Today I’m interviewing Leigh Drogen, a former quantitative analyst and fund manager who is now the founder and CEO of Estimize. Leigh started his career at Geller Capital where he ran a quantitative non systematic earnings acceleration and analyst estimate revision model which also relied heavily upon relative strength and trend following. He then went on to run Surfview Capital successfully employing a similar strategy before moving into the financial technology world. Prior to founding Estimize he was an early member of the product and business development teams at StockTwits, the largest social network of investors on the web.

Estimize, Inc. was founded in 2011 to provide the financial community with a platform for the generation of estimate data sets from buy side and independent analysts, as opposed to current data sets such as IBES which only source from sell side analysts. Beginning with a focus on EPS and Revenue models for public companies, Estimize now has over 13,000 member analysts and coverage on over 1,000 companies. Their consensus estimate numbers are not only more accurate than comparable data sets from the sell side, but their open and transparent platform allows members to view the depth of estimates and identify the analysts with the highest accuracy metrics over time. You can now find the Estimize data set on Bloomberg and can register for the service here.

So what’s in your library Leigh?

Reminiscences of a Stock Operator by Edwin Lefevre - There’s no other text that captures as well what it feels like to operate in financial markets than Reminiscences of a Stock Operator. This book really was my indoctrination at the age of 15 and taught too many lessons to count. Above all though it drove home the fact that it’s far easier to make money positioned in the direction of the primary trend as opposed to attempting to outsmart everyone else by going against it. Play big a few times a year when the odds are heavily in your favor and go to the beach when it’s not your market.

Six Days of War: June 1967 & The Making Of The Modern Middle East by Michael B. Oren - I studied war theory during my undergraduate education and was able to transfer many of the lessons into money management and building companies. Six Days of War was a detailed account of the calculations made by military and political leaders on both sides of the 1967 war between Israel and its neighbors as well as the global powers both before and during the conflict. The primary difference between Israel’s ability and Egypt’s inability to execute their strategies was the accurate, or in the case of Egypt, inaccurate flow of information from front line soldiers up to tactical and strategic decision makers. Information is power and you can not make quality decisions without it.   

Way of the Turtle: The Secret Methods That Turned Ordinary People Into Legendary Traders by Curtis Faith - Trading Places was a hilarious movie, so when someone told me a story about how some Chicago traders basically did it for real, I had to read Way of the Turtle. Putting aside the fact that it was an extremely entertaining story, the main lesson of developing and back testing a strategy that works, and then sticking to it over the course of time really resonated with me. It also deeply ingrained in me the belief that buying begets buying and selling begets selling. You want to scale up into longs and down into shorts, not the other way around, use momentum to your advantage don’t fight it, the big panic moves in both directions are where the money is made.

The World Is Flat: A Brief History Of The 21st Century by Thomas Friedman - Tom Friedman is one of my favorite writers for his ability to see the forest through the trees. Tom writes how our minds should operate, he takes a lot of individual anecdotal stories along with hard data and builds a thesis with them. The World Is Flat taught me how to step back and think about the inevitability of certain global trends and how they impact the micro environment. Just being on the right macro curve and not fighting against the larger forces at work can set you up for success in many cases to a greater extent than even your execution in a micro sense.

Technical Analysis of Stock Trends by John Magee - Technical analysis is scoffed at by many as using a crystal ball, largely because technicians have not positioned the skill set in the right way. Understanding patterns in the supply and demand for any asset is extremely important in order to manage risk, the study of technical analysis gives that to us. This book is basically the first text anyone who wishes to understand this practice should read, and in my opinion that is anyone who operates in financial markets where there is a bid and an ask.

Thinking Fast and Slow by Daniel Kahneman - Daniel Kahneman is a hero of mine and a huge influence on how I think about, well, thinking. I believe heavily in behavioral finance and that markets are extremely inefficient due to the large gap between was Kahneman calls “Humans and Econs”, Econs being the fictional perfectly rational actors. His study of heuristics that influence our behavior and decision making is necessary reading for anyone who wants to understand their own decision making and how to take advantage of the flawed process that others use.

Thanks Leigh.

As always, you can buy the books Leigh talked about in the Sniper Book Bin

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.

Last week we published the first half of excerpts from a talk given by Samuel Eisenstadt, the former Research Chairman of Value Line Inc. at a QWAFAFEW meeting in New York during April of last year. QWAFAFEW (The Quantitative Work Alliance For Applied Finance Economics And Wisdom)  is a Quantitative Investment Society with chapters in New York, Princeton, Hartford, Boston, Washington DC, Chicago, Denver and San Francisco. The talk was given in a question and answer format. This week we'll finish up with the remaining questions from that talk as well as two additional questions that I asked Sam this week.

