4 Books To Read On Risk Management In Markets And Life

Written by Dana Sanchez
Here are four books to read on risk management in markets and life, written before the world entered the current uncharted waters. They tell the stories of past market wizards, meltdowns and teachable moments. Image: MMG

The coronavirus has changed everything. Businesses face unprecedented new unexpected and potentially harmful events that can cost the company money or cause it to permanently close.

Here are four books to read on risk management in markets and life, written before the world entered the current uncharted waters. They tell the stories of past market wizards, meltdowns and teachable moments.

‘When Genius Failed: The Rise and Fall of Long-Term Capital Management’ (2001) by Roger Lowenstein

When it was founded in 1993, Long-Term Capital Management was toasted as the most impressive hedge fund in history. For four years, the firm dazzled Wall Street as a $100-billiondollar moneymaking giant. Then it went belly-up, suffering catastrophic losses that jeopardized not just the biggest banks on Wall Street but the stability of the entire financial system. Sound familiar? It was the prequel to the Great Recession that struck Wall Street 10 years later, from Lehman Brothers to AIG.

In a new foreword, author Lowenstein said the Long-Term Capital implosion was a template for market meltdowns and a wake-up call that Wall Street and the government ignored.

Jack Covert, seller of books and founder of 800-CEO-READS, counted “When Genius Failed” among The 100 Best Business Books of All Time.

Amazon reviewer, Lionel S. Taylor, said the book is still relevant in 2020. “What makes this story interesting is not what happens. You know that from the beginning but how it unravels,” he wrote. “If you are not interested in finance and familiar with a few terms this book may not be for you… This is an older book but is still useful is revealing the attitude of the market and the refusal to accept the fact that the MARKET CANNOT BE PREDICTED.”

The real genius of the book was that Lowenstein nailed why genius failed, Meritt J. Finer wrote in a 2017 Amazon book review. “The same lessons the professors and traders at Long Term Capital failed to learn are the ones that all traders need to know. Trading in the financial markets is art as well as science. Knowing what quantitative models can and cannot do, and knowing when a model’s underlying assumptions are violated are key to successful trading. And finally, having the humility to accept that no matter how smart you are (or think you are) the financial markets can and will periodically make you look like an idiot.”

‘Market Wizards, Updated: Interviews with Top Traders’ (2012)
by Jack D. Schwager

In his series of books, “Market Wizards” author Jack Schwager lets you hear what super traders have to say about their success, in their own words, and he distills their responses down into a set of guiding principles other traders can use.

Schwager interviewed superstar money-makers including Bruce Kovner, Richard Dennis, Paul Tudor Jones, Michel Steinhardt, Ed Seykota, Marty Schwartz and Tom Baldwin. He tells the stories behind amazing trading coups, including one about a trader who turned $30,000 into $80 million, a hedge fund manager who averaged 30-percent returns every year for at least 21 years, and the T bond futures trader who turned $25,000 into $2 billion in a day.

Schwager interviewed dozens of top traders across most financial markets. They all had different stories but the same essential formula: solid methodology + proper mental attitude = trading success. 

Amazon reviewer Roddy10 described “Market Wizards” as one of the best hedge fund books ever written. “I initially read this book (the original edition) in the early 1990s. To say it was influential in my life was an understatement – it led to a change of career and I ended up working for the firm of one of the traders interviewed in the book. Even today – over 25 years since I first picked it I refer to it frequently. I have also recommended or bought copies for juniors over the years.”

Anyone interested in trading (or investing) should go “through this book line by line,” he said. “There are a lot of insights in the book that take a lifetime to appreciate.”

‘The Black Swan: Second Edition: The Impact of the Highly Improbable’ (2010) by Nassim Nicholas Taleb

A black swan is a highly improbable event that is unpredictable, massively impactful, and is characterized by claims, after the fact, that it should have been predicted.

After the fact, we concoct an explanation that makes it appear less random and more predictable than it was. In his book about black swans, Nassim Nicholas Taleb says black swans underlie almost everything about our world, from the rise of religions to events in our own personal lives. Google was a black swan and so was 9/11, he said.

Part of the reason we don’t acknowledge the phenomenon of black swans until after they occur is that humans are hardwired to learn specifics when they should be focused on generalities, Taleb writes. “We concentrate on things we already know and time and time again fail to take into consideration what we don’t know. We are, therefore, unable to truly estimate opportunities, too vulnerable to the impulse to simplify, narrate, and categorize, and not open enough to rewarding those who can imagine the ‘impossible.'”

We fool ourselves into thinking we know more than we actually do, Taleb says. “We restrict our thinking to the irrelevant and inconsequential, while large events continue to surprise us and shape our world.”

Based on reader reviews of his books, Taleb’s ideas inspire emotions that range from uncomfortable and downright angry to admiring.

“Worst book I read for a while,” Andreas from the U.K. wrote on Feb. 19, 2019 in an Amazon review. “While the central idea is interesting, the way it is presented is just awful. Nassim Nicolas Taleb does not introduce the topic, except through anecdotes, uses terms before he writes what they actually mean and never really explains how his ‘theory’ works and the whole thing does not have any structure. The book is full of disrespect for anyone else, except for his closest friends, it is a prime example how to bully others in writing.”

Amazon reviewer Michael dexcribed “Black Swan” as “an incredibly thought provoking read … I am reassured by the fact that he made money by trading using his abilities … It is a refreshing change from the superficial books expressing amazement by journalists or people who have never actually tested their theories in reality. Assuming he is right, much of modern finance and indeed thinking about highly improbable (but not impossible) events is frighteningly wrong. For anyone involved in business, investing (stocks, FX, bonds etc) – even if that is just your own pension – this is essential reading.”

‘The Complete TurtleTrader: How 23 Novice Investors Became Overnight Millionaires’ (2009) by Michael W. Covel

This is the true story of how Wall Street legend Richard Dennis and his disciples, the Turtles, used his trading techniques to make a fortune.

Convinced that great trading was a skill anyone could learn, Dennis made a bet with his partner and ran a classified ad in the Wall Street Journal looking for novices to train. His recruits, who became known as the Turtles, had nontraditional backgrounds for Wall Street traders. They included a game designer, a professional blackjack player and a pianist. For two weeks, Dennis taught them his investment rules and philosophy, then set them loose to start trading, each with a million dollars of his own money. When the experiment concluded, Dennis had made a $100 million from his Turtles and created a Wall Street legend.

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Author Michael W. Covel, managing editor of TurtleTrader.com, interviewed individual Turtles for the book. He breaks down the Turtle system and rules, showing how they made money and what happened after. Some became top hedge fund managers.

Amazon reviewer Brad Mills said the book helped him make money in the cryptocurrency market. “This book is for non-traders,” Mills wrote. “You don’t need to have any technical knowledge of trading to understand it and find it highly entertaining and informative … in 2013, it just so happened to be around when bitcoin popped. I started using his rules to trade altcoins and I made a bunch of money following his strategy laid out in the book! I’ve actually been using this book as a guideline to trade cryptocurrencies since then on and off, and I’ve netted well over 6 figures trading the turtle trading method.”