I'm starting to be intrigued by Finance/Trading/Stock Market, but sadly know nothing about it from a professional perspective. I don't even know what to ask for, the same way a complete luddite wouldn't know how to ask for more than "What are some good resources to learn to start building computer programs?" So with that said, where would one start?
For the love of all that is holy go to Amazon right now and buy a copy of Trading and Exchanges: Market Microstructure for Practioners by Larry Harris.
I'm not a trader, or an exchange, but I've been forced to get very, very intimate with the technological plumbing of both, and I've interviewed many of their developers, and you'll find the architects of match engines, order routing systems, and clearing backends recommending this book just as much as I do.
It is exceedingly well written, too.
Investing strategy? Stick with Malkiel, like everyone here is (and is going to) recommend.
Another suggestion: you can download the recordings of Schiller's Yale Financial Markets class from iTunes (and from Yale); I listened to it on the way to/from a client in the suburbs for a couple weeks and enjoyed it, particularly the guest speakers.
My roommate and I are both algorithmic traders. He LOVES that book with deep sophisticated passion. I haven't read it yet, but he described it to me as a high level discussion of why and how people trade. It's not necessarily going to help you be an awesome trader, but it will help you interpret the markets in a way you've never imagined before.
I know HN frowns on "me too" posts, but Harris' book is the first to read for anyone wanting to get into the trading business. It's good enough that it deserves another recommendation.
I heard about Trading and Exchanges from http://scottlocklin.wordpress.com, which has since become my gateway to the world of trading. Along with some very good posts (like http://scottlocklin.wordpress.com/2009/08/17/a-bestiary-of-a...), there are also great links--like to the author's Amazon reviews, which are a gold-mine for reading suggestions and to the NuclearPhynance forum, which seems to be a gathering place for actual trading professionals.
For some reason, this stuff seems to interest a lot of people here. Me too, I'll admit. But when I think about it, I come away with a deep suspicion that "the only way to win is not to play the game". How are you, as an individual, supposed to come out ahead playing in the same field as people with more knowledge and skills than you? The only way I can see is to have a 'sure thing' of some kind. Some sort of knowledge that is not widespread, perhaps to the point of insider knowledge, which is actually illegal. Perhaps you can gain that knowledge through lots of research, but even there... how much time is that going to take and how can you be sure you'll get there faster than bigger, well connected people and companies? For instance, any sort of quantifiable data is going to be picked through by someone with a bigger, faster, more extensive set of algorithms than you can dream up on your own.
Edit: one more thing: with a startup, the opportunity cost is likely your biggest expense. With trading, you risk losing the money you put in, which, combined with the time, could really amount to something.
I guess the question is: where is the parallel to startups, where a small group can do well? Also: is it possible to do well without basically making a job out of it? Otherwise, perhaps it's best to avoid the whole thing: a few ETF's and forget about them, and concentrate on doing something you have an edge at.
I think that many HNers could have an edge in the tech sector. Most of us could probably not beat the Wall Street guys with analytical trading or whatever it's called (analyzing charts or detecting some patterns), but we could certainly predict which tech companies are likely to succeed in the foreseeable future and which are likely to fail. Does it make sense? I am totally ignorant about finance/trading, perhaps someone can correct me if I'm wrong.
If you were allowed only the proverbial one book on the island, I'd recommend Kuznetsov's "The Complete Guide to Capital Markets for Quantitative Professionals".
It is one of the rare books where the marketing blurb is actually a valid description: "...a comprehensive resource for readers with a background in science and technology who want to transfer their skills to the financial industry."
Instead of further praising it myself, I'll copy a reader review from amazon that describes how I feel about it: "Rarely a book with a title as ambitious as "Complete Guide" fulfills its promise. This book does. Big time.
It is written for quantitative professionals (current and prospective) and gives a bird-view account of all types of activities available to them in a typical Wall Street firm.
The author cleverly avoids pitfalls of the books of this genre. The book is general enough to cover various settings, but not too general to become useless. It is detailed enough to provide relevant information, but not too detailed to become a software manual or a textbook.
The text educates without being annoying and entertains without being lightweight.
Hopefully, readers will appreciate consistency and appropriateness of the book's style. The author avoids over-fragmentation and "bulletization": the book consists of 20 chapters without any further subdivisions. It makes for much smoother reading undistracted by unnecessary subheadings.
