The Finance Book Club

I think we are all in it for the profit

https://www.forexfactory.com/thread/...6#post14192316
Indeed, one of the better reviewed books and probably underrated.

but the real treasure is the friendships we made along the way.

On this site, as far as I can see, there are three schools of thought - 1. Speculator 2. Interrupter/Manipulator/Predator 3. A person whose knowledge and experience is not founded in technical analysis etc etc etc and definitely not of this site.

You be the judge of which one has the greater ability to learn and do well in their activities.

For me, being 1 through to 3 is an easy cop out. An easy-eeeeer way to think but with an obvious conclusion.

Q - If I give you a horse then you go home with it and cut off its legs at the main torso, is it really still a horse?

Same concept here. People would be very surprised as to what they can learn along their travels re: trading, if only they bother to pay attention. Specs make the mistake of believing that everything they bring into their circle of use must have a payoff, so no real learning can be applied inside or outside trading. A feasible reason why so many think tech analysis IS trading. Why people "believe" a gambler over an investor or vice versa. Why people "believe" instead of gaining a well rounded understanding and then go from there. And why common sense in this century is more valuable than gold AND platinum AND ALL human labor combined.

So anyone who reads or investigates just for the sake of answers, really, is wasting their time if you ask me. Throwing the baby out with the bath water. Yes yes sure, some people on these sites say "it's all just fagazzi" etc etc, but really, is THAT a conclusion derived BY that person, or, (And this next point is far more likely) is it a conclusion they themselves arrived at through someone else's input ??? .... Therefore they're really just parroting what others have said.

So when the "stew" is all boiled out and reduced down to its truest merits, the act of chasing money or "doing it for the money" is an endless rat wheel. A conclusion that is forever just beyond your grasp. This is an understanding that comes from appreciating the difference between trading for primary income vs part time or casual activity. I'm not trying to lecture here, merely offering my input.

Peter

In an attempt to slim down and avoid dying of a heart attack too soon, I have dismantled my home office and converted it into a home gym. I also got rid of my desktop and now do my trading entirely on my phone. I’ve been told this is crazy but it seems to work for me and I am a little more active. Not a lot. What with wildfire smoke and 30 degrees C temps, it’s not very tempting to go out and jog around.

The additional screens were mainly a distraction I now realize. However they were handy when I was doing book summaries because I could put the book up on one screen and then type my notes on the other.

For the next book, “Liar’s Poker” I’m going to try something different. I’m going to paste my kindle highlights and then comment in my own words why I think it’s interesting. My comments will be in green as usual.

Liar’s Poker
Rising through the wreckage in Wall Street
By Michael Lewis

is exactly the sort of book that I thought it would be. Tells the story of a novice trader at Salomon brothers during the 1980s. Lewis, being a sensitive artistic type inclined to write books, finds himself at odds with the real trader personalities who dominated the trading rooms back in those days.

He gets the job purely by chance, at a time when Salomon was expanding rapidly. Although the whole book is written with a hint of contempt for the whole enterprise of trading, it’s also clear that Lewis is not an unwilling participant and that he desperately wants to avoid “getting sent to equities in Dallas” which is the worst assignment that you can get in the whole company.

Although it seems strange to us now, equities did not make any money and the real action was in mortgages. All the traders want to be put on the mortgage desk but they are the biggest and meanest traders of all.

if there’s one theme that runs throughout the whole book it’s that the marketplace is full of bullies and Salomon Brothers is simply a microcosm of that bully playground. Whereas in normal civilization bullying is frowned upon and actively discouraged, at trading firms, at least in those days, it was tolerated if not actively encouraged. The only thing that mattered was bringing in the money and the “big swinging dicks“ who could do that were untouchable. Above the rules.

Chapter 1
Traders are masters of the quick killing
Does he mean scalping?

