Sign in to follow this  
Followers 0
rtg24

More Money than God

11 posts in this topic

I read a lot of books. It's par of the course with my job - the better you understand the world, the more money you can make. Out of the several dozen books on finance/economics that are piling up on my bookshelf, a few occasionally stand out because they are exceptionally well written, because their content is exceptionally interesting, or both. Examples are King of Oil (the story of Marc Rich, the man responsible for you paying the market price for gas at the pump), Greatest Trade Ever (how could one man make close to 5 billion USD as a personal bonus in just one year? this will also appeal to any cultural contrarians, which currently means most Objectivists), but also more complex, harder to understand books such as Invisible Hands and Inside The House of Money by Drobny (both going through exceptional hedge fund managers' tactics via personal and very detailed interviews, but both requiring some background in economics and investing to be readable).

More Money than God is striking a good balance. It is exceptionally well written, the content is excellent, but it is also readable by the average person in the street, and indeed should be read by the average person in the street before they start investing their savings.

The book goes through the history and tactics used by the greatest names in 20th century investing, tracing the history of hedge funds, which have since the mid-20th century been the place of choice for the best talent in investing. To paraphrase an economist (and Commodities Corporation co-founder) quoted by Mallaby, if you have investing talent that is far above the norm, why rent it out for a low fee to a large company when you can keep the gains for yourself? Hedge funds are the Google and Apple of the investment world, including in size and power. They are where you find the best talent and the most cutting-edge thinking.

The first hedge fund, and the origin for the name, was Alfred Winslow Jones' investment partnership, which he called a "hedged fund". Proving once again that, outside the sciences, practice often precedes academia, Jones set up most of the innovations of both the hedge fund world and academia. He was the first to reward managers based on the performance of their ideas, the first to "hedge" his bets by shorting (selling) bad stock as well as going long (buying) good ones, the first to diversify, to extract the performance of a manager (alpha), from that of the market (beta... well, this is not quite right but enough for the finance luddite) so that he wouldn't pay his managers fortunes when they had just floated up with everybody else.

Jones was interesting because he had none of the profile of the typical manager you see today. There was no PhD in economics, no MBA from Harvard. In fact, Jones was a fervent anti-capitalist, and had spied in Germany for the count of communists. He started his "hedged fund" (which the press misread as "hedge fund", popularising the later expression) very late in life, purely because he needed money to fund his socialist causes. Like a later investment great, George Soros, he spent his life tortured between his irrational philosophy and the evidence that a daily encounter with reality that every market player has brought to his eyes.

The book covers the history and great trades of several legendary managers, dispelling many myths about their trades (such as the common one that Soros "broke the pound" because he disliked John Major's Conservative government - in reality, Soros like any manager never FORCED markets, he merely acted as a catalyst for much needed readjustment). It also acts as an investment education the quality of which you will never get from a Masters in Finance or other prestigious qualification. It goes through the dilemma between the equity types, brought up on Graham and Dodd, believing that so long as you buy undervalued companies they will eventually go up so you should hold them and take the losses for now, and the commodity types, trend surfers who will get out of positions if the market moves against them to limit damages, and the men who bridged the gap between both. There are several very important takeaways, for example the notion (discovered first hand by Robertson, luckily in time for him to pull out) that European companies that appear strongly undervalued by American valuation standards are actually fairly valued, because they are run by Europeans which means for their employees, not shareholders. Mallaby paints a vivid picture of Robertson realizing that the planes taking off in front of the headquarters are in fact free pilots' license training available for all employees of the West German corporation he had just invested in, and a call to his trader followed very rapidly.

The most interesting takeaway, for me, was Mallaby's explanation of the rise of efficient market theory and the reason for which global macro investors (investors that bet on anything, anywhere, based on political or other themes) have dominated the hedge fund world since the drop of the gold standard. The Efficient Market Hypothesis, which states that markets at all times reflect the information available in the world and thus that you cannot make money, was developed in the stable world of gold standard post-war USA academics, in the most stable academic institutions. Subsequently, fiscal discipline disappeared as states could devalue their currencies at will to fund the bribes they promised their electorates. Coupled with oil shocks and events like the breakdown of the USSR, from the 70s onwards the world became very volatile, making it a great hunting ground for people with an understanding of history, economics, and psychology.