After finishing the book one can only marvel at the author's efficiency, wondering how he could cram so much useful and interesting information in just 600 pages. "
Kuznetsov also includes a great commented bibliography for further reading. I know many of the books therein, as well as their competitors, and I can say his are good recommendations (at least, I would have picked the same in most cases and found a lot of good reads there too).
I'd also recommend reading Nassim Taleb's books Fooled By Randomness and The Black Swan (info at his website http://fooledbyrandomness.com/) along with one he recommends:
SkyMarshall said
Those will all teach you what not to do, which is just as, if not more important in investing and trading than what to do.
Anyone can notice the successful investment decisions after the fact: buying Apple Inc on March 6, 2009 at $83.50 or selling BP on January 19, 2010 at $62.30. No stock or mutual fund can beat the market, each year, over twenty years. Neither can you.
What you can do is not beat yourself. Within the nuts and bolts of a portfolio, some trades may cost you dearly in terms of capital gains tax. Lopsided distribution of your investments in too few asset classes will also wreck havoc. Avoid these mistakes and you can greatly improve your rate of return.
<another_shameless_plug> I run the investment website http://blog.realized-app.com and companion web app for getting these decisions right. </another_shameless_plug>
That highlights a fundamental error many people make - you can't average percentages. A graph of an index fund on a percentage basis for the last 20 years tells you nothing useful (at least not directly).
Here's a key excerpt from What I Learned Losing a Million Dollars, basically the book in a nutshell. Forgive the wall of text, but it's worth the read.
This starts right after the author finishes recounting how he lost his $1.6M fortune and seat on the Chicago Mercantile Exchange back in the mid 80s:
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It was a painful realization to discover that I wasn't a trader. I didn't have the patience or mechanical skills to be a successful floor trader, nor the consistency to be a successful upstairs trader. If I was going to learn how to make money trading, I was going to have to find out how others had done it. I went and read the books and articles about, and interviews with, sucessful market professionals. I studied the best investors and traders from Wall Street and La Salle Street: Peter Lynch, Bernard Baruch, Jim Rogers, Paul Tudor Jones, Richard Dennis and many more. After all, when you're sick you want to consult the best doctors, and when you're in trouble you want the advice of the best lawyers. So, I consulted what the successful pro's had to say about making money in the markets. If I could figure out how they did it, I could still pull off getting rich again. And this time I would keep the money.
Below is some of the advice the pros offered for making money.
Advice and Dissent:
'I haven't met a rich technician.' - Jim Rogers
'I always laugh at people who say, 'I've never met a rich technician.' I love that! It is such an arrogant, nonsensical response. I used fundamentals for nine years and then got rich as a technician.' - Marty Schwartz
'Diversify your investments.' - John Templeton
'Diversification is a hedge for ignorance.' - William O'Neil
'Concentrate your investments.' - Warren Buffet
Averaging a Loss:
'You have to understand the business of a company you have invested in, or you will not know whether to buy more if it goes down.' - Peter Lynch
'Averaging down is an amateur strategy that can produce serious losses.' - William O'Neil
'Don't try to buy at the bottom or sell at the top.' - Bernard Baruch
'Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich.' - Jim Rogers
'I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all the money by catching the trends in the middle. Well, for twelve years I have often missing the meat in the middle, but I have caught a lot of bottoms and tops.' - Paul Tudor Jones
Spreading Up:
'When you're not sure what is going to happen in the market it is wise to protect yourself by going short in something you think is overvalued.' - Roy Neuberger
'Whether I am bullish or bearish, I always try to have both long and short positions - just in case I'm wrong.' - Jim Rogers
'I have tried being long a stock and short a stock in the same industry, but generally found it to be unsuccessful.' - Michael Steinhardt
'Many traders have the idea that when they are in a commodity (or stock), and it starts to decline, they can hedge and protect themselves, that is, short some other commodity (or stock) and make up the loss. There is no greater mistake than this.' - W.D. Gann
I had expected there might be some subtle differences among the pros. After all, some were stock market moguls, while others traded options or futures contracts. But didn't these guys agree on anything? Based on the examples above, they sounded more like members of a debate team trying to score points against each other.