Never before have so many unskilled twenty-four-year-olds made so much money in so little time as we did this decade in New York and London.
You can already hear the disrespect but as Lewis himself admits, the interview process is gruelling and he never would have gotten in if he hadn’t met (and charmed) the wife of one of the directors at a Royal function.

the rule of the marketplace is that one takes out no more than one puts in.
You are not expected to win.

"One hand, one million dollars, no tears."
The King of Wall Street, as Business Week had dubbed Gutfreund, wanted to play a single hand of a game called Liar's Poker for a million dollars.
What’s happening here is that the Director of the entire firm is challenging his second in command to a game that is supposed to be one that helps traders hone their skills.

The game involves holding up a dollar bill and bidding on the (hidden) serial numbers. Whoever comes closest to the actual numbers wins.

The second in command is acknowledged to be the master of this game. He’s also probably the only other person in the company who has enough money to make this challenge. Whoever wins gets $1 million and the other person can’t complain about it.

Why would the boss do this? Lewis thinks it’s about trying to stay relevant. The boss wants to feel like he’s still one of the gang.

However the lieutenant is going to lose no matter what because if he wins this game it will show up his boss. And if he loses he’ll be out $1 million which is even worse. So thinking quickly he ups the ante to $10 million which is too much risk even for the wealthy boss. He says “you’re crazy“ and walks away. This type of quick thinking and gambling attitude epitomizes the trader character according to Lewis.

to succeed on the Salomon Brothers trading floor a person had to wake up each morning "ready to bite the ass off a bear."
It is like going into battle each day. If you’re not ready you can get wrecked.

Foolish names and foolish faces often appear in public places.
It’s better to be lucky than good.

For a great player, however, the math is the easy part of the game. The hard part is reading the faces of the other players. The complexity arises when all players know how to bluff and double-bluff.
Recall the discussion on tertiary level thinking. The market is continually double bluffing.

Each player seeks weakness, predictability, and pattern in the others and seeks to avoid it in himself. The bond traders of Goldman, Sachs, First Boston, Morgan Stanley, Merrill Lynch, and other Wall Street firms all play some version of Liar's Poker.

Chapter 2

The first thing you learn on the trading floor is that when large numbers of people are after the same commodity, be it a stock, a bond, or a job, the commodity quickly becomes overvalued.
The crowd is both wise and foolish in different ways.

Economics was practical. It got people jobs. And it did this because it demonstrated that they were among the most fervent believers in the primacy of economic life.

economic theory (which is, after all, what economics students were supposed to know) served almost no function in an investment bank.

The bankers used economics as a sort of standardized test of general intelligence.

The Study of economics is so boring that it whittles away any but the most dedicated. In a similar way the training process at Salomon brothers whittles away any but those who will follow orders and fit in with the company culture unquestioningly. For that reason, Lewis believes that the beginning of the downfall of companies like Salomon began when people like him were let in. Diversity of thought may be good for thinking overall, but it may not be good for trading company longevity.

“You work long hours in this job, and you have to be motivated by more than just money. It's true, our compensation is in line with our contribution. But frankly, we try to discourage people from our business who are too interested in money.”
That money wasn't the binding force was, of course, complete and utter bullshit.

This bit reminds me of the exchange between Kefada and Peter Caleb. Kefada is the earnest and honest Salomon trainee who is there to make money. Peter is the dissimulating Salomon recruitment officer who is there to disqualify anyone who tells the truth. The reality is everyone is in it for the money. Soldiers who don’t get paid don’t fight, no matter how much they hate the enemy. Money is more than sufficiently interesting for anyone but professors of economics.

When Lewis tells his economics professor how much he’s getting paid as a first year intern at Salomon he nearly has a heart attack because it’s double what he makes as a man in his 40s at the top of his profession.

Chapter 3
He who makes a beast of himself gets rid of the pain of being a man.—Samuel Johnson

In 1968, the last time a degree count was taken at Salomon Brothers, thirteen of the twenty-eight partners hadn't been to college, and one hadn't graduated from the eighth grade. John Gutfreund was, in this crowd, an intellectual; though he was rejected by Harvard, he did finally graduate (without distinction) from Oberlin.

most traders act simply as toll takers.

