Exchange-risk Books

2nd edition (2000) with Johns Downes, 259 pages

O'Higgins' basic method for selecting out of favour stocks from the Dow Jones Industrial Average can be explained in a single sentence: list the ten stocks from the Dow with the highest dividend yield, and then select the five with the lowest share prices from these ten. Buy an equal weighting in each of them and after one year, sell and start again.

So you could be forgiven for wondering how he manages to fill a book. I found significant chunks to be of little interest in understanding why and how his method has worked. For example, I didn't find his introduction on why stocks are the best long term investments, or his potted history of each of the Dow constituents (which takes up just under half the book) added much. (The history of the Dow stocks also reads as if at least the updates for the 2nd edition were written in a considerable hurry.) However, if you are new to equity investing these parts may be more useful to you. Even so, I cannot understand why O'Higgins included the addresses for each of the Dow stocks in the main body of the book when his method is a mechanical one which requires that you do not do any specific stock research or have any contact with companies.

I bought this book with a particular aim in mind: to understand the background better to see how it could be applied in the UK. For example, some people try to apply it to the FTSE 100 and others to the FT 30 index and others use the lowest market capitalisation rather than the lowest share price as the second filter.

After reading the book I concluded that the FT 30 index with lower share prices (i.e. with minimum changes to O'Higgins' original method for the Dow) would be most appropriate. This is because the FT 30 index is modelled on the Dow and has greater stability than the FTSE 100. Even so, there are differences between the FT 30 index and the Dow, which might mean there is greater specific stock risk in the FT 30 (for example, FT 30 stocks are only replaced if they are taken over or fail, whereas Dow stocks can be replaced by the editors of the Wall Street Journal).

Regarding the choice of low share price or low market capitalisation for the second filter, O'Higgins specifically states that the most relevant factor is "simply the phenomenon that the less expensive a stock is, the more it is prone to greater percentage moves." O'Higgins also believes UK companies are more prone to cutting their dividends in difficult periods compared to US companies and that this may mean a mechanical method based upon dividends would work less well in the UK.

Anyway, notwithstanding my gripes above about the padding in the book, the good parts are very good and the book carries an excellent central thesis: that simplicity not only entails less work, but also often produces better results.

By the end of the book I also understood why the method is likely to continue working. Historically the method did not work every year (for example during the last few years of the dot com boom), but produced good results over the long term. As O'Higgins states: "It's the occasional off-year that allows anomalies, like the strategies we'll be discussing next, to exist." The second, critical factor is that the method automatically enforces a contrarian discipline. I like the way O'Higgins puts it:

"In an investment world addicted to complexity, it can almost be said that keeping it simple is itself a form of contrarianism. It can certainly be said that for a system like mine to become too popular to work, contrarianism would have to become conventional wisdom. That would mean turning human nature on its head."

This book simply suggests listing the 30 Dow components and then buying the lowest price stocks in the group that also has the best yield (Dividend %).You skip the lowest priced because that one probably does have issues versus being a value. You can either put your $5000 in the second to lowest priced with the best yield, or the 2nd-6th stocks, or the 2nd to 11th stocks that are the lowest priced with the best yield. He shows the back tested history of this method as delivering huge gains. It is a system to think about or use it to develop your own.
The biggest thing I got out of this book was the direction to read books by Yale Hirsh. This was very profitable for me to discover the November-May stock market pattern, the presidential election cycle and the days of the week. You must read The Almanac Investor(by his son), it is VERY valuable, I made $10,000 from Sept 1st 2006 to Dec 9th 2006 due to my aggressive stance in November and December.

"Beating The Dow" by Michael O'Higgins offers the following simple investment strategy. You simply buy the ten highest dividend paying stocks among the Dow Industrial Averages. The Philosophy is that as the value of the stocks increase, via stock price lagging or falling below the market, the dividend yield will tend to rise. (i.e. the assumption is that dividend yield is a proxy for value. One problem is that not all Dow stocks pay out the same level of earnings, so some stocks will tend to have higher dividends.)

While I tend to be skeptical of any investment strategy that is too simple, if you must use such a simple strategy, then you could do far worse selecting the highest dividend paying stocks from the Dow. Of course, the other option is just to index your money in a mutual fund that buys the entire stock market. Vanguard Funds is the leader in such index funds. But, I like dividends.

The difficulty with simple investment strategies is that they tend to be arrived at via data mining. The proponent of the investment method asks "What worked in the past?" and then tries to draw up a canned investment method. Almost always, the proposed method then starts to lag behind in the present and future stock market performance. (the recent performance of this strategy is discussed in another person's great book review. See that.) This is not due to market efficiency or that the method is becoming well known. It just means that the method wasn't entirely valid as a predictive method.

