If anything, this economic crash happened because of too much regulation, not too few. The mortgage loopholes, the whole subprime business, was made possible by governmental intervention into the free market. This resulted in a bubble, and now the bubble has burst and pulls down the whole economy.

Circa seven years ago the dot-com bubble has burst and caused a short period of recession, which hurt most badly the industry that originated it – the hi-tech, software and internet businesses. This makes lots of sense, and I don’t think anyone serious blamed the free markets for the crash. The free markets (like most economic theories) work over prolonged periods of time, not over short few-year spans. The dot-com bubble burst made lots of investors cautious, and a similar burst is very unlikely any time soon (though it will happen eventually, since people have short memories. See the tulip mania, for example). A few months ago (before the big crash) the NASDAQ index was at 60% of its value in the peak of the bubble. This is the free market’s way of correcting itself. Some business model seemed successful at one period of time, but (again, as happens a lot in economics) most investors didn’t really know that it was shaky – a bubble. So the market crashed – it makes sense.

The same can be said about the latest crisis. Yes, it’s deeper, because the financial and banking industry is much larger and affects much more people than the internet business. But it was a bubble none-the-less. And moreover, it was aided caused by the government’s regulation of the loaning business. And eventually (in a few years, it seems) – the free market will correct itself, and people will just be more cautious in the future.

But the government tries to solve the problem by even more intervention. My opinion may be unpopular on this subject, but I’m not sure that bailing out banks is a good idea. It’s an incentive to err again in the future, and that worries me. Brokers who went loose with the inverstors’ money that was based on shaky foundations, and those bankers who’ve lent money knowing that it won’t be paid, but that they will get the bonus for the deal, won’t be careful next time, because the government has intervened. “The fed will save us again” they’re now saying, and as soon as the crisis ends they’ll be back.

Recently I’ve heard that the incentives programs of the big governments include not only saving banks but also real economic incentives for returning to growth. This is great, but I’m still concerned about the ratio of these expenditures. Saving banks won’t help the economy recover, incentives to the industry and to consumers will.

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Today I made the first order – “Lisp in Small Pieces” – it’s just the kind of book to buy as a special present to myself. I doubt I would agree to shell out the $80 it costs had I not had the RAC money in PayPal already. For now it looks like the transaction was processed successfully and BN pulled the money from my PayPal account.

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And yet – Israel’s economics is expected to grow by almost 7% this year. The stock market is booming and is at its highest ever. The foreign investments in Israeli companies are at a peak. The unemployment rate is going down, the average wage is going up and with it the level of life. The inflation is very low, and the NIS is getting stronger against the USD and other currency. The hi-tech sector is flowering again – there are not enough employees to fill all the vacancies.

What is going on ? It seems that the economics and the general population have completely detached themselves from the governing of this country. Nothing seems to stop the high wave, not terrorist acts, not wars, not dishonest ministers. If anything is a bubble, then this is it ! However, this is not new. Rather, it is a process that has been building up in the past couple of years – less and less correlation between the geo-political situation of Israel and its financial situation. This is definitely a very unusual and curious phenomenon, perhaps worth a doctoral thesis or two in Political Science and / or Economics. Anyway, as long as the slant is positive, it is definitely good, and I hope it will continue like this…

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Geesh, how much money the banks make from their defaultness – mortgage insurances, currency exchange, investment portfolios. In the latter case, especially. Costly cuarterly commisions (even when no actions are done in the portfolio), commisions for unsuccessful orders, etc.

We commenced sniffing around for alternatives – and it’s a beautiful world out there. It seems very unlikely that we’ll stay in our bank – the private brokerage houses offer far better rates and conditions.

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What if I told you that you could read one book and know everything you are going to need to know about managing your investments? And I mean, everything. Well, it’s true. And this is the book. If you can’t be bothered to read anything else about investing, read this one book.

Well, I heartily agree. This is probably the best finance/economics book I’ve ever read.

Burton Malkiel takes a simple, logical approach, with intuitive mathematical expositions, statistical studies and numerous examples to explain his view of the investment practices on the stock market. He analyzes fundamental and technical analysis and points out their flaws (loaded with historical studies that prove his point). Then, he presents the random walk theory (efficient markets) and takes a position as its proponent to some degree. The book concludes with a guide to investment taken from his own experience.