Sam started his financial career at Value Line in 1946. "In 1965 Sam persuaded management to change the Ranking System by using "cross-sectional", regression analysis, a procedure that measures relationships at a point in time rather than across time (time series regression). This was a major shift that greatly improved the performance of the ranking system in subsequent years. Sam became the Research Chairman for Value Line in 1987 and held that position through the remainder of his career at Value Line, which came to an end in 2009. Sam remains active in investment research and is often quoted by Mark Hulbert in his Market Watch articles. In fact, here is an interview with Mark that Sam did last week:
S&P 500 will be at 1,700 on Halloween - Mark Hulbert - MarketWatch

Special Meeting of QWAFAFEW, New York 
April 16, 2012

Question: Asset allocation models used to include just stocks and bonds or stocks, bonds and cash. Now we see institutions and pundits talking about allocations to foreign developed markets, emerging markets, currencies, gold, commodities and other asset classes; What are the challenges in trying to model so many asset classes? Are we trying to make the world too complex?

Answer: To start, lots more data are required as well as observations. With foreign markets, quality of the data becomes questionable and the consistency of the data from country to country raises doubts. I'm sure that powerful computer programs will be developed to manage these problems, however.

Question: Amid all the discussion and debates about indexes and indexing, Value Line developed its own index of the market. Could you shed some light about how that came about and what things you learned after launching the index? 

Answer: Some time in the early 1950's Value Line developed a geometric index of the stocks in the survey at the time. Why a geometric index? Keep in mind that from Value Line's standpoint each company was a separate report, and each company was equally important. In getting a picture of the "typical" stock, we sought an index that treated each company equally.

Subsequently, we found that a geometric index came close to passing through the middle of all of the price curves. In getting the relative price performance of stocks, we wanted a universe where as many stocks outperformed as underperformed. The geometric index appeared to achieve this. Thus it was used to measure the price performance of the rankings themselves - an improper usage in order to measure wealth performance. Here, of course, an arithmetic average would be the proper measurement.

The question arose, "which was the correct measurement?" To get the typical chart of relative price performance, I would argue the geometric index is correct. To get the correct wealth growth performance of the groupings, the arithmetic index is correct. Thus, Value Line currently publishes both. One final thought: The University of Chicago at one time suggested that the average of the arithmetic index and the geometric index came closest to measuring the "typical".

Question: Which people within the industry have earned the greatest amount of respect from you, including those you've merely observed through books and media, personal correspondence , or those you've met personally?

Answer: Obviously the first person that impressed me most was Arnold Bernhard, the founder of Value Line and the person that hired me after my release from the service. I had come to Value Line with an undergraduate degree in statistics - not finance. Hence Value Line provided on the job training for me in finance. The idea for a "Value Line" and an attempt (albeit non-mathematical) at objectivity was his. Bernhard was a great writer and any improvement in my writing skills, I probably learned from him. He was a good analyst, but lacked statistical training, so our association was a good one. I most admired that he was open minded and always willing to try new things.

Another person that helped me along in my beginning years was a gentleman named Daniel Embody - a name that I'm sure is unfamiliar to all of you. He joined Value Line a year or two after me. He came from the Bureau of Ships, U.S. Navy. I learned a lot about hand-run multiple regression analysis from him. He devised worksheets that enabled us to run by hand four- to five-variable analyses with ten or twenty years worth of observations. This was many years before electronic computers made their way into our office. While time consuming, running these studies manually gave us a better understanding of the process.

Another person I must mention is Dr. Herbert Arkin, my stat professor at the City College of New York. He is the one who originally opened my eyes to this field, which was still in its infancy. So much so, that few at that time had any idea what a statistician did for a living! In Wall Street jargon at that time a statistician was an analyst that worked with numbers, but who had little training in statistical methods beyond measuring averages and medians.

Professor Fabricant, a physics professor at Brooklyn Polytech who observed that when a Value Line analyst raised their annual earnings forecast on a company, there would be a favorable price response subsequently.  This thought gave rise to the earnings surprise factor in the Ranking System sometime around 1969. Others have since started services that are primarily based on earnings surprise and claim its discovery.

Victor Niederhoffer, a prominent trader and a strong believer in statistical testing of systems. Despite his University of Chicago training, he has devised strategies that have served him well, and sometimes not so well, but has remained stalwart in his belief that one must subject ideas to significant tests before acting upon them. He is the author of several books - The Education of a Speculator and Practical Speculation, both of which I would highly recommend to any budding speculators.

Peter Bernstein, an eminent economist, financial theorist and original thinker, recently deceased and author of several excellent books on finance and economics.

Mark Hulbert, financial reporter for the Wall Street Journal and Market Watch. Mark is one of the few financial writers who applies and respects statistical methods and testing in his writings. He keeps up with the learned economic articles and journals and keeps his readership informed on new developments in finance. He runs a service that evaluates many advisory services and keeps them honest on the basis of their advertising claims and results.

