Watch the expressions on the faces of your friends as you lie down on your beach blanket and pull out the 688-page tome, A History of Interest Rates. Nope, it is not a sexy title for a book. Yet, the book is a classic. As one hedge fund manager I know says, “I don't know how anyone could work on Wall Street without reading it. It's a hell of a lot more useful than a Series 7.” The author, the late Sidney Homer, who pioneered fixed-income research for Salomon Brothers, first published A History in 1963 because he couldn't find a comprehensive history for the “practical requirements of a business on Wall Street.” The book was updated in the 1990s by Richard Sylla, an economics professor at the Stern School of Business at New York University. A History is ordered chronologically, with a brief discussion of primitive credit (conclusion: it probably existed and was most likely a simple loan of seeds from brother to brother or father to son) and describes interest rate trends and data of countries around the world through 1995. The book is also organized by country or region; what's fun about this book is that it can be popped open to almost any page and read from there.
“A comprehensive view of the history of interest rates will unsettle most preconceived ideas of what is a high rate or a low rate or an average rate,” the book states. For students, the history of interest rates' “backward-looking knowledge will not tell them where interest rates will be in the future, but it will permit them to distinguish a truly unusual level of rates from mere change.”
This is a book for people who like to know arcane historical facts.
A History of Interest Rates, Sidney Homer and Richard Sylla, Third Edition, Revised, Rutgers University Press, New Brunswick, N.J.
Burton Malkiel, professor of economics at Princeton University, needs no introduction. After all, Malkiel can accurately be called the Father of Indexing. His book A Random Walk Down Wall Street, first published more than 30 years ago, is probably one of the greatest and best-selling books on investing ever written (it ranks right up there with Ben Graham's The Intelligent Investor). A Random Walk was quite a finger-in-the-eye to Wall Street when it came out (less so now, since financial institutions are happy to offer index funds and other passive investments), because of what it tried to prove: Investors are better off buying and holding an index fund than trying to pick individual stocks or actively managed mutual funds. What's great about the book is that Malkiel examines the major investing strategies in simple terms for the layman (and then tries to show that whatever investing style is in vogue doesn't work for long). But be warned: Malkiel is no fan of the financial advisory community, from personal advisors to asset managers. Still, this is a great book, especially for clients who are interested in investing but don't have a good grasp of fundamentals.
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, W.W. Norton & Co.
For those who want more a history of investing ideas and less of the indexing-polemics in Malkiel's primer, check out Capital Ideas by Peter L. Bernstein. The book tells the story of how academia and Wall Street partnered to produce some of the tenets of investing that are still believed to be true today. First published in 1992, Capital Ideas is an entertaining read and a good way to brush up on modern portfolio theory and other financial theories.
Capital Ideas: The Improbable Origins of Modern Wall Street, by Peter L. Bernstein, The Free Press.
Pioneering Portfolio Management is a serious, slow read. It's not going to set you on fire, but after reading it, you will have a better understanding of portfolio management. The book was written by David Swensen, Yale's chief investment officer, who is a master investor. As the head of Yale's endowment, Swensen is a god to most knowledgeable investors, since he has achieved double-digit rates of return for Yale by using nonconventional strategies. Back in the 1990s he was famous for reducing the exposure of his portfolios to large U.S. stocks, preferring the less-efficiently priced private equity. Liquidity, says Swensen, is overrated and overpriced: It's never there when you really need it.
Swensen offers excellent pointers for setting investment policy, evaluating performance and other fundamental investment ideas. And like some of his academic peers, Swensen takes a jaundiced view of most asset managers. “Like the residents of Lake Wobegon who all believe their children to be above average, all investors believe their active strategies will produce superior results,” he writes. “The harsh reality of the negative sum game dictates that in aggregate, active managers lost to the market by the amount it costs to play, in the form of management fees, trading commissions and dealer spread.” That said, it's possible, as long as you don't think like everyone else. “Long-term success requires individualist contrarian behavior based on a foundation of sound investment principles.”
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment, by David F. Swensen, The Free Press.
Where Are the Customers' Yachts? or A Good Hard Look at Wall Street was first published in 1940 and is a funny rag on Wall Street and the futility of financial advice. The author, Fred Schwed Jr., worked on Wall Street in the 1920s, ending up there after being ejected from Princeton in his senior year. (Schwed was caught with a girl in his dorm room.) As Moneyball author Michael Lewis writes in the forward to the reissue of the book, “What Schwed has done is capture fully — in deceptively simple language — the lunacy at the heart of the investment business: the widely held belief that there is someone out there who can tell you how to turn a little money into a lot, quickly.” The book also captures the style and the rhythms of a long-gone era. But it offers some eternal truths, humorously rendered. Under a section called, “A Little Wonderful Advice,” Schwed offers this (for, as he notes, no fee at all): “When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stock you sold will go higher. Pay no attention to this — just wait for the depression, which will come sooner or later. When this depression — or panic — becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you'll have the pleasure of dying rich.” Chapter Three, “Customers — That Hardy Breed,” is a must read.
Where Are the Customers' Yachts? Or A Good Hard Look at Wall Street, by Fred Schwed Jr., John Wiley & Sons.
