2022 was a difficult year for the stock market to make money.
This year saw a large and severe sell-off in Equities, as investors panicked about a possible recession, rising interest rates and Russia's invasion.
The Nasdaq has fallen 32%, as growth stocks led the downturn. After two years of record-breaking performance from major indices, and the prolonged bull run that lasted ten years after 2008's financial crisis, some retail investors and professionals are now experiencing a bear market.
Insider asked several Wall Street veterans which books helped them better understand stock market crashes, recessions and bear markets.
They shared 20 top picks. These ranged from Michael Lewis's "The Big Short," which tells a significant story of 2008's financial crisis to Edwin Lefevre’s 1923 novel "Reminiscences of a Stock Operator".
Michael Lewis' "The Big Short", a story about three investors who placed bets against the US housing market before the 2008 financial crisis, is told by Michael Lewis. Later, it was adapted into an Oscar-winning movie starring Christian Bale as Michael Burry.
The book explains how Steve Eisman, Burry, and Cornwall Capital's Jamie Mai and Charlie Ledley used unusual methods to identify the US housing bubble. They then shorted bank stocks to buy credit default swaps that would protect subprime mortgages and profit from the stock market crash.
Recommendation by Amanda Rebello (head of passive sales at DWS Group).
Famed market guru Jeremy Siegel discusses his top stock-picking strategies in "Stocks For the Long Run", with a special focus on the 2008 financial crisis. Professor at Wharton School recommends that investors avoid bonds because of their poor long-term performance and instead choose index funds for passive income.
Alexander Chaloff, co-head of investing strategies at Bernstein Private Wealth Management, told Insider that "It's an essential primer for investing in stock market." You don't buy stocks to hold them for a month, a quarter, or even an entire year. They are bought for the long-term. This book captures this concept.
Recommendations: Nancy Tengler (CEO of Laffer Tengler Investments); Alexander Chaloff (co-head of investment strategies at Bernstein Private Wealth Management).
Roger Lowenstein's book "When Genius Failed" details the rise and fall in hedge fund Long-Term Capital Management. The $100 billion fund lost enormously in four years. This not only caused ripples on Wall Street but also the financial system around the world.
Court Hoover, Pervalle Global's head of research, stated that "it's good to learn from other people's errors." "Every trade either makes one richer or more wiser," Court Hoover, head of research at Pervalle Global said. You can learn a lot from mistakes.
Court Hoover is the head of research at Pervalle Global.
Edwin Lefevre's book "Reminiscences of Stock Operator" is a first person chronicle of a stock market trader who made all his fortune and then lost it all. The book was written in 1923 and features a fictionalized account about Jesse Livermore, a prominent Wall Street day trader and speculator.
Recommendation by Michael Wang, founder and chief executive at Prometheus Alternative Investments
Jack D. Schwager's Market Wizards features interviews with 17 Wall Street veterans, including Bruce Kovner and Richard Dennis. The book was published in 1989 and recounts the extraordinary success each individual had, turning small amounts of capital into large fortunes.
Recommendation by Michael Wang
Liaquat Ahamed’s "Lords of Finance” recounts the events leading to 1929 Wall Street collapse, with a focus on the central banks of the US, UK, France and Germany.
Insider was told by Bernstein's Chaloff that "Lords of Finance" is more of an alarming book. However, it can be useful to learn the dynamics that can lead to market crashes. "This is my recommendation for people who are asking 'how bad it can get' -- a global war and a great Depression, that's how bad.
Alexander Chaloff recommends
Russell Napier, author of "The Asian Financial Crisis", recounts his experiences writing for institutional investors during an economic downturn. In that period, the US dollar value on certain Asian stock market stocks fell 90%. This catastrophe resulted in the loss of billions and hundreds of lives due to rioting.
Understanding financial crises is crucial because they offer such opportunities. Hoover stated that a financial crisis must be unpredicted by most participants in order to occur. It wouldn't happen otherwise. These unforeseen events are the best for potential returns.
Court Hoover is the head of research at Pervalle Global.
Nassim Taleb's "The Black Swan" outlines times in history when unlikely events like Google's huge success or disasters such as 9/11. These events are also explored in the book, along with what lessons readers can learn from them. Taleb identifies three main characteristics of Black Swan events: their enormous impact, unpredictable nature, and later attempts to explain it to make it seem less random and strange.
Recommendation by Amanda Rebello
Burton Malkiel, Princeton economist, wrote "A Random Walk Down Wall Street". This popularized the "random walking hypothesis" - a financial theory that suggests traditional stock markets can't be predicted and are unpredictable. Malkiel criticizes both technical and fundamental investing strategies, stating that traders can't consistently outperform the market averages.
Recommendation by Kevin Philip, Partner at Bel Air Investment Advisors
Investors are trying to find the bottom of this bear market so they can begin buying undervalued stocks that have the potential for long-term growth.
Russell Napier examines the causes of bear markets ending in "Anatomy of the Bear" Investor and economist Russell Napier analyzed over 70,000 newspaper articles in order to determine when Wall Street sentiment started to shift stock market bottoms in 1921, 1932 and 1949.
Recommendation by Patrick Diedrickson (equity analyst at Ameriprise Financial).
