"One thing that every beginning trader needs to learn is there are a lot of ways to skin the cat," says Tommy Goelz who's been a stock trader for the past 33 years. For the past five, Goelz has been running the training program at First New York, a leading multi-strategy trading firm and one of the few remaining independent partnerships on Wall Street.
"What works for one might not work for the other, and vice-versa," he says, and this is why he hands every incoming trader-to-be at FNY a laundry list of 40-some-odd books -- their effective summer reading. Wherever these new employees are in terms of experience -- from fresh-clipped English majors to semi-trained finance rookies -- they're expected to knock off most of these titles. But don't be mistaken, these books aren't meant to teach new employees how to trade. (That happens over months or even years wedged between Goelz and other grizzled trading vets, including -- in the interest of disclosure -- my father, who's a partner at the firm). Instead, these books are meant to teach each newbie how to think, as their eyes become accustomed to the up- and downticks of the Dow Jones Industrial Average (^DJI).
"Different things work for different people," Goelz explains. "Now, there are certain rules of trading that are important across asset classes or across styles. How to take and manage risk would be the two most important, no matter what or how you're trading. We focus on those things, too. But really what we are doing here is showing them the buffet [of trading styles] and letting them pick what dishes they want to eat, what will make them successful."
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Here, Goelz sits down with Minyanville and checks-off his and his team's top picks, giving all of you future traders a heads up on the books that should probably be on your shelves, and all of you seasoned ticker-jockeys a reminder of where your fundamentals should lie.
1. Reminiscences of a Stock Operator by Edwin Lefèvre
"It's still on my bedside table, and I pick it up every so often to read a few pages," Goelz says of Edwin Lefèvre's thinly veiled biography of the infamous speculator Jesse Livermore and his time on Wall Street in the early 1900s. "If you think algorithms and the speed of news have changed the game, then you're mistaken. Just read this book."
Reminiscences of a Stock Operator traces Livermore's fictional counterpart Lawrence Livingston from the age of 14 into adulthood, as he cuts his teeth in so-called "New England bucket shops," embraces his supreme talent for numbers, amasses a million-dollar fortune, and continues to lose and win it back several times over on Wall Street throughout the first two decades of the 20th century.
Reminiscences is widely considered a timeless compendium of trading wisdom, with generations turning to tried and true nuggets such as:
"A battle goes on in the stock market and the tape is your telescope."
"I never argue with the tape. Getting sore at the market doesn't get you anywhere."
"Speculation is a hard and trying business, and a speculator must be on the job all the time or he'll soon have no job to be on."
2. Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders by Curtis M. Faith
It's an age-old question: Are good traders taught or are they born? In the early 1980s, trading guru Richard Dennis decided he was going to find out, explaining to his longtime friend and fellow trader William Eckhardt, "We're going to raise traders just like they raise turtles in Singapore." Thus began one of the most renowned -- and profitable -- trading experiments of all time.
Way of the Turtle follows the success of a group of 23 people plucked from all walks of life and trained by Eckhardt and Dennis in a short two weeks, who went on earn an average return of over 80% per year and profits of over $100 million. Only 19 years old at the time, the littlest "Turtle," Curtis M. Faith, is regarded as the most successful of this group. In his book he details the entire experiment, including a secret methodology that has since been exposed. This system combines different breakout techniques tailored with specific money management rules such as pyramiding, correlation limits, and position size control in tight markets, to name but a few. But don't be mistaken: Way of the Turtle isn't so much a how-to-trade guide as it is a meditation on taking risk -- in any market.
3. Market Wizards: Interviews With Top Traders by Jack D. Schwager
The original Market Wizards published in 1988 -- and, for that matter, its follow-ups The New Market Wizards (1992) and Stock Market Wizards (2001) -- offers a glimpse into the minds of dozens of past decades' most successful traders. Author Jack D. Schwager set out to find the ultimate secret to each trader's success; through in-depth interviews he learned that each trader operated by a unique method tailored to suit his or her personality. Again and again, regardless of how these master traders did it, Schwager found a combination of firm methodology and the right mental attitude yielded the greatest trading success.
The book drives home that fact that there are as many -- if not more -- ways to make money from trading as there are markets to trade in, and that the true secret to trading success lies within the individual. Markets are a collection of individual action, thus, they are a representation of human psychology. Mastering them not only requires talent and hard work, but also a commitment to a single method of trading, which a trader must refine and adapt over time.
4. The Big Short: Inside the Doomsday Machine by Michael Lewis
"Really, any of Michael Lewis' books are worth a read," Goelz says, mentioning 2003's Moneyball and 1989's Liar's Poker in addition to 2010's The Big Short: Inside the Doomsday Machine. The Big Short, a New York Times bestselling book, charts the 2010 housing and credit bubble from shady feeder markets in the early 2000s to a full-blown national crisis by the end of the decade, with a cast of characters including the investors who called the bubble early, the quant behind the first CDO market, and a one-eyed, Asperger syndrome-suffering ex-neurologist turned hedge fund manager. In addition to being an entertaining read, the book accurately depicts the simultaneous inflation of the housing bubble and how some of the biggest investment banks managed to sell junk bond securities with AAA ratings to institutional investors, which, when everything unraveled in 2007, arguably drove the United States into its current recession.
