Comment by maest
6 years ago
I have almost 10 years in the finance industry, both buyside and sellside and my take is that, while there are some fundamental principles at play, the world of finance is too messy and complicated for any one book to describe it. An even stronger statement I am willing to make is that no one person correctly and fully understands the financial system.
So, once you accept that there is no "correct" answer to how the financial system and how markets work, what's left to do is to follow what's happening in the world and try to build your own mental model.
One source I'm a big fan of (and has a bit of a cult following in the financial world) is Matt Levine's "Money Stuff" blog: https://www.bloomberg.com/opinion/authors/ARbTQlRLRjE/matthe...
He's engaging, funny, talks about interesting topics and, most importantly, he's _rarely_ wrong. It's a rare thing seeing a journalist talk about your specialty subject and actually being correct.
Similar source is Felix Salmon: https://www.felixsalmon.com/
Similar league as Levine, but I find him slightly less engaging, for whatever reason.
I work in fintech and I've been reading Matt Levine for a few months now after seeing his name pop up here on HN several times.
I agree with everything you say.
> He's engaging, funny, talks about interesting topics and, most importantly, he's _rarely_ wrong. It's a rare thing seeing a journalist talk about your specialty subject and actually being correct.
More importantly, on this point, when he is wrong, he freely acknowledges it, embraces it, and then corrects himself in a way that demonstrates he's more interested in truly understanding the topic and updating his cognitive model than in "being right".
Thursday's column is a case in point, where he owns up to two mistakes:
https://www.bloomberg.com/opinion/articles/2020-03-12/the-bu...
He's also the source of one of my favorite quotes on the last tech bubble. From his 8/7/2019 column, on MoviePass, borrowing from Dickens:
Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. Annual income twenty pounds, annual expenditure three hundred million pounds, result unicorn.
Agreed that Money Stuff generally technically accurate. The only gripe I have about it is that it has a bias in the direction of "everything is so messed up / comical". This is an irreducible bias as it's the job of the journalist to make a topic seem engaging and interesting.
However, if you take the theme of Levine's articles too literally/thematically, you'll think that finance is filled with quirky rules that produces comically inefficient outcomes most of the time. You'll think that there are easy system changes that any layperson can see that would make the system run much better. You might even think that finance is clear swamp ready to be drained -- this plays into the confirmation bias of readers who come in already with the thesis that "the system is totally broken".
In fact, against this theme, 90% of the time the story is incredibly dry and uninteresting because the system works exactly as intended. 90%+ of the time, stock A + B bundled is worth exactly the sum of it's parts. 90%+ of the time, the regulations do protect investors, are cheap to check off, and causes no weird behavior. 90%+ of IPOs are textbook win-wins and not Adam Neumann playing Softbank or a sell-side banker eating grandma.
To be constructive though, what's the solution? Start with skimming over the most classical textbooks (Mankiw or the recommended non-heterodox textbooks from the relevant classes by your local colleges). This is the classical theory of both how things are supposed to work, and how 90% the value generation actually occurs in 90% of the cases.
I agree that he gravitates towards quirky ends of the market - it's a big part of what makes it enjoyable to watch. To his credit, however, whenever he discusses a mechanism breaking, he usually starts by explaining how the machanism usually works. To wit, he did a good job explaining how the aluminum market works when discussing the GS market manipulation accusations and he explained how index inclusion works (and what an index provider's job and incentives are) when discussing the Snapchat IPO.
But yeah, for someone coming in with 0 knowledge, some more fundamental, drier texts may be more efficient in imparting knowledge.
I'm a daily reader of Matt Levine for probably four years now and I have to admit I've come to precisely the opposite conclusion about how he writes. He points out quirky situations that may appear superficially stupid, but in reality are somewhat justified given the way the system exists. And he does a superb job in pointing out the humor of these situations while still breaking them down to show why things are not as simple as they seem.
I've always gotten the impression that under the jokes and sarcasm, Matt Levine loves finance, though I agree that he focuses on the interesting in a way that might skew a layman's perception of the likelihood of various things happening.
He really does love it in an intellectual sense, which is an infectious passion that is hard to find in an industry where many are optimizing just for financial success.
As someone who accidentally got into finance as a software engineer, he more than anyone has made me really fall in love with the domain.