There is the old joke about the "X investment strategy." When a computer was asked to vigorously evaluate the stock market and look for predictors of future investment success, the computer spit back the answer, "Invest in stocks whose name begins with an 'X' and whose name ends with an 'X.' " Xerox was the top performing stock over the period.

"Beating The Dow" is one of those books, if read all by itself, might mislead a new investor into an over-simplified investment strategy. Yet, you might enjoy reading it. And, as stated, you could do worse than holding the ten highest dividend-paying Dow stocks.

"Beating The Dow" also mentions what Michael O'Higgins calls the "Penulatimate Profit Prospect (PPP)" which involves buying just one stock. The Stock with the second lowest price among the ten highest yielding stocks. I consider that Penidiotic. We conservative investors do love our stock dividends, and the focus on dividend yield gets "Beating The Dow" a solid honorable mention.

Peter Hupalo, Author of "Becoming An Investor: Building Wealth By Investing In Stocks, Bonds, And Mutual Funds."

O'Higgins writes nicely... and identifies with specificity one generally agreeable style of mechanical stock investing... it doesn't particularly work well recently... but it is a useful text to introduce the idea of rule-based (non-emotional) trading decision making. assumptions of money management particularly out of phase with first tier thinking.. but i like the book.

Michael O'Higgin's investing classic holds up as well in the New Millenium as it did when it first hit book stands 10 years ago.

He maintains that it is still possible to beat the DOW by buying the 10 highest yielding stocks and tweaking your holdings each year, with correspondingly greater rates of return with a two- or five-stock selection from the group. O'Higgin's admits in the new eidtion that the strategy has been muddied by a drop in the relative importance of dividends as a part of total yield of the DOW. Dividends and payouts have lost lost out to stock buybacks, in part because dividends are taxed at a higher rate than long-term capital gains from stock sales. Changes in the DOW have also reduced the overall dividend payout. Of the most recent additions, Microsoft pays no dividend and Intel and Home Depot have nominal payouts. O'Higgin's strategy may also be less effective because it's simplicity and past returns attracted the attention of Wall Street money managers and of many, many individual investors. There is at least one web site devoted to the Dogs of the Dow and a number of similar investment strategies were profiled for several years on the Motley Fool website.

Nor is the most valuable part of O'Higgin's book his thumbnail sketches of other value strategies for beating the market with a basket of DOW stocks. Several seem downright ridiculous. I remain skeptical that investing based on presidential election cycles or end-of-year asset sales by fund managers can yield meaningful, long-term results for individual investors.

The value of this book is O'Higgin's championing of value investing in general and his highlighting of the resilience of the DOW stocks in markets bull and bear. Most people aren't professional investors and lack the time and resources to profit from a strategy of active trading. If the efficient markets guys are right, then buying all 30 DOW stocks and holding on long-term will beat returns of most professionally baskets of stocks, with less risk and less payouts for taxes and trading costs to boot. Or maybe buying the highest yielders in any given year and holding. Anyway, you get the picture.

Regardless of whether you think the high-yield 10 is still capable of outgaining the overall DOW, O'Higgin's book is, to me, as valuable in 2001 as it was when I first read it in 1993.

This book is second only to The Alchemy of Finance. I highly recomend this book to any trader with a basic understanding of the markets.

This book is not about investing in hedge funds. It does, however, teaches you how to invest like a hedge fund manager. This means you invest globally; you invest in variety of asset classes (equities, metals, bonds, VC, real estate, etc); you shift your investments depending on the market climate; and so on. Essentially, this is the "edge" Mr. Boucher was talking about. You, as an investor, are not encumbered to invest in any particular asset class, sector, country, or investment style as would other money managers do. This book gives you investment tools / models that you can use right away. Plus it also teaches you how to understand them so you can build your own tools as well, or at least be able to recognize when a tool stops working.

Mr. Boucher, THANK YOU for generously sharing your research and the ideas / techniques of other great innovators. Mr. "X" would have been very proud of you. Oh yeah, I like the "Coconut Price Index (CPI)" analogy - I almost died of laughing.

first, in boucher's defense, other reviewers have misunderstood the term "hedge fund" to mean "market neutral." the term "hedge fund" simply means the ability to go short in a portfolio. in that regard, the title is not misleading at all. this book does outline several short strategies based on an understanding of the liquidity cycle.

however, boucher, for as much as he espouses the austrian economic method, has forgotten that one tenant of that methodology is a total diregard for econometric forecasting. the relationships he defines in this book would have had many people in trouble in the early 2000s because, as the austrians state, what happened (past economic relationships) in the past does not have to happen in the future (these once dependable relationships may break down - with your money on the line). current monetary policy has been ineffective, and therefore, so would any of boucher's systems that rely on monetary indicators. these indicators would have been screaming "buy" the equity markets, while the equity markets themselves would have been screaming "sell us...now!"

