Sales & Trading and Hedge Fund reading list

Even though I should be studying for my Options & Futures exam coming up next week, I am meeting up with lots of first years interested in working on the trading floor or in hedge funds to give them advice on CVs and interview preparation. The question on what to read in preparation keeps coming up, so I will make a post with all the books I find very helpful to get inside into trading and investing, as well as the technical knowledge required. I recommend the following books. Obviously, you don't need to read them to pass interviews. If you are lazy, you can get by with your introductory finance class, the Wall Street Journal, and the Vault Guide to Finance Interviews. Still, I believe that if you are not interested enough to pick up a good book on investing or the markets in your spare time, it is questionable if you will enjoy working in the financial markets, and thus it is unlikely you will be successful or happy if you work in this field. So at the least reading these books will give you an idea if you are really passionate about markets.

Technical knowledge
Inventing Money: The Story of Long Term Capital Management and the Legends behind it


This is the best book on the lives of Fischer, Black, Scholes, and Merton, the fathers of modern derivative pricing. It gives an excellent introduction into how and why derivatives were developed and how the industry grew. It might be a bit heavy if you have no background whatsoever, but even then I think it will familiarize you with the concepts important in trading.

Derivatives

We have had some readings from this book in our Options class, and as an introduction it is much easier to understand than the classic John Hull book on derivatives that everyone recommends but probably not many actually fully understand. So if you want a book on derivatives that is easy to understand and study by yourself, with a very good depth and practical and intuitive explanations, this is really good. It is written by the NYU Stern professor Rangarajan Sundaram. It is more expensive than the Hull book unfortunately.

Now on to lighter things :-). There are a lot of books on investing, the hedge fund world, and trading, but these are my favourites. Depending on where you lean and what you are interested in, you may have other choices, here are my top choices.

Easy reading
Reminiscences of a Stock Operator

This is the autobiography of one of the first speculators in the 20th century, who made his fortunes in the 1929 crash shorting stock prices. He seems to have had a very unusual gift for interpreting stock prices and where they were likely to go, so much so that brokerages would refuse to take his orders, forcing him to operate anonymously even when he was in his teens. His insight on trading and investing are as true today as they were 80 years ago.

How I made $2m in the stock market


Despite the dodgy title, this is actually an excellent book on stock picking. It was written by Nicolas Darvas in the late 50s and follows a very similar investment style to Jesse Livermore, the author of reminiscences of a stock operator. It is a great introduction to technical analysis versus a fundamentals based approach to investing. It is also a very easy read and a great way to get started on investing.

Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets

As stupid as the title sounds, this is actually a great book full of interviews with macro traders, i.e. investors who analyze global economic trends in currencies, interest rates and commodities to take positions on large movements and trends. It is fascinating how they interpret current events and what connections they make. You have to be interested in macro investing to like this book, as it is unrelated to corporate finance or technical aspects of trading.

Market Wizards: Interview with Top Traders

This is something like the original of Inside the House of Money, a collection of interviews with successful traders from the 70s. Lots of their stories are focused on how they made money shorting soybeans or wheat in the Chicago trading pits, but there are lots of characters here that became famous hedge fund managers later. It does get technical when they describe exactly what they sold when and why, so again you need to be interested in investing to read this book.

Hedgehogging

A much lighter read, this is quite an entertaining book on the hedge fund industry and the characters in it (managers, investors, wives, journalists, funds of funds etc.). It is written by Barton Biggs, formerly head of Morgan Stanley investment management. He has a degree in literature, is well-read and has a healthy distance to money and the finance industry. He can be quite sarcastic at times and I laughed a lot reading it.

Beating the Street

Written by Fidelity star Peter Lynch. This is about investing in stocks and quite useful personally. There are a lot of interview questions like "how would you invest $1m" or "which stock do you like and why", so this comes in handy.

