Aside from not putting in the study time – recommended at around 300 hours per level – there are surprisingly common mistakes or assumptions people sitting the exam make, which often make the different between a pass and a fail.

1. Assume there are clues in the structure of the multiple choice questions

The ‘item sets’ in CFA level I and II are essentially multiple choice, which means it’s tempting to roll out that classic pub quiz technique – if you don’t know the answer, choose ‘B’. Other popular assumptions include thinking either the shortest or longest sentence is the correct one or answers with the word ‘never’ or ‘always’ are a warning sign. This is bunk – there’s no pattern.

“There is no way to discover a secret formula to answering multiple choice questions,” says Tom Robinson, CFA, managing director of education at CFA Institute.

“The questions written in as open language as possible, and the multiple choice answers can be very similar. So, if it’s a written answer you need to understand the subject thoroughly, or if it’s a calculation they will make two of the three options answers you could have easily landed at if you made simple error,” adds Richard Fernand, global head of CFA training for 7city Learning.

2. Skimp over certain modules (particularly ethics)

It’s tempting to assume that getting more points on more numerical elements of the exam like, say, financial statement analysis, will make up for glaring weaknesses or a lack of preparation in the softer elements such as standards, ethics and regulations. Sadly not.

“Some elements of the course will help with others – financial statement analysis will help you understand equity investments, for instance, or quantitative methods will increase your understanding of fixed income,” says Fernand. “But all syllabus points could be tested, so paying less attention to some could be the difference between a pass and a fail.”

“For candidates at the margin of the minimum passing score, performance on the ethics portion of the exam is important,” says Robinson.

3. Be overly reliant on study guides

It wasn’t so long ago that the recommended number of study hours per CFA level exam was 250 – it’s now been upped to 300. Suffice to say, cutting corners isn’t wise and, as helpful as they are, relying more or less solely a study guide is just that.

“Historically, people simply used materials by companies like Schweser and Stalla to guide them through the exams,” says Fernand. “I wouldn’t recommend using them exclusively – you need to also closely study the syllabus.”

“CFA Institute does not consult with or provide planned exam content information to prep course providers at any point during the exam development process,” warns Robinson.

4. Assume the written parts of level three mean composing a novel

For most of us, writing vast pontificating essays is something last done at university when it was perfectly acceptable to get your point across in 2,000 words. The level III exam is indeed the only one with a written element, but you’re not Charles Dickens.

“It’s not an essay, and don’t assume that flowery language will score you extra points,” says Fernand. “Think of it as writing a memo to your boss – they want to see the facts and their implications in clear, concise language.”

5. Apply the same study techniques to each exam level

“Surprisingly, some people – particularly those with a finance-based degree – breeze through level I, because many of the concepts are familiar to them,” says Fernand. “They apply the same (often less rigorous) study techniques to level II – possibly because they’re more senior and have less time – and then they come a cropper.”

This is clearly reflected in the CFA’s stats – 22% of level I, 58% of level II and 49% of level III candidates found the questions to be more difficult than expected, Robinson tells us.

Recruitment spree for investment professionals range from the small – Lothian Pension Fund is looking for two investment professionals – to the large (Universities Superannuation Scheme, which says it intends to add nearly 50 investment professionals over the next three years).

The benefits to the pension scheme are obvious – they can create more tailored investment strategies and it’s a cheaper option than using a third-party. But how can they convince investment professionals to switch from mainstream asset managers?

USS’s trio of hires earlier in the year suggest this is where they will look for new recruits.

“Historically, pension funds simply haven’t paid enough to attract top professionals, and any that do move go for reasons other than money,” says Richard Parkhouse, chief executive of asset management remuneration specialist PRPi Consulting. “On the other hand, compensation within asset management houses has been going down, and continues to do so, so this may present an opportunity to the pension funds.”

Salaries can be fairly miserly – Lothian was offering £45-52k for its investment roles, for instance – but the highest paid position at USS was paid £480k last year, according to the scheme’s accounts, which compares relatively favourably with asset managers.

David Crum, who previously worked for Lothian Pension Fund and Strathclyde Pension Fund before moving to investment consulting, believes the range of opportunities and work-life balance are big selling points.

“Compared to a larger asset manager, there’s a lot more freedom in the role and you tend not to get pigeon-holed in the same way,” he says. “In my role, for instance, I started in UK equity passive management, but was able to do some UK active equity management as well as performance measurement, corporate governance, reporting and analysis and other areas. It’s a very stimulating role.”

One asset management headhunter adds that as most larger firms are not indulging in a great deal of recruitment currently, any investment roles within pension funds are likely to attract higher calibre candidates than would have been the case in a more buoyant market.

Getting started

The Millionaire Next Door – Thomas J. Stanley and William D. Danko
The Millionaire Next Door is one of those rare investment books which happens to be both very good and a best seller to the general public. This is uncommon because investment books that sell well are usually get-rich-quick rubbish. The Millionaire Next Door talks about good old fashioned frugal spending, hard work and long term investment. If you are looking for a book on wealth to give you a kick off, this is a good start.