Dr. Fischer Black (deceased) -  A professor of Finance at the University of Chicago and MIT. Dr.Black wrote a now iconic paper,"Yes Virginia, There is Hope, Tests of the Value Line Ranking System". This paper, presented at the University of Chicago, propelled the Ranking System to the attention of academia and subsequently resulted in numerous research papers. Had Dr. Fischer lived, there is little doubt that he, too, would have received a Noble Prize in Financial Economics along with others.

Question: Which industry practices and/or cliches irritate you the most? Are there any assertions that people continue to make even though the data simply do not back those assertions up?

Answer: Discussions of price charts breaking moving averages of various lengths. Typically, these are made by chartists to justify resistance levels for stock prices. I think there are as many moving average rules as there are chartists. And you find them all over TV! I find these most irritating since no evidence is presented.

Question: What are the dangers in trying to draw conclusions or derive investment strategies from historical data?

Answer: Historical data can be tricky. Trends, auto correlations, and serial correlations can all impact the data. Transformations of the data may be necessary. Use of differences or absolute data, and seasonal adjustments may be called for. Data should be carefully examined before proceeding with the analysis. Also, trends can change. Keep in mind that we are not dealing with physical laws, like when the next eclipse will take place.

Question: Have you ever tried using valuation relative to the stock's past trading multiples as a factor, and if so, what limitations kept you from adding it to your system? 

Answer: Annual earnings ranks and price ranks (non -parametric equivalents of price earnings ratios of preceding years) are  components of the timeliness ranking system.  At least they were when I left Value Line more than 3 years ago.  I am not aware of what changes have been made since then. Also historical price /book, p/e and yield have been tried in the past but did not add to  the explanatory power of the model.  Keep in mind that the ranking forecast is for 6-12 months, a period that may be too short for valuation factors to assert themselves.

Question: If you have found that the Timeliness Ranking System has stopped consistently outperforming because value oriented strategies have come to the fore since 2000, have you tried to add any value oriented factors to the system? If so, how has it turned out? 

Answer: .The Timeliness Ranking model was  based upon many years -  more than 30 when I was there. Predominance of value factors in recent years were not sufficient to overcome the "growth" of earlier periods, despite their out performance in recent years.  Models based upon too few years can be susceptible to short-term cyclical behavior which would tend to make the model unstable. A  model based upon the last 13 years would be essentially a "value" model and could be misleading when and if the market environment should change.

Thank you Sam.

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.
This week I am departing from my usual format to bring you excerpts from a talk given by Samuel Eisenstadt, the former Research Chairman of Value Line Inc. in front of a packed house of analysts and portfolio managers at a QWAFAFEW meeting in New York during April of last year. QWAFAFEW (The Quantitative Work Alliance For Applied Finance Economics And Wisdom)  is a Quantitative Investment Society with chapters in New York, Princeton, Hartford, Boston, Washington DC, Chicago, Denver and San Francisco. The talk was given in a question and answer format. At the end of the presentation, I have added three questions that I asked Sam this week along with his answers.

Sam started his financial career at Value Line in 1946 as a proof reader, but was quickly recognized for his acumen with statistics. "In 1965 Eisenstadt persuaded Bernhard to switch from time series regression analysis to "cross-sectional", a procedure that studies relationships at a point in time rather than across time. This was a major shift that greatly improved the performance of the ranking system in subsequent years. The new system ranked about 1700 stocks relative to one another, based largely on measures of momentum for both earnings and price. In effect the system is designed to ride winners and avoid losers. Sam became the Research Chairman for Value Line in 1987 and held that position through the remainder of his career at Value Line, which came to an end in 2009. Sam remains active in investment research and is often quoted by Mark Hulbert in his Market Watch articles.

Special Meet of QWAFAFEW, New York
April 16, 2012

Question: Please describe the circumstances that lead to the development of the Value Line Timeliness Ranking System. What needs were perceived to need addressing? When it started, did you have any idea how long it would take to complete?

Answer: No, it was an open-ended research project for us. The purpose was to produce an improved system. We noticed that interrelationships between highly related variables frequently caused factors to drop out of regressions. An example of this was IBM, a consistently up-trending stock, where the lagged price became the most important factor.

Question: The academic literature references relative earnings and price ranks, EPS growth, price momentum, and earnings surprise as being factors in the model. It has also been noted that Value Line was the first known system to use earnings surprise as a factor. How did this factor become a part of the system?

Answer:  A physics professor from Brooklyn Polytech, Professor Fabricant had detected that whenever an analyst's earnings projection (next 12 months) was raised, the relative price action of the stock subsequently improved. The question became: "How could we take advantage of this action in the Ranking System?" We believed that by examining the reason for the revision, we might improve the System. We found that, more often than not, the revision took place after an earnings release.  Thus, by evaluating the earnings release, we could get a jump on the analyst revision itself. Hence the birth of the earnings surprise factor. It was tested, found significant, and introduced into the system prior to anyone else's use of this factor (to the best of our knowledge).