I don't like any of the overhyped books such as Liar's Poker or When Genius Failed and think they are quite useless and won't give you a good idea of what trading floors or hedge funds are about. I do think reading the Wall Street Journal and the Economist helps a lot as well. The FT has some advantage in their coverage of political issues, but in terms of finance and business the WSJ goes into greater depth and technical detail, which is very helpful if you want to go beyond the journalist ling

Lots to read over the Xmas holidays!!! ;-). I didn't do it last year but in retrospect I must say I was not well prepared for the interviews, I didn't even know how options were priced, so I really recommend the following class to prepare better than me and know about option pricing and the general idea of hedging trading positions.

Surprising career choices

Many people have been asking me which job I ended up signing, so it is time to talk about it. I made a perhaps unusual choice. I signed with an investment bank instead of taking the offer from an established multi-billion dollar hedge fund. And I did this even though in terms of the internship, I enjoyed the work at the hedge fund more. Where shall I start to explain and justify myself? I myself was wondering once in a while if I am crazy. But I believe I did the right thing. Here's why.

Content and style of work: in terms of the style of working, the hedge fund was fantastic. It is quite creative and independent, and you never have to worry about selling anything or pleasing anyone. You just try to find out what is the right position to take, if there is a trade or not, and if yes, how to structure the trade in an intelligent way, and you are very free in terms of the opportunities you explore. Banking is very client driven, so obviously it will be more rigid and focused on selling products. The advantage of a bank is that one can move around quite easily and explore different areas, as well as switch desks or divisions. In a hedge fund, once you do merger arbitrage with European equities, it is unlikely that you will ever do anything else. The freedom of moving around and seeing different asset classes and regions was one of the reasons the investment bank seemed more attractive to me

Macro versus micro: the specific job I would have been hired for at the hedge fund required going into deep details of the financial reports of companies, finding inefficiencies and mispricings in their assets and liabilities. The trades were then structured in a market neutral way, so as to take a position only on the mispricing, while hedging out all market risk. Unfortunately, market risk is exactly the part I find most interesting, while accounting is what I like the least. Again, I prefer to work in commodities, interest rates, FX or emerging markets, rather than reading annual reports. This was the strongest reason of all.

Continuation of business school: another attractive element of the Associate programme in a bank is the fact that you are part of a group of 40 associates and about 80 analysts, and have the first 2 months together in New York of training, living in Manhattan, enjoying New York, making lots of friends. If you want to make money in the future, it helps to know a lot of people in different areas, and especially as a career changer I felt that so far I have very few contacts and know very little. Judging from last summer, I know I will enjoy having a large peer group of people in the same situation as I am, as it will make the transition from lovely student life to hard work easier.

Let's see how it all works out. I am meeting with lots of first years these days to explain them what Sales & Trading is all about, so I will probably make a post about it soon. At least I will post my reading list on how to prepare. This is a very busy week with lots of assignments, plus the final exams are coming up, so I have no time to get bored!

Tick tock tick tock: enjoying student life for 9 more months

Tick tock tick tock - I signed my job offer last week, next year July I will start working again. Now it is time to travel and party as much as possible!! Well, obviously I am also planning to learn as much as possible of the things I won't have time to learn once I work. Having worked in finance for 6 months over the summer and getting the sign on bonus are helping me a lot to enjoy London fully without feeling so poor anymore. It's the first time in my life basically that I don't have financial or personal worries and it feels great. I feel grateful everyday and thank God all the time, even though I am an atheist - I have to thank someone!!

Life has been very good here, we've had the Diwali party on campus which was lots of fun. I managed to organize a Sari and get help from my friends to put it on. I am so happy we have the Indian community on campus, they are fantastic and organize a lot of great events.

I'm also quite active academically now, since I have a lot to catch up!! I noticed over the summer that I just haven't learned enough in the first year. When I walk out of the school with an MBA next year, I want to know the basics of macroeconomics and accounting, and I just don't. I want to know how exchange rates work, how global trade works and so on and so on. I know in the end academia seldom has the answer, but it will be good to at least know the theories and frameworks to know where to start. This summer I truly felt that I do not know even 5% of what I should know about accounting or finance or economics before walking out of here. This will keep me busy!