Why Smart People Make Big Money Mistakes – and how to correct them – G. Belsky & T. Gilovich
Exceptional book on investor’s psychology. If you want to start investing, first you will need to understand that the biggest obstacle you will face is yourself, and not dodgy auditors, greedy company directors, or market manipulators. The book picks on the investor’s psyche in a way that will have you squirming with embarrassment when you realize just how much that sounds like you. After you have read The Millionaire Next Door and Why Smart People Make Big Money Mistakes you will be set to start reading books on actual investing.

Books on asset allocation, returns, market efficiency (or lack thereof), index funds and actively managed funds

The Bogleheads’ Guide to Investing – Taylor Larimore, Mel Lindauer, John C. Bogle (foreword)
Mainly aimed at novice investors, it puts up a good case for investors to use a simple, low cost indexed strategy with their portfolios.

Common Sense on Mutual Funds – Jack Bogle
One of the best, and most sensible books ever written on investment. The book recommends investors use index funds as much as possible, minimise turnover and general commissions, and take a long term view.  Armed with a huge volume of statistics to back up his points, Jack argues that index funds are a superior choice, but if you prefer to buy an actively managed fund, you should avoid conservative index hugging ones and go for very active managers with unusual portfolios and low fees.

The Intelligent Asset Allocator – William Bernstein
This is a very neat book that will change your perspective on portfolio construction. It takes modern portfolio theory and strips it down to a simple and very useful form. It doesn’t refer to beta and the capital asset pricing model isn’t used, thankfully, but instead shows a very practical way of putting together portfolios to minimise risk. It answers the age old question – should you invest in property, shares, bonds, cash or hedge funds? The answer is all of them, but rebalance the portfolio regularly. This is a surprisingly sensible book and it has none of the silly assumptions or overcomplicated mathematics that are so annoying about most Modern Portfolio Theory books. Definitely on the required reading list, it presents only a mild technical challenge because the author seems to be one of those guys that believes an ounce of common sense is worth more than a tonne of computer power. Some have complained that this book has too much math in it, but it is written in a format where the mathematical details are locked up in tiny boxes that can be bypassed by the uninterested reader without harming the narrative.

The Four Pillars of Investing – William Bernstein
Four pillars is the least technical of William Bernstein’s books. It covers a number of subjects from portfolio construction to behavioural finance and is pitched at investors who don’t like maths very much. It is something like a version of The Intelligent Asset Allocator which you can read on the bus on the way to work, whereas The Intelligent Asset Allocator is more technical and the best value can be had from it with a pen and notebook in one hand.

Value Averaging: The Safe and Easy Strategy for Higher Investment Returns – Michael Edleson
Value averaging is a modified form of dollar cost averaging where you calculate a “value path”, i.e. a theoretical target for your portfolio based on an assumed long term return, and compare your portfolio’s value to the projected value to see how much you need to invest (or withdraw from the portfolio).  Unlike dollar cost averaging, value averaging makes you invest more money when markets are down and less money when they are up.  According to Edleson this has resulted in higher long term returns than ordinary dollar cost averaging.

A Random Walk Down Wall Street – Burton G. Malkiel
A 500 page doorstop, but hard to put down since it is so fun. Malkiel slays a variety of Wall Street sacred cows from head-and-shoulders topping patterns through to the hallowed Capital Asset Pricing Model. He gives lurid accounts of manias from the South Seas Bubble to the biotech boom and how even well known fund managers and brokers always seem to get it just as wrong as the most incorrigible punters. He is generally critical of almost all Wall Street lore, systematically bashing practically everything and everyone, so no wonder it is a fun book. Giving even fundamental analysis a thumping (though O’Shaughnessy has a few words to say about this in What Works on Wall Street), he does come out on the side of the blindfolded-baboon-throwing-darts-at-the-quotes-section-of-the-paper method for stock selection and seems to regard Buffett’s success with some scepticism, but this is a must-read book anyway. His criticism of fundamental analysis only really deals with growth stocks, pointing out how unreliable earnings forecasts can be, especially when they optimistically run into the future. He is less critical of value investment, since although he spends the bulk of the book advocating random stock picks, he suddenly changes his tune at the end with a moderate endorsement of value investing. On the other hand he gives technical analysis in all its forms a hiding. You’ll get a lot out of this book, even if it is just to put you off growth/momentum or technical investing.

Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life – Nassim Taleb
This is a very interesting book that explores randomness and in particular discusses how traders often mistake dumb luck for skill. He’s a bit pompous, but occasionally amusing. He has some interesting ideas on risk and return, and his views on option trading are a little different to most.

Global Bargain Hunting – Burton Malkiel, J.P. Mei
From the author of A Random Walk Down Wall Street, this book talks about the opportunities available in Emerging Markets. Focusing on both the risks and returns, with as much backup data and research as you might expect from a Malkiel book, this lays out a compelling case for considering allocating a portion of your portfolio into investments in the Pacific Rim, Eastern Europe, South America and Africa. It documents the fundamental shift in the world over the last 20 years, the cold war ended and democracy is blooming, globalisation is opening up new opportunities socialism is wilting. As a result, economic growth in many economies is significantly higher than that in more developed markets. At the same time, they argue that valuations tend to be much lower and as a result returns of stocks in emerging markets can be much higher. The book not only discusses high profits, it also discusses risks, including lawlessness, nationalisation, bubbles and busts and bad debts. It also goes into some detail talking about active vs passive investing, market timing, buying closed end funds at discounts to net asset backing or selling at a premium and a fair bit of information about value investing.

