My top 3 trading/market ‘related’ books read this year.

As 2012 comes to a close I thought I would look back over my reading, and highlight my 3 top trading ‘related’ books that I read this year. Just to elaborate; when I say ‘trading related’ not only does this include books obviously connected to trading, it also includes books that in my mind illuminate some aspect of human psychology, behaviour or the human condition, which can add insight to ourselves as traders, or to the behaviours of others and the market in general. As you will from my ‘top 3’ list, two of those included are in no way directly and perhaps in one case, even loosely, connected to trading.

During the past year I would say I have probably read around 10-12 books which I would say are in some way connected to trading in terms of markets, trading, risk or some aspect of human behaviour. In addition I have read many more books that I have never completed, but will endeavour to do so still, some of which are overhangs from last year or even a year or two previously. The books I have read are books that have piqued my interest at some point, and led to me picking up and thumbing through, or have come across on the internet, or have been reminded about or recommended to. There are many more books too which I have ordered, and which rather sadly gathering dust on a shelf, or sitting currently unloved on my kindle.

Top 3 (Not in any particular order)

Moneyball: The Art of Winning an Unfair Game by Michael Lewis.

The book tells the story of how the Oakland A’s and general manager Billy Beane used unconventional wisdom to win. Faced with a very low budget, the Beane and the A’s competed with the richest teams in baseball. The innovative approach was so successful that it changed how teams were put together.

I came to this book quite late (It was originally published in 2003). The film about the book really brought this to my attention. Without the movie I doubt I would ever have come to read a book about baseball, which here in the UK garners about as much interest as cricket does in the US.

The fascinating thing about this book, and it was occasionally a struggle due to my unfamiliarity with the language of baseball (thank god for Wikipedia), was that much as it was about baseball, it also about so many other things ‘trading related’ including performance, the human condition, human behaviour, risk and statistics. Written by Michael Lewis, of Liar's Poker fame, it is his excellent writing and ability to tell a story and tie its various themes into coherent and gripping whole, which make the book so accessible to someone who has never watched a baseball game. In fact so excellent and gripping was the story, and the writing, that the book became almost un-put-downable (My own small and rather pathetic contribution to the English language).

There are so many facets of the story and small elements within it that any trader can recognise and relate to from the small private trader to the large bank or hedge-fund trader through to the investment and asset manager. A couple of examples include the quotes by Pete Palmer, ‘The pain of looking bad is worse than the gain of the best move’. Does that not resonate with Daniel Kahneman work on Loss Aversion? The consequence of this for Palmer is that ‘Managers tend to choose a strategy that is least likely to fail. Rather than pick a strategy that is most efficient.’ And how about this line, when talking about Billy Beane, the highly talented rookie who was expected to the next big thing, but was failing with the bat: ‘He (Billy Beane) began in the Private Casino of the Mind, to hedge his bets.’ I am sure many a trader will be able to relate to that sentiment.

Also fascinating to the book was the post-script focusing on the reaction to the book and its theme, particularly within established baseball circles. This further illuminated aspects of the human condition and behaviour, and in particular the ability of entire groups of people to dismiss a view or proposition without so much as listening to or considering its arguments. If you have not read Moneyball yet, then I'd recommend putting it on your reading list for the coming year.

Hedge Fund Market Wizards: How Winning Traders Win by Jack D.Schwager.

The next book is one for the purists. Jack Schwager takes a behind-the-scenes look at the world of hedge funds, from fifteen traders who've consistently beaten the markets. Exploring what makes a great trader a great trader, Hedge Fund Market Wizards breaks new ground, giving readers rare insight into the trading philosophy and successful methods employed by some of the most profitable individuals in the hedge fund business.

Jack Schwager, who I had the pleasure to interview earlier this year, released 'Hedge Fund Market Wizards', the long overdue follow-up to his original Market Wizards books earlier this year. I always recommend any younger trader to read the original two Market Wizards books, and I advise many more established to traders who have read the books to re-read them. In terms of trading books, the Market Wizards books are timeless classics. I therefore was keenly looking forward to this latest version, but also wondering whether he was going to repeat the brilliance of the original books, whilst updating and probably most significantly being able to add something new. - I was delighted to say that I was not disappointed.

