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When Genius Failed: The Rise and Fall of Long-Term Capital Management
When Genius Failed: The Rise and Fall of Long-Term Capital Management
by Roger Lowenstein
Edition: Hardcover
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16 of 22 people found the following review helpful
4.0 out of 5 stars Absorbing account, flawed conclusions, August 28, 2001
Lowenstein's book traces the collapse of the hedge fund Long-Term Capital Management in 1998. It draws two cautionary lessons, one relating to financial markets and one more widely applicable to human affairs: first, there are inherent limits to the usefulness of models based on historical data; secondly, there are inherent limits to human intelligence ' even Nobel Prize-winning intelligence ' when it is not tempered by judgement.
Lowenstein maintains that LTCM's models had an excessively narrow concept of risk, interpreted as volatility around the mean. Historic volatility proved to be an inadequate guide ' and in the autumn of 1998, no guide at all ' to future volatility. He states that a more relevant measure of risk for LTCM, unacknowledged by its partners, was leverage: the position size was too big. In the autumn of 1998 - when Russia in effect defaulted on its sovereign debt, and markets in South-East Asia and Latin America crashed in short order ' markets became characterised by so-called 'contagion', which gave a new understanding of the risk of leverage. A highly-leveraged fund found that it could not count on being right (that is, on betting on mean reversion) eventually: it had to be right sufficiently, every day. If it was highly leveraged and its bets proved wrong, it would not be able to get to the long term. A fund could be illiquid and heavily exposed, or it could be leveraged; if it was both, it could be wiped out in a single day. This simple truth was the weakness at the heart of LTCM. The company's models indicated that they were unlikely to lose more than about $40 million on any given day; in two days, in August and September 1998, they lost more than $500 million on each day.
Lowenstein's account is fascinating; he focuses on the irony that LTCM's strategic rationale was the management of risk, yet in practice the company ended up speculating and lost. But this is where his argument goes awry. He argues that this experience 'betrayed the flaw at the very heart ' the very brain ' of modern finance'. Yet the evidence contained in the book suggests the opposite conclusion.
Modern finance teaches that you cannot earn 40% a year without some risk of losing a lot of money; LTCM's experience confirms that. Indeed, Lowenstein makes two further points that are perfectly consistent with modern finance. First, LTCM's weakness was not its strategic rationale or its models, but its management procedures: there was no independent check on the traders. Perversely, LTCM increased its leverage as spreads narrowed ' as if borrowing more would turn an unsound business into a better one rather than a still-riskier one. Secondly, while LTCM's diversification strategy ostensibly proved of little value, as markets crashed simultaneously, in fact the company's investments were less well-diversified in practice than in theory. LTCM had in effect taken the same bet ' on lower-rated bonds ' but done so in so many permutations as to give the illusion of diversification. Diversification it might have been; efficient it was not. The experience of LTCM should in no respect be taken as an indictment of the role of financial markets in allocating scarce resources to productive uses, or of modern financial theory - whose insight it confirms rather than refutes.

Personal History
Personal History
by Katharine Graham
Edition: Paperback
Price: $13.47
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4 of 4 people found the following review helpful
5.0 out of 5 stars A fine, honest and moving memoir, August 28, 2001
This review is from: Personal History (Paperback)
This is one of the most astute and inspiring memoirs to have come from Washington in recent years. Mrs Graham recounts with an understatement that makes them all the more dignified and poignant the family tragedies in her life, and gives a riveting account of the decisions she took to maintain the integrity of a free press. Most obvious among these were her decisions as publisher of the Washington Post to run the Pentagon Papers and Watergate. The American press has frequently been attacked by partisans of the far Left and the far Right for supposedly being in the pay of the conspiracies that these paranoids claim to detect; Mrs Graham's building the Post into a fearless journal of record demonstrates how bizarre those prejudices are. What is most obvious from this memoir, however, is not the shifting sands of politics and journalism, but the strength of character of Mrs Graham. At a time when it was far less common to find professional women in the higher reaches of the professions than it is now, she withstood prejudice and condescension, and displayed an eminently practical answer to her critics: ability and determination. Her life and career are a credit to American public life, and this book is testament to her qualities.