Question: The first famous article about the Value Line ranking system as an "anomaly" to the Efficient Market Theory being trumpeted by academics was called "Yes, Virginia, There Is Hope; Tests Of The Timeliness Ranking System" by Dr Fischer Black. Could you tell us how the article came about; what assistance you provided in helping him perform his tests, and any other things you think we might find interesting?

Answer: Dr. Black was invited by Arnold Bernhard to test our ranking system using any procedures and tests that he could think of. The result was "Yes Virginia, There Is Hope;". Value Line provided the computer power and Fischer was paid for his efforts. Several professors at the University of Chicago claimed that Dr. Black was "paid and quartered by Value Line", thus suggesting that his results were biased towards a favorable outcome for Value Line. Subsequent results of the ranking system for many years would appear to have validated Fischer Black's conclusions. Indeed, Value Line's ranking system results might have resulted in some modifications in the Capital Asset Pricing and Efficient Market discussion!

Question: Why do you enjoy tinkering with data so much?

Answer: I was always looking for numerical solutions to stock price forecasting. Discovery of statistical solutions and significance, particularly in stock price forecasting provided a thrill - even if only a momentary one, at times. It shed a bit of light on the darkness that enveloped the subject. I think the thrill would have been there, even if the subject under investigation were other than stock prices.

Question: What other ranking systems and models have you been involved in testing and attempting to develop over the years?

Answer: I've developed a technical ranking system. Most technicians do not use statistical methods to construct and test their systems. This is one field that requires such testing since much of their beliefs are not justified by mathematical verification. The technical system provides a small amount of explanatory power with mixed results, particularly in recent years. Relative strength is the primary tool, but applied using multiple regression techniques. Also, in the early years, a model was constructed in order to assign quality grades to companies based upon growth and price stability.

Question: Getting back to some of the efficient market debates, one of the reasons for the persistence of that theory is the simple empirical fact that the majority of mutual fund managers under-perform their benchmark indexes even before fees. What are the biggest factors contributing to this prolonged phenomena? 

Answer: In a nutshell, success carries with it the risk of ultimate failure. This is also true to some extent of the Value Line timeliness rankings and other statistical approaches. Recent studies have indicated a shrinkage in the spread between good and bad companies making discrimination much more difficult. This may be due to the proliferation of ETFs which select companies on the basis of sector rather than individual company characteristics. These days, they buy the whole steel industry rather than only the "good" steel companies.

Question: You once had a debate with Dr. Rex Sinquefeld who went on to become the founder of Dimensional Fund Advisors. What was the nature of this debate? Are there any specific exchanges that you can recall?

Answer: The title of the debate was "The Efficiency of Capital Markets". The debate was held at the University of Chicago before a large group of MBA students. I was chosen, largely as a defender of the Value Line ranking system who argued that if our results at Value Line were accurate, then equity markets were not as efficient as claimed. This was largely a continuation of the old debate which Fischer Black had addressed in "Yes Virginia, There Is Hope". Either the Value Line results were misleading or the efficiency argument was faulty.

After a lengthy discussion of Value Line results, Rex argued that if Value Line numbers were correct, in time the results would deteriorate as more and more followers followed the system. There was a large element of truth in this as later results would show. My response at the time, which drew considerable laughter from the MBA students, was that as long as the University of Chicago continued to teach their market efficiency argument, there was hope for us! Later papers on the market efficiency argument tended to soften the position of the university's academics. 

Question: Are there any areas of quantitative analysis that you would like to explore that just were not viable in the past due to lack of computing power or lack of data? 

Answer: I feel computer power and lack of data do not represent a problem today.  Indeed, there may be too much data available - so much so that I sometimes think it serves to confuse the issue.

Question: As more and more funds have turned towards quantitative analysis and rules-based investing have you seen any changes in the performance of your own models? Have factors that have suggested the potential for out performance in the past now stopped working? Also, have you seen the duration of the holding periods for the stocks that your model picks change? 

Answer: Factors that have worked in the past have not worked well in recent years.  Earnings growth and price momentum which worked extremely well prior to 2000 were largely displaced by value factors since 2000. 

One does not hear of outstanding results from relative price strength in recent years.  It appears that overall, the markets have become more efficient in recent years.  The overall spread between outperforming stocks and underperformers has shrunk in the past 10-15 years. If good and bad stocks are performing more and more like the general market, it becomes more difficult to differentiate.  Perhaps the influx of Phd's in mathematics and physicists from academia have accentuated this process. In addition, the phenomenal growth of ETF's, which tend to group stocks by industry and sector rather than by value or growth have contributed to the diminution of spread between attractive  and unattractive.  This may be carried too far and will probably reverse some day.

