Books I've Read and Recommend
Friday, June 20th, 2014
Fred Goodman
There are no clunkers here.

The following are books I have read and found either interesting in general, or vital to my investing techniques. Each has a relationship to investing, but some are of general rather than specific interest. They appear below in no order other than chronological with the most recent appearing at the top. I will continue to add to the list when appropriate.


I recommended Currency Wars, by James Rickards two years ago and called it a "must read." His new book, The Death of Money is better.

Even if we discount his take on controversial political topics, there is enough to be learned about the workings of debt, interest, inflation, taxes and gold to make the book required reading, especially since the financial crisis of 2008 remains unresolved in the author's opinion.


I just finished reading Probable Outcomes, by Ed Easterling, and learned more about the eight secular bull and bear markets of the last century than I wanted to know.

One of the things I didn't want to know is that the average price/earnings ratio (PE) at the end of each of the four bear markets in the 20th century was 8, just half the current PE. So unless earnings double in the next few years, the market is likely to undergo some serious corrections before this decade is over.


Currency Wars, by James Rickards is a must read for anyone wishing to understand what's going on in the world. Not only in financial matters but in politics in general.

It's well written and can be absorbed by readers with or without a lot of prior exposure to the material. It received only two 1-star reviews out of 107 at Amazon, and one of the 1-star reviews said "it was actually one of the best books I have read this year."


I very carefully research the books I choose to read and even so rarely find one as good as Keynes Hayek, by Nicholas Wapshott. The writing is excellent, easy to read and completely unbiased in spite of the controversial nature of the material.

You will walk away with a feeling for all of the presidents from Wilson through Obama and all of the English Prime Ministers since Lloyd George. Their economic strengths and weaknesses are noted and you will learn the causes and possible solutions for the present economic crisis.


Summer is here and one of the most enjoyable books I have read in a long time is well-suited for vacation reading. It is not an investment book, but if you read it you will know more about the history of the planet and of civilization than almost everyone you know, and you will learn it from a page-turner.

Water, by Steven Solomon is subtitled "The Epic Struggle for Wealth, Power, and Civilization." Among many other things, you will learn how spices were brought to Europe in boats that were disassembled, hauled across Africa by camel and reassembled to cross the Mediterranean.


Planet Water by Steve Hoffmann is a book I wish I had read when it first came out two years ago -- I'd be richer -- but it's not too late. The Water Industry can only grow as the infrastructure continues to deteriorate, population continues to grow and technology evolves.

All aspects of purification, distribution and recycling are discussed, with specific coverage of both domestic and international companies. I won't recommend specific companies, but a likely general ETF is the Guggenheim S&P Global Water Index ETF (CGW).


It is difficult to examine a group of indicators and then analyze, rate and put them together into a meaningful single indicator that retains their meanings while providing market guidance. I have been trying to do that with my Summary Index, which is based on 29 technical indicators, so I know whereof I speak.

In his Book, The Magic 8, Arthur M. Field has accomplished this for a group of diverse economic indicators, and has distilled the information provided by them into a single indicator that helps one trade on the right side of the economy.


High Profit Candlestick Patterns, by Stephen Bigalow is not a cheap book, but it was worth every penny to me. It is not that there is anything mysterious about candlestick charts, but they can be used in conjunction with standard tools of technical analysis to confirm or deny them.

The patterns stand out so clearly that I can scan more charts faster and more accurately than before, and if I choose I can use programs to find patterns automatically so I can zero in on the ones to study in more detail.


I started reading the Technical Analysis of Stock Trends, by Edwards and Magee over again -- it's excellent and well worth the time spent. I found the latest edition (9th) edited by W. H. C. Bassetti to be acceptable, but it is the original material, not the editor's additions that are worth reading, his embellishments detract somewhat from the original.

Accordingly, I found that the 1992 edition is still available on Amazon.com, and it is half the price ($30).


One of the books I read on vacation was The Forgotten Man, by Amity Shlaes. It is a book about the 1930s and if you want to understand what is happening now in America, I recommend it.

You will find uncanny parallels to the present economic and political scene that will astonish you regardless of your political leanings. Love it or hate it, it will leave you with a clearer picture of both periods.