I had to find out how the pros made money in the markets. I had to learn the secret that all of them must know. But if the pros couldn't agree on how to make money, how was I going to learn their secret? And then it began to occur to me: there was no secret. They didn't all do the same thing to make money. What one guy said not to do, another guy said you should do. Why didn't they agree? I mean, here was a group of individuals who had collectively taken billions of dollars out of the markets and kept it. Weren't they all doing at least a few things the same when they made their money? And if the first guy hadn't lost, why didn't the second guy?
If imitating the pros was supposed to make you rich and not imitating them was supposed to make you poor, then each one of these guys should have lost all his money because none of them imitated each other. They all should be flat broke b/c they very often did things opposite of each other. It finally occurred to me that maybe studying losses was more important than searching for some Holy Grail to making money. So I started reading through all the material on the pros again and noted what they had to say about losses.
Losses:
'My basic advice is don't lose money.' - Jim Rogers
'I'm more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not letting your losses get out of hand.' - Marty Schwartz
'I'm always thinking about losing money as opposed to making money. Don't focus on making money; focus on protecting what you have.' - Paul Tudor Jones
'One investor's two rules of investing:
1. Never lose money.
2. Never forget rule #1.' - Warren Buffet
'The majority of unskilled investors stubbornly hold onto their losses when the losses are small and reasonable. They could get out cheaply, but being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.' - William O'Neil
'Learn how to take losses quickly and cleanly. Don't expect to be right all the time. If you have a mistake, cut your loss as quickly as possible.' - Bernard Baruch
Now I was getting somewhere. Why was I trying to learn the secret to making money when it could be done in so many different ways? I knew something about how to make money, I had made a million dollars in the market. But I didn't know anything about how not to lose. The pros could all make money in contradictory ways because they all knew how to control their losses. While one person's method was making money, another person with an opposite approach would be losing - if the second person was in the market. And that's just it; the second person wouldn't be in the market. He'd be on the sidelines with a nominal loss. The pros consider it their primary responsibility to not lose money.
The moral of course is that just as there is more than one way to deal blackjack, there is more than one way to make money in the markets. Obviously, there is no secret way to make money because because the pros have done it using very different, often contradictory, approaches. Learning how not to lose money is more important than learning how to make money. Unfortunately, the pros didn't explain how to go about acquiring this skill. So I decided to study loss in general, and my losses in particular, to see if I could determine the root causes of losing money in the markets. As I said at the very beginning of this book, I may not be wise, but I am now very smart. I eventually did learn from my mistakes.
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At the beginning of the book he said, "Smart people learn from their mistakes. Wise people learn from others' mistakes". The rest of the book is an examination of the psychological and emotional reasons for the distorting biases, poor judgement, and bad decisions that lead to loss and failure, as well as a strategy for avoiding that.
I agree - The Black Swan is great. It's a great read with an interesting viewpoint on the Finance world and investment strategies that are sometimes contrary to what the so-called experts say.
Can I be the contrarian here and suggest that both _Fooled By Randomness_ and _The Black Swan_ are overrated, overlong books consisting largely of impenetrably written anecdotes and roman-a-clefs shellacked onto a few basic, true, valuable ideas about the failings of human psychology?
What do either of these books teach you about trading, other than "never forget that shit happens, because your mind will do everything it can to convince that it won't?"
That's one way of looking at it. Some assert that Taleb's work is a tautology, as you seem to, while others, especially in academia, have been trying to disprove/discredit/find flaw in it. I won't try to argue that, but will just point out a few things, in no particular order:
- FBR and TBS are both for lay audiences. Taleb has hashed out his ideas in numerous academic papers posted on http://SSRN.com as well.
- In investing and trading, knowing what not to do is often easier and more valuable than knowing what to do. All three books I referenced are all about that, though Taleb's are more on a philosophical level than What I Learned.
- You get more out of Taleb's books if you also read the stuff he references in his bibliographies, from What I Learned..., to Mandelbrot's (Mis)behavior of Markets (understanding Black Swans in terms of fractal randomness gives it a whole new meaning), to Taleb's first book on trading Dynamic Hedging (where he basically explains his extremely technical trading strategy to hedge and exploit the shit that happens in markets), to the stuff on SSRN.
- Most books on trading (or any other kind of advice these days) can be said to overdevelop a single topic or idea. Partly to pad pages, but also partly to drive home the message to the lowest common denominator of their audience. If you're the type that can speed read through the whole thing in a few hours, try not to hold that against them if the content is good.