Question: If you could impart one pearl of wisdom to someone just starting out in the investment field, what would it be? 

Answer:  With respect to newcomers in the field, I would recommend - stick to it.  I am optimistic.  While answers may never be found, it's fun looking for them and potentially profitable even if one gets close.

Thank you Sam.

The above excerpts make up about half of the original Q&A session plus my three questions. The article is getting a bit long in the tooth now, though, so I will save the second half for some time in the future.

If you'd like to sample my research, sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.

Today I am interviewing Pierr Johnson, a veteran of Wall Street with twenty-two years as an analyst in both investments and banking. Pierr is the founder, Principal and Analyst at Neoga Advisors, a firm that offers research, analytic and advisory services to Tech and Life Sciences companies and investors. Prior to Neoga, he was a Vice President and Equity Research Analyst at John Hancock Funds where he specialized in technology companies. Pierr also was a Senior Vice President and Analyst in Bank of America’s Tech Banking Group, where he supported a wide range of M&A and related financing transactions. He got his start in the business as an Equity Analyst at The Value Line Investment Survey in the early 1990's.

So, what's in your library Pierr?

Graham & Dodd's Security Analysis 3rd Edition by Benjamin Graham & David Dodd  I first read this great work when I got hired as an Analyst at Value Line. I devoured a library copy eager to learn about a discipline that was new to me. I soon bought the 5th edition, along with various finance books, as my mentors there guided me through their analytic program. As it has been for so many analysts, Graham & Dodd was my doorway into a profession I’ve truly loved to pursue. It’s a great book for learning how to do investment analysis.

Margin of Safety by Seth Klarman - This is a very hard-to-find book on value investing by a hedge fund legend in Boston, where I live. Yet through networking with colleagues I learned that a pdf is available via the Internet and it is well worth the read, even in a notebook display. (A hard copy will set you back a couple thousand.)  As a Tech investor, I realize scarcity always enhances value. With so many growth companies and stocks to follow, a focus on valuation to me is very important. 

The Dark Side of Valuation: Valuing Young, Distressed, & Complex Businesses by Aswath Damodaran - Damodaran is well known for his classic Investment Valuation, which explains the discounted cash flow valuation process. Here he offers ways to apply these processes to valuing bubble-like stocks, which for me was very useful when he published it at the time. The book also gives strategies that are useful for investors looking to value trending stocks. Understanding discount rates with high-multiple stocks (e.g., when P/S looks like P/E) is very helpful to me, especially once I’ve aggregated the fundamental factors that support the high valuation. 

Standard & Poor's Fundamentals in Corporate Credit Analysis by Blaise Ganguin - When I first became the Senior Analyst to the BofA Tech Banking Group, my Research Director had me read a number of works to get me up to speed on Corporate Finance and Investment Banking. The obvious one to single out is S&P’s guide to Credit Analysis.  I had read Fabozzi’s giant tome twice, but as a bank, they had an army of people pricing debt. When you participate in a company’s manifold capital transactions, credit analysis and corporate finance have a different importance. This book and the Van Horne/Wachowicz Fundamentals of Financial Management were both required and valuable reading.

Valuation: Measuring & Managing The Valuation of Companies by Tim Koller, Marc Goedhart, & David Wessels - With the Banking Group, I got involved in all the significant strategic and financing events of our closest clients, especially those related to M&A. Investors purchase  marketable securities, hoping to sell them for a gain. With our clients’ capital transactions, however, Valuation and Financial Management required a broader perspective and I found this book (published by Wiley for McKinsey and Company) a great resource to me.

Acquisition & Corporate Development: Contemporary Perspectives For The Manager by James Bradley & Donald Korn - My firm grew from networking with local Investors and Corporate Development professionals as they sought to leverage my deep skills and experience. Two of a number of books I read were especially interesting as I rounded out my service offering. Bradley and Korn’s work I found on Google Books, which at the time allowed full access to the text. Placing M&A at the heart of strategy in the corporate development process was key. There is also Christopher Clarke’s Shareholder Value: Key to Corporate Development, which is still in print, if a bit pricey.

Biotech Valuation: An Introductory Guide by Karl Keegan – Some years back I was asked to extend coverage to Life Sciences and Biotech, having at the time covered Tech for way over a decade. Two books were very helpful to me is getting my coverage launched.  Karl Keegan’s book is targeted more to Equity Analysts and provides both a great introduction to this unique industry and a useful framework for valuation.  Keegan for many years was Canaccord Adams’ Biotech Analyst.  Boris Bogdan’s Valuation in Life Science also has a great introduction to the industry but is more targeted to valuing transactions and alliances in the industry. 

Valuation in Life Sciences: A Practical Guide by Boris Bogdan & Ralph Villiger - (mentioned above)

Thanks Pierr.