With these passages we clearly see how Lewis is uncomfortable with the profitability of trading as it seems to generate profits far in excess to the value that it provides.

"There is a magic moment, during which a man has surrendered a treasure, and during which the man who is about to receive it has not yet done so. An alert lawyer [read bond trader] will make that moment his own, possessing the treasure for a magic microsecond, taking a little of it, passing it on."
Lewis paraphrases Vonnegut.

The men on the trading floor may not have been to school, but they have Ph.D.'s in man's ignorance. In any market, as in any poker game, there is a fool.

Warren Buffett is fond of saying that any player unaware of the fool in the market probably is the fool in the market.

Salomon bond traders knew about fools because that was their job. Knowing about markets is knowing about other people's weaknesses.

Ask any astute trader and he'll tell you that his best work cuts against the conventional wisdom.

Good traders tend to do the unexpected. We, as a group, were painfully predictable.

"You've got to think of Salomon Brothers as like a jungle,"
Recall the ecosystems of Neiderhoffer.

The back had its share of expensively educated people. It had at least its fair share of brains. So why were these people behaving like this? And why did Salomon let it happen, I still don't understand. The firm's management created the training program, filled it to the brim, then walked away. In the ensuing anarchy the bad drove out the good, the big drove out the small, and the brawn drove out the brains.

They were the victims of the myth, especially popular at Salomon Brothers, that a trader is a savage, and a great trader a great savage.

Life as a Salomon trainee was like being beaten up every day by the neighborhood bully. Eventually you grew mean and surly.

the firm built a system around the belief that trainees should wriggle and squirm.

Not only is the bully jungle an unpleasant place to work it’s also not clear to the trainees how to achieve success. It seems to depend on being selected by managing directors so the only options are to kiss up to them or somehow appear more desirable than others. Lewis does this somehow by creating a rumour that he is being scouted by other managing directors. As his stock rises he gets invitations from other departments which unfortunately includes the equities department. He desperately does not want to get recruited by the equities department because it has the lowest status.

The back row set the tone of the class because it acted throughout as one, indivisible, incredibly noisy unit. The back-row people moved in herds, for safety and for comfort, from the training class in the morning and early afternoon, to the trading floor at the end of the day, to the Surf Club at night, and back to the training program the next morning.

A new employee, once he reached the trading floor, was handed a pair of telephones. He went on-line almost immediately. If he could make millions of dollars come out of those phones, he became that most revered of all species: a Big Swinging Dick.

Big Swinging Dicks showed more grace under pressure than front-row people.
The front row are the educated earnest types. The try-hards.

Producing in an investment bank was less a matter of skill and more a matter of intangibles—flair, persistence, and luck.

The movements of the trading floor respond to the movements of the markets as if roped together. The American bond market, for example, lurches whenever important economic data are released by the U. S. Department of Commerce. The bond trading floor lurches with it. The markets decide what are important data and what are not. One month it is the U.S. trade deficit, the next month the consumer price index.

Salomon trainees were freeloaders, guilty until proven innocent.

the traders know what economic number is the flavor of the month and the trainees don't.

Chapter 4

Who knew where he had picked up the wise statesman routine? But no one thought it was real. Just dangerous—like the mesmeric gaze of a cobra.

Uncle Dale's face wrinkled. "What do you want to know about that for?" he snapped.

Throughout the book the trainees are encouraged to ask questions. However every time a trainee asks a question he is punished for it either because the question is stupid or because it is about a sensitive topic that the managing director doesn’t want to talk about or it simply gets the attention of the back row who use it as an opportunity to begin mocking them. Eventually the smart trainees, like Lewis, learn to stop asking questions. This is despite the fact that one of the secretary’s jobs is to go round to the trainees and beg them to ask questions during important sessions with top brass.