The Napoleon of Notting Hill (Dover Books on Literature & Drama)
The Napoleon of Notting Hill (Dover Books on Literature & Drama)
by G.K. Chesterton
Edition: Paperback
Price: $8.93
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18 of 19 people found the following review helpful
5.0 out of 5 stars A wise and exuberant fantasy, August 24, 2001
Chesterton is one of the neglected giants of 20th-century English literature. This book ought to be considered a minor classic of both fantasy and political allegory. It tells the story of the consequences of a decree issued on a whim by a bored governor that London be devolved into districts corresponding roughly to its ancient boroughs, and each given municipal rituals in order to instil a sense of civic belonging. This joke takes on a life of its own, as the citizens of the "new" boroughs take the battle - eventually, literally a battle - to each other. The Napoleon of the title is Adam Wayne, an enthusiastic *citoyen* who takes the new arrangements with great seriousness - and whose territorial aggrandisement and downfall mirror Napoleon's career. The point that Chesterton intimates - in a vastly more effective, because more subtle, way than more explicitly political novelists, such as Upton Sinclair - is that small and knowable communities are a desirable and indeed virtuous focus of our loyalties, but that the aggrandisement of power and territorial ambition tend to corrupt. While fashionable literary opinion (Wells, Shaw, Wyndham Lewis and so many others) was about to take a terrible wrong turning in favour of the totalitarianism of Right or Left, Chesterton's essential and very English sense of moderation formed, and continues to express, a most effective and beautifully written counterpoint.

Winning the Loser's Game: Timeless Strategies for Successful Investing
Winning the Loser's Game: Timeless Strategies for Successful Investing
by Charles D. Ellis
Edition: Hardcover
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15 of 18 people found the following review helpful
5.0 out of 5 stars Perhaps the best of all primers on investment, August 23, 2001
Charles Ellis takes as his premise the applicability of the Efficient Markets Hypothesis, not as a dogma, nor even necessarily as an explanatory model, but as an immensely powerful prescriptive model. Financial markets are *highly* efficient, and it is exceptionally difficult to identify opportunities for arbitrage (riskless profit) within them. For the individual, retail investor the best course by far is to accept that investing is what Ellis calls "a loser's game". By this he means that - in his own analogy - successful investing is more like amateur tennis than professional tennis: in professional tennis the winner is the one who has the best technique and the greatest skill; in amateur tennis, the winner is the one who makes fewest mistakes. Investing ought to start with the axiom that managing risk (which is what drives investment returns) is immeasurably more important than seeking market inefficiencies (if such exist), while trading on 'tips' is an almost guaranteed way to make yourself poorer.
Ellis explains in non-technical but never simplistic language the essentials of a rational approach to portfolio construction and management. He has a particular gift for explaining highly abstruse notions in modern portfolio theory and making them sound like common sense. This is a necessary and important book in a field plagued by charlatans. I recommend to anyone seeking to maximise his wealth over the long run.

Socialist Idea: A Reappraisal
Socialist Idea: A Reappraisal
by Leszek Kolakowski
Edition: Hardcover
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10 of 10 people found the following review helpful
3.0 out of 5 stars Superb, ground-breaking essay by Kolakowski, August 23, 2001
This book is a collection of papers, by various authors of a socialist persuasion, presented at a conference in 1973. It is, unsurprisingly, a hugely dated work. The theme of the conference was a critical examination of the prospects for socialism at that time, when the experience of its application - especially, but not only, in eastern Europe - had hardly accorded with the hopes of its adherents.
Nearly 30 years later, it is striking just how little relevance to modern politics the authors' ruminations have. None of them foresaw the breakdown of the Keynesian consensus on the rock of high inflation, or dealt with the information problem inherent in the allocation of scarce resources. Some of the essays are almost comical in their social scientific jargon: an essay on 'Socialism and the Nation', by Peter Ludz, concludes portentously, "In contrast to SED [the East German Communists] internationalism, however, the SPD [the West German Social Democrats] inter-state concept does not derive its internationalism from class theory." It's tempting to attribute this deadly bureaucratic prose to a simple failure to foresee that the only really important historical question that applies to these two parties is that one, the SED, was a totalitarian monstrosity running a police state, while the other, the SPD, is a democratic party adhering to liberal values. Tempting, but too generous to the author: there were many heroic souls throughout the Cold War and across the democratic political spectrum who saw these issues clearly enough, including left-wingers like George Orwell and Sidney Hook.
So far, so turgid. But the real importance of this book, and what makes it well worth pursuing in second-hand bookshops, is an outstanding essay ("The Myth of Human Self-Identity") by the book's co-editor, Leszek Kolakowski, a Polish philosopher who at that time still considered himself a Marxist. Kolakowski calmly and with a complete absence of polemical tone manages to isolate a crucial reason why the Marxist project has always and everywhere turned bloody when it has had the opportunity to wield power. His argument - which is not an easy read, but then it is a complex point - is that Marxism is rendered totalitarian by its notion of 'the perfect unity of social life'. It is not possible to have more freedom, more equality and more justice (the pronounced ideals of socialism) if at the same time one aims at a unified human society.
Kolakowski's insight, while wholly original, was also wholly consistent with the liberalism of a thinker such as Isaiah Berlin (who made a similar point in his very last essay, published as "The First and the Last") and the conservatism of Michael Oakeshott. Socialism in the sense meant traditionally by the British Labour Party, the Israeli Labour Party or the German Social Democrats is not totalitarian precisely because it values liberty more than it values socialising production (though such economic and social policies have had real costs, as the more orthodox policies pursued by Tony Blair would indicate), but then it is not socialist either. Real socialism of the type advocated by the Marxist left *is* an essentially totalitarian project because of this fundamental flaw.
The principal reason I myself abandoned socialism was because the force of Kolakowski's point was too great to ignore. His point has never been answered, though he has been met with much abuse and accusations of bad faith (notably by the late E.P.Thompson, whom some mistakenly believe to have been an honourable man). It is well worth searching for this essay, as a prelude to Kolakowski's great trilogy "Main Currents of Marxism".
Comment Comment (1) | Permalink | Most recent comment: Feb 19, 2014 10:48 AM PST