There’s something very charming in the methodical, determined approach of this book. Malkiel takes no prisoners with the techniques he criticizes. He presents studies, both academic and by financial institutions, simulations, discusses some economics related maths and presents historic evidence to prove his points.

I’m not sure I agree with Joel on the “only one” part of the review. I’m glad I’ve read some investments books before this one, so I can fully grasp Malkiel’s criticism. I can especially relate to the attack on technical analysis. As I wrote in previous reviews, this technique of investment analysis seems somewhere from unreal to ridiculous to me, and reading this book just made this opinion stronger. It’s very amusing to read about some of the occasionally-popping technical analysis gurus, about running computer simulations with historical data that shatter all the technical “signs” and about random simulations that contain “head and shoulders”, “triple bottoms”, etc.

The investment plan offered in this book is probably the most logical and down-to-earth one I’ve read about. To conclude, go get this book, it’s a terrific review of where you should and shouldn’t invest money.

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Carrying on with my financial education, a serious text on
technical reference was due. After having read a soft primer
on fundamental analysis (Lynch), I felt a need to see
“the other side” as well. There’s an Israeli online forum of
stock market enthusiasts I’m following, and most of the discussions
there are “technical” (no doubt because it’s the sexiest topic
of stock trading – more on this later). So, I just wanted to
finally understand all those idioms people are using. I mean, I can
grasp what a “trend” is, but when they dive into RSI, stochastics,
Doji candles, continuation head & shoulders, fibonacci retraces and
Eliott’s 3rd wave I just feel a need to get myself acquianted with
the whole topic.

So, after some online searching, I came upon “Technical Analysis of
the Financial Markets” as the de-facto text on the topic. Its first
edition came out somewhere in the 80s, and since then it’s definitely
considered as “the one, if you only want to read one book on the topic”.

The book itself is somewhat encyclopedic in nature. Over 500+ pages,
the author presents the theory/applications of technical analysis,
from the best-known methods to some obscure ones. Though there is
probably more to the topic than covered in this text, I’m sure the
99.9% of the things people actually know/use is there.

It starts with a chapter on the philosophy of technical analysis,
and then dives right into the theory. Beginning with the “simplest”
and the most traditional – Dow theory (trends, basic charting),
and going on to charting, reversal/continuation patterns, options/futures,
moving averages, oscillators, Japanese candle-sticks, time series,
and so on. The scope, as I mentioned, is vast.

I personally feel that there’s too little “philosophy” in this book.
The first chapter is good, and is a must read for everyone who’s
interested in stocks, but I think that the rest of the book would use
some “justification” as well. At some point, the impressions is that
“patterns” are thrown at the reader in a rapid pace, without giving time
to think them over, and without even trying to stress the reason _why_
these patterns work. Maybe it’s because the book is intended more as
a reference and not as a light-read.

In this review I don’t want to go much into my own view of trading
- fundamental vs. technical, etc. I think, however, that this book
should’ve spent a little more time explaining some of the drawbacks
of techinal analysis, it would be only fair. The amount of information
is overwhelming, and one could be easily fooled to believe that these
are “magic methods” that just work. Naturally, most of the examples
are tailored with perfect patterns. Perhaps more examples which show
how patterns fail, and explain why they fail would be helpful.

Technical analysis is dangerous exactly because of such books – a wealth
of information, “neat tricks” that tell you how stocks will behave.
What is more “cool” – a trader that spends days reading financial reports
(dull !!) of a company prior to deciding about buying their stock, or
someone who fiddles with formulas on a computer, drawing pretty “candles”,
“trend lines” and counting fibonacci sequences ? Clearly, the latter
is much more attractive to investors. People want it quick, without too
much hard work. “Just show me the numbers”.

To the defense of the author, I must say that he indeed warns people
of using the techniques frivolously. Applying many analysis techniques
in parallel is recommended, and tips are given on how to manage investment
funds better (how much money to allocate to each trade, etc.)

All in all, the book is useful if you’re seriously into trading. Although
technical analysis is definitely no panacea, I think that it can be combined
with fundamentals, and some common sense to produce good results. After all,
though the market is clearly driven not only by sentiments, it’s not driven
solely by fundamentals either. Technical elements do play role in the movement
of stocks, and having tools to analyze these elements is important.

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But there’s something that annoys me immensely about this site. They have a “Top stories” box (to the right from the market summary chart) where they post “stories” usually from CBS MarketWatch. These top stories are so dumb I sometimes lough out loud…

First of all, in a stormy market day, they always lag by a hour or two at least, thus being completely irrelevant (imagine that a weather forecast would be posted once in a two months and stayed posted thgroughout).