- If his ideas are relatively simple, why does the whole world keep fucking them up? Both the financial crisis and the BP oil spill can be examined from Taleb's framework. Why have governments not realized how fundamental these ideas are and 'robustified' society against 'shit happening'? (these are all rhetorical questions, I know the answers) Someone needs to keep driving them home till we all grok that robustness + redundancy > optimization in many areas.
- Nobody in academia, government, or media took him seriously for a long time, even with a Wharton MBA and 99th percentile track record in trading. He said he had to get a PhD to help get his message across. That his ideas may now seem obvious is probably a 'hindsight is 20/20' thing.
The world fucks up his simple ideas because the whole nature of his simple ideas is that the human brain is riddled with biases that cause it to misinterpret raw information. Essentially, his core idea is just that misunderstanding risk is human nature.
Another good book I've read recently is Liar's Poker by Michael Lewis. I thought it was a good look into Wall Street and it's culture and how 'the system' is still susceptible to human judgment and misjudgment.
It seems to be implied, but I'm not taking anything for granted so my suggestion is thus: Maths. What do you know about math? Start there. You will be quickly asea if you are innumerate. Don't even think about reading any of the suggested literature (some very good suggestions, too...) without a good grounding in mathematics all the way through the Calculus. Don't make the mistake of thinking that the maths that may have helped inform any knowledge of computers and/or computation, will translate cleanly. Understand the maths first. You will then be able to understand where the authors, such as Michael Lewis and others, gloss over the mathematics to make the story more palatable to the 'average reader'. It's not that they do this deliberately, as much as their editors force them to do so. (Possibly apocryphal story: when Stephen Hawking submitted a first draft of "A Brief History of Time" it was rejected on the theory that each equation included in the manuscript would halve the sales... and he had so many equations that, it was quipped, "people would need to be paid to read it..." )
As for "what questions to ask for", start with the clear and explicit: "who's expecting to make money...? And how do they expect to make it?" This will lead you to interest rates and bond coupons, dividends, etc... But make certain you understand the math.
This is true once you get into the mechanics of algorithmic trading, but maths aren't needed to understand the basics of how markets and trading function. In fact, one recommendation of Trading and Exchanges starts "Although this book doesn't contain a single equation...".
If you know programming, the thing probably is to get intrigued about the various different areas.
The Predictors (Thomas Bass)
Market Wizards (there's a series)
When Genius Failed
Pit Bull (Marty Schwartz)
Rigged (Mezrich)
Liar's Poker
Reminiscences of a Stock Operator
These are all basically novels. All basically dated, misguided and incorrect. But then slowly you might learn to ask the questions that will interest you.
In terms of learning finance or trading, you have to learn that thing in a spiral (like with programming). Unless you're superhuman. In which case, by all means, pick up: Fabozzi for bonds, Ross for equities (Corporate Finance is the name of his book, but he's known for inventing APT, a key model in equity portfolios -- so unlike a lot of people, he does have a pretty clear sense of authority) and Hull for options/derivatives, etc.
But remember -- that one thing that is very much alive in the markets is the invisible hand and specialization. There are even fewer generalists than there are among professional programmers, etc. Most highly successful people can summarize their trade by highlighting 1/2 of a sentence in some textbook. (If they have experience, they might also be able to tell you how 40% in that textbook relates to or is in some ways similar to that 1/2 of a sentence.)
So it's kinda like that, imho. Good luck. And as I think you mention in one of your recent posts about being a millionaire, leverage your strengths, etc. If it becomes a very large interest, probably the most efficient thing is to go to a prop shop or a large firm and learn from the source.
<shameless plug> I run http://Newsley.com. We're pivoting away from social news we're rebuilding the back end to turn it into a real time search engine for financial and economic news. The front page is populated with financial news and macro economic articles of interest </shameless plug>
1. Caveat: the market can teach expensive unforgiving lessons. After you've read, learned and developed your own theories/strategies test them with practice and see if you're any good - consistently. Use a free service like vse.marketwatch.com or wallstreetsurvivor.com, or just pen and pad for several weeks/months before actually trading. This becomes more important depending on your level of aggression/risk.