You can say the same about any field. Nobody understands all of physics. Or biology. Or finance. That shouldn't prevent us from giving them clear places to start and giving them overviews.
This is wrong. Just spend some time in finance, then spend some time in a field which is closer to a hard science and you'll realize it. As an example, most theories in physics are pretty darn good - ie you can use them to predict the outcome of something. Most theories in finance and economics are pretty darn bad - ie you can't use them to do anything useful.
This!
There is a joke that goes like this: Economist is the one that will tell you tomorrow why their prediction was wrong yesterday!
As an outsider to economics, I feel like there's much more science in physics/biology, and too many factors in economics for people to make accurate prediction at the moment.
Biology is the ultimate horribly complex poorly understood set of systems.
"Money Stuff" is excellent. I also recommend the FT. Their Alphaville section is very good. One of my favorite classic Levine articles is "Regulators Want to Slow Runs on Derivatives."
Some other resources I came across via those and friends:
• "Other People's Money" by Kay
• "Zombie Banks"
• "The Money Problem"
• This NY Fed study of shadow banking: https://www.ft.com/content/1a222bf4-f33d-11df-a4fa-00144feab...
• "All the Devils are Here"
Echoing the sentiment on "Money Stuff" - this is one of the only email newsletters that I subscribe to and regularly read.
Money Stuff is great, and explains things quite well, generally, but I think for a beginner in the field it presupposes too much. It dwells on the amusing arcana, the esoteric warts of the system often, that you only appreciate once you have a certain base level understanding of the industry.
Lastly, it’s fairly focused on the investment banking side of things (derivatives, capital markets, IPOs, the finance industry), not so much on the monetary system, macro, and institutions.
On banking and banking regulation, making a case for higher capital (=equity) requirements for banks, The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig is a good read [1].
I can’t think of a good book on money and the various theories about - if someone has a recommendation there, would be great.
[1] see here for a flavour of it https://www.jstor.org/stable/j.ctt1r2dn0
I agree with you. I believe the university textbooks are no good either as they are too far away from the real market. DO you believe that financial history books or even just history books with financial materials might actually be better?
I once read the "Reminiscence Of A Stock Operator" and my edition happens to include large paragraphs of description of the market at that time, and they are really fascinating and I felt that I learnt a lot.
There’s a certain amount of baseline knowledge in university books that is very helpful such as MPT, DDM, DCF, bond prices vs yields, theoretical relationship between rates and equities, no arbitrage pricing theory, etc.
It really depends on the book. The main issue regarding historical books is that they can very easily become dated.
I've also read Reminiscence of a Stock Operator and I found that, while interesting, very little of that informs how the market works nowadays. It did shine a light on why TA is still a thing nowadays - a flavour of TA used to work historically and you can still see echoes of that today.
>while there are some fundamental principles at play, the world of finance is too messy and complicated for any one book to describe it. An even stronger statement I am willing to make is that no one person correctly and fully understands the financial system
All models are wrong, but some are useful.
> All models are wrong, but some are useful.
A slogan usually trotted out in defence of bad modelling.
Some models are useful. Some are dangerous. Do you have the means to tell the difference?
> An even stronger statement I am willing to make is that no one person correctly and fully understands the financial system.
This.
> So, once you accept that there is no "correct" answer to how the financial system and how markets work,
And this.
If someone tells you simple truths that you think make intuitively sense, just run away.
Money/Finance is a damn slippery concept and when you dig into it, you find that everything turns out super abstract and answer to almost everything is "It depends."
But to the very original question, here are some quick/dirty pointers what to look for:
1. A Classic economics approach book. Money is unit of measure, store of value, and medium of exchange etc.
2. A discussion about how (modern) money actually is debt. In a very fundamental sense.
3. History of money/banking. How things got from barter (questionable, agreed) to metal money to gold standard to Bretton Woods to free floating fiat currencies. History of financial crises.
4. Some coprorate finance. Equity, debt, derivatives. Why/how banks are really weird corporations from the balance sheet point of view (massive leverage, that is). What is arbitrage, how you price options.
5. Practical finance, ie. interesting stories. E.g. Nick Leeson, Michael Lewis, Satyajit Das.
After all that you may start to have a hunch how little you actually understand so far, but then you start to have tools to build your own mental model.
What you really should not read is goldbugs and cryptofolks stories. They are just one massive Dunning-Kruger bunch and will waste your time.