I've read at least a half dozen books about the Federal Reserve in the past year that explain why it is sometimes more harmful than helpful. However, Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse, by Thomas E. Woods Jr. is without doubt the shortest, simplest and most clearly written.

It was just published and includes news as recent as December. I recommend the book to all who would like to have a better understanding of the Fed -- its power, shortcomings and the likely results of its current actions.


The Future of Everything: The Science of Prediction, by David Orrell. In three major areas of investigation -- the climate, the economy and biology -- predictions have been found to be no more accurate than random guesses because of the complexity of each field. There are just too many variables to be able to predict how a system will respond to change.

Even twins with identical DNA express differences due to local phenomena active during their development. So it is obvious that if one makes many changes simultaneously, there are going to be surprises and unintended consequences. It is better to study the effects of moving averages and the MACD by making small changes in one at a time to learn their effect on stock selection.


Nathan Lewis, in Gold, The Once and Future Money has traced the history of money from the ancients through Clinton and has documented many monetary disasters. In every case, without exception, spending was raised to the point of insolvency by every failed government and taxation was increased to the point of civil unrest, exodus or overthrow.

There have been many bailouts throughout history and in every case the bankers have been bailed out while the shareholders have been left swinging in the wind. Resolution has always required stabilization of the currency and in most cases, gold came to the rescue.


I read Anatomy of the Bear, by Russell Napier in July when it was optional, it is mandatory now.

This excellent book discusses the similarities between four major bear markets; 1921, 1932, 1949 and 1982, and how to know when to get back in. One of the most important similarities was that good news appeared in the Wall Street Journal and elsewhere at least three months before the market hit bottom.

This is counter to conventional wisdom that suggests stock market lows lead economic recovery by 6 to 9 months -- quite the opposite is true, so there's likely to be a long road ahead of us.


I am not a conspiracy theorist. I do not accept as fact the belief expressed in The Creature from Jekyll Island that Winston Churchill was complicit in the sinking of the Lusitania or that the Federal Reserve is the tool of Socialists.

However, most of this book presents in clear and compelling terms how the Federal Reserve works, how money is created from thin air and the mechanism behind the recent takeovers of financial institutions like Fannie Mae, Freddie Mac, AIG, Bear Stearns, etc. As a bonus, it reads like an action novel.

Congress is quick to blame "big business" for our difficulties, but they should reserve most of the blame for themselves. Google "Fannie Mae lobbyists" for names of the extortionists.


Alexander Elder's new book Sell and Sell Short, was certainly timely, coming out just before the market self-destructed, but it is important in all market climates to know when to sell a good thing as well as one that is underperforming.

He discusses the selection of a target in addition to a stop, and teaches how to use it to get out when the getting is good.

The book is an important supplement to his classic, Come Into My Trading Room, in which he presented his Kangaroo Tail trade, to which I have referred many times in these reports.


The collapse of the subprime market is just the latest in a string of financial collapses and crashes, and more will follow. The crash of 1987, the Asian Contagion and the collapse of Long Term Capital Management had a common thread -- positive feedback -- and the fact that Richard Bookstaber, the author of A Demon of Our Own Design, was working as a risk manager during all three crises makes him eminently suited to explain their cause.

Of more interest are the lessons we can learn about designing our own investment program and how we can avoid the many pitfalls. The book is extremely well written and reads like an action novel.


The conditions that existed in 1907 when many banks failed and businesses went bankrupt, strike me as being very similar to present conditions. To add another eerie similarity to the present, the actions of J. P. Morgan did much to shorten and finally end the panic, just as his namesake was involved with Bear Stearns last week.

The Panic of 1907, by Robert Bruner and Sean Carr, is not only informative, but it is a page turner. They made the events understandable and exciting to read -- well worth spending a few hours to appreciate the potential of our current situation.


For a better appreciation of the importance of probability in investing, I suggest Chances Are, by Michael Kaplan and Ellen Kaplan. They discuss the history of probability from Aristotle to the present. It was written by a student of European history who has written and produced films for PBS, and a mathematician/archaeologist.

