Part of growing as an investor is learning, speaking to others, and reading on your own. With the internet being a sea of information, I've tried to put a definite list of good reading material and certainly welcome your feedback. More updates on this list (hence the Episode 1).
Derivatives
If you still have your TI-83+ and can still integrate trigonometric functions, you might enjoy these reads.
- Option Volatility & Pricing by Sheldon Natenberg
- This is the gold standard of all finance text because Natenberg details options trading from the view of a practitioner, which is much more important than being able to memorize stochastic formulas. There no book that is equal in richness of practical information; besides, you little math to follow most of it. For example, there is a good illustration of dynamically delta-hedging an option to capture realized vol. Other topics include: option greeks, option spreads, path dependency, etc. Please note this book is already required reading for trader assistants during training at option market-making firms.
- Dynamic Hedging by Nassim Taleb
- Taleb is one arrogant dude who loves flooding his books with archaic words which were last employed in the English Language by Geoffrey Chauncer. But alas, Dynamic Hedging is a strong advanced text which goes through many nuanced topics. For example, he makes some good points on managing option greeks. Some chapters I really enjoyed: soft American options, discrete delta vs continuous delta, fungibility. Just a warning that you might have to read over sections multiple times before you digest ideas.
- The Eurodollar Futures and Options Handbook by Galen Burghardt
- The honorable mention and recommendation for aspiring rates traders. There is a good discussion on convexity adjustment of futures vs. interest rate swaps
Value Investing
Many people claim to be "value investors", but some of these pretenders are simply buying a broken company for cheaper than what the business was historically trading for. Imagine someone trying to sell you Detroit bonds, "If before you liked it up there, now you've love it down here!" (Citation: Y.W.). The books below are for the guys who want to avoid Detroit.
- The Essays of Warren Buffett by Laurence Cunningham
- Basically a collection of letters by Buffett where he shares his perspectives. He's very easy to understand and follow. His discussion on dividend policy and share buy-backs really left an impression for me, but there's a load of other subjects: conflicts of interests with management, acquisitions, etc. Also, let's not under-estimate that Buffett is an extremely talented manager (Berkshire Hathaway is basically the world's largest conglomerate), and we can all take a lesson from him on how he encourages his employees; you'll see a lot of "honest compliments" that Warren hand's out, similar to what is preached by Dale Carnegie.
- One Up on Wall Street by Peter Lynch
- This was the first book I read in college and luckily, it was also one of the best. Like Buffet, Peter Lynch is humble and a huge proponent of investing in what you know (i.e. "circle of competence"). There is a great section on financial statement analysis, what to look for on the balance sheet or income statements (I mean real financial statement analysis for evaluating companies, not what you are taught by college accounting professors). If you enjoy this one, there's a sequel Beating the Street, which is written in more of a journal format (the precursor to the modern day blog)
- Margin of Safety by Seth Klarman
- Klarman is probably the best fund manager that normal people have not heard of. Many of his themes are similar to Buffett (market is a voting machine in the short term, but a weighing machine in the long-term). One part of the book did a terrific job detailing the short-comings of EBITDA. While the book is out of print, you might be able to find .pdf versions.
Global Macro:
- Inside the House of Money by Steven Drobny
- Great collection of interviews with many fund managers on various topics. I remember how most portfolio managers saw convergence trading / fixed income relative value as being short gamma. I sometimes re-read this book on a long plane ride and still learn something new every time. Drobny followed this one up with a sequel, The Invisible Hands, which is not as strong, but still somewhat intriguing.
General Trading
Throw-out your day-trading books please, usually, you should be reading or taking advice people who actually make money.
- Market Wizards Series by Jack Schwager
- Like Inside the House of Money, every time I read these books, I learn something new. There is a good balance between some technical topics (options) and risk management.
The Sam Bowie List
Allow me to humor you with some history: the 1984 NBA Draft turned out later to be one of the most prolific rookie classes (multiple Hall of Famers and future 1992 Dream Team members). 1st Overall was Akeem Olajuwon. The Portland Trail Blazers, in need of a rookie, used the second overall pick to draft Sam Bowie from University of Kentucky. Then, the Chicago Bulls used the 3rd overall pick to take a guard out of UNC by the name of Michael Jordan. 30 years later, ESPN is still laughing at the Trail Blazers for their decision (In Portland's defense, they drafted for need since they already had a young point guard Clyde Drexler).
So below are a few of the worst finance books ever published, analogous to draft busts:
- Options, Futures, and other Derivatives by John Hull
- You might as well be taking a calculus class if you use this text book. There are no good practical explanation or intuitions on certain formulas (not to mention that most of the models in that book are out-dated). Where's the juicy stuff? Where's the graphs which is worth more than 1000 words when discussing gamma? Really a very over-rated book.
- The Alpha Masters by Maneet Ahuja
- A generous 4-Stars on Amazon, so I have to give my perspective. The feel of the book is written by a first grader with almost no knowledge of finance or logic. Here's an example, author will state "Paulson entered in into X trade, because he thought that these securities are cheap". Then the next part will describe how much money Paulson makes on trade. Well, why is X cheap, was there some forced seller, what is Paulson's logic, what are the downsides, what are the upsides, did Paulson look at any alternative way to implement his views, what was the current environment? That is the tasty stuff, and it is nowhere in the book. Hence, the book does not serve the purpose of its title, which should be instead "Biography of Fund Managers for Kindergarten Reading."
Any book about Warren Buffet which is not the one mentioned above is basically a waste of paper. I am ashamed to say I have already been arbitraged many times when purchasing a Warren Buffett book at the airport right before a flight, so do not make the same mistake as me. Buffett himself is so skilled at presenting advanced topics so that even a child could understand, yet no other author possesses a great understanding of Buffett's though process (except for Cunningham who simply compiled Warren Buffett's own words).
Hope you enjoyed, more to come soon...
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