Unconventional Success: A Fundamental Approach to Personal Investment – David Swensen
David Swensen has been the Chief Investment Officer at Yale University since 1985. He is responsible for managing and investing the University’s endowment assets and investment funds, which total about $22 billion, realizing an average annual return of 17.8 percent on his investments over the last ten years. He’s scathing of Wall Street and the conflicts of interest it suffers from. His book focuses on alternative asset classes, and discusses their good and (mostly) bad side, concluding that most people are better off with a core portfolio of index funds from the major asset classes. He also spends quite a lot of time talking about rebalancing portfolios, and why this step is one of the most important parts of asset allocation and portfolio management.

Market history

Against the Gods: The Remarkable Story of Risk – Peter Bernstein
This is a fascinating historical exploration of the development of the mathematics of economics and risk management, discussing the origins of statistics and probability theory, game theory, regression to the mean and modern economics. It won’t teach you how to value a company or recognise an “oversold” stock, but if you read it from cover to cover you will become a more sophisticated investor with a deeper understanding of the way markets and risk function. The mathematics discussed are sophisticated, but the book doesn’t go into these concepts in any great depth, it is more a narrative on how we arrived at modern theories and thus you can read it without needing a background in economics or maths (instead, this book is supposed to give you that background).

The Birth of Plenty – How the Prosperity of the Modern World Was Created – William Bernstein
William Bernstein, author of The Intelligent Asset Allocator and The Four Pillars of Investing turned his eye to the subject of why it is that some countries are wealthy but others poor, and why for most of the world’s history economic growth has been almost negligible but yet, about 200 years ago, it suddenly picked up pace enormously.  He came up with a 4 factor model explaining that protection of property rights (so people have an incentive to look after and improve their property, build businesses and make money), scientific rationalism (so scientists, engineers and inventors are not persecuted), a good transport and communications network (so goods can be efficiently transported and ideas shared) and good financial markets (so capital can be raised to commercialise inventions, like building an electrical grid from scratch so Thomas Edison’s company could sell its new wonder invention, the light bulb) are all essential.  With a long view of history going back to ancient times, he applies his four factor model to explain the very different paths taken by the western world and other nations, why some countries have everything (including natural resources) yet are poor, whereas others with seemingly nothing can grow rich through commerce.

The Crowd/Extraordinary Popular Delusions – Gustave le Bon and Charles Mackay
A classic double volume, originally written more than a century ago.  This is not an investment how-to book as such, but is one of the classic books about manias and booms. From the South Seas Bubble to the French equivalent, Dutch Tulipomania and more recent busts. It talks about how crowd psychology works on prices and feeds an extraordinary lust for ever higher gains, forcing up prices to levels far higher than could ever be sustained. Original editions appeared in the 19th century, but updates have been made in recent editions.  Part of the reason why this book still sells after all this time is that the authors just got it right.  If the language was a little more modern you’d think it was written just recently with lessons supposedly learnt the hard way from the .com boom and bust.

Global Investing: The Professional’s Guide to the World Capital Markets – R. Ibbotson, G. Brinson
This is a book for data junkies. If you are looking for the definitive book on market returns, covering many countries going back many years, with data on taxes, returns, risk, correlations etc, then this is for you.

Books on stock picking

Sensible Share Investing – Austin Donnelly
How the Stock Market Really Works – Martin Roth
Understanding a Prospectus – Des Luplau
Basic information on the stock market. Easy to read but detailed enough not to offend advanced readers. Read these BEFORE you open a brokerage account.

The Intelligent Investor – a book of practical counsel – Benjamin Graham.
An advanced book, definitely not the sort of thing you would plough into straight away, but rightly called “the best investment book ever written”. It isn’t so much that the material is difficult, on the contrary his approaches are fairly intuitive if you “get” value analysis, but it is dry and pretty foreboding, the sort of book you may have to force yourself to keep reading. Every couple of pages he makes a statement that is so profound and quote worthy that you’ll want to take notes. Warren Buffett learned investment from this man, and in the later editions an appendix and introduction by Buffett make interesting reading.

Security Analysis – Benjamin Graham and David Dodd
Graham’s other book, another milestone in investment writing. This one leans more toward being a textbook than a book. The Intelligent Investor should be read cover to cover, but this one will remind you of your old economics textbooks from school. There is also a new version out called Graham and Dodd’s Security Analysis by Sidney Cottle, Roger Murray and Frank Block. It is supposedly just a new edition but is in fact a radical rewrite. If you feel up to it you can read both, they are similar books, but they aren’t quite the same book. Like the bible, not many people attempt to read Security Analysis from cover to cover, as even professional financial analysts prefer to take this book in small doses. It is a heavy technical book on how to appraise equities and bonds, though if you take the time necessary to get through it, you will be as qualified a securities analyst as you’ll find anywhere. If you liked Securities Analysis, you’ll probably also like The Interpretation of Financial Statements, which is similar.

The Zulu Principle and Beyond the Zulu Principle – Jim Slater
Two excellent and thorough book on fundamental analysis and how small investors can do very well investing in small growth companies. Beyond- is the newer book, and is essentially a rewrite of the first. You will benefit from both books because they don’t completely overlap but the newer one is the better book if you only want to buy one. There are chapters in the first book that aren’t repeated in the second, maybe you should buy Beyond- and look for the other one in the library. Another book by the same author, Investment Made Easy is more of a beginner’s primer, covering a variety of investment topics but not in such fine detail. The Zulu books are only an intermediate challenge and will not be too difficult for anyone that knows what a price earnings ratio is.