that being said, the primary reason not to buy this book is that some of the systems that boucher gives are insightful logically, but dubious in execution. while he may give you a system, he does not give you all you need. the reader assumes that he is giving valid systems, with all pertinent information. but, he leaves certain important points out. for example, on page 138, he says that you should buy stocks when up volume on the NYSE is greater than 77% of total volume and then he gives past buy and sell dates for the strategy. after much testing, i figured out that he is not using total volume on the NYSE, but rather total volume less unchanged volume. in other words, total volume is up volume, down volume and unchanged volume for all shares trading on the NYSE. boucher's "total volume" is just up volume plus down volume. this makes a huge difference.

also, any time he uses 30-year t-bond data, good luck to you trying to figure out what he's actually using. the fed has a constant maturity series that goes back to 1977. boucher can go back to 1943 for this data. hmmmmmm. i'm sure he's using something, but i have no idea what. so, what good is the system if you don't know what he's using as the "30 year treasury yield"? and, through no fault of boucher, the 30-year is not issued any more.

he also relies quite heavily on the dow jones 20 bond index. this series was discontinued. this is not boucher's fault, of course, but just another reason to steer clear of this book.

i will say that i learned quite a bit from this book, however. it was fun to read. my problem simply resides with the somewhat tricky way that some of his systems are given. hey, i don't expect the guy to give away a proprietary system, but if you give a system, step up to the plate and tell the reader you're going to leave out some things (he actually does do this when he relays someone else's strategy). i find his method a bit disingenuous.

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I must agree with reviewer Omar Wanza. There is nothing in this book about statistical arbitrage, which is probably the most effective strategy used by hedge fund managers. Nor does it really talk much about many of the other methods used very effectively by hedge funds.

While the book covers a wide variety of topics pertinent to investing, its central thesis is that knowing and understanding the liquidity cycles of individual countries is of paramount importance in developing a portfolio strategy. When he talks about the liquidity cycle, the author is bascially talking about the business cycle. Due to the rise of the global economy, however, the likelihood that different countries will continue to have differing liquidity cycles is becoming more remote. Also, because it is extremely difficult, in practice, to predict any liquidity cycle, it would seem to me that the information in this book is only of limited value for any investment strategy.

The basic problem with this book is that it was written in 1999, which was not only before global investing became less profitable as a hedge fund strategy, but prior to the current bear market in equities. Based upon various demographic considerations, the author, Mark Boucher, predicted that a bear market in equities would be likely in the year 2005. Some of Boucher's assumptions regarding the relationship of liqudity cycles to various asset classes seem to me to be in need of adjustment based upon the actual economic events that have transpired in the last few years.

In one of the later chapters, he recommends a number of hedge funds, but the book would have been far more valuable if, instead of recommending various hedge funds, he had actually outlined the many different effective methods used by hedge fund managers to manage their own portfolios.

Although there are many potentially helpful things in this book, the title seems to me to be misleading, and I'm not sure that all of the theoretical considerations in it would necessarily pan out in the crucible of current market conditions, whereas certain hedge fund strategies, which are not even mentioned in the book, would probably be far more promising for today's environment.

Like many books written by practitioners, "The Hedge Fund Edge" provides some insight as to how one man makes his living, warts and all. By warts, I mean specious reasoning by the author. One of the warts in this book is a misunderstanding of basic macroeconomics. For example, Boucher presents capital input growth as productivity growth. The 'models' presented in the book are vapid space filler and could have been taken from an undergraduate's class presentation. All of the models could have been summarized neatly on one page rather than several dozen. Also, there are multiple typographical errors and citation errors throughout the book.

The author likely used the phrase 'hedge fund' to tap into a hot topic in order to sell more books. This book is not about hedge funds, it's about global macro trading. You can learn more about global macro trading in the preface to Soros' "Alchemy of Finance" than you'd get out of this entire book.

Well written with a lot of new ideas and useful info.

However, with the money I spent, I wish that I got more quantity than a mear newsletter. Having known then what I know now, would I still spend the cash on it? Definitely!

pretty outdated... the ratio of the added value of the book to the time spent to read it is far below than i expected..

Baird's "Option Market Making" is the *other* essential options book that any serious practitioner should read. Whether you are buy-side or sell-side, or trading your own book, this work is fundamental and extends where Hull leaves off. In short, pricing models do not a bid-offer spread make, and Baird illuminates this dark world with the well-crafted sunshine of expertise, mathematical rigor, and experience. In addition, Baird's prose is clean, clear, readable and lean, without glossing over tough spots or ignoring extremes.