This well-written book covers gambling, weather, warfare, medical treatment and other subjects -- it will give you an understanding of the role that probability plays in the stock market, and in life in general.


Last week I tried to take a break from the stock market by reading Endless Universe by Steinhardt and Turok. It didn't quite work because they presented a theory that the universe has neither a beginning or an end -- when one cycle ends another starts, like the market seems to be repeating 2001.

Nevertheless, the book is the best I've read on the subject. Without any math at all, the authors were able to paint a clear historical picture of cosmology including the latest research available in 2007. They also discussed where research will be taking us in the next 10 years. It's an excellent read.


Paul Samuelson said, "The stock market is a great leading indicator, it has forecast 10 out of the last seven recessions."However, the opposite side of the coin is what Joseph Ellis spent much of his time discussing in his must-read 2005 book, Ahead of the Curve.

Ellis shows that by the time a recession has started the stock market has generally fallen at least 12% from its high, so obsessing over a possible recession is not going to save your from losses.

He then analyzes economic indicators that have helped forecast recessions with enough lead time to avoid the carnage.


In addition to providing information that will improve the technique of even experienced professionals, Marcel Link offers in depth descriptions of price movements that clarify one's understanding of previously opaque chart patterns. Foremost among them is a discussion of the relationship between price and volume that lies behind Benjamin Crocker's Price/Volume Charts.

I heartily recommend High Probability Trading because I guarantee that you will discover many trading tricks that will make money for you on your first trade.


I usually dislike alarmist books. They have been coming out every few years for as long as I can remember and I cannot think of one that was both accurate and without an ulterior motive. Crash-Proof: How to Profit from the Coming Economic Collapse by Peter Schiff is no exception, he spends half the book selling his brokerage house, but many of his points made a lot of sense even if his disaster scenario is, hopefully, dead wrong.


In addition to limiting risk by selecting firm mental stop losses, the size of the position relative to your portfolio size is critical. I have read several books that address the subject, but probably the most thorough is Trade Your Way to Financial Freedom, an important book by Van Tharp.

The method I have chosen to determine position size is to set three times the Average Trading Range (ATR) equal to the maximum dollar risk I am willing to take.


In his book Come Into My Trading Room, Alexander Elder provides the benefit of his experience in trading by discussing in detail three important concepts: Mind, Method and Money Management. While he occasionally strays from his message to indulge in personal stories, I found the book extremely helpful in all three areas and have made real dollars immediately by following his techniques.

The Method part was of particular interest to me since in it he discusses his personal technical indicators and trading tools, but I was probably more in need of the "Mind" section since he addressed those characteristics that differentiate between anxiety and calm and that often represent the difference between success and failure.


In his book Money Mischief, the late Milton Friedman presents the research behind his well known theory that "substantial inflation is always and everywhere a monetary phenomenon." Simply stated this means that you don't create inflation by raising prices or stop it imposing price controls. The only way to create inflation is for a government to print money, thereby increasing the supply of money without there being a commensurate increase in production.

The book is written with almost no math and provides a painless introduction to a vitally important subject.


If you wonder how big your position in a stock should be relative to the size of your portfolio, and where you should place a protective stop loss, Trend Trading by Kedrick Brown is a book that will help you.

Trend Trading presents the "how to" while Trading in The Zone provides the "why."


I can't say enough about Trading In The Zone, by Mark Douglas. If you have ever thought a stock would go up, bought it and then blamed yourself when it went down, you have to read this. Douglas shows us how to handle a position -- once we have decided to trade it -- in an automatic and consistent manner, and to take advantage of an edge without self-doubt.


All right, I admit it, even though I have spent decades studying technical anallysis, I have had several sojourns into fundamentals. I've read a score of books on intermarket analysis, value investing, earnings analysis and earlier books about economic indicators, but until I found Bernard Baumohl's The Secrets of Economic Indicators -- which in my opinion is required reading -- I could not get into it.


I don't think it is possible to read The World Is Flat by Thomas L. Friedman and not run out and buy Indian stocks. The story of outsourcing and its effect on the present and future growth in India is just too compelling. I only wish I had read the book last summer after the big correction, rather than now.