One up on Wall Street and Beating the Street – Peter Lynch
Peter Lynch ran the Fidelity Magellan Fund for many years, and though now retired will be remembered as one of the greats. Some very good general stock investment advice on a number of different types of stocks and the strategies that work with them. His approach to investing is surprisingly simple, and basically revolves around the idea that “if you like the product, you’ll probably love the stock, so it is best to buy shares in a company you know is doing well rather than take a flier on some biotech startup”. He himself was a fund manager, but generally doesn’t have very complementary things to say about the analysis skills of most of his colleagues, in fact he urges investors to think like an “amateur”.

How to Pick Stocks Like Warren Buffett – Timothy Vick
The Midas Touch – John Train
Buffett Step-By-Step: an Investor’s Workbook – Richard Simmons
The Warren Buffett Way, The Warren Buffett Portfolio and The Essential Buffett- R. Hagstrom
The Essays of Warren Buffett – Lawrence A. Cunningham
Buffettology – Mary Buffett (his former daughter-in-law)
Buffett – The Making of an American Capitalist – John Lowenstein
How to Think Like Benjamin Graham and Invest Like Warren Buffett – Lawrence A. Cunningham
Of Permanent Value : The Story of Warren Buffett – Andrew Kilpatrick
Wall Street on Sale – Timothy P. Vick
A Wonderful Company at a Fair Price – Brian McNiven
Some very good books about Warren Buffett and his methods. You can’t call yourself an investor until you can write an off-the-cuff two page essay on Warren Buffett and his methods! How to Pick Stocks Like Warren Buffett and The Essential Buffett are probably the best of the bunch.

Common Stocks and Uncommon Profits – Philip A. Fisher
You can save yourself a lot of reading on Warren Buffett simply by going through this volume. The “other writings” alluded to in the title are several short works that are bundled into the one cover with Common Stocks and Uncommon Profits. These other works are “Conservative Investors Sleep Well”, which deals with the subject of how to identify a safe company with powerful competitive advantages, as opposed to a speculative company, and “Developing an Investment Philosophy”, which goes at length into such things as being a contrarian, focusing on businesses instead of stock markets, market timing (and why you shouldn’t do it) and an argument against the Efficient Markets Hypothesis. All of Buffett’s talk of “margin of safety” and “value” comes from Graham, but Fisher is the one that promotes the idea of the super business franchise, the buy and hold forever doctrine for quality companies and all of that stuff about competitive advantages. If you study your Ben Graham and Phil Fisher you’ll have virtually the entire foundation that Buffett drew on, in fact after a good read of Fisher I came to the conclusion that most books on Buffett are simply Fisher ripoffs with a bit of value investing thrown in.

Dean LeBaron’s Treasury of Investment Wisdom: 30 Great Investing Minds – Bean LeBaron
Another book in the “Money Masters” genre, this is an excellent book reviewing a wide range of successful approaches to investment and the investors who use them with a bit of discussion about the pros and cons of each method. This is definitely one of the books you ought to read if you are still trying to find your “niche” as an investor, as it will give you exposure to some of the possibilities that are out there.

What Works on Wall Street – James P. O’Shaughnessy
O’Shaughnessy was the first outsider ever to gain access to the Standard and Poors Compustat database, the ultimate resource for investment researchers containing an overwhelming amount of price and fundamental data for many thousands of securities over many decades. Using computer simulations he backtested a variety of trading and investment strategies and made some interesting discoveries on which strategies work the best. This book contains the results of his findings and though many people have criticised the book as just another exercise in mindless data mining, mutual funds based on his strategies have emerged, and although they underperformed at first, they’ve done very well since inception.

Contrarian Investment Strategies: The Next Generation – David Dreman
A cross between What Works on Wall Street and A Random Walk Down Wall Street. He attacks conventional wisdom just like Malkiel does and gives detailed arguments to show Wall Street analysts in a rather ridiculous light but also runs an equity fund and shows a variety of strategies that have worked in the past. His backtesting, based on Compustat just like O’Shaughnessey comes to similar conclusions but does not reveal anything you didn’t know after reading O’Shaughnessey’s book. He argues just like Malkiel does that a blindfolded monkey, lubricated with sufficient alcoholic beverages could pick stocks as well as any analyst, but takes an interesting approach in that he actually regards this as an exploitable phenomenon to make money! Dreman’s systems, which are basically just value investing techniques work on the idea that analysts are far too bullish on growth stocks and far too pessimistic on “dogs”, therefore you can do very well by buying stocks that analysts are exceedingly bearish about and have sold down to the point that they trade very cheaply. When earnings recover, as they usually do, the stock will “surprise” Wall Street and rally nicely. Dreman’s own investment record is excellent, which indicates that he may be onto something. He advises people to buy very oversold stocks, provided that the company is still in one piece and not likely to die completely, so unlike both Malkiel and O’Shaughnessey he does value qualitative factors like management and business prospects.