Baird's 1993 "Option Market Making" while a bit dated, is becoming recognized as an enduring classic. Not because it is up-to-date with the latest smile dynamics from the research of Avellenada or Rebenato, but because it does what it does very well. Like a classic cookbook such as The Joy of Cooking, this work tells you how to make perfect pot roast, but not the latest slow braised chipolte-rubbed hand-aged hanger steak.

Baird's "Option Market Making", indeed, is an economic anomaly, for it refutes an old chestnut: "those who can't do, teach." In the financial publishing world a book that makes or saves you money should not exist, since the expected return of taking the time and work for authorship is much lower than another economic activity (probably including flipping hamburgers). What motivated Baird? Who knows? But this is pure saved gold here.

Option neophytes should not be misled: this is not a book of "secrets of" that will lead you to quick easy riches in the sometimes wild swings of delta and gamma in options markets. Rather, this is a sober, careful, useful book on the actual difficulty of making a market under uncertainty and rapidly changing information sets. This is a work for practitioners and professionals who want to survive and thrive, not "*just*drive!*" Cowboys and "feelings" punters look elsewhere to scratch your itch.

Standout chapters include "Options Risk" which treats delta, gamma, lambda, theta, kappa/vega, rho, skew, and time spread risks in a clear, although direct and quick, manner. "Position Risk Profiles" covers the meat and potatoes of an options market maker: what is in your book at any one time. This chapter mercifully is not in a "panic mode" tone, but rather carefully and soberly guides you through essentials of risk determination for your entire book.

The chapter "On Strategy" will be helpful for punters and those who have committed some capital to being a market maker, covering delta neutrality (yawn!), but more importantly time spreading, expiration, Fences, and high volatility periods (yeah!). It also treats broker order flow and open interest analysis in a sober way ("saucer bottom" and "reverse hook" technical analysis copter beanies need not apply).

The chapter "Market Making Tactics" is perhaps the most aggressive, but it also patiently spells out what option market makers do on a daily basis. The entry on "common mistakes" alone is worth the price of this volume. Baird closes with a lighter "Observations from the Floor," which it behooves all to read nd revist upon occasion. Having worked in a pit myself, all I can say is "amen Brother, and again I say amen."

Anytime anyone is willing to credibly tell you what he does to make money over the long run with well defined low-risk strategies you should listen because casinos, banks, and insurance companies certainly do. The author implies a positive expectation to option trading and those who make a living doing it would agree. The book has a conversational read and has something for the novice to the successful option trader. Highlights are: Delta neutral trading, gamma scalping, the use of spreads to enter, lay off risk and adjust, and emphasizes long volatility trading. The title of the book has probably disuaded more traders from buying the book because it is equally benefical to those who are not option market makers.

Just out of curiosity it may be worth skimming through its pages, but the way Mr Baird used to trade in the past (with sheets to get ur position from) is far away from how this is done today. Hence, do not surprise yourself if discussions such as smile delta and smile gamma do not come into play.

The book opens with an overview of hedge funds. He classifies hedge funds according to the strategies they employ: relative value, event driven, macro, etc. Not only does he explain the trading strategies, but he delves into what can go wrong. In general theres more discussions on equity related strategies, and less in interest rates. Theres lots of historical data/information on hedgefunds performance ,indicating the very poor performance (and high total risk) of traditional funds.
This book provides a nice introduction to hedgefunds, perhaps not so much news for experienced readers. At times theres very detailed information, in other parts the author provides only an overview (whos the audience?).

The iceberg on the cover represents total risk-partly visible and partly not. Ineichen's point is that hedge fund or absolute return managers tackle total risk while their traditional mutual fund counterparts worry about only one part of it, namely the risk of straying from their benchmark. His extensive discussion contains worthy lessons for all investors who want to understand risk. While not every chapter may be useful for every reader, this book is an excellent place to learn about alternative investment strategies.

The author presents a wideranging and at times very detailed discussion of hedgefunds. The writing style can be rather rambling with sayings of famous investment managers inserted at random and many sarcastic asides in footnotes. The work is rather polemical, trying to convince the reader that they should invest in hedge funds. The author emphasizes all the statistics which point to hedge funds having high returns and low risks and tries to explain away information which points to some high risks atached to hedge fund investing. I think his audience is an institutional investor (particularly European institutional investors) who is wondering whether they should look more closely at hedge funds. But he also insults this group along with about everyone else apart from hedge fund managers.