The interviews he conducted were a thoroughly illuminating look into the mindset of successful traders. Schwager also varied his subject matters, the list of interviewees included some who were extremely well known, and some lesser known. Interestingly Schwager focused on a wide and diverse spectrum of trading styles, methods and approaches, which highlights many different ways traders are able to achieve success in the markets, and everyone who trades or has traded will probably find someone in there they can relate to. I don't honestly think there is a sentence or word in the book wasted; my own particular favourite interview was the fascinating interview with trader Jimmy Balodimas. Balodimas’ style and approach seemed to baffle Schwager, it is a style and approach which seems to defy convention, though personally I have witnessed a number of traders of that type who probably could not explain what they do right, but have developed an instinct for trading, using innate skills and abilities which enable them to prosper and thrive. The interview itself was ‘Pure Gold’, with Schwager revealing as much about himself in this interview as he does about the interviewee, and in this case rather bizarrely offered advice to Balodimas on how he could improve his trading.

The Balodimas interview is a great example of the human element which Schwager so brilliantly manages to bring out in every interview, and which allows the reader to get inside the mind of the traders interviews and to perhaps gain a greater understanding of themselves. Amongst the many excellent interviews, the ones which stand out to me were the interview with Ray Dalio, a true legend of the markets, and Edward Thorp, the man who beat the casinos, even devising a machine and system to win at roulette.

I, Mammal: Why Your Brain Links Status and Happiness by Dr Loretta Graziano Breuning.

This is the book, which I am almost certain nobody who trades or has traded would have read, and which is absolutely nothing to do with trading and yet in my mind explains so much in the world of trading (and beyond). The central theme of this book is how Mammals seek dominance and status because that stimulates their brain to produce ‘Happy Chemicals’; serotonin, dopamine, oxytocin and endorphins. As humans our brains are based on the same model as our mammal ancestors; the ancient mammal brain does not communicate in words but uses neurochemical. Our neurochemical ups and downs make sense when looked at through the private lives of mammals.

This is a fascinating book that provides a new look at how to understand human behaviour. The book itself is part scientific treatise and part personal happiness manual. The science element is mainly evolutionary biology; the happiness manual adds relevance to the science. Loretta, writing in her own particular and at times quite jaunty and quirky style, explains the biology in simplified terms for the non-experts, and manages to keep the reader interested with stories, examples and real scientific research.

The book is self-written and self published, this means it does lack the benefit of being professionally written, edited and presented. In light of this some patience and understanding may be required occasionally, however the reward for this in my mind well worth it, the reward being the learning and provocation of thought that this book inspires.

The book explores a wide range of interesting questions which focus on human behaviour and can easily be applied to trading and markets. Questions such as; why we behave the way we do? Why are all we prone to patterns of repetitive behaviour? Why do people often act in ways that undermine their own happiness, success and well-being? Why are the emotional rewards of success often short-lived? And, above all, how can people start to come to terms with their emotional selves that are often self-judgmental and self-critical?

More than anything I came to appreciate that we rely on an ancient operating system, which has developed and evolved over millions of years, this operating system acts as our default system; it manifests itself and reveals itself in the form of emotions and feelings, and is driven by automotive responses to stimulus which creates powerful chemical responses in our body and mind. This unstoppable emotional system is far more controlling and influential than our more recent add-on, ‘the logical human brain’, which allows us to think rationally and enables us to abstract and plan the future. I see this book tying in, from a biological perspective, many of the theories we see in ‘Behavioural Economics’. Daniel Kahneman, in ‘Thinking Fast and Slow', talks about humans as almost two separate entities, instinctive and impulsive on the one hand, and deliberate and calculating on the other. The theories put forward in 'I mammal', start to add some biological flesh to these theories.

If I was to recommend one book out of all the books I have read, which deepen my understanding of the human condition, and then this is it.

As I stated at the very beginning, there are many other excellent books I have read that could so easily have made it into this list, however I wanted to keep the list to just three, other notable books I have read this year which I would highly recommend include; ‘The Hour Between Dog and Wolf: Risk-taking, Gut Feelings and the Biology of Boom and Bust’ by John Coates. ‘Risk: The Science and Politics of Fear‘ by Dan Gardner. ‘Market Mind Games: A Radical Psychology of Investing, Trading and Risk' by Denise Shull, and most recently ‘Lords of Finance: The Bankers Who Broke the World' by Liaquat Ahamed. There were also some real duds and disappointing reads too, I’ll do those books the courtesy of not naming them.

I hope you find my little recap useful and informing. If anyone has their own personal recommendations or some feedback or comments of their own, I would be happy to hear from you.