As always you can buy any of the books Pierr mentioned at the The Sniper Book Bin. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.
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This week I am speaking with Larry Rothman, an Associate Editor at Dealreporter, a subsidiary of the Financial Times. Larry started his career as an analyst at Value Line, working in both equity and convertibles. He then jumped to Miller Tabak, where he was a high yield and convertible analyst, before moving to William Blair, where he specialized in convertibles. Larry has also worked at a couple of independent research companies over the years covering the entire capital spectrum, from equities, to convertibles, and high yield. 

Larry is always happy to hear from analysts, portfolio managers, and investment bankers that would like to comment for future articles. It can be for attribution or kept as background. 

So, what's in your library Larry?

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One Up On Wall Street by Peter Lynch - This was one of the first books I had read on investing. It was insightful and paved the way for me to analyze equities. In fact, I still use some of what I learned from it today, particularly when I read various arguments that have nothing to do with the underlying fundamentals of an investment. 

Graham & Dodd's Security Analysis by Benjamin Graham & David Dodd - A book that is as timely today as it was when it was first written! Core principles that are necessary for analyzing all stocks can be found in this book. All said, I believe this book should be mandatory reading for all finance majors.

Buffett - The Making of an American Capitalist by Roger Lowenstein - An interesting history about "The Oracle of Omaha". The book goes beyond his personal biography, though, and there are nuggets of investment wisdom to be gained. The main tenet: "We should all think like owners in the businesses in which we invest".

When Genius Failed: The Rise & Fall Of Long Term Capital Management by Roger Lowenstein - Besides being a fascinating read, the book shows the pitfalls of hubris and greed. Add leverage to the mix and the potential for disaster rose exponentially. All said, "pride goeth before a fall...and the fall here was epic! A great, overall read.

A Random Walk Down Wall Street by Burton Malkiel - A timeless lesson on how difficult it is to beat the market. It shows the powerful effect of bubbles, why they are formed, and the inevitable pain when they pop. Another "must read" for market participants! 

As always you can buy any of the books Larry mentioned at the The Sniper Book Bin. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.
Today I am going back to the well and giving you a second list of books that have helped to shape me as an analyst. I told you in the inaugural article that I might give you a second list from me, and with two potential interviewees having to put me off this week due to a looming deadline and a vacationing compliance officer I thought this week would be a good time to give you that second list.

For those of you that didn't read the first article, I am Wayne Nef, President of Sniper Research and author of The Sure Shot LetterI have worked on the Street for over twenty years with stints at Value Line, Merrill Lynch and Circle T Partners. For the past ten years I have worked as a consultant to hedge funds through my company Nef Value Research.

So what's in my library?
A Zebra In Lion Country by Ralph Wanger - This book gives you another look into the mind of a great investor. As the man says right in the beginning of the book "If you've done it, it ain't braggin!" And this man has done it! Wanger had an average annual return of 17.2% for the Acorn Fund from 1970 through 1998. He got there by investing in small cap stocks. This book does a good job of explaining his investment  philosophy and gives some good accounts on how he found some of his greatest picks.

Reminiscences of a Stock Operator by Edwin Lefevre - An oldie but a goodie. This book was first published in 1923, yet I don't know many in the business that haven't at least heard of it, if not read it! If you don't read it for the great story, then read it for the great thoughts on crowd psychology or market timing. While some of the stocks mentioned are no longer with us, the set ups that created the opportunities are timeless and you'll think of many instances where the same story has been played out by other stocks in other times. A great book, even today, 90 years after it was first published.

Contrarian Investment Strategies: The Next Generation by David Dreman - Here's another investment master giving away secrets. Dreman is a big believer in psychology and probability. The book focuses in on certain investor behaviors and how to potentially exploit it. A Well-researched read that is also entertaining.

John Neff On Investing by John Neff - Neff is an advocate of low P/E investing. This man is an excellent writer. Not only does he convey his strategy and why it works, but at some points he can make you feel the fear that was driving the market at a given point in time (1973, for example) and how it helped to set up some of his most profitable investment opportunities. 

The Devil's Dictionary by Ambrose Bierce - If you are looking for investment advice, you're not going to find it here. Instead this book is a "how to" book on developing cynical wit, which can be useful in our line of business! The Devil's Dictionary gives example after example of Bierce tearing down ideas, notions and people who were considered untouchable in his time. All said, if you want an education on how to be cynical, Ambrose Bierce stands up there along side H.L. Mencken!

As always you can buy any of the books I mentioned at the The Sniper Book Bin. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.
Today I am interviewing Peter Gaynor a long-time Wall Street veteran. Peter has been a Senior Portfolio Manager at Wilmington Trust and has worked as an Investment Officer at Evergreen Investments. Prior to that he has had stints at Merrill Lynch Investment Managers and PNC Bank, both as money managers. He started his career as an analyst at the Value Line Investment Survey in the early '90s.