Hedge funds burst into the headlines in the early 1990s, when George Soros became a household name - at least in Europe, where many people blamed him and his hedge fund for wrecking the European exchange rate mechanism. Similarly, a U.S. hedge fund called Long Term Capital Management (LTCM) began with an aura of investing invincibility, only to fail dramatically. Hedge fund investing is sometimes, but not always, high risk and high return. Once limited to a privileged elite group of investors, hedge funds are now opening their rosters to less sophisticated, less wealthy speculators. But hedge funds are not just like any other funds, and anyone contemplating an investment needs a solid, comprehensive guide, such as this book. Author Alexander M. Ineichen, neither a salesman nor an alarmist, pulls no punches when discussing the risks of hedge funds. He is quite straightforward about the sometimes astonishing success of some hedge fund managers, but careful to point out the common misconceptions about them. Without hedging our bets, we find this book a valuable addition to every investor's library.

This book rambles on about the hedge fund industry. It gives a lot of definitions and statistics, but ultimately falls down. When you buy a hedge fund, you never really know what you are getting.

I was disappointed by trading title. The large text (12 or 14 type font) and small size should have been warning signs.

While the book definitely imparts important information every trader or investor should know, the advice is very simplistic. For example, chapter one explains that we should "buy low and sell high" or that we must be emotionally prepared for losses and gains. One rule he gives could be dangerous if incorrectly applied, and this involves selling too early. The author says that selling too early does not cause you a loss, after all. However, this could be hazardous to a trend following system which depends on a few large gainers. If those few large gainers are sold early, they will never develop into large gainers and offset the many losses. In short, and as other trading experts have noted, one CAN broke taking profits early because this may avoid the big gainers - unless your system is one which is more dependent on the frequency of winners than the size of those winners (e.g. a day trading system).

The text is very introductory and should be for the introductory trader.

I can't believe the insite of the author and useful information which this book covers. This book makes you think about what you are doing and how important risk management is to your trading plan. The book delivers a clear well written and versatile approach to developing a winning trading plan.

I have been trading for 15 years and very few books are as on the mark as this one. The author takes very complex information and explains it in a concise and crystal clear explanation.

I would recommend this book to anyone who wants to trade or invest. WOW!

This text quickly covers a large variety of topics in shallow detail. If you need to be told that you should cut your losses and let your winners run, then this is your book. If you want a text that will help you find winners (or the losers you are supposed to avoid in the first place) you best look elsewhere.

Deel teaches you, from an insider's mind (he used to work the Floor), how to trade the markets.

He teaches technical analysis and he doesn't stay clear of fundamental analysis although he stresses the technical side of things.

It is his view that all the information is in the price. It is.

But he goes on to teach that in spite of the price being the ONLY thing that matters in knowing where to place your investment money, he also explains that every stock does exactly what it's supposed to do... just not exactly WHEN it's supposed to do it. Therefore, your plan has GOT to make room for contingencies. I appreciate how he stresses stop losses. I know of many (poor) investors who heard the lie, "Don't place stops or the specialists will take you out!"

If you're brand new to the market, I'd get a VERY intro book on investing first, and then I'd read/devour this text. It's not an advanced book but if you've never bought or sold a stock, it will confuse you. You don't need much experience though to make this work for you.

This book is a paradox. How can just a few simple concepts explained in a somewhat shallow way be 'enough'?

Well, i've read books on money management that go too far on systems and techniques that aren't that easy to grasp or implement. This book by Mr. Deel goes a long way on showing you ways to complement your trading system with just a few rules that will keep you alive for many losing trades in a row, if such a tragic situation ever occur. So, don't waste too much time on making a buying decision. This book is for you. If you're into mathematics, this one will leave you wanting. If you just want a simple and effective way to complement a trading system so that you'll be right there for that next trade with enough tradind capital, than this is it.

If you trade futures only, look elsewhere...

1. Collaterized Mortgage Obligations grew to $1 trillion by 1993, 500 times the size of the Junk Bond melt down, valued at $22 billion and in 1994-96, the CMO market crashed.

2. The second most important financial instrument over the past half century has been the residential mortgage. In 1996, the outstanding value of residential mortgage was about $3.8 trillion. If fund manager fear getting stuck with illiquid investments, they will demand higher interest return. In the case of mortgages, these returns are passed on, as higher financing costs for home buyers, fewer sales, and less construction activity.

3. Freddie Mac and Fannie Mae are private corporations supervised by government. They are authorized to buy high-quality conventional (non-federally insured) mortgages with principle amounts geared at middle-income buyers. They raise money for financing on the private market. Only Ginnie Mae has obligations guaranteed by the government.

4. Saving and Loan falter as higher interest rates in the 1970s cause mortgage values to devaluate. Because of S&L accounting practices, losses did not have to be recognized on the book until the mortgages were sold. So S&L stopped selling, which meant they had no cash to lend, and no new mortgages for Salomon Brothers to trade. St. Germain S&L legislation allow S&L to spread their losses over forty years.