John Neff on Investing – John Neff
This guy is considered to be one of the greatest fund managers of all time, right up there with Buffett, Templeton and Lynch. His Windsor fund beat the market in most of the 30 years of his tenure and his final score was more than 3% higher than the market. This book has three sections. The first is autobiographical, talking about Neff’s early life and how he came to be running a fund. The second section, which I more-or-less summarise in the “Great Investors” FAQ (“Neff’s Methods”) deals with Neff’s value approach and “Measured Participation” portfolio construction strategy. The third section is something of a historical account of what it was like to run Windsor.

Global Investing the Templeton Way – Norman Berryessa and Eric Kirzner
This book is based around a series of interviews with Sir John Marks Templeton. The two authors, a financial writer and a finance academic wrote this book obviously with a profound reverence for the efficient markets hypothesis and modern portfolio theory, and as a result many pages are expended extolling the virtues of these techniques. Interestingly though, in their interviews with Templeton they keep putting forward MPT ideas and Templeton rejects them. Repeatedly Templeton says he doesn’t have much use for MPT, ranking it along side technical analysis as something they take a look at from time to time but otherwise have found little use for. This book, which contains plenty of sage advice relating to value investment by Templeton would mainly suit investors wanting to learn more about global investing, as it devotes much space to the peculiarities of having to invest across borders and live with foreign investment restrictions, exotic tax systems and the challenges of digging up good financial information in poorly regulated and informed foreign markets.

Books on speculative trading

How to Make Money in Stocks – William J. O’Neil.
A highly regarded book on growth stock trading, the CANSLIM approach explained. This book will be more suited to medium term traders/investors that like to combine technical analysis with fundamental analysis. He advocates stop-loss techniques such as “always sell a stock if it falls 10%” and has chapter after chapter devoted to charting. His methods are typical of the high-turnover approach used by stock brokers, and he is more concerned with trying to find the next big thing and make 100 times your money than long term steady accumulation of profits. If you like Warren Buffett you’ll probably hate William O’Neil.

Trading For A Living – Dr. Alexander Elder
This is one of the best trading books, Elder is a trained psychiatrist and professional futures trader. The book stresses that the answer to trading success is not in finding a technical buy or sell signal as such, but in recognising your own psychological pitfalls and mastering money management. He gives black box software a thrashing, and compares Gann, Elliott Wave, various other gurus and systems with astrology.

Technical Analysis Explained – Martin Pring
Technical Analysis of the Financial Markets – John J Murphy
Technical Analysis of Stock Trends – Robert Edwards
The Complete Day Trader: trading systems, strategies, timing indicators, and analytical methods – Jake Bernstein
A Complete Guide to the Futures Markets – Jack D. Schwager
Some of the most interesting books about trading with technical analysis.

Futures: Fundamental Analysis – Jack D. Schwager
A really dry book on fundamental analysis of the futures market. Kind of like Securities Analysis except this one talks about commodities.

Market Wizards and The New Market Wizards – Jack D. Schwage
These books are from the transcripts of a series of interviews with some of the world’s top traders. These guys aren’t amateurs doing a bit of trading from home, but mostly guys that run huge trading accounts for institutional clients. They don’t tell you a whole lot about the actual techniques used because of commercial secrecy, but if nothing else they will bang into you the importance of money management, discipline, intelligence and an enormous amount of hard work. Shattering the “easy money” illusion that people get about trading, these books will either put you off trading for good or prompt you to assess your own professionalism in trading.

How I Trade for a Living – Gary Smith
Smith is one of those very rare trading book writers who is able to back up what he says with genuine, authenticated trading statements signed by his broker that show he is in fact a highly profitable trader. He talks about how he trades for a living, using divergence, momentum and contrarian sentiment studies. He seems to be on some kind of crusade against trading system vendors, and he openly challenges vendors who announce their systems over the Internet and through trading magazines to actually put forth some trading statements to show profitability. He is sceptical of firm mathematical indicators and he advises against leveraged trading (like futures and options) and short selling. He mainly trades stock funds, and almost always takes long positions. If you do want to start trading you could certainly do a lot worse than reading this book first, he gives a quite good insight into the sort of lifestyle and the amount of work you have to do in order to become a professional trader. His method is geared more for the continuous, reliable, unspectacular profits style of trading, as opposed to the crash test dummy method (going for broke trying to triple your money every two weeks).

Reminiscences of a Stock Operator – Edwin Lefèvre
This book is the thinly disguised biography of Jesse Livermore, one of the greatest traders of all time. Although he eventually shot himself dead following his umpteenth bankruptcy, his book is still regarded as a trader’s classic. This book is probably the “The Intelligent Investor” of trading books.

Trade Your Way to Financial Freedom – Van Tharp
The Mathematics of Money Management: risk analysis techniques for traders – Ralph Vince
Portfolio Management Formulas: mathematical trading methods for the futures, options and stock markets – Ralph Vince
The Irwin Guide To Trading Systems – Bruce Babcock, Jr.
Money Management Strategies for Futures Traders – Nauzer J. Balsara
The Definitive Guide to Futures Trading – Larry Williams
For the serious trader wanting a better understanding of the sort of money management techniques mentioned in the trading FAQ, these are very good reference books. They may on occasion mention technical analysis but they are significantly more advanced than that, going well beyond just being another book on drawing trend lines and watching support and resistance levels. These are hard going, advanced texts that employ a lot of mathematics, but far from being ivory tower academic stuff they are written by professional futures traders (except Tharp, who as far as I know is a psychologist or something). You can scratch around for years and never see the need to do much more than standard charting, but if you want to take your trading to the next level and get really serious these books are well worth looking up. If you trade stocks without leverage you might be able to get away with ignoring this field, but if you intend to use margin, to trade futures or options then you had really better get acquainted with this material as quickly as possible.

