If an ‘expert’ is warning you that the market is about to crash, check their math
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Beyond popping up as talking heads on cable news, Wall Street analysts and economists serve an important purpose helping to guide the financial decisions of a wide array of investors — from average Americans worried about retirement to large institutions deciding where to put billions of dollars. At its best, Wall Street’s coterie of experts is supposed to translate the shifting sands of the economy into a cogent, useful investment view.
I’ve been a sell-side economist for over 15 years, helping clients and the public understand the shape of the economy and what it means for the markets. I’ve always tried to be clear and allow the data to shape my thoughts, rather than fit it into my preconceived notions. But over the past few years, and especially since the onset of the coronavirus pandemic, I’ve noticed that more and more analysts are relying on low-quality, prepackaged narratives to drum up fear about the direction of the economy and stock market. Admittedly, stocks haven’t done well over the last year, but instead of providing clients and the general public with clear-eyed views, a new ecosystem of hackneyed, alarmist analysts is relying on low-quality data to push people away from steady investments into an alternative ecosystem of products of dubious quality.
Put these 20 books on your Christmas wishlist if you want to understand investing and conquer bear markets, according to top Wall Street experts
The S&P 500 has slumped over 19% this year as investors fret about a potential recession.
We asked experts for the essential reading that’s helped them to better understand bear markets.
Here are 20 books to help investors navigate a stock market downturn.
2022 has been a tough year to make money in the stock market.
Equities suffered a broad and deep sell-off this year, with investors panicking about a potential recession, rising interest rates, and Russia’s invasion of Ukraine.
Growth stocks have led the downturn, with the Nasdaq down 32%. Some retail and even professional investors are experiencing their first prolonged bear market after two years of record-breaking outperformance from major indices and the extended bull run in the decade after the 2008 financial crisis.
Insider asked a number of veteran Wall Street strategists which books have helped them better understand bear markets, recessions, and stock market crashes.
They shared 20 top picks, ranging from Michael Lewis’s “The Big Short,” which tells an important story of the 2008 financial crisis, to “Reminiscences of a Stock Operator,” a 1923 novel written by the journalist Edwin Lefèvre.
1. “The Big Short: Inside the Doomsday Machine” by Michael Lewis
Michael Lewis’ “The Big Short” chronicles three sets of investors who bet against the US housing market ahead of the 2008 financial crisis. It was later adapted into an Oscar-winning film that starred Christian Bale as Michael Burry.
The book details how Burry, hedge fund manager Steve Eisman, and Cornwall Capital’s Jamie Mai, Charlie Ledley, and Ben Hockett used unconventional methodologies to identify the US’ housing bubble — and then shorted bank stocks and bought credit default swaps against subprime mortgages to profit from the stock-market crash.
Recommended by: Amanda Rebello, head of passive sales at DWS Group
2. “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” by Jeremy Siegel
In “Stocks for the Long Run,” famed markets guru Jeremy Siegel shares his ultimate stock-picking strategies, with a particular focus on the impact of the 2008 financial crisis. The Wharton School professor recommends that investors should avoid bonds due to their weak long-term performance, instead preferring index funds for their passive income.
“It’s a must-read primer for investing in the stock market,” Bernstein Private Wealth Management’s co-head of investing strategies Alexander Chaloff told Insider. “You don’t buy stocks for a month, or a quarter, or even a year. You buy them for the long run. And this book captures that concept.”
Recommended by: Nancy Tengler, chief executive of Laffer Tengler Investments; Alexander Chaloff, co-head of investment strategies at Bernstein Private Wealth Management
3. “When Genius Failed: The Rise and Fall of Long-Term Capital Management” by Roger Lowenstein
Roger Lowenstein’s “When Genius Failed” chronicles the rise and fall of hedge fund Long-Term Capital Management. In four years, the $100 billion fund suffered enormous losses, not only sending ripples through Wall Street, but the world’s financial system at-large.
“It’s good to study other people’s mistakes,” Court Hoover, head of research at Pervalle Global, said. “There’s an old quote that says ‘Every trade either makes you richer or wiser.’ When you get something right, there’s a tendency not to think about it. You made money. If you get something wrong, you really study it, but that’s a really expensive way to learn a lesson.”
Recommended by: Court Hoover, head of research at Pervalle Global
4. “Reminiscences of a Stock Operator” by Edwin Lefèvre
Edwin Lefèvre’s “Reminiscences of a Stock Operator” is a first-person chronicle about a master stock market trader who made and then lost all of his fortune. Written in 1923, the book details a fictionalized account of prominent Wall Street speculator and day trader, Jesse Livermore.