5. A mortgage backed security is a long-term security, and its value is affected by changes in interest rates. About half of the thirty-year mortgages are prepaid by about the twelfth year, and after fifteen years or so, prepayments drop off sharply. When rates rise mortgage backed fall. When rates fall, homeowners prepay, so the fund managers find themselves holding an unexpected slug of cash that has to be reinvested in low return environment.

6. In the 1970s, Freddie Mac introduced the Guaranteed Mortgage Certificate (motorcycles) which guaranteed interest and principal and the timing of cash flow which made the risk of prepayment moot. The problem with motorcycles was the more risk Freddie Mac removed from investors, the more it was taking on itself. Loss of expected cash flows might make it impossible to service the Motorcycles cash flow guarantees. The solution was to break the device into three tranche types: slow, medium, and fast pay. The affect, Wall street could get paper with maturity and payment predictability like short term treasury notes. Interest rates on each tranche type was based on the risk of prepayment; the medium-pay tranche would have more prepayment risk than the fast-pay. The birth of the CMO. By the 1990s, about two-thirds of all mortgages were securitized and resold, about half were CMOs. By 1987, the average mortgage spread over comparable maturity treasuries was 1 percent. The annual savings to home owners was an estimated $17 billion a year.

7. S&L usually retained most of the mortgages they issued, but whenever mortgage growth outran its financing capability, it sold off some its portfolio to Fannie Mae and generated more money for lending.

8. Mortgage bankers work with a network of mortgage brokers, who get paid by putting home buyers in touch with the lowest-cost sources of financing. The mortgage banker uses the mortgages as collateral for CMOs, pass-through certificates, or other forms of securities, which are sold through Wall Street investment banks. Investment banks that underwrite CMOs are constantly calling on mortgage banks for more product that they can sell off to investors.

9. Instead of borrowing working capital from banks, all America's biggest companies now sell short-term paper to institutional investors through Wall Street at low interest and thin fees. The commercial paper industry was born. Sub-prime collateralization would be linked to commercial paper and risk factors would drive commercial paper into scarcity, in 2008.

10.The CMO colossus distributed clean CMO bonds with well protected cash flows. The more attractive the CMO engineer tried to make the planned amortization class bond with shortfalls absorbed by the companion, the more volatile the by-products he produced. While the CMO was growing, raised capital kept it growing. During the Gulf war, 1990-91, characterized by falling rates caused an unprecedented wave of mortgage refinancing. Some CMO investors were hit hard. But fixed-rate instruments did well as a group and investors flush with cash. CMO issuance grew, reaching one level after another, however, once the Fed, started raise rates, CMO valuations declined, and prepayments lessen. The hedge funds holding the CMO securities implode from the pressure dropping market values. Hedge funds could not tolerate small percentage declines because the securities were highly leveraged. Examples of this implosion are Askin and Kidder and Peabody. CMOs are not market neutral.

11. Askin CMOs were collateral against margin loans. Askin used his $610 million CMO assets to acquire a $2 billion position, leveraging for profits, from Kidder, Bear Stearns, and Merrill Lynch. If the securities value falls, the borrowing company must pay. If the investor fails to come up with the money, the brokerage firm is entitled to sell the securities and proceed against the investor for the difference. The fed rate shock demonstrated the degree of non-liquidity in the CMO market. Bear Stearns moved first, calling in $63 million margin call, Askin paid $40 million. Kidder and other firms made margin calls of their own. A few of Askins clients tried to stem the tied by meeting margin calls with their own cash. Investors lost all of their $600 million dollars.

Mexican Peso Devaluation

1. Mexico's huge oil reserves and expectations oil was heading for $60 a barrel made it favorable for $100 billion in loans, mostly for grandiose state-company projects. 1979-1981, Paul Volcker clampdown on American credit. Mexico defaulted in 1982.

2. Between 1983-1988, Mexico sent 6 percent of its GDP overseas, mostly to service old debt.

3. 1988-90, major American banks wrote off their uncollectible petrodollar-era loans, and the new "Brady Bond" allow Mexico and other Latin American debtors to place most of their external debt on a manageable long-term footing. Default loans were converted into bonds with a US zero-coupon treasury bond as collateral. The repayment of principal was insured. The Brady bond maturity duration varied between 10 and 30 years. The Brady bonds included warrants for raw materials available in the Mexico and Latin America.

4. Long-term debt management resulted in spectacular short term performance in Mexico. In 1990, inflation was cut from 160 percent in 1987 to 6 percent in 1994. Big industries were privatized, NAFTA was passed, and growth in Mexico was strong. The US was experiencing recession and Mexico enjoyed growth from the lower interest rates . The Mexican Peso was strong. The strong Peso signaled to foreign investors that the value of their investments would not erode away by devaluation. A strong Peso signal that local Mexican productive was competitive against comparable foreign competition. Strict monetary and fiscal discipline ensured high saving rates and was used as production capital.