Second, and most annoying, they just provide dumb, “backwards” explanations. The gem is as usual the US interest rate. At 11 AM of some imaginary day the stock rise and the “top story is”:

Stocks rise due to strong economic data

Nice. A hour later, the stocks lose height, the “top story” says:

Stocks dip into the red as investors are concerned that the strong economic data will lead to a rise in the interest rates soon.

I kid you not – a hour later as the stocks emerge into the green again, the “top story” goes back to the first excuse. Geez… Just today, before the marked opened the “top story” babbled that US’ good employment data in May can harm the stock market because “the interest rates will raise”. When the marked opened with +1.0% on the Nasdaq, the “top story” now says:
U.S. stocks rose Friday following a strong May jobs report

I can bet you a nickel that if the stocks end red today, we’ll see again “concern of interest rates”.

I just have the impression that these CBS MarketWatch dudes have seated some moron-head in the office, whose only job is to write such “stock commentaries” and “explain” them as well as possible (all “stories” are in past tense for some reason). It’s no wonder the public treats economists with such suspicion – these people excel at predicting the past, and making mistakes about the future.

Argh.

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Let me start by saying that this is the worse piece of editing/publication I’ve ever seen. The font is ugly, the paragraphs are scattered without the least care for aesthetics, and the spelling errors… oh the spelling errors. FFS, the book was written in 1979, couldn’t they release a normal Hebrew translation since then ? The errors look like scanning errors – letters replaced by letters that look like them. I bet no quality control was present in this printing house – the errors are so obvious…

Ok, ok, enough whining – lets cut to the chase. The book, as its title suggests, is about free economy. Milton Friedman is a known economics prof that holds some very interesting (and somewhat controversial) ideas about the economic market. His basic argument is that everything should be free – he relays on Adam Smith’s “The wealth of nations” (I must read this book…), quoting the great economist about the merits of free trade.

Friedman attacks socialism and bureaucracy, and I don’t mean the socialism in the USSR (the book was written in 1979…) but the socialism in the western world – US, England, etc. He argues that the govermental control of economics and business is too vast, which brings to a lot of waste, bureaucracy and generally slows down the economic progress.

In fact – this is what this book is mostly about. The author discusses freedom against govermental control in business, monetary markets, education, health, energy, oil, trains, flights… everything. This is, I guess, why some think he’s controversial. Some of his ideas are on the verge of anarchy – even I’ll have to admit this.

The general idea is sound – economy should be free, only from a free trade between people where each side is interesting in maximizing his own profit, a healthy economy will rise. Govermental control has historically proved to only slow things down and cause a lot of waste by means of feeding a huge bureaucratic machine.

The applications to finance, trade and historical examples are what I really loved in this book. It gave me a lot of food for thought, and helped me to reach a few interesting conclusions about economy. Pity that most of the book deals with the author’s personal vendetta against the US goverment – trying to convince the reader how it got it all wrong, starting with Social Security and ending with the Drugs administration. It really started to get boring, and in the end I found myself just flippling through, seeking something new.

To conclude this (as usual) scattered lump of thoughts I call a “book review” – this book has some good sides, but also some bad sides (IMHO, of course). I’m glad I’ve read it. From the fraction of it I actually enjoyed, I learned things that will help me shape my thoughts about economics and finance, and that’s a good thing.

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Consider a thought experiment: new tools are developed that boost productivity of developers so much that 30% less developers are actually needed (This is not too far fetched, I think). What will happen ? Well, what happened when machines replaced 100,000s of textile workers, what happened when factory automation caused massive lay-offs ? How many secretaries/assistants/typers lost jobs as a result of the PC ? The same will happen here, fewer developers will be needed, so fewer will be employed. This is the free market economics, this is how these things work.

Now, consider that this new tool was invented – it’s called CIRR (China, India, Russia, Romania). This tool allows companies to develop applications and do IT with less cost than they currently do. We (thankfully) are part of a free economic market, so companies naturally seek ways to do stuff cheaper.

Goverment invervention is wrong in such cases, as history proved more than once. It’s like fighting a new automated tools, like making laws that factories will produce cars with 200 workers hand-crafting each part, instead of using robots.

More thoughts on this later…

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