I get lots of requests for a good stock market book…what can I read? Five Crashes will fulfill that request for the reader interested in facts, figures, and hard answers. It will bore those without a decent understanding of markets and does require knowledge of the ever-present role of liquidity. Rather than tip-toeing through the tulips, the book names names and assesses guilt. That being said, you can gain both by reading Five Crashes.
This book is rather technical and not all will be interested in tackling it, so know who you are before you pick it up. My reason for this recommendation comes from a behavioral finance point of view. I have long held the opinion that most investors would prefer to own a 10% bank CD over a common stock that grows at 8% while paying a 5% dividend. The stock’s price fluctuations can be annoying and even though the CD interest is typically compounded….the investor wants the option of spending it. On the other hand, the gunslingers of Wall Street covet leverage, volatility, and financial engineering. The more complicated the better.
The author, Scott Nations, points out that each of the five crashes he analyzes are precipitated by the advent of a new Wall Street investment scheme du jour: investment trusts, leveraged investment trusts, portfolio insurance, subprime mortgage syndication, and algorithmic trading. I was present and at my post for the last three of the five crashes, and I doubt there are any living witnesses to the first two. In each case, the portfolios I managed had no direct exposure to the author’s smoking guns…portfolio insurance, subprime mortgages, and algorithmic trading. However, the value of our stocks declined with the market. They had to, they were best of breed and held by the width and breadth of the market….we provided liquidity for the guys caught pouring ether into the carburetors of their lower quality holdings. I would expect the same thing to happen again, don’t know when but it will probably happen. When it does, we will loss trade our stocks, generate loss carryforwards and duplicate the events of 1987, 2008 and 2010. If you want market or better returns, this is the landscape. Like The Big Short, Five Crashes describes why our emperors unabashedly appeared without clothes and investor lemmings still charge headlong to the sea.
I loved Nation’s courage in complimenting the heroes…J.P. Morgan, Hank Paulson, and his unabashed condemnation of the losers…Herbert Hoover, Alan Greenspan, and Michael Milken. Even more refreshing was his identification of the Rasputins and their pawns…Ayn Rand (Alan Greenspan), Andrew Mellon and Herbert Hoover (Calvin Coolidge).
I liked this book. As time passes both rallies and corrections become contained by the ever-increasing speed of communication. However, predictors and charlatans are attracted by any exchange of dollars and they will continue to use investor folly and hysteria against the crowd. History doesn’t always repeat itself but it does rhyme. Patience is a huge virtue and knowledge is the best elixir I know of. The more you know, the better off you are.