So, what's in your library Peter?

Investing: The Last Liberal Art by Robert Hagstrom The book ties together the scientific models of different disciplines as they might relate to an investment framework. Hagstrom looks at the governing models of other disciplines such as physics, biology, philosophy and literature and spotlights their potential use in investing. The book highlights the importance of cyclicality and life cycle and how investors can improve their returns by moving away from financial concepts only and including strategies and methods from other fields of study.

Advances In Behavioral Finance by Richard Thaler Thaler explores the emotional biases of investors and how those biases affect decision making. A classic example of this is people's reluctance to sell stocks that have lost money due to a fear of admitting mistakes or recognizing a loss. This bias also runs in the opposite direction as many people will also sell winners too early in order to realize the pleasure of winning. Finally, the efficient market theory can never explain thoroughly high over or under valuation for any individual stocks.

What Works On Wall Street by Jim O'Shaughnessy A good review of the long-term historical predictive value of financial ratios. Over very long time horizons he shows which ratios hold the greatest chance for making money. This is a good source for background information for building quantitative models. He goes over price to book, price too earnings, price to sales, price to cash flow etc., providing a valuable historical perspective for decision making.

Financial Shenanigans by Howard Schilit This book helps investors identify balance sheet tricks that companies can use to inflate earnings. It's useful for identifying high-flying companies that have unsustainable trends. This book really puts the spotlight on accounting gimmicks and is filled with case studies. I love case studies!

Extraordinary Popular Delusions & The Madness of Crowds by Charles MacKay The book reaches back into history to vividly describe cultural manias and preoccupations, including tales of 18th century investment fads in Tulip bulbs, South Seas trading and Louisiana land development. MacKay examines the basis for the hyperbolic expectations and colorfully shares the ultimate folly of even the most respected intellectuals of the day. This is definitely a buyer beware type of book! Its enduring message: weigh carefully the wisdom of popular belief. 

Thanks Peter.

As always you can buy any of the books Peter mentioned at the The Sniper Book Bin. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.
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This week I’m speaking with Tom Mulle, a twenty-year Wall Street veteran and founder and principal of the Pierian Fund. Tom Started his career at Value Line in the early 90’s and has worked as a technology analyst at Oppenheimer and Alkeon Capital. In 2005 he was the highest ranked analyst at Fred Alger Management by attribution. While there he co-managed two institutional technology portfolios that outperformed the Goldman Sachs Technology Index by 650 basis points while under his co-management.

In 2006 Tom left Fred Alger to found and manage the Jefferies Technology Fund. The fund generated a 26.0% positive absolute return before fees in 2008 compared to the NASDAQ decline of 41%. All said, for well thought out technology research, Tom is your go-to guy.

So, what's in your library Tom?

One Up On Wall Street by Peter Lynch The first book that any future investor should read. Even in today's high frequency trading world you can be ahead of the Wall Street data points just by looking around you. There are also some useful basic accounting tips that even seasoned pros overlook. A must read for anyone starting to get an interest in finance!

Liar's Poker by Michael Lewis "$10 million, no tears." That is the whole book right there. You never want a weak hand, but lots of times the other guy has an even weaker one. Granted that you should keep in mind that the guy who said that blew up Long Term Capital with the help of a bunch of Nobel Laureates!

The Big Short by Michael Lewis Anyone that thinks they want to be a hedge fund manager should read this book and try to relate to Michael Burrey. He was alone and the smart money, including his institutional investors turned out to be not so smart. None of them were capable of looking forward. When it turned out that Burrey was correct, there was only silence. It reminds me of the Emily Dickinson  quote "Success is counted sweetest, by those that never succeed."

Market Wizards by Jack D. Schwager This book shows that there are a lot of different ways to make money. Schwager interviews lots of successful traders. All but one have one thing in common: they all cut losses quickly and let their winners run.

You Can Be A Stock Market Genius by Joel Greenblatt The book is about spin offs  which are a great way to make money. Too bad there aren't that many of them in today's world of flush private equity. 

Thanks Tom.

As an added bonus, here is a write up on Tom's own book! Tom is an accomplished writer of children's books. The one below is one of my daughter Madison's favorites.

The Big Little Christmas Tree by Tom Kringle A touching children's story that should teach patience, especially since yesterday's world of instant gratification is probably not going to come around again for a while. It's a nice Christmas tale that should be read to the family around a warm fire.

As always you can buy any of the books Tom Mentioned here. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.
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Today's Interview is with Herb Blank, a senior consultant at S-Network Global Indexes LLC where he develops rating systems specializing in indexes and exchange traded funds. Prior to S-Network, Herb was the Head of Quantitative Risk Solutions at Rapid Ratings for five years and was the President of QED International, his own consulting firm for 10 years. Before starting QED International, Herb worked for Deutsche Bank and managed the first ETF family to trade on the New York Stock Exchange. He has also worked at Value Line Inc. in New York. Herb started his career at Fidelity Bank, no relation to Fidelity Investments.