[Lewis' Liar's Poker recently made Minyanville's list of The 11 Books Investors Must Read to Prepare for 2013.]
5. Secrets for Profiting in Bull and Bear Markets by Stan Weinstein
In 1988, financial expert Stan Weinstein decided to sit down and put his market-tested trading strategies down on paper. What came next was a book outlining his stage analysis technique, which is widely regarded to still hold true over two decades later. Weinstein's methodology discourages traders from betting on the news, and urges them instead to trade future trends, the four market cycles that every stock will pass through. By looking for specific patterns in stock charts, investors can pinpoint the right times to buy and sell shares. This might seem obvious to some, but for many beginning traders, this can be misconstrued.
Secrets for Profiting in Bull and Bear Markets has remained such a solid fixture of the trading canon that Weinstein has often found himself pressured to write another book. To these requests he has famously replied: "I've already said everything I could have said."
This thick, technical tome is less a casual beach read and better suited for coffee-fueled highlighting and copious margin notes. John J. Murphy's Technical Analysis of the Financial Markets has earned its place as one of the foremost references for learning the ins and outs of complex charting techniques. It's not only been cited in Federal Reserve studies, but is also used as the primary source in the Market Technicians Association testing program. A recently updated edition is suited better to modern technologies and markets, and includes coverage of intermarket relationships, stock rotations, and candlestick charting.
7. The Art of Short Selling by Kathryn F. Staley
Goelz and his team are quick to notice a poor understanding of how to sell short among their new trainees. Kathryn F. Staley's The Art of Short Selling offers a dexterous explanation of an incredibly profitable but oft misunderstood discipline that no novice trader should be without. Staley gives insight into the key signals for when a stock's price is going to drop, where these signals are found, and how to utilize these signals to make a profit. Short selling, however, remains incredibly risky, and a few missteps can yield an irrevocable loss. Having a good foundation in the practice is a must, and Staley's guide is a fantastic resources to build one.
[More from Minyanville: A Survival Guide for Bears in a Bull's World]
8. Trader Vic II: Principles of Professional Speculation by Victor Sperandeo
Victor Sperandeo, the author of what Goelz considers an overlooked book, Trader Vic II: Principles of Professional Speculation, proposes that market moves are not random, but instead are driven by fundamental economic forces, which themselves are influenced by political decision-making. Because of this, Sperandeo argues that the first step in making successful investment decisions is to think about the effects that changes in the tax law and fiscal policy will have on the market, as well as on individuals and groups. While others might focus on precise timing to master the markets, Sperandeo believes success comes in pinpointing the commonsensical effects of changes in the country's economy, which, in time, will drive the market in a predictable direction. Trader Vic's well-learned philosophy is geared to both amateurs and pros, helping all make more prudent investment decisions.
9. Elliott Wave Principle: Key to Market Behavior by A.J. Frost and Robert R. Prechter
Developed in the 1930s by Ralph Nelson Elliott, a financial accountant, the Wave Principle remained relatively obscure for decades until two analysts, Robert R. Prechter and A.J. Frost, began utilizing the method in the 1970s. When they published Elliott Wave Principle: Key to Market Behavior in 1978, the investing community quickly became aware of how fundamental mathematical patterns not only observed throughout the scientific and natural world, but also in historical human behavior, could be utilized to profit from seemingly unpredictable markets. The book has since proven to be an investing classic and as one of the few that promises a tried and tested, reliable trading method.
10. Options as a Strategic Investment by Lawrence G. McMillan
Options as a Strategic Investment by Lawrence McMillans is great resource to help novice investors wrap their heads around the world of options investing. It covers the basics of how options work, and offers numerous strategies for a variety of different markets. The newest edition of this guide showcases a variety of options trading products now available, as well as contains a section on volatility trading. If you're thinking of using puts and calls, read this book first.
11. The Day They Shook the Plum Tree by Arthur H. Lewis
While being familiar with trading strategies and market behaviors will take you far, understanding the history and culture of Wall Street is a quintessential part of any new trader's education. The Day They Shook the Plum Tree by Arthur H. Lewis recounts the life of Hetty Green, the infamous financier nicknamed "The Witch of Wall Street," whose accumulation of wealth throughout the Gilded Age put her on par with Rockefeller, Carnegie, and Morgan. As "The First Female Tycoon," Hetty was, at the time, the richest woman in the world -- a reputation topped only by her infamous penny-pinching. Hetty was a notorious miser, making the story of how she made her money almost as interesting as the ways she managed to keep it.