Charles P. Kindleberger, a 1978 author of "Manias Panics and Crashes", outlines the speculative panic that is associated with major financial crises and the mismanagement money and credit. The book is engaging because it details financial explosions over the centuries, from the 1720 "South Sea Bubble" to the many stock market bubbles that followed.
Marc Chandler, chief market strategist for Bannockburn Global Forex, recommends this book
David Graeber, an anthropologist, argues that there was credit and debt before money. Graeber's "Debt" explores the ways it penetrates every major social institution, such as marriage, religion, and government.
Marc Chandler recommends
Hyman P. Minsky, in "Stabilizing an Instable Economy," argues that the financial system is inherently unstable and prone to tottering. Minsky's 1986 book explains why the United States experiences periods of high unemployment, debilitating inflation, and credit crises.
Marc Chandler recommends
The authors of "Triumph of the Optimists" compare the performance of the US stock markets over time to those of 16 other developed countries.
David Waddell (chief investment strategist and CEO of Waddell and Associates) stated that the big revelation is that equity prices have an upward bias, regardless of where they are located. "Bets against global equities are simply bets against human progress. Zooming out !!!" is the best way to get through bear markets.
Recommendation by David Waddell (chief investment strategist and CEO of Waddell and Associates).
John Kenneth Galbraith, economist, demonstrates the age-old saying that history repeats itself. He examines major market crashes over the past 300 years in the US.
"When it comes to volatility, this classic is timeless," Dan Kimerling (founder of Deciens Capital), said. "Irrational exuberance is a common phenomenon throughout history, and these bubbles are not always permanent."
Recommendation by Dan Kimerling (founder of Deciens Capital).
Andrew Ross Sorkin, an acclaimed financial journalist, recounts the 2008 economic crash from two perspectives: the regulators and the top leaders of the largest investment firms. Robert Johnson, CEO, Economic Index Associates, stated that the book reads like a novel and doesn't get too technical for those with a finance background.
Robert Johnson, Creighton University finance professor, and CEO of Economic Index Associates
Robert Shiller, Nobel laureate and Nobel laureate, wrote "Irrational Exuberance" in 2000 to explain the stock markets cyclical peaks/troughs and argue that the US stock exchange was significantly overvalued. This was one month before the historic dot-com bubble burst. Two editions of "Irrational Exuberance" have been published since then: one in 2005 that warned readers about a housing bubble crash and one in 2015. The 2015 edition cautioned against long-term bonds.
Robert Johnson recommends:
Quinn and Turner explore the history of financial busts and the actions taken by investors and speculators leading up to them in "Boom and Bust".
The authors refer to creating fire as an analogy for bubbles. Excess money, liquidity, and speculation are all necessary ingredients for a bubble. "Often times, new technology acts to set things in motion," stated Garrett Aird, Northwestern Mutual Wealth Management Company's vice-president of investment management and research.
This historical context helps future investors to predict the coming economic downturn by highlighting the three main elements of a financial bubble.
Recommendation by Garrett Aird (Vice President of Investment Management & Research at Northwestern Mutual Wealth Management Company).
Charles MacKay's book is an early example of crowd psychology. It was written more than 150 years ago. MacKay's "Extraordinary Popular Delusions and the Madness of Crowds" examines historic market crashes such as the South Sea Company bubble and Dutch tulipmania in the early 1800's to show that market speculation is always around.
Aird told Insider that while the underlying causes might be different, human nature hasn’t changed. The book helps to understand herd mentality and avoid groupthink.
Robert Hagin's "The Dow Jones-Irwin Guide for Modern Portfolio Theory" is an authoritative guide to portfolio strategies, asset valuation, and risk management. Hagin, who was formerly the executive director of Morgan Stanley, discusses investing and financial concepts. He also recalls lessons learned during his 40-year tenure on Wall Street.
Franzen stated that he believes it is a masterclass in individual investment analysis and portfolio allocation, which was pivotal in his growth as an investor.
Recommendation by Caleb Franzen (senior market analyst at Cubic Analytics).
Bank of America reported Friday that investors pulled a record amount of money out of stocks last week in a financial strategy to lower their tax bills.
The investment firm reported that $41.9 billion was the highest ever outflow from equities, and the biggest amount ever for "tax-loss harvesting," in its weekly Flow Show Note. This note is the last to conclude a bruising stock year.
Tax-loss Harvesting allows investors to sell stocks, ETFs and mutual funds at a loss, then use the loss to offset any capital gains.
According to Fidelity, even if investors don't have any gains they can still reap the benefits of harvesting losses. The losses can be used to offset future income or to make future gains.
BofA reported that investors pulled out $10 billion in bonds over the past week. They also pulled out $27.8billion from passive equities, and $17.2billion from US value funds. This set new records.
Investors reduced their cash holdings by $59.5 million, the largest reduction since February. As investors became more worried about Russia's war with Ukraine, slowing global economic growth and rising inflation, fund managers increased cash holdings in February and March.
As they prepare for the next tax season, investors are reducing what is expected to be a losing fiscal year for US stocks. The S&P 500 is on the verge of a 20% decline, while the Nasdaq Composite is down by more than 30%.
The Federal Reserve's fight against inflation caused a spike in borrowing costs, which in turn drove equity prices into a bearish market.
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