5. In 1992, a rush of foreign currency forced currency values higher than the Mexican wanted. Foreigners were buying Pesos. The Mexican central banks started selling Pesos to drive down the exchange rate for Pesos, an absurd move for an emerging economy. Local costs could not keep pace, growth slowed, and the trade deficit accumulated. The Mexican government loosened internal create controls and Mexican bank credit grew at a compound rate of 26 percent from 1990 - 1994. The trade deficit soared to 29 percent of exports because of a surge in luxury and consumer goods imported.

6. In the mid 1990s, Mexico was totally dependant on the flow of money from American mutual funds and pension funds. Mexico offered to exchange peso-denominated bonds from the tesobono, a short-term note indexed to the dollar - a promise to protect investors against devalutation, a promise to maintain, as the Peso declined against the dollar In 1994, tesobono grew to $29 billion.. Tesobonos temporarily prevented capital flight, but no funds were coming into Mexico. Mexican elite began moving money overseas. Dec 16, 1994, the Mexican government devalued the Peso, 15 percent. Investors and fund managers felt deceived and began dumping Pesos, a $30 billion dollar market loss. IMF put together a $16 billion rescue package. Not enough, as $50 billion falling due 1995. The Clinton administration proposed a $40 billion American rescue package.

7. The initial peso shock stopped the Mexican economy. A more competitive peso caused exports to jump 31 percent in 1995 and imports fell; the net trade surplus of $7.4 billion represented a $25 billion swing in just one year. Inflation rose to 15 percent between the years 1997-1998 and GDP was 7 percent in 1997 and 4.6 percent in 1998.

Mr. Morris book provides a very readable survey of financial crisis which occured during the last 150 years. The real value of this book lies Mr. Morris's commentary which draws into focus the fundamental similarities between seemingly unrelated financial disasters.

It is banal to observe that the future is likely to include some as-yet unforseen financial meltdown. Armegeddon-peddlers, chicken-littlers, and perpetual bears have been saying this for centuries. It it brilliance on the part of Mr. Morris to explain exactly why this is the case.

Mr. Morris debunks the garden varieties of conventional wisdom, which variously held that financial crisis are "caused" by currency speculators, Michael Milken, junk bonds traders, Jews, computer trading programs, etc. Mr. Morris demonstrates that all crisis run a predictable course: economic innovation and growth, corresponding financial innovation provide capital to fuel the growth, over-shoot of valuations of the new financial mechanisms by financial markets chasing high yields, and the invevitable crash and ensuing chaos.

The USA Savings and Loan debacle, Asian currency crisis, British investments in post Civil War USA railroads are all shown as variations on this theme.

I did not award 5 stars because the book often delves into complex financial mechanisms which could have been explained in a more layman friendly manner.

An excellent book for the serious investor who wants historical perspective on the market changes happening today. It's added gift is that it will imbue its reader with the knowledge to preserve wealth and actually profit whenever the next financial crisis comes, since the author proves that there is not much new in modern crises, and their prescriptions, that couldn't be found in crises a hundred years ago. The author serves the reader well by constantly pointing out the irresponsibility of the nation's bankers and financial institutions especially when motivated by greed- "the opportunity to fleece the greedy proved irresistible," The author possesses the rare skill of being able to see the wood for the trees and of relating that to his readers. The foreword is right on.

I found this to be a very well written and interesting book and learned a great deal, but much of the book was over my head. An example: "...They [Barings] were the major underwriters of the bonds for the Louisiana Purchase, and in the 1820s rapidly expanded their underwritings of American state bonds to finance internal improvements. But the bookkeeping on their securities was still following trade-based forms. Issuers of bonds were authorized to draw bills of exchange on the Barings, which they would cover by forwarding the new securities to London, just as merchants would cover a trade bill by forwarding the documents on a cotton cargo." A substantial portion of the book is similarly written, but balanced by a healthy dose of colorful characters and sharp opinions by Morris.

Charles Morris' book, despite its historical depth, falls short of providing a new insight on financial crises. This book is great for starters but cannot compete against Chancellor's "devil take the hindmost" or Kindleberger's "manias, panics and crashes". Clearly a dominated asset...

When he appears as one of Paul Kangas's Friday market monitors, Robert F. Drach always has a cagey smile like he knows something you don't. He's one of the few analysts (Hilary Kramer is another) on the show who isn't full of bull.

Drach manages the Nightly Business Report model portfolio, which beats the major averages, according to the NBR web page.

