Do we want to play Liar’s Poker? Notes 1

I found two books listed most frequently as favorite books among PF bloggers — Liar’s Poker: Rising Through the Wreckage on Wall Street and A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition. I felt a bit embarrassed that I did not know these two books, though I had thought about getting a job in Wall Street. I decided to make up my ignorance.

I finally got the two books one month after I placed holds on them. By then Yannick and I got very busy with our work. So we decided to optimize our times — each read one and exchange reviews.

Yannick likes numbers, so he got the “Random Walk”. I am more fiction or biographic type, so I picked “Liar’s Poker”.

The first thing that struck me was the author’s comments on “economics”. He noted that, although most arrivals on Wall Street studied economics, the knowledge was never used – actually, any academic knowledge was frowned on by traders. Economics is not really a science, but rather a means by which investment bankers find potential candidates to hire.

This sounds like Michael Spence’s model of job market signaling. I always considere it a drawback in signaling game — Education is useless other than being a signal to the potential employer. Now Liar’s Poker confirmed this assumption with a real life example. I guess that this was one of the very few cases where the assumptions of an economics model hold true in reality. Unfortunately, instead of increasing my confidence in my economics education, it makes me even more disillusioned with the economics knowledge I got from PhD classes.

On the other hand, the book gave us a relief. As the book says, most millionaire traders started their trading business in their early 20’s. We had some sort of regret that we missed the opportunity to be there. Given that I have so many friends working in investment banking, I can’t (or do not want to) believe that the life in Wall Street is like the “jungle” the book described. However, I doubt that the way the IB sales traders and people make money has changed much. They consider it a success by deceiving the less-informed public and ripping off their clients. I do not think that Yannick will ever be able to do this. So this may not be the road for us anyway.

The book also talked about Michael Milken’s junk bond empire. It is interesting to see a different view on Michael Milken from Den of Thieves


2 Responses to “Do we want to play Liar’s Poker? Notes 1”

  1. mOOm Says:

    Hi jacqui

    I saw again today how hard it is to actually trade 😦

    I’ve read Liar’s Poker and I’ve also been on the other end of the phone/e-mail with those kind of salespeople from Citibank when my Mom was a client. They are mostly clueless and just trying to sell whatever crap they are told to sell. If they are any good they will go get a job managing money somewhere and make more money. This is why we quit Citibank. Hopefully the guys we now have are better but they still need to prove themselves.

  2. Yannick Says:

    hi mOOm:

    thanks for sharing your experience. Jacqui often feels excited about traders’ anecdotes, while I am usually more skeptical about the eventual dramatic winnings. Therefore, Jacqui enjoyed very much Liar’s Poker, while I am taking a Random Walk on our real portofolio. As a husband, I’m responsible for taxes and investment. 🙂

    However, I have to admit that I’m pretty amazed by your track record so far. It’s hard to see $2500 evaporized within one day. However, even without option trading, I did see my portofolio change values around $2000 a day several times. So you’re doing very well in such a difficult game.

    I started with trading individual stocks in 2003, which was a pretty good time. Retrospectively, I beat the market not because of my skill, but because of my overweights on tech and energy stocks. However, as I got busy with my research and other activity, I stoped watching them closely and suffered some big loss. Given my schedule, I realized that I wouldn’t have been able to graduate on time without giving up my stock picking.

    I am really impressed that you manage to invest actively being a economics professor. I will not even try it if I were a professor. You picked a much better game by trading QQQQ index options. You managed your risk well by limiting the size of your portofolio exposure to option tradings. You seem to be winning the game, though not every time, however, most of the time. Good luck to achiev your goal sooner!

    I am curious about today’s event though. How confident you are about your model? Techinical analysis give predictions after things start to happen. So my guess is that your model should not pick up events like Fed’s announcement in advance, unless there’s enough information leak to change the market before announcement, right?

    Given your winning experience, it’s not that difficult for you to tell the level of those salespeople. Also because of it, you can entrust your Mom’s money with some managers charging 3% fee because you believe that they will beat the market by a large margin. I did do a bit funding picking (not totally random walk here) too, though conservatively limiting to low expense funds.

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