"Those who say don't know, and those who know don't say."

To get the best job, you had to weather the most abuse.

Join equities and kiss ass like Willy Loman; join bonds and kick ass like Rambo.

[People like] Benjamin Graham were wheeled in to defend their position: "In the stock market the more elaborate and abstruse the mathematics the more uncertain and speculative the conclusion we draw therefrom. . . . Whenever calculus is brought in, or higher algebra, you could take it as a warning signal that the operator was trying to substitute theory for experience."

Never agree to anything proposed on someone else's boat, or you'll regret it in the morning.

Good bond traders had fast brains and enormous stamina. They watched the markets twelve and sometimess sixteen hours a day—and not just the market in bonds. They watched dozens of financial and commodity markets: stocks, oil, natural gas, currencies, and anything else that might in some way influence the bcond market. They sat down in their chairs at 7:00 A.M. and stayed put until dark. Few of them cared to talk about their jobs; they were as reticent as veterans of an unpopular war. They valued profits. And money. Especially money, and all the things that money could buy, and all the kudos that attached to the person with the most of it.

What was the secret to dealing with the assholes? "Lift weights or learn karate," said O'Grady.
Why not both?

I was fascinated by Ranieri. For several years running he and his traders made more money than anyone on Wall Street. I didn't like them one bit, but that was probably a point in their favor. Their presence was a sign of the health of the firm, just as mine was a sign of the illness. If the mortgage traders left Salomon, I figured, we'd had it. There would be nothing remaining but a bunch of nice guys.

Chapter 5

This chapter gets bogged down in the inter-departmental feuds between government bonds and mortgage bonds. It’s not just that there are no generalizable lessons to gain from this history, it’s that it’s a dull story.

Although one interesting bit is that Lewis focuses on the birth of CDOs (before they were even called that) and it might give some insight into their role in the 2008 crisis. This book was published 1989.

For the home mortgage to become a bond, it had to be depersonalized. At the very least, a mortgage had to be pooled with other mortgages of other homeowners.

Thus standardized, the pieces of paper could be sold to an American pension fund, to a Tokyo trust company, to a Swiss bank, to a tax-evading Greek shipping tycoon living in a yacht in the harbor of Monte Carlo, to anyone with money to invest.

The story of Lee Ranieri is also interesting. He gets assigned to head the new mortgage department and instead of being resentful, he transforms it in his own image.

"When I first came into the business, trading was not a respectable profession," he later told the writer L. J. Davis. "I never hired a B-school guy on my desk in my life. I used to tell my traders, 'If you guys weren't trading bonds, you'd be driving a truck. Don't try to get intellectual in the marketplace. Just trade.”

Lewie was not just a trader, though: He had the mentality and the will to create a market. He was tough-minded. He didn't mind hiding a million-dollar loss from a manager, if that's what it took. He didn't let morality get in the way. Well, morality is not the right word, but you know what I mean. I have never seen anyone, educated or uneducated, with a quicker mind. And best of all, he was a dreamer."
This seems like pure cowboy nonsense to me.

"The firm took care of its people," says Ranieri. "There used to be all these expressions, like 'It's more important to be a good man than a good manager.' And people really meant them. We were a band of brothers. There was, as the people say, a covenant."

Lewie was sure he wasn't being paid what he was worth to the firm. He said, and I remember his exact words, 'If it weren't for the fact that I can do anything I want around here, I'd quit.'

Back, office staff who worked for Ranieri remember him telling them what to do by screaming at them at the top of his lungs while standing on the top of a desk waving his arms, like a referee. Still, he had the charm of wanting to be loved. "I have no enemies," he says. "Even my competitors like me which is amazing considering I never let them get any of the business."

when I ran mortgages, I religiously took people from the back office. At first I did it for moral reasons. But it worked. They appreciated it. They didn't feel like the world owed them a living. They were more loyal."

There is also the story about currency trader, Bob Dall. At the time leverage was low and currencies are by nature not very volatile. This made them hard to trade. Still does in fact.