I'm very happy for some of my best friends who have gotten job offers these days. A lot of interviews are still going on, but knowing that two friends who were less lucky for the summer internship this year now have full-time offers from the McKinsey London office makes me very happy. Then, I'm spending a lot of time right now talking to our first year students to advise on job search. As so many time before, I feel the main difference between those who will be successful and those who won't is that the former know exactly who they are, what they want and what they don't want. You cannot stop someone who is determined (yet humble!) and knows where he is going! On the other hand, others are very smart but full of doubts, and unfortunately nobody wants to hire people who doubt if they will do the job for more than a year. I had the same problem last year, and I got quite a few rejections because of that (Goldman explicitly told me after the final round last year that the only reason they did not make me an offer was they didn't believe that's what I really wanted). And I think they were right at that time, I was not well prepared and did not have a compelling story when I interviewed - I am embarrassed to think about it now - I interviewed for trading jobs but couldn't tell them how to price an option and not even what factors went into pricing of an option. If I hadn't spent 4 months wondering if I should go back to McKinsey or not in the first term but had prepared for the interviews instead, the story could have been different.

So my advice as always is that you have to be honest with yourself and speed up the decision process on the summer internships, don't wait till January to decide because it is very easy to spot the difference between people who have known what they want and prepared for it and people who stumble into interviews trying to fake interest for the job, it won't work.

This is my wise advice for the day (though it's becoming repetitive, I know), now I'm off travelling for the weekend :-).

On freedom

This is the end of my first week in freedom. It has been one of the best weeks in a long time. It feels so great to be a student again, especially a student without financial worries taking very few classes this term!! Now I understand why the MBA2007s seemed to be partying all the time last year :-).

I've used my spare time to catch up with a lot of my best friends during the day and to do sports. If you want to know what freedom feels like, go running through Regent's Park in the very early morning. It is so beautiful and so much better than going to the office on a Monday morning. I also go to the gym a lot, which is less beautiful but more social, since quite a few 2nd years without much to do hang out there :-).

Other than that, I'm also trying to be helpful to first years exploring opportunities for the summer internships, I have met with about 5 by now to talk about Sales & Trading. I'm quite impressed by how well prepared first years are this year, or maybe I only get to see those who know what they want already. It is funny remembering how I was in their shoes last year, asking the same questions, exploring the same issues - it shows me how much has happened over the last year.

One very big difference now I have noticed is how broader my perspective has become, which is the main reason I have been neglecting this blog recently. I am finding it less and less interesting to talk about jobs, career choices, MBAs, parties etc.. I much prefer to think and talk about other things in life which are much more important. So I'm not sure yet what I should do from now on: either I will shift quite considerably what I write about, which might disappoint some applicants or first years (although they can always go back to the old posts), or I might simply write less often but focus on the issues that this blog was set up to cover. Let's see. At least what I have noticed is that the MBA funnily has allowed me to spend more time on what I want out of life, and it has raised my expectations of life high enough that the solution for me is not finding a job in an investment bank. It may be a nice thing on the side, but it is not going to be my central goal. I guess it is just an effect moving higher up on Maslow's pyramid, now that all existential problems have been solved.

Someone asked a few weeks back if 2nd year is really as relaxed as I describe it here. The answer is that it depends on each student. You can take more courses or less, you can aim to finish earlier or later, you can work part-time, study hard and do all the readings or only get by academically, you can contribute a lot to your teams or you can choose to work less etc. etc. In my experience it depends completely on personality, there are people who will always be super busy and stressed no matter how small workload is objectively, and there are people who will always be relaxed no matter how stressed everyone is. I've decided to take it easy over the next year, I'll just take 3 courses each term, I've dropped out of the exchange to avoid the hassle of applying for a US visa (among other reasons), and I plan to spend more time on things that I really want to do. I really dislike more and more having my daily activities dictated from outside (through course assignments etc.) and much prefer to shape what I want to do or learn. At least for the next 9 months I will do that, because afterwards it will be hard for a few years.