You will also certainly enjoy the insight into Soros' mind (although Druckenmiller, not Soros, invested Soros' money from the 1980s onwards; something neither the publicity-shy Druckenmiller nor the publicity-loving Soros were particularly willing to promote). It is well known that Soros' failed philosophy was a huge draw on his investing track record, which is nothing short of extraordinary. Soros' talent is rare because he is able to ride a bubble upwards, and downwards. Most investors either bet on things eventually breaking down (like John Paulson and the mortgage crisis), or on things eventually getting better (such as Seth Klarman, an expert in buying undervalued assets in bankrupcy proceedings or elsewhere). Soros will detect a bubble forming, go long, detect the top, and reverse his position 100% to capture the downside. His theory of reflexivity, which states that investors affect the outcomes of market events (for example, investors believing in real estate investment trusts will provide them with the cheap capital needed for them to do well, thus creating a self-fulfilling prophecy) is very important to understanding today's volatile and often "irrational" markets. Unfortunately, he derived it from Karl Popper's philosophy, which is also the reason for which he funds Democratic causes and the Open Society Institute, arguably our biggest intellectual enemy. Fortunately, he is the exception - most hedge fund managers are staunch individuals who understand reality first hand, and thus almost never vote Democrat, with rare exceptions (David Einhorn, who still skewered Obama in his Feb 2010 letter, Bill Gross and Warren Buffett come to mind).

I strongly recommend this book even for those who are not active investors.

Share this post


Link to post
Share on other sites

Thanks for the recommendation. For some reason, economics isn't treated as the everyman's subject that it should be (to an extent, of course). Non-college economy students spend more time being taught poetry and sociology than rational principles for handling their life's earnings and savings. This should be interesting.

Share this post


Link to post
Share on other sites

Before I launch into reading this, I'm curious: How much finance/economics knowledge is assumed on the part of the reader?

Share this post


Link to post
Share on other sites

Not that much. Although Drobny's books are targeted at the professional and expect you to understand eg the relative value trade, here Mallaby explains all but the very basics like what a share is. Occasionally he calls on relationships most laymen wouldn't be aware of like how the ust curve trades but it is very, very minimal and he keeps it written 'for your wife' as Seth Klarmam described his book.

Share this post


Link to post
Share on other sites
Not that much. Although Drobny's books are targeted at the professional and expect you to understand eg the relative value trade, here Mallaby explains all but the very basics like what a share is. Occasionally he calls on relationships most laymen wouldn't be aware of like how the ust curve trades but it is very, very minimal and he keeps it written 'for your wife' as Seth Klarmam described his book.

Thanks for the reply. So far, it's been easily understandable and entertaining.

Share this post


Link to post
Share on other sites

I would like to take back what I implied above about Bill Gross being just another leftist. As of this week Gross has fully divested his main fund - the largest in the United States - from US Treasuries blaming the Obama administration's lack of concern for exploding deficit. We will probably know why in a few months but Gross is incredibly smart and I am sure he had good reasons to time his trade like this...

Share this post


Link to post
Share on other sites
I would like to take back what I implied above about Bill Gross being just another leftist. As of this week Gross has fully divested his main fund - the largest in the United States - from US Treasuries blaming the Obama administration's lack of concern for exploding deficit. We will probably know why in a few months but Gross is incredibly smart and I am sure he had good reasons to time his trade like this...

And perhaps even more good reasons to be loud about it.

Share this post


Link to post
Share on other sites

Thanks for the review rtg24. I've been hearing about this book and it will be next on my purchase list.

I have been attending the local university extension to study financial planning and the theory of efficient markets was pounded into our heads in my last class.

Share this post


Link to post
Share on other sites
Thanks for the review rtg24. I've been hearing about this book and it will be next on my purchase list.

I have been attending the local university extension to study financial planning and the theory of efficient markets was pounded into our heads in my last class.

We just made 4 million USD today with a fraction of our risk limit due to "efficient" panic.

Share this post


Link to post
Share on other sites

Economics teaches you to "follow the money" or examine incentives. Economists in academia are those who failed to cut it on Wall Street. They spend the rest of their lives, taxpayer-funded, explaining why and pretending their smarter classmates were superior.

That being said I do not demean the work of Fama et al. The Chicago School was one of the first times for almost a century that academics promoted the market, and Eugene Fama (much like Ed Thorp, the first quant, later did with his trading) placed great emphasis on the limitations of the EMH.

Share this post


Link to post
Share on other sites

I am reading the book now. I was well entertained on the chapter about Soros. I also like the brief touches on how the EMH was challenged by Mandelbrot. This is a great read.

I took my final exam in my financial class Wednesday so now I can get back to reading for the fun of it. I've also been hired by a national firm, as a financial analyst. However, I keep in the back of my mind the thought of working for a hedge fund someday. Right now I'm a two-job guy. Engineer by day and financial analyst by night. My answer to the recession (if one agrees that's what we're in now) is to make more money.

Share this post


Link to post
Share on other sites
Sign in to follow this  
Followers 0