Dall was in the market to buy (borrow) fifty million dollars. He checked around and found the money market was 4 to 4.25 percent, which meant he could buy (borrow) at 4.25 percent or sell (lend) at 4 percent. When he actually tried to buy fifty million dollars at 4.25 percent, however, the market moved to 4.25 to 4.5 percent. The sellers were scared off by a large buyer. Dall bid 4.5. The market moved again, to 4.5 to 4.75 percent. He raised his bid several more times with the same result, then went to Bill Simon's office to tell him he couldn't buy money. All the sellers were running like chickens. "Then you be the seller," said Simon.

So Dall became the seller, although he actually needed to buy. He sold fifty million dollars at 5.5 percent. He sold another fifty million dollars at 5.5 percent. Then, as Simon had guessed, the market collapsed.

That was how a Salomon bond trader thought: He forgot whatever it was that he wanted to do for a minute and put his finger on the pulse of the market. If the market felt fidgety, if people were scared or desperate, he herded them like sheep into a corner, then made them pay for their uncertainty. He sat on the market until it puked gold coins. Then he worried about what he wanted to do.

By 1985 the golden age was nearly over.

By 1985, when Matty Oliva hopscotched from Harvard to the training program to the mortgage trading desk, a barrier had arisen between the back office and the front. The process by which one became a trader had become rigidly systematized. You needed a resume. You should have graduated from college. It helped to have gone to business school. It was important to look like an investment banker.

The firm encouraged both aggression and ability; it made a point never to interfere with natural jungle forces.

Salomon Brothers began to resemble the rest of Wall Street. It recruited the same M.B.A.'s as Goldman Sachs and Morgan Stanley.

Chapter 6

This chapter gets bogged down in stories about fraternity style pranks that the traders play on each other, details about the food they eat, and the petty bickering they do over salaries. However near the end of the chapter we can see how Salomon Brothers is going to dissolve because they’re losing traders who feel like they aren’t being paid enough in relation to the massive profits they bring in while other firms try to bolster their mortgage trading departments.

After the government allows savings and loan companies to recoup losses through a tax break that involves selling their mortgage loans the struggling mortgage trading office becomes more profitable than all the other firms combined. Practically overnight.
says Lewis:
It was as if Steven Jobs had bought office space, built an assembly line, hired two hundred thousand salesmen, and written brochures before he had anything to sell. Then someone else creates the personal computer, and seeing this, Jobs leaps into action, calling his previously useless infrastructure Apple Computer.

Clearly Lewis doesn’t think that Ranieri is anything besides lucky.

Short-term outlook enables them to exploit the weakness of their customers without worrying about the long-term effects on customer relations. They get away with whatever they can. A desperate seller is in a weak position. He's less concerned about how much he is paid than when he is paid.

Detecting desperation and weakness is critical. That’s why I was so disappointed in Jankovsky’s book.

"October 1981 was the most irresponsible period in the history of the capital markets," says Larry Fink, a partner with Steven Schwartz-man, Peter Peterson, and David Stockman in the Blackstone Group. In October 1981 Fink was head of the small mortgage trading department at First Boston, which would soon grow large and become Lewie Ranieri's major competitor. "The thrifts that did the best did nothing. The ones that did the big trades got raped."

“Thrifts” is trading slang for Savings and Loan companies. I mainly highlighted this because Larry Fink is now the head of Blackrock, and the most powerful man in finance if not the entire world.

They told me I was going to go to jail. But whole loans were ninety-nine-point-nine percent of the entire mortgage market. How could you not trade whole loans?" How indeed. "We bought them," says Tom Kendall, "and then found out you had to have an eagle before you buy them." An eagle was Federal Housing Administration approval to trade in whole loans. "So then we went and got the eagle."

As long as you’re profitable you can get away with anything. Notice that Bankman- Fried and Binance didn’t get into trouble until they got too broke to be able to afford to hire SEC chairmen as consultants.