General

When Genius Failed: The Rise and Fall of Long-Term Capital Management – Roger Lowenstein
The story of the rise and fall of one of the most famous hedge funds in history.

Asian Eclipse – Michael Backman
Considering buying Asian stocks? This book deals with corruption and financial scandals in Asia. If you have heard all this stuff about the need for banking reform in Asia, yet don’t know what it all means, read this and be shocked at the manipulation, fraud, cronyism and contempt for minority shareholders that characterise most Asian stock markets. Find out what happens when incompetent real estate speculators are allowed to buy their own banks and judges earn such low salaries that only by accepting money from the accused can they pay their bills.

Suggested books for a self-study course in investments

Level one, getting off to the best possible start:

1. The Millionaire Next Door by Thomas Stanley and William Danko
2. Why Smart People Make Big Money Mistakes – and how to correct them by Gary Belsky and Thomas Gilovich
3. Common Sense on Mutual Funds by Jack Bogle
4. The Intelligent Asset Allocator by William Bernstein

Level two, learning the truth about the way markets work:

1. A Random Walk Down Wall Street by Burton Malkiel
2. What Works on Wall Street by James O’Shaughnessey
3. One Up on Wall Street and Beating the Street by Peter Lynch
4. Contrarian Investment Strategies: The Next Generation by David Dreman

Level three, the stock picker:

1. How to Pick Stocks Like Warren Buffett by Timothy Vick
2. The Warren Buffett Way and The Essential Warren Buffett by Robert Hagstrom
3. John Neff on Investment by John Neff
4. The Zulu Principle and Beyond the Zulu Principle by Jim Slater
5. - and anything else you can find on Warren Buffett

Level four, the hardcore guru type:

1. The Intelligent Investor by Benjamin Graham
2. Common Stock and Uncommon Profits by Phillip Fisher
3. Security Analysis by Benjamin Graham and David Dodd and the newer version Graham and Dodd’s Security Analysis by Sidney Cottle, Roger Murray and Frank Block, I count these as two different books.
4. Against the Gods: The Remarkable Story of Risk by Peter Bernstein

Something similar for a study course in trading could go along the lines of:

1. Anything by Daryl Guppy
2. Trading for a Living by Alexander Elder
3. How I Trade For a Living by Gary Smith
4. Market Wizards and the sequels by Jack Schwager
5. Trade Your Way To Financial Freedom by Dr Van Tharp
6. Reminiscences of a Stock Operator by Edwin Lefèvre

Have a good read.

BOOKS
• Stocks, Bonds, Options, Futures (Stuart R. Veale, New York Institute Of Finance)
• Inside the Yield Book (Sidney Homer and Martin Leibowitz)
• The New Market Wizards: Conversations with America’s Top Traders (Jack D. Schwager)
• Bond Markets : Analysis and Strategies (5th Edition) (Frank J. Fabozzi)
• Reminiscences of a Stock Operator (Edwin Lefevre, Foreword by Jack D. Schwager)
• Random Walk Down Wall Street (Burton G. Malkie )
• Security Analysis: The Classic 1940 Edition (Benjamin Graham, David Dodd)
• The Investor Anthology: Original Ideas from the Industry’s Greatest Minds (Charles D. Ellis)
• Memos from the Chairman (Greenberg, Alan C.)
• Fooled by Randomness (Nassim Taleb)
• Options, Futures & Other Derivatives (John Hull)
• Fixed Income Securities: Tools for Today’s Markets (Bruce Tuckman)

PERIODICALS
• The Wall Street Journal
• Barron’s
• The New York Times
• Institutional Investor Magazine

WEBSITES
• www.thestreet.com
• www.wsj.com
• www.bloomberg.com
• www.cboe.org – has a “Learning Center” and options tutorial.
• www.nyse.com – has several informative pages under the “Education” tab.
• www.nasdaq.com – offers a trading simulation.

SWINE FLU: PREVIOUS PANDEMICS AND THEIR ECONOMIC IMPLICATIONS

The swine flu has infected more than 1600 people in Mexico, of whom more than 100 have died. • It’s too early to consider it a pandemic but the market impact could be large, driven by fear more than facts.

1) THE VIRUS AND THE MEDICAL SITUATION

The virus responsible for this outbreak of swine flu belongs to the type A, which comprises four main strains: H1N1, H1N2, H3N2 e H3N1. Most of the cases detected so far have been affected by the H1N1 type. H1N1 is the same strain that causes seasonal flu outbreaks in humans but the newly detected version contains genetic material from pigs and birds influenza. Some experts believe that we are not in the presence of a completely new virus, but rather a mutation of an H1N1 virus first isolated in 1933. Since then, the virus may have changed about 60-70% of its genetic code, but it’s unlikely to have mutated completely, which makes it potentially less lethal than otherwise.