The book is almost 600 pages, but it reads quickly, is well written and in reality you will get the message from the first 325 pages. The rest has a bit of politics thrown in which I found I could take or leave. However, the body of the book discusses business in general, not just in India, and things I found so important for my grandchildren's education that I sent copies to my daughters.


Terry Burnham in Mean Markets and Lizard Brains has written a book that is perfect for the summer -- well written, entertaining and at the same time it provides a good grounding in behavioral finanance and macroeconomics. Here you will find evidence to support the observation that things are different from the 1980s and 1990s, and suggestions for conducting your investment program accordingly. It is a book I liked a lot and strongly recommend.


The (MIS)Behavior Of Markets, by Benoit Mandelbrot is an absolutely must-read book by Benoit Mandelbrot, the mathematician who was deeply involved in the early days of chaos theory and fractals. He is well grounded in the stock market, and has studied price extremes of securities for 50 years. The math is conveniently tucked away in the appendix where it can be easily ignored. If you measure the value of a book in terms of the new understanding it gives you about things with which you are already familiar, this book rates near the top. As the author correctly warns in the first pages, the book will not make you a fortune, but it will help to think more clearly about price movements, and it may save you from losing a fortune.


Thomas Bulkowski's Encyclopedia of Chart Patterns is the definitive work in which to find information describing the myriad of patterns found in charts of individual stocks and indices. It is the first and only place that I go to to find out if a chart pattern is worth trading.

In it he exhaustively defines and describes the success and failure rates of over 75 generic patterns and presents specific profit-loss returns with targets and logical entry points and exits.


If you have ever wondered as I have, how the stock market can make sudden reversals when there was nothing markedly different in the world situation (there is still shooting in the Middle East), or in the economic fundamentals, you will be interested in reading Mark Buchanan's entertaining and well-written book Ubiquity.

He explains the similarity between wild moves in the stock market and natural occurrences such as earthquakes, hurricanes, avalanches and forest fires. How it is possible to believe in the efficient market hypothesis as espoused in Burton Malkiel's A Random Walk Down Wall Street after reading this, I don't know.


Marty Zweig's book, Winning on Wall Street is the classic book on technical analysis that I refer to constantly and reference frequently in the reports.


Martin Pring -- Market Momentum is another classic text that is written clearly and precisely and will provide a good grounding in the fundamental techniques for technical analysis.


BACKTESTING METHODOLOGY  The GPS technique has been refined using optimization of test parameters on past stock price data. Such techniques have had considerable criticism heaped on them -- and rightly so -- for being used to "data mine" or "curve fit" past results. When one tightly fits an equation to past data it almost always ceases to fit new data quite quickly. To make my testing as robust as possible to markets as they evolve in real time, I have used techniques documented in the excellent book Design, Testing and Optimization of Treading Systems by Robert Pardo.


There are other cycles and seasonal trends of interest. Most of us have heard the dictum "sell in May and go away." This came from the observation that markets have been stronger in the period November through April, than during the rest of the year. According to Les Masonson's excellent book All About Market Timing, which I highly recommend, an initial investment of $10,000 invested every May through October produced a cumulative loss of $77 dollars between 1950 and 2001. On the other hand, the same investment, invested every November through April during those same years, yielded a gain of $457,103.

 


 

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Fred Goodman, CFP, is a fee-only Certified Financial Planner based in Los Angeles. To send Fred your questions or comments, click here: Fred@MarketMonograph.com. E-mail sent to Fred may be edited for clarity and brevity and published on this web site, and may include your name unless you request anonymity or specify not for publication. The charts and commentary represent what Fred thinks about the market and what he is thinking of doing for his own account and for accounts he manages at the time of writing. Fred, his clients, or his family may have positions or may make trades in securities mentioned in these commentaries. There is no guarantee that you will profit from trading as discussed herein. You may lose money and Fred assumes no responsibility for what you do or do not do with this information. Copyright©2001-2020 Fred Goodman. All rights reserved. For information purposes only, offered as a periodical of general circulation; not to be deemed to be recommendations for buying or selling specific securities or to constitute personalized investment advice. Derived from sources believed to be reliable, but no warranty is made as to accuracy.