2. Always define how much you're comfortable losing before trading. (time frames for entering/exiting trades helps too) The more you adhere to this the better you can control emotion-based trade decisions, and that equals money in this game.
for technical analysis:
1)World famous Dan Zanger (turned ~30k into 42 million in 2 years) http://chartpattern.com/
for options
1) cboe.com has the best online education around (free too).. including video cast and other media
2) option training: dan sheridan: http://www.sheridanmentoring.com/ , mark: http://www.option911.com/
both Dan and mark used to work w/ the najarien brother's in their huge market making firm on the CBOE.. both know their stuff backwords and forwards
Isn't technical analysis basically a kind of stripped-down version of quantitative analysis focusing on relatively easy to compute and/or eyeball trend statistics?
It's more like using statistical regression methods and Microsoft Paint to find patterns in tea leaves, but as long as you use disciplined money management and avoid major losses you can still make money at it.
The only thing I know about Dan Zanger was when he was featured in one of the trading magazines many years ago, in an article discussing his feat. He accomplished it during the 90s tech boom, when you couldn't lose money even if you tried. No idea what he did after that.
Since "Finance/Trading/Stock Market" is a bit of a wide net to cast, I will offer my opinion on a small chunk. To understanding modern automated US equity trading, it pays off to understand the basic mechanics underpinning the market, and get a feel for the opportunities this structure presents.
I would suggest reading up on the national market structure, and reading "Inside the Black Box" by Narang for a good overview of how automated trading is structured.
You're going to have to figure out what style of trading fits your personality. Value, growth, income; long term, swing, daytrading; futures, stock, options, forex; quant or discretionary; and so on. There are some quintessential resources for each "bucket" which are fairly well known-- Graham, Livermore, O'Neil-- I'd start with the classics and go deeper into what your interested.
I do this for a living, if you want to talk more just google my name
I'd advise you to read Fortune's Formula, by William Poundstone first. It's entertaining, an easy read, and you'll pick up loads of information that will be useful going forward.
After that:
If you want to invest on fundamentals go for both of Graham&Dodd (aka the bible) and Seth Klarman's margin of safety (http://www.my10000dollars.com/MS.pdf).
For technical/quant trading both Trading+Exchanges and Volatility Trading are good books to read. Then look up some of the articles on wilmott.com and papers about things like Universal Portfolios or Neural Networks for trading on places like CiteSeer. Poking around Interactive Brokers' documentation isn't a bad idea either.
I'd start even simpler than a lot of these other comments. I've worked in the investment space for years and there are many, many great books to read. In fact, there are just too many of them.
Start of with a book by Peter Lynch - Probably "One up Wall Street". He's a legendary investor. After that, go a bit more broad - "A Random Walk Down Wall Street". After you're done with that, try learning about fundamental and technical analysis. They are 2 very different things, but are the basis for valuation/pricing.
When you're done with that, you'll know more than most.
Replace CNBC with Bloomberg and I'd agree. I was forced to work in a small trading floor with CNBC on all day every for almost a year, and those people are absolute morons, spin doctors, and cheerleaders.
Basically they take John Madden/Dick Vitale announcing style (but not the substance) and apply it to market news. You might learn a few terms from them, but I'm convinced CNBC exists for no other reason than to lure the next marks and suckers into the market, intentionally misinform them, hype them up, and then get kickbacks from the sharks and traders who take their money.
I'm late to the thread - but along with all the good advice here, my advice would be "don't actually trade any REAL money for the next 5 or 6 years, just sock your cash away in safe banks and currencies". Practice, study, try out your algorithms and systems, and watch what unfolds for the next half decade before you start trying to game the market - because it's very possible that those with liquidity a few years from now will be the ones in the best position to reap huge rewards.
I would start by reading The Intelligent Investor by Ben Graham. If you like it, then move on to Margin of Safety by Seth Klarman. (I have a value investing bias.)
Check out http://www.investimonials.com It's like Yelp for finance related stuff. It's a great place to find reviews of brokers, books, newsletters, blogs, etc.
I'm not a trader, or an exchange, but I've been forced to get very, very intimate with the technological plumbing of both, and I've interviewed many of their developers, and you'll find the architects of match engines, order routing systems, and clearing backends recommending this book just as much as I do.
It is exceedingly well written, too.
Investing strategy? Stick with Malkiel, like everyone here is (and is going to) recommend.
Another suggestion: you can download the recordings of Schiller's Yale Financial Markets class from iTunes (and from Yale); I listened to it on the way to/from a client in the suburbs for a couple weeks and enjoyed it, particularly the guest speakers.