According to the Mexican Health Ministry, so far 1,614 have been infected and 103 have died. Of theses, only 20 were so far confirmed to have been caused by the new virus. Most of them were is the 25-45 age range, which generally tends to identify potential pandemic threats as opposed to normal flu episodes. Those who are infected outside Mexico have experienced only mild symptoms, and no one has died yet. If the virus mutates further and become fully transmissible human-to-human, the threat can be greater, especially if characterized by a relatively low case/fatality rate.

In fact, a virus that causes less debilitating disease and fewer fatalities is likely to infect more people. For instance, the Ebola virus that killed hundreds of people few years ago in Africa (despite being highly infectious) proved to be characterized by a not very ’successful” strategy of diffusion since it used to kill its victims too fast, preventing itself from spreading more (which is the ultimate goal of a virus). A virus able to kill 5% percent, and not 50% of those infected (like the Avian flu) would be therefore more dangerous and would dramatically resemble the 1918 Spanish flu pandemic, which killed about 50 million people. Since at that time the world population was 1.8 billion people, today a pandemic with the same case/fatality rate would cause about 150 million deaths.

ANTI-PANDEMIC PLAN: There is an international 6-level scale for the pandemic threat. Levels 1 and 2 correspond to an inter-pandemic phase, which entails low or limited risk for humans. We are currently in phase 3, which corresponds to ‘limited cases of human-to-human transmission” and triggers the pandemic alert. Level 4 is associated with an ‘evident’ increase in the human-to-human transmission, with the ascertained presence of a mutated virus able to infect human beings. Phase 5 kicks in when there is a ’significant’ increase of human-to-human transmission and 6 corresponds to a declared pandemic, with ’sustained’ pace of transmission of the virus.

VACCINATION: Since 1997, experts are working on a pre-pandemic vaccination based on the avian virus H5N1. Most likely, the millions of vaccine doses prepared against the H5N1 strain are useless, but the experience accumulated so far should allow our medical structures to prepare an effective vaccine in less than six months. Other remedies are the anti-viral medicines developed in recent years to combat threats coming from viruses such as HIV.

COMPARISON WITH PREVIOUS PANDEMICS: Pandemics appear regularly, and 40yrs have passed since the last one. The last century witnessed the outbreak of three main pandemics: (1) the Spanish flu in 1918-1919, which infected up to 40% of the world’s population and killed more than 50m people, with young adults being particularly badly affected; (2) the Asian flu in 1957 was caused by a human form of the virus H2N2, combining with a mutated strain found in ducks, and killed two million people, with the elderly being particularly vulnerable; (3) the 1968 outbreak first detected in Hong Kong, caused by a strain known as H3N2, killed up to one million people globally, with the over-65s being the most affected. During this century, the pandemic risk has been associated with two episodes: the SARS in 2003 and the avian flu, which has hit the scenes in three different waves since 2003. Let’s examine some of them for comparison.

THE SPANISH FLU: The so called Spanish flu, the most intense pandemic that have occurred to date, hit the world between 1918 and 1919 by inflecting one billion people, about 40% the world’s population at that time, and killed between 40 and 50 million (for comparison, the just finished WWI had an estimated death toll of 10 million). The given name “Spanish” comes from the fact that Spain, not being involved in the war, had a free press that could report the developments of the pandemic in their country, and for this reason when the Russian newspaper Pravda reported on the situation in Moscow, the headline was “Ispanka (The Spanish Lady) is in town”. The first town the ‘Lady’ visited was Camp Funston, Kansas – USA on 8th March 1918, and then the pandemic hit the world in 3 waves: summer 1918, autumn 1918, early 1919. Worldwide, since the second wave took only 2 months to circle the globe, it is estimated that 30% of the world’s population fell ill with influenza.

The most remarkable characteristics of this pandemic was its age distribution mortality: while general influenza claims the older and younger segments of the population, 45% of the victims of the Spanish Lady were people aged 15-35 (more than the usual 9%), and fully 50% of the mortality occurred between ages 15 and 44. What made this figure impressive is not the 2.5% of the so-called case fatality rate (deaths/infected people), but the morbidity of the disease (infected people/population) which varied between 25% and 50% across the regions, and the fact that a healthy young individual could die within 48 hours after contracting the disease. Apart from the age distribution, the Spanish flu was remarkably ‘democratic’ in its victims. First of all, there was not a noticeable sex differentiation of the victims (52% women – 48% men). Secondly, little association was found between influenza mortality and general health standards, wealth and overcrowding conditions. Crowding was not an issue because the virus was so infectious that the likelihood of the exposure to the virus of all persons living under urban conditions was just negligibly increased by an increase in the number of people living in the same dwelling. Thirdly, all in all, the incidence upon town and country was nearly equal, with the towns not suffering more than the countryside, but suffering first. The diffusion was in fact helped by the movements of troops at that time traveling through many ports simultaneously. However some studies suggest that urban areas, coastal areas and areas well served by mass communication and transport link suffered higher mortality rate than rural inland and isolated areas.

SARS: This virus which was declared a pandemic in March 2003 and the most affected countries were Singapore, Hong Kong, China and Malaysia. Other countries involved were Canada, South Africa, Sweden, France and the United States. SARS caused some 8,000 cases and close to 800 died from the virus.