Relative performance since portfolio initiation (5/5/95)
This Model Portfolio + 214%
Nasdaq Composite + 203%
Dow Industrial + 194%
S&P 500 + 172%

Drach says he doesn't buy any of the stocks he recommends on NBR. Yet that sly smile seems to have money behind it. He compiles a "Master List" of about 100 of the best American stocks, or "A+" stocks as he calls them. Stocks are bought or sold depending on their overvalued/undervalued status. He even times the market by gauging the overvalued/undervalued status of the entire Master List.

The method isn't about hitting home runs; it grinds out small steady profits from only a few positions. You don't have to buy all 100 stocks! Nearly every position winds up a winner. If you've done any stock trading, you know the trauma of taking losses, even small ones. Drach all but eliminates that. Woo-hoo!

Drach is obviously some kind of financial egghead judging by the chapters in which he lays out the rationale behind his methods. Don't try this at home is the appropriate disclaimer. Save yourself the brain damage and subscribe to his newsletter. When I checked in '05 it was only $100 a year. What a steal for advice from a pioneer analyst.

For those of you who like to look under the hood and understand how a thing works, the book is a worthwhile read. Drach writes with the tone of someone who has it all figured out. I can only imagine what that feels like. I haven't even figured out what to have for breakfast.

In addition, you get the advice of another financial egghead, Thomas J. Herzfeld, who gives you the lowdown on closed-end funds. Closed-end funds are fertile ground for those who don't want to follow the crowd. Only a few financial nerds even know what they are. Herzfeld, also a Friday market monitor, has been following closed-end funds for 40 years. He might be the world's foremost authority. Unlike Drach, Herzfeld does buy the funds he recommends. With his $625-a-year advisory service, Herzfeld is livin' large.

Update: On his December NBR appearance, Herzfeld said right now is "the best opportunity in at least a decade" for closed-end fund traders.

On his January 18 appearance, Drach delivered a bullish assessment for stocks in '08. The "A+" stocks are beaten down and poised for a rally.

KANGAS: So you're basically telling our viewers, don't panic and stay with high-quality stocks, correct?

DRACH (with a sly smile): You want the person you're buying from to panic, but that's what they're doing.

With better editing this book could have been a classic. The authors perform a valuable service in disposing of some common illusions regarding the stock market, but the reading experience is marred by frequent defects in the English.

A true "cult classic" among investment books. The authors take the traditional academic and modern portfolio theories of investing and turn them upside down in this straightforward description of how to become a true professional stock trader.
The method and logic used are down to earth so that the average aspiring stock investor can utilize the system.
For any stock investor truly after high consistent return with low risk, it is the only system you will ever need.
The method is as relevant today as when Mr. Drach started his investment research report 30 years ago.

This book performs a valuable service to novice investors by explaining some of the realities of the stock market. Unfortunately, the poor editing makes the book awkward to read and unnecessarily hard to understand. If the publisher could do something about that before bringing out the next edition, the book could become a classic.

This is an excellent book that is still useful years after publication. I would love to see it back in print so I can buy several more copies.

Contents Include:

* Currency Derivatives: A Guide for Practitioners (G. Hopper)
* Everything You Ever Wanted to Know about Currency Futures..(H. Taylor)
* Central Banks and the Currency Markets (A. Hodge)
* Speculative Trading and Hedge Funds (M. Rafferty)
* Fundamental Analysis (Earl Johnson)
* Technical Analysis (T. Basso)
* Option Strategies (Neil Record)

* Maximizing Diversification in International Investing: New Opportunities (V. Parker)
* Immunization Strategy for Multinational Fixed-Income Investments (Hauser, Levy, Yaari)
* Currency-Hedging Foreign Investments: Why Bonds and Equities are Different (Lee Thomas III)
* Measuring the Performance of Currency Managers (B. Strange)

* The relationship of Management To Effective Risk Control (Alex Koh)
* Risk Measurement (Linsmeier & N. Pearson)
* The Uses of Analytics (E. Zask)
* Passive versus Active Management (L. McNew)
* Foreign-Exchange Risk Management at Tenneco (James West, Jr.)
* Regulatory Issues: Accounting and Financial Reporting for Instruments Subject to Global Currency Risk (Herz, Linsmeier, Bhave)

This book contains some useful stuff for those hoping to understand exchange rate risk management. Unfortunately, being a collection of articles by different authors, it also contains a lot of stuff that is less useful and lacks coherence. A good book for those involved in risk management to delve into on occasion. Beginners need to be careful as it seems to contain some questionable arguments.

If you want a nice mixture of infrastructure info and basic risk management priniciples for this sector of the derivatives market, this book is a good investment. Not overly burdened with the mathematical models underpinning pricing for every single type of instrument in existence, I really like this book for giving me both a decent range of information on the nuts and bolts of how these are traded and the macro principles involved in examining their risk context.

Is a very good introduction for a Foreign Exchange Market. Specially in futures markets