Recommended by: Michael Wang, founder and chief executive of Prometheus Alternative Investments
5. “Market Wizards: Interviews with Top Traders” by Jack D. Schwager
Jack D. Schwager’s “Market Wizards” features interviews with 17 of the most successful Wall Street vets including Paul Tudor Jones, Bruce Kovner, Richard Dennis, and Michael Steinhardt. Published in 1989, the book recalls how each person had unprecedented success, turning small sums of capital into large fortunes.
Recommended by: Michael Wang
6. “Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed
Liaquat Ahamed’s “Lords of Finance” retells the events that led to the 1929 Wall Street crash, focussing on central banks in the US, the UK, France, and Germany.
“‘Lords of Finance’ is more of a dire-warning book, but it’s helpful to understand the dynamics that can create market crashes that are driven by central bankers,” Bernstein’s Chaloff told Insider. “This is my recommendation to people who ask ‘how bad can it get’ — a world war and a great depression, that’s how bad.”
Recommended by: Alexander Chaloff
7. “The Asian Financial Crisis 1995-98: Birth of the Age of Debt” by Russell Napier
In “The Asian Financial Crisis,” author Russell Napier recounts his time writing for institutional investors amid an economic downturn, when the US dollar value of certain Asian stock markets sunk 90%. The catastrophe led to the loss of billions of dollars and hundreds of lives in rioting .
“Understanding financial crises is really important because they present such opportunity. In order for there to be a financial crisis, it has to be unforeseen by the majority of participants,” Hoover said. “Otherwise, it wouldn’t occur in the first place. And those sorts of unforeseen events offer the most asymmetry in terms of prospective returns.”
Recommended by: Court Hoover, head of research at Pervalle Global
8. “The Black Swan: The Impact of the Highly Improbable” by Nassim Taleb
In “The Black Swan,” Nassim Taleb details times throughout history when highly improbable events have occurred like the enormous success of Google or catastrophes like 9/11. The book explores the implications of these as well and what readers can take away from them. Black Swan events have three major characteristics, per Taleb, including their massive impact, unpredictability, and that later people try to explain the phenomena to make it seemingly less random and bizarre.
Recommended by: Amanda Rebello
9. “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” by Burton Malkiel
Written by Princeton economist Burton Malkiel, “A Random Walk Down Wall Street” popularized the “random walk hypothesis ” – a financial theory that argues traditional stock markets cannot be predicted, and, well, are random. Malkiel critiques popular investing strategies like technical analysis and fundamental analysis, adding that the traders cannot consistently outperform market averages.
Recommended by: Kevin Philip, partner at Bel Air Investment Advisors
10. “Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms” by Russell Napier
Many investors are now aiming to identify the bottom of the bear market so that they can start snapping up undervalued stocks that are well-positioned for long-term growth.
In “Anatomy of the Bear,” Russell Napier investigates what causes bear markets to end. The investor and economic historian read over 70,000 old newspaper articles to try to pinpoint when sentiment on Wall Street started to shift the stock market bottoms of 1921, 1932, 1949, and 1982.
Recommended by: Patrick Diedrickson, equity analyst at Ameriprise Financial
11. “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger
Charles P. Kindleberger outlines the speculative panic associated with major financial crises, along with the mismanagement of money and credit, in his 1978 book “Manias, Panics, and Crashes.” From the so-called “South Sea Bubble” of 1720 to countless stock market bubbles since, the book engages readers by detailing financial explosions throughout the centuries.
Recommended by: Marc Chandler, chief market strategist at Bannockburn Global Forex
12. “Debt: The First 5,000 Years” by David Graeber
Before money, anthropologist David Graeber argues, there was debt and credit. “Debt” by anthropologist Graeber explores how it seeps into every major social institution like marriage, religion, government, and war.
Recommended by: Marc Chandler
13. “Stabilizing an Unstable Economy” by Hyman Minsky
In “Stabilizing an Unstable Economy,” Hyman P. Minsky argues that our financial systems are inherently dubious and prone to tottering. Published in 1986, Minsky makes sense of why the United States undergoes phases of rising unemployment, debilitating inflation, and even credit crises.
Recommended by: Marc Chandler
14. “Triumph of the Optimists: 101 Years of Global Investment Returns” by Elroy Dimson, Mike Staunton, and Paul Marsh
In “Triumph of the Optimists,” the authors compare and contrast the performance of the US stock market over time to markets in 16 other developed nations.
“The big reveal is that equities have upward bias regardless of jurisdiction,” said David Waddell, chief investment strