investor learning this information from annual reports and other observations. One should also assume, that similar approaches are already used with all those mutual funds there, who can throw a whole lot of analyst time and processing power trying to figure out these numbers, and still arrive to mediocre investment returns when compared to market averages. Case in point is the Gateway case study as presented in the book, which, after a whole lot of pages of calculations and assumptions, arrives to three prices for the company, from which one would be expected to select the right one to use, based on your expectations of the expectations of the market, which does not take us very far from acting on the perceived random behavior of the market. Gateway itself was purchased by Acer for $1.90, which is well below of any of the expectation price ranges as calculated in this book. There are also some chapters offering generic discussions on how mergers and acqusitions, share buyback and executive compensation influences the perceptive and real outlook of companies. Do not expect much reading this book.


The Day Trader: From the Pit to the PC by Lewis Borsellino (1999)

The author and his brother (also a trader in the S&P pit), grown up in a Sicilian Italian family, with their made man father serving a organized crime robbery conviction in their younger years, and who was later murdered by his own associates. The childhood education sticks, he and his brother shaking down exhibitors as a summer job with the and it also earned Mr. Borsellino a battery conviction during college. It also helped him to muscle in quite literally (by beating up other traders) into several pits of the Merc. We also learn how much their father loved them, how they loved him back, how hard it is to be discriminated against as an Italian, and how smart and hard working the author is. Fortunately for him, the author was not indicted in the FBI sting against illegal trading practices at CME. We also learn of escapades, with trades outside of any reasonable trading limits, with throwing up right afterward in the bathroom, and also how to scalp the customer order flow for nice quick profits (of course this is only nice if you are the one doing the scalping). The author also offers his (narrow-minded) views on electronic trading (basically it is good-for-nothing), where his limited knowledge of computer systems does show. Some references to support and resistance, reading the mind of market are there, but if looking for some trading knowledge, there is not much to see here, so move along. Otherwise the book makes a nice biographical read of the almost bygone era of the pit trading, similar to Charlie D.: The Story of the Legendary Bond Trader.


The Science of Winning (High Stakes) by Burton P. Fabricand (1977)

The author leads us from the applicability of random walk and normal distribution to various areas of human behavior, including wealth distribution, gambling results, and in particular to parimutuel betting (read horses) and the stock market. In the author's view both of these markets are efficient in expressing market expectations of participants, but this does not mean they are "strongly efficient". Statistics and methodology are presented on beating the tracks and the stock market (although the 15-20% "take" from the top might make the tracks a harder nut to crack). Statistical formulas like expected standard deviation Ö`N`*`p``*`q (calculated from the number of trials, percent of losses, and percent of gains), chi-square tests, "t" test, ballot theorem are used to substantiate the findings. At the tracks, favorites are underbet and last minute information are not absorbed to change the expectations of the outcome. Betting on favorites and utilizing last minute information (and following a myriad of other proposed rules), might allow the reader to beat the "take" and come out ahead. The author actually takes less than half the number of pages as compared to racetrack betting to discuss his stock market approach. Going against the mainstream efficient market hypothesis (EMH), the author offers statistics proving, that corporate events (like earnings surprises) are not discounted quickly enough (one explanation could be that big market players just cannot get quickly enough in/out of a particular security and also that they do not have lots of choices of companies to invest in, so might choose to stay in a security, even if it is already understood to be declining). Of course various other discussions like this were made available on this subject, mostly proving this same point. Actual process seems simple enough, investments are selected by comparing ValueLine estimates to actual earnings reported by the Wall Street Journal (of course one can substitute other sources for this information if preferred, one could also take time to do earnings swags as the "real" analysts do), and companies with an earnings increase of more than 10% are bought and with an earnings decrease of more than 10% can be shorted. With the market's upside bias, the short positions were doing worse than the long positions. Options could also be used to simulate the same positions, or enhance the leverage. An entertaining read, although the (likely computer generated) rules on racetrack betting getting to be a tedious read (and probably even more painful to implement :) ...


Our Brave New World by GaveKal Research (2005)

Indeed, "this time it is different" are the most expensive words pronounced. This excellent book by Louis V. Gave and associates offers an overview of the economic landscape, and unfortunately offers some conclusions, which clearly became incorrect based on the current happenings in the US finance and housing markets. The author argues, that we are well on our way into the The Third Wave as described by Alvin Toffler. Free trade, technological progress, industrial overcapacity and easy movement of goods, led to the creation of "platform" companies, which keep the high value added parts of their processes in-house, and outsource all the rest (including most production). These companies need much less working capital (a good example of this would be Ikea, entirely being financed by its profits, taking in no external capital). The outsourcing eliminates industrial employment (and trade unions) in the developed countries (where most of these companies like to be located, as they also rely on the rule of law for their functioning), and exports volatility to producer countries. The old forms of accounting and economics also describe this process incorrectly, hence the big discussions on the US trade deficit (this is not to say, that the US dollar exchange rate will not worsen ...). Most profit of any production stays with the platform companies, and the profit generated abroad also has a strong incentive to be repatriated into the stable developing economies (as investment, real estate purchases, luxury consumption, and the like).
There is also the giant sloshing pool of capital invested with the various hedge funds, trying to find inefficiencies (and quickly eliminating any and all), working with leveraged "return to mean", "momentum based" and "carry trade" strategies. Lots of capital chasing less opportunities, so capital is becoming cheaper, but mostly for the customer in the developed countries (as platform companies need less capital, and it is likely not smart to lend to the volatile industrial producers and to their workers, who can get laid off very quickly ...) moving us towards a deflationary environment.
So where does this lead us? The conclusion on the decreased volatility and sustainable real-estate prices were incorrect conclusions, based on the latest dips (or depression ...) in the US Housing prices and great increase in the market volatility. Maybe this was just another asset bubble (sustained by the extra low US interest rate) or the world economies need to be observed as a whole. Also the deflationary pressure seem to be lacking just by looking at the US budget deficit. But there are other valuable pointers: invest in customer related companies (retail, finance, although finance stocks are not doing that great either), buy scarcity assets (like high end real-estate, art, and the like), invest in emerging markets (with an eye on the economy cycles) and invest in platform companies everywhere. There is also an interesting table evaluating various economies, on how much Ricardian growth (based on economic freedom) and Schumpeterian growth (based on economic creativity) is expected to happen (the UK and Eastern Europe do quite well, the US and Australia lining up behind). Recommended.


Full of Bull: Do What Wall Street Does, Not What It Says, To Make Money in the Market by Stephen T. McClellan (2007)

If, after learning the stories of Henry Blodget, Jack Grubman and the like, you still harbor any illusions on the usefulness of security analysts and their investment advice, this is a book to read to clear your view. The author is an industry insider ("McClellan, are you still writing all that bullshit?" as Michael Bloomberg being quoted to be said in the book), who on one hand seems to be proud of his own qualifications of having an MBA and CFA, his own Institutional Investor Reasearch Team rank and being member of the "club" in general, while on the other, bashing the the investment advice industry overall, where advice to "Hold", means "Sell Yesterday", and also offering a few kind words on mutual funds, their biggest customers. Even if the advice coming would be worthy, it gets very very stale until the "retail" (an being "retail" is a dirty word in this context) participants get their hands on it and has been acted upon by all other market participants. In addition to the usual quantitative approach, the author practiced and advocates gaining investing information by smoozing corporate executives (which this approach might simply be out of reach for most investors), which includes frequent golfing on best known greens preferably on a corporate dime, to learn their character and for the rest of us, as a good substitute, listening to conference call, which would allow learning of the character and trustworthiness of the executives. Lots of worthy observations are also listed like:
  • deletion of stock coverage is a major read flag (this happens in lieu of downgrading)
  • there is a large company bias, and small companies are rarely covered (this also shows that this research is oriented towards institutional investors)
  • executives never think that their stock price is too high
  • executives and hedge funds curry, cajole and muscle favors with analysts (and the companies employing them). Major PGA golfing events definitely come to mind here ...
  • prefer specialized simple businesses (as compared to generalist companies)
  • avoid weird tock structures (voting, non-voting shares), and sweetheart management setups
  • invest in themes and rising industry sectors (maybe using ETFs)
  • prefer NYSE listed stocks to NASDAQ
  • tread lightly with International Companies
  • turnarounds almost never work
  • do not invest in IPOs
  • mutual funds offer safety bundled with mediocrity
  • (for US investors) focus on the one year mark (for reduced capital tax rates)
  • do not sell on downgrade (in particular on the day of a downgrade), the stock price likely has already fallen
  • be aware of the January effect, as January goes, so goes the whole year
  • do not read quarterly press releases, but do listen to the quarterly earnings conference calls
  • investigate hedge fund positions (if they happen to be accidentally revealed), but give little head to mutual fund positions (as they get paid by the size of the fund, not based on their performance)
  • give stocks to your kids
  • dramatic acquisition during troubled times is a diversionary tactic
  • stock buybacks usually do not accomplish much
An excellent list of various executive management styles are also given (smartly characterizing Bill Gates, Larry Ellison, Steve Jobs and others). The book completes with a call for reforming the industry (although one could argue that it is another middle man industry, which outlived its usefulness in the light of improved access to the markets and company information ...). The author had a good sense to choose retirement after the year 2000, when the gravy train stopped (and salaries up-to $1,000,000 per year were no longer given for questionable advice) and now advocates a longer term view to the market. It is unclear, except for mentioning some instances were those investments worked out, what his overall investment results happened to be over the 32 years spent advising clients in the industry. Proceed with some caution.