The apparent lack of volatility in markets may have left some investors twiddling their thumbs- the passive acquisition of risk premia can sometimes be a dull world after all. To help you through until the next market episode, here are seven reading suggestions from M&G’s episode team to pass the time over the summer months. Some are old, some are new, some are familiar and some (Eric Lonergan) are mathematically-dense five volume collections of theoretical economics….
The Most Important Thing – Howard Marks
“Nobody goes to that restaurant anymore, it’s too crowded’ – Howard Marks uses Yogi Berra’s quote to illustrate that human beings are often not logical. Instead, they are driven by emotion which can cloud their judgement and create distortions in financial markets. Marks dedicates a chapter each to the twenty most important things that investors need to know, including the importance of second level thinking and patient opportunism. Drawing on more than four decades of experience in the industry, he shares his wisdom in a straightforward and entertaining manner – a must read for anyone keen to truly understand financial markets.
Adaptive Markets – Andrew Lo
It may not represent an all-encompassing theory, but Lo’s book from earlier this year helps to reconcile the worlds of behavioural finance (with its focus on individuals),and the collective behaviour of markets. In short, market participants do not need to be ‘irrational’ for investment opportunities to be created. More importantly, understanding the powerful forces of evolutionary trial and error can explain why investment opportunities are created, and why they might disappear.
Irrational Exuberance – Robert Shiller
One of the seminal behavioural finance books which captured the zeitgeist of the late ‘90s dotcom bubble, brilliantly describing how ‘new era’ beliefs take hold and the collective psychology of an investment mania.
Collected Papers – Paul Samuelson
Samuelson is maligned by his reputation for putting macroeconomics on an inexorable path of pseudo-scientific formalism. He contributed more than anyone else to the dominance of mathematical method.
Until recently, the discipline had become narrow and irrelevant, but Samuelson’s own work is striking for its combination of rigour, deep thought, and eclecticism. There is a lifetime’s worth of theoretical insight, interspersed with frequent deep thoughts into asset pricing and investment.
Do No Harm – Henry Marsh
A noninvestment book that provides a fascinating insight into neurosurgery, where the emotional and psychological aspects of decision-making are critical to the outcome. It is a personal account of a surgeon trying to overcome his own fear of failure when errors of judgment often lead to catastrophic outcomes. Interesting to see Henry mention Daniel Kahneman’s great book “Thinking, Fast and Slow” as having helped him recognise some of the behavioural biases that prevent us learning as much as we should from our own mistakes. Reminds us what true risk is.
Other People’s Money – John Kay
An insightful and readable survey of the current environment in the financial industry. Perhaps most importantly, it underpins how important it is to understand how incentive structures and human behaviour play a critical role in all parts of the world around us.
The Big Short – Michael Lewis
A page turning account of scandalous behaviour pre-crisis. Puts a human face on the problems identified by John Kay and provides a simple and entertaining primer on the complexities of the financial crisis. Perfect for the beach.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.