The shakier the loans, the larger the fee a thrift had to pay to get its mortgages stamped by one of the agencies. Once they were stamped, however, nobody cared about the quality of the loans. Defaulting homeowners became the government's problem.

"The attitude at Salomon was always, 'If you believe in it, go with it, but if it doesn't work, you're fucked.'

At other places management says, 'Well, gee, fellas, do we really want to bet the ranch on this deal?' Lewie was not only willing to bet the ranch. He was willing to hire people and let them bet the ranch, too. His attitude was: 'Sure, what the fuck, it's only a ranch.' In other shops, he'd have had to write a two-hundred-page memo for a committee that wanted to be sure that what he was doing was safe.

The Salomon trading floor was unique. It had minimal supervision, minimal controls, and no position limits. A trader could buy or sell as many bonds as he thought appropriate without asking.

Where there was distress, there was always opportunity.

"It was great if you could find a government housing project that was about to default on its mortgage," says Brittenham. It was great because the government guaranteed the loan and, in the event of a default, paid off the loan in full. The windfall could be in the millions of dollars.

Even larger windfalls came from exploiting the inefficient behavior of the American homeowner.

Howie Rubin began to calculate the probability of homeowners' prepaying their mortgages. He discovered that the probability varied according to where they lived, the length of time their loans had been outstanding, and the sizes of their loans. He used historical data collected by Lew Ranieri's research department. The researchers were meant to be used like scientific advisers at an arms talk. More often, however, they were treated like the water boys on the football team. But the best traders knew how to use the researchers well. The American homeowners became Guinea pigs in a lab.

if you think retail traders aren’t studied in a similar manner I have a bridge to sell you.

Chapter 7

This chapter is about the soap opera that is the end of the mortgage department at Salomon. It ultimately concludes with the firing of Ranieri and one of the firm’s VPs becomes the new head of mortgage securities despite knowing little about them. Soon everyone loyal to Ranieri has moved on.

By allowing dozens of able mortgage traders to fertilize the mortgage departments of other firms, Salomon Brothers let slip through its fingers the rarest and most valuable asset a Wall Street firm can possess: a monopoly.

To attract new investors and to dodge new regulations, the market became ever more arcane and complex.

"I have this theory," says Andy Stone, seated in his office at Pruden-tial-Bache Securities. "Wall Street makes its best producers into managers. The reward for being a good producer is to be made a manager. The best producers are cutthroat, competitive, and often neurotic and paranoid. You turn those people into managers, and they go after each other. They no longer have the outlet for their instincts that producing gave them.

The book is starting to drag for me as we’ve met most of the characters and can anticipate most of the story. I’m sure if you worked in the firm this would all be riveting but otherwise I might finish it here. If something stands out at the end I will update.

This is neat. I didn’t realize Lewis also wrote The Big Short and Moneyball. Clearly he found his vocation.
https://ritholtz.com/2022/04/liars-p...0-years-later/

definitely

Ok I must update because in chapter 8 the focus of the book switches away from Salomon brothers to Lewis himself and his sales experiences. Since he befriends two highly capable salesmen (Dash Riprock and Alexander) with trader instincts, their advice is very interesting if somewhat familiar.

Chapter 8

Learning what to do meant learning an attitude: how to sound on the telephone, how to deal with traders, and, most important, how to spot the difference between a financial opportunity and a rip-off.

In need of a euphemism for what we did with other people's money, we called it arbitrage, which was just plain obfuscation. Arbitrage means "trading risklessly for profit." Our investors always took risk; high-wire act would have been more accurate than arbitrage.

On fleecing his first customer:
Poor Herman never knew what hit him. I proposed lunch, and he accepted. He was a tall, gruff German with an incredibly deep voice and the distinct impression that he was born to trade. He thought he was very, very smart. It was my job to encourage him in this view, since the smarter he felt, the more he traded, and the more he traded, the more business he could give me.