THE AVIAN FLU: As we mentioned, the Avian Flu (or Bird flu) hit the world in three waves. The first wave of H5N1 (the so-called Yunnan) outbreaks occurred in late 2003 and 2004 in many Asian countries. The second wave (called Guiyang) started in China’s Qinghai Lake in May 2005 and the strain characterizing that wave is the one that has been found in parts of Europe, Africa and the Middle East. A third wave started in Oct 05, led by a strain called the “Fujian-like virus” because it was first isolated in China’s southern Fujian province in Mar 05. The strain proved to be resistant to the vaccines that China began using on a large scale from Sep 05 to protect poultry from H5N1.

The new strain had infected poultry in Hong Kong, Laos, Malaysia and Thailand, and sickened people in China and Thailand. Since its first appearance, the three strains of H5N1 virus are reported to have killed more than 209 million poultry worldwide, the UN’s Food and Agriculture Organization said in a report released in June 2007. However, despite being strongly infectious for birds, (luckily) the virus proved to be still poorly infectious in humans. According to a WHO report released on Oct ‘07, the H5N1 virus is known to have infected 256 people in 10 countries in the past three years, killing 152 of them. More than five of every 10 reported cases were fatal, implying a case fatality rate (deaths/infected people) of 50%, much higher that the 2.5% of the Spanish flu.

2) ECONOMIC IMPACT

In terms of economic impact, we have to consider the consequences of ‘a fear of a pandemic’, rather than the pandemic itself. In this case, probably the most appropriate reference point, given the early stage of this outbreak is the SARS episode. From an economic perspective, the most relevant impact of SARS was on tourism and consumption patterns, while Singapore and Hong Kong slipped into recession in 2003. According to the Asian Development Bank, the cost of SARS in terms of lost GDP in nominal terms for East and Southeast Asia was about USD 18bn or 0.6% of their 2003 GDP. According to a Reuters’ report (Swine flu: Is SARS a guide for the economic impact? By Vidya Ranganathan, Reuters, 27 April 09), SARS-affected economies experienced drops in retail sales in the order of 5-10% in early 2003. Hong Kong’s economy contracted by 2.6% and Singapore’s by 2% in the first half of 2003. Market reaction was muted possibly due to the quick policy response. Hong Kong’s government announced measures of about 1% of GDP, and Singapore implemented a rescue package and devalued its currency. Still, according to the cited Reuters’ report, Malaysia’s package was close to 2% GDP. Reuters says that ‘Hong Kong’s benchmark index lost 18% of its value between Dec 02 and Apr 03, bottoming at a 4-year low’. Once again, the greatest risk – in this preliminary stage of the threat – is now run by airline companies and travel-related industries. Additionally, as long as uncertainty persists, risk aversion may also rise, with implications for equities and (conversely) bonds.

If the current situation develops into a proper pandemic, the cost of it could be enormous. There were no official statistics able to estimate the economic impact of the Spanish flu worldwide, especially because the pandemic overlapped with WWI. However, the influenza severely disrupted commercial activities and social life, caused staff problems for businesses, schools, hospitals, chemist and post offices, bus and train services, triggered the closure of cinemas, churches, music halls, theatres, Sunday schools. Particular concern was voiced over the impact of absenteeism on war related industries such as mining and munitions, but all service employers and institutions were affected. A remarkable effect was caused to insurance companies, which had to pay very high premia related to the quoted disruptions. It is worth noticing that quarantine-like remedies were generally not applied, because when adopted, proved to be unsuccessful. A study recently published by the World Bank shows that today a Spanish flu-like pandemic may cost as much as USD 2tn. However, there are studies that prove that global economic losses could run to USD 4.4tn in the worst-case scenario, the equivalent of wiping out Japan’s annual GDP.

What might happen to a country such as the UK if a pandemic reaches its shores? A preliminary contingency plan organized for planning purposes by the UK Govt for the first wave of the Avian flu in 2005 assumed an infection rate of 25% and a case/fatality rate of 0.37%, around 7 times lower than the Spanish flu and 140 times lower than the observed figure of 51% for the Avian flu. Even under these over-optimistic assumptions, the 60 million UK population would experience 14.5 million people infected, 53,700 deaths, 79,600 hospitalisations, 2.9 million outpatient visits in a single 12-week wave. In terms of economic costs, unlike the Spanish flu, also children and adults are expected to be at the greatest risk, which will have a disproportionate knock-on effect on services. Moreover, according to a report from Nottingham University based on the “middle” government contingency estimate of 14.5 million people becoming infected, GDP would decline by 8%, while 3.3% of total employment (941,000 jobs) would be lost because of companies’ bankruptcies.

Some Useful Links

World Bank:

http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:20978927~menuPK:34472~pagePK:34370~piPK:34424~theSitePK:4607,00.html

IMF:

http://www.imf.org/external/pubs/ft/afp/2006/eng/022806.pdf

Asian Development Bank:

http://www.adb.org/Documents/EDRC/Policy_Briefs/PB042.pdf

FAO:

http://www.fao.org/ag/againfo/subjects/en/health/diseases-cards/cd/documents/Eco

nomic-and-social-impacts-of-avian-influenza-Geneva.pdf

Lowy Institute:

http://www.lowyinstitute.org/Publication.asp?pid=345