Herb is co-founder of the New York chapter of QWAFAFEW (The Quantitative Work Alliance For Applied Finance Economics And Wisdom). QWAFAFEW is a not-for-profit society designed for quantitatively oriented investment professionals and friends to relax and participate interactively during presentations and panel discussions on germane issues. The group has chapters in New York, Princeton, Hartford, Boston, Washington DC, Chicago, Denver and San Francisco. 

So, What's In Your Library Herb?

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein Each chapter chronicles the life of a different quant and tells how they impacted the industry. I enjoyed reading about some of the accomplished people I have had the priviledge of working with and helped to inspire me to persevere in the quantitative field.

A Random Walk Down Wall Street by Burton Malkiel
This book helped shape the way I look at the market. I find it a great book to recommend as an essential primer for anyone interested in the market.

Active Portfolio Management: A Quantitative Approach For Producing Superior Returns & Controlling Risk by Richard Grinold & Ronald Kahn This book was one of the building blocks of my career as a quantitative portfolio manager.

No One Would Listen: A True Financial Thriller by Harry Markopolos
The harrowing real life experiences of a personal colleague and friend proving that the fate of a whistle blower is never easy. Harry was the man who went to the SEC three times to warn about Bernie Madoff and was shunted aside.

Veeck--As In Wreck: The Autobiography Of Bill Veeck
The chronicles of an irrepressible maverick baseball pioneer. It taught me that the conventional path is not always the right one!

Thanks Herb.

As always you can buy any of the books Herb mentioned here. If you'd like to see another great read, sign up for The Sure Shot Lettermy monthly newsletter that is packed full with great investment ideas.

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This week I'll be speaking with Rob Wheeler, a Director at ACP Financial, specializing in high-yield debt, distressed debt, and special situations. He is an expert in sourcing and distributing alternative investments and new private equity and debt placements. Prior to ACP Rob spent fifteen years at Miller Tabak Roberts as an analyst of convertible, high-yield and distressed debt. He started his career in 1993 at The Value Line Investment Survey.

With that said, what's in your library, Rob?

A Random Walk Down Wall Street by Burton Malkiel Picking stocks and bonds is an exercise in futility according to this book. I'm generally in agreement with this premise, which almost by default implies that I long ago picked the wrong profession. Luckily, when I first read the book, the Value Line Investment Survey was mentioned favorably as a possible exception to the premise, so at least on paper I was in the right place. The most relevant take away from the book now is that the most lucrative investments are likely to come from markets and asset classes with asymmetric information flows.

The Big Short by Michael Lewis
I thought I understood the housing market pretty well in 2005; at least well enough to sell my Hoboken condo that year. The housing crash seemed imminent at that time, certain in 2006 and at the precipice in 2007. The three-year run up in housing prices between 2005 and 2008 made absolutely no sense until Lewis explained the mechanics and motivation of the MBS short sellers willing to let out the rope with which the longs would eventually hang themselves. The capital markets today still reflect the idiocy of the pre-2008 bubble and post 2008 bail out making The Big Short still a worthwhile read.

The Forgotten Man - A New History Of The Great Depression by Amity Shlaes
The Keynesians made the Depression last a lot longer than it should have according to Amity Shlaes. She offers a contrarian view of Roosevelt's attempts to deliver the country from its depressive state. In short, Roosevelt made the depression last longer than it should have. I believe this history lesson holds a lot of relevance to our current economic situation and leads one to conclude that meaningful growth will not resume until the Keynesians running the show are sent packing.

Up In The Old Hotel by Joseph Mitchell
This book is a collection of stories and essays written by Mitchell for the New Yorker from the 30's to the 50's. The essays describe the city back in the day and mentions a few of the bars and taverns that are still in existence today including McSorley's the Old Town and others. The book is a reminder that the most interesting "Street" color (ie. who is hiring, who is firing, what shop is on the way up, what shop is on the way down) usually first gets revealed over beers in Irish bars that have been around forever.

Billy Budd by Herman MelvilleThis is the story of an American sailor who was impressed to crew on a British warship at the turn of the 18th century. Budd proves to be a popular and charismatic sailor with his new shipmates but is eventually falsely accused of planning a mutiny by an antagonizing and belligerent officer. In a fit of rage, Budd accidentally kills his superior while defending himself against the trumped up charges. Despite the protestations by the crew, who believe that Budd's actions were accidental, if not justified, he is sentenced to hang by the rules obsessed Captain Vere and achieves a martyr's status by the crew. While this book doesn't really have a business moral, it is a great read! 

Thanks Rob.

If you'd like to see another great read, sign up for The Sure Shot Letter,my monthly newsletter that is packed full with great investment ideas.