"who do you work for, this guy or Salomon Brothers?"

A policy of screwing investors could lead to ruin. If they ever caught on, we'd have no investors. Without investors, we'd have no business raising money.

"Customers have very short memories."

It was one thing to screw a customer. It was another to tell him in advance you were going to. The difference in style between the AT&T trader and Strauss was the same as between a sucker punch and a duel. Still, neither was great for business. One thing my customer never forgot was that Salomon Brothers thought he had a short memory.

How could anyone be so stupid as to trust a trader? The best thing I could do was pretend to others at Salomon that I had meant to screw the customer. People would respect that. That was called jamming. I had just jammed bonds, albeit unknowingly, for the first time. I had lost my innocence.

His bank had given him twenty million dollars to trade but would not let him lose sixty thousand of it. If it knew he was down that much money, it'd fire him.

Whats the point of having so much capital and such a tight risk limit? Might be the Forex trader in me.

There was a convenient way of looking at this situation. My customer did not like his loss, but it was just as much his own fault as mine. The law of the bond market is: Caveat emptor.

It was not an auspicious start to my career. Within a month I'd blown up my first and only customer. There were, thankfully, plenty more where he came from. All met the two requirements to speak with a geek: first, that they be small investors and, second, that they be so awed by Salomon Brothers as to assume anything they were told was good advice.

The only thing that saved me in meeting after meeting in the early days at Salomon was that the people I dealt with knew even less. London is, or was, a great refuge for hacks.

As is the entire financial marketplace.

Dash did what most salesmen did, only better. He kept his nose pressed up against the green screens on which the market in U.S. government bonds was trading and looked for small discrepancies in price. To anyone but a born bond salesman (they do exist), his daily routine was painfully dull. There are several hundred different U.S. government bonds, ranging in maturity from a few months to thirty years. Dash knew what their prices should be, which large investors owned which bonds, and who was the weak hand iri the market. If a price was off by an eighth of 1 percent, he'd pile half a dozen institutional investors into a trade to make that eighth of 1 percent. He called his technique nips for blips, blips being the little green numbers that represent bond prices on the screens.

Many of the trades that Alexander suggested followed one of two patterns. First, when all investors were doing the same thing, he would actively seek to do the opposite.

contrarian. Everyone wants to be one, but no one is, for the sad reason that most investors are scared of looking foolish.

Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses.

In an age when failure isn't allowed, when the U.S. government had rescued firms as remote from the national interest as Chrysler and the Continental Illinois Bank, there was no chance the government would allow the Farm Credit bank to default.

Imagine if you’d read this book in 1989. You’d be set for 2008.

Alexander wasn't constrained by appearances, he sought to exploit people who were. (The occupational hazard of his role was an ugly elitism; you begin to think everyone else is stupid.)

The second pattern to Alexander's thought was that in the event of a major dislocation, such as a stock market crash, a natural disaster, the breakdown of OPEC's production agreements, he would look away from the initial focus of investor interest and seek secondary and tertiary effects.

The focus of investor attention was on the New York Stock Exchange, he said. In particular it was on any company involved in nuclear power. The stocks of those companies were plummeting. Never mind that, he said. He had just purchased, on behalf of his clients, oil futures. Instantly in his mind less supply of nuclear power equaled more demand for oil, and he was right. His investors made a large killing.

Mine made a small killing. Minutes after I had persuaded a few clients to buy some oil, Alexander called back. "Buy potatoes," he said. "Gotta hop. "Then he hung up. Of course. A cloud of fallout would threaten European food and water supplies, including the potato crop,

There was a game we played called What if? All sorts of complications can be introduced into What if? Imagine, for example, you are an institutional investor managing several billion dollars. What if there is a massive earthquake in Tokyo? Tokyo is reduced to rubble. Investors in Japan panic. They are selling yen and trying to get their money out of the Japanese stock market. What do you do?

I recognize Du Toit’s relational analysis.