Book Review - The Quants

For my first review I considered old staples such as The Wealthy Barber or The Millionaire Next Door but decided to start with a book which illustrates the potential dangers of technical trading and also reinforces the investment philosophy at Aura Wealth Management, that of fundamental investing. The aforementioned books are good and I recommend everyone read them, but they are geared towards "savings and investing 101".

The Quants is far more relevant to the investment environment we are currently living in. Written by Scott Patterson in 2010, The Quants reviews events leading up to the 2007/08 stock market crash and the types of trading models that helped exacerbate the problem. As the Wall Street Journal summarizes:

"On Wall Street, they were all known as "quants," traders and financial engineers who used brain-twisting math and super powered computers to pluck billions in fleeting dollars out of the market. Instead of looking at individual companies and their performance, management and competitors, they use math formulas to make bets on which stocks were going up or down."

The book goes into the history of these quantitative analysts from their early days to their positions as the head of hedge funds managing billions of people’s money. The book is an easy read and doesn't get too technical about this kind of trading, but rather is a narrative introducing us to these men, how they think, invest and the consequences that came.

The Quants is by no means a comprehensive telling of events leading to the recession; that would require an entire library. But it gives a look inside Wall Street and some of the players that wielded (and still wield) massive amounts of power over capital markets. Their universal love of poker isn't lost on the author either:

"Skill at poker meant skill at trading,” Mr. Patterson says. “And it potentially meant something even more: the magical presence of alpha,” a quant word for individual skill at beating markets."

It's probably good to be skeptical of any investment system or portfolio manager that equates investing to gambling.

I recommend The Quants as an introduction to understanding the market crash and potential pitfalls of technical investing. Technical analysis has its place; however you can see how a trading system governed by computers can be undermined by a market ruled by emotion.

Sources: The Wall Street Journal, New York Times