Investment Timing and the Business Cycle (Frontiers in Finance Series)
Investment Timing and the Business Cycle (Frontiers in Finance Series)
by Jon Gregory Taylor
Edition: Hardcover
Price: $60.96
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8 of 17 people found the following review helpful
2.0 out of 5 stars Founded on a misconception, August 23, 2001
The purpose of the book is to set rules for successful market timing according to the stage of the business cycle. The attempt is misconceived and the result is likely to damage the economic well-being of anyone who puts it into practice.
It is one thing to say, uncontroversially, that financial asset returns are affected by business conditions. It is even plausible to say that, in certain limited respects, financial asset returns follow predictable patterns (such as return to size, or price-to-book ratio) that are not encapsulated in the standard framework of the semi-strong form of the Efficient Market Hypothesis. But the suggestion that one can derive accurate forecasts of financial asset returns from a knowledge of the business cycle (even supposing, mirabile dictu, that it is possible to forecast the business cycle) is plain wrong. Financial theory, which is largely borne out in statistical tests, stipulates that expected returns on particular assets are equal at any stage of the business cycle once you have adjusted for risk. It is shifts in *expectations* for business conditions, and hence for the net present value of future earnings, that determine asset returns, not shifts in the conditions themselves. There is such a thing as the business cycle, and there is such a thing as the interest rate cycle, but there is no such thing as an equity market cycle. Equity prices don't go in cycles.
The entire premise of the book is thus a mistake. Basing your investment decisions on a mistake is never a good idea, and basing market timing decisions (in which, because you have to time your investment behaviour correctly on two decisions - when to get out of an asset *and* when to get into an alternative asset) is an exceptionally risky strategy to found on a mistake. I give this book two stars, because the discussion of the economic indicators themselves is well-presented an informative - but as an investment book, this fails. Much better to follow the advice of Burton Malkiel, in A Random Walk Down Wall Street, or Charles Ellis, in Investment Policy.
Comment Comment (1) | Permalink | Most recent comment: Jan 4, 2009 12:53 PM PST

by John Updike
Edition: Mass Market Paperback
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22 of 23 people found the following review helpful
5.0 out of 5 stars Wonderful evocation of formative years, August 23, 2001
John Updike is arguably, with Saul Bellow, the greatest of living authors writing in English. This volume exemplifies his strengths. His evocation of growing up in middle-America is often quite beautiful. Yet this book is not a memoir in the conventional sense of a chronological account, but more of series of scenes and reflections from a full and satisfying life. Updike's moving account of his struggle with psoriasis and his marital difficulties is personal without degenerating into the narcissism of so much second-rate autobiography, even if he pays slightly more attention to his rakish period in the 1970s than we might strictly wish to know.
Updike writes poignantly but with resolution of his lonely status as a liberal writer in the 1960s who did not lose his ideals as a liberal Democrat, in the traditional sense of that term, and thus who abjured the descent into extremism and anti-anti-Communism of many of his contemporaries. To have believed that the Vietnam War was imprudent and prosecuted by morally dubious means, yet known the noble cause that was at stake in it - namely, preventing a country from falling to a ferocious Communist tyranny - won Updike few friends and lost him many, yet his stance was an honourable and principled one.
The final chapter of the book is, for me, the best. Updike writes particularly well of his liberal religious faith, which almost amounts to fideism. One can admire his honest wrestling with such questions without sharing his conclusions, and admire even more the quality of writing and personal reflection here expressed.

