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Title: A Mathematician Plays the Stock Market by John Allen Paulos ISBN: 0-465-05480-3 Publisher: Basic Books Pub. Date: 13 May, 2003 Format: Hardcover Volumes: 1 List Price(USD): $25.00 |
Average Customer Rating: 3.4 (43 reviews)
Rating: 2
Summary: Off Base
Comment: I read both Innumeracy and Beyond Numeracy, the books for which John Allen Paulos is best known. Beyond Numeracy was presented as sort of a sequal to the first book, but they actually were quite different. Innumeracy, a polemic on our society's butchery of numerical concepts, was a book with a theme. Beyond Numeracy was simply a collection of essays on mathematical topics.
Paulos has returned to bigger concepts with A Mathematician Plays the Stock Market. Here he dissects financial markets, along with the pundits and stock tips which have blurred the line between analysis and entertainment (...P>The author's stated motivation for writing this book was to examine the losses he suffered from investing in WorldCom, the once high flying internet services company which in 2002 filed the biggest bankruptcy in U.S. history. Paulos doesn't wallow in the details of his disastrous flirtation with day-trading, but it appears that as the stock tanked he continued to purchase more and more shares, and eventually lost all of the money that he invested.
Paulos' examples and puzzles are clever and amusing, but unfortunately few of them yield real insight into the workings of financial markets. He aims to examine the conceptual mathematics of the markets to examine qualities such as efficiency and randomness, but most of the vignettes that he presents miss the point. The fact that a mathematical mind like Paulos can get caught in this wave of irrational hysteria shows us that there is a lot more to financial markets than cool-headed logic.
In most cases Paulos' examples are entertaining but simplistic, but unfortunately they occasionally veer into the territory of being incorrect and downright dangerous. The most egregious example that pops to mind is his treatment of insider trading. He treats this phenomenon is being largely harmless, arguing that in a market in which an investor may be either long or short shares he or she is equally likely to profit or lose through an insider's manipulation. Insider trading, in Paulos' eyes, is simply one of many variables which move the market.
This examination misses the point entirely. Publicly traded companies are run by professional managers who have the specific mandate of maximizing value for the shareholder (individual investors, pension funds, etc.) CEO's and CFO's who take profit from manipulations of the stock price are violating the trust that is placed in them, and are destroying value for the shareholder and society at large. It's not just through moral indignation that we want to see these guys in handcuffs; it's because a free market economy cannot prosper when the CEO's to which we entrust our corporations are running them as short term investments designed to fill their bank accounts.
There is a real danger in trying to write a book about an area in which you're not an expert. What's next, Paulos on International Affairs?
Rating: 5
Summary: Of Numbers, Odds, Emotions and Crooks!
Comment: If you would like an objective view of the stock market, are comfortable with math and enjoy a little irreverence in your investment reading, you will love this book. The material is easily accessible for anyone who finds algebra not too taxing. Professor Paulos minimizes the formulas for you by using anecdotes, simple brain teasers and practical examples instead.
What makes the book delightful is his self-effacing sense of humor. I cannot remember reading another book in which a writer is as candid and funny about his own failings as an investor. Only Andy Tobias comes anywhere close. The book's running joke is the professor's disastrous obsession with buying WorldCom stock using borrowed money before it became apparent that the company's reported earnings had more to do with wishful thinking than reality. It is this example that makes the book also insightful for the reader because it shows how easily our emotions and instincts can lead us astray, even when we understand as much about the stock market as Professor Paulos does.
I have read dozens of stock market books that have attempted to explain the "numbers" aspect of stock-market investing. None of them covered as much ground or did so as succinctly as this book does. I was very impressed by the depth of reading that this book reflects. Although it is not an academic book, the rigor is impressive.
The basic point is that the stock market is a lot more complicated than anyone can hope to understand, and likely to be more volatile than almost anyone will be comfortable with. Professor Paulos provides potential remedies for both (index investing, diversifying active portfolios, and using derivatives as insurance against large risks).
One of the many brilliant math examples shows how some games cannot be won with "success" strategies, but if you can combine a certain two "failure" strategies you will be a guaranteed success. With that wonderful point, the idea of being a contrarian was better expressed than in anything else I have read on the subject.
By inserting himself in the book through the WorldCom example, Professor Paulos powerfully introduces the element of individual and market psychology. Although he is neither a psychiatrist nor a psychologist, the book abounds with material about the psychology of how the market works and why investors make mistakes. To me, the ultimate lesson here was that one's stock market approach has to be one that fits emotionally well . . . or you will never execute it successfully.
Ultimately, successful active investing requires you to correctly pick what everyone else will find irresistible not too long before that compulsion hits them. I came away, once again, delighted that index fund investing is available as a sure-fired way to outperform more than 90 percent of all professional portfolio managers while sleeping soundly at night.
After you finish enjoying the book, I suggest that you also think about where else you commit your financial resources in large measure more due to your emotions than to your sense of how to calculate an advantage. How could you change your approach in that other area to be more emotionally and financially rewarding?
Donald Mitchell
Co-author of The 2,000 Percent Solution, The Irresistible Growth Enterprise and The Ultimate Competitive Advantage
Rating: 3
Summary: curious
Comment: (I gave this book three stars only to be able to write this---I haven't read the book).
The reviewer "a reader from Chicago" skewers Paulos for having ignored risk, and he deserves it if true. If you don't take risk into account properly, you don't understand trading---the real issue is how to do it properly, and that's a book in itself.
Since RC has proven himself to be a tough audience (and I like that), I'd appreciate his view of the investment chapter in my book on decision making (Why Flip a Coin, Wiley, 1997, available in paperback)
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Title: Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life, First Edition by Nassim Nicholas Taleb ISBN: 1587990717 Publisher: Thomson Texere Pub. Date: October, 2001 List Price(USD): $27.95 |
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Title: Innumeracy: Mathematical Illiteracy and Its Consequences by John Allen Paulos ISBN: 0809058405 Publisher: Hill & Wang Pub Pub. Date: 18 August, 2001 List Price(USD): $12.00 |
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Title: A Mathematician Reads the Newspaper by John Allen Paulos ISBN: 038548254X Publisher: Anchor Pub. Date: 01 March, 1996 List Price(USD): $12.95 |
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Title: Yes, You Can Time the Market! by Ben Stein, Phil DeMuth ISBN: 0471430161 Publisher: John Wiley & Sons Pub. Date: 04 April, 2003 List Price(USD): $24.95 |
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Title: Practical Speculation by Victor Niederhoffer, Laurel Kenner ISBN: 0471443069 Publisher: John Wiley & Sons Pub. Date: 21 February, 2003 List Price(USD): $29.95 |
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