Letters of Sidney Hook: Democracy, Communism, and the Cold War
Letters of Sidney Hook: Democracy, Communism, and the Cold War
by Sidney Hook
Edition: Hardcover
Price: $99.70
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4 of 4 people found the following review helpful
5.0 out of 5 stars Spirited and erudite defence of democratic ideals, August 23, 2001
Sidney Hook's philosophical works, notably those expounding pragmatism and Marxism, are of enduring value and are still in print. But his most consistent writings were his shorter pieces attacking totalitarianism and defending the ideals of a free society. It was a feature of his exemplary life that he wrote an enormous volume of correspondence, where he felt it worthwhile to explain and explicate democratic values.
This book contains a small, chronologically-ordered selection of those letters, which make fascinating reading. The defence of democracy is never less than erudite and thought-provoking. Hook was often criticised for being impatient of those who differed from him, but these letters give no such indication. On the contrary, his unfailing generosity of spirit is evident in the letters reproduced here to his fellow-philosopher and humanist Corliss Lamont, who unfailingly defended the vicissitudes of Stalin and than whom no more egregious apologist for Soviet tyranny existed. The editor, Edward Shapiro provides a useful introduction to each decade's correspondence, and observes that in later years Hook's political writings were dominated by the subject of the Communist threat, and that the spark seemed to be lacking in, for example, Hook's defence of social democracy. I am sure this is right, and equally I am sure that Hook's emphasis was justified. The differences between conservatives and social democrats on economic philosophy are family differences among those who share a commitment to democratic processes and institutions; the differences between that heterogeneous collection of democrats and totalitarianism are fundamental and extreme. Hook's letters provide a powerful contribution to the defence of democratic values.

Armchair Economist: Economics & Everyday Life
Armchair Economist: Economics & Everyday Life
by Steven E. Landsburg
Edition: Paperback
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4 of 7 people found the following review helpful
5.0 out of 5 stars Witty and thought-provoking, August 22, 2001
Non-technical economic writing usually takes the form of superficial - and often inexpert - commentary on ephemeral issues. Landsburg's work is different, in that his non-technical writing consists in the explication of complex economic concepts in lucid and entertaining prose. It is witty and perceptive writing, and is likely to be of enduring value. There are three absolutely priceless chapters in particular that are devastatingly funny and economically important: a list of economic howlers (such as that of the well-meaning, non-economist academic who believed that government spending involves no cost anywhere else in the economy); a shrewd description of the differences between environmentalism (which, in its non-economic form, is more like a branch of religious fundamentalism) and economic reasoning; and a superb exegesis of equilibrium theories of asset pricing. The last of those chapters covers my own professional field, and I can only say that the sport Landsburg has with those supposedly expert financial advisers who tout dangerous superstitions like 'dollar-cost averaging' ought to be required reading for anyone considering investing in the stock market.
My only real criticism of the book concerns the ubiquity of Landsburg's premise, which he deploys over a range of subjects, that economic agents respond to incentives. That, of course, is absolutely right, but it is not the only reason that markets generally allocate scarce resources more efficiently than bureaucrats. A more powerful reason is the problem of information: market pricing is a co-ordinating system as much as it is a system of rewards. Even if men were sufficiently altruistic not to require incentives, they would still need information, of a type that dirigiste economic planning cannot provide.
But this is a minor quibble. The book is great stuff.

by Sidney Hook
Edition: Hardcover
Price: $34.19
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3 of 3 people found the following review helpful
5.0 out of 5 stars Fitting epitaph to an exemplary life, August 22, 2001
This review is from: Convictions (Hardcover)
Sidney Hook was an outstanding philosopher who tried to fashion a synthesis of Marxism and Dewey's pragmatism. But his most important work was as a defender of the values of a free society against totalitarian ideologies.
This posthumous collection of essays contains Hook's reflections on a range of public policy questions, from an essay on euthanasia (which, while I do not agree with his conclusion, is a most moving account of his closeness to death) to a characteristically robust defence of the western enlightenment tradition against the educational obscurantists who would misunderstand it as 'eurocentric' and 'imperialist'. What shines through the book - especially in a gem of an essay in which he patiently explains to the pseudo-historian Howard Zinn why an imperfect liberal democracy has immeasurably great merits that are worth defending - is Hook's belief in the power of human reason applied to human affairs, tempered by his insistence on the necessity of constitutional government to protect us from the arbitrary power of totalitarian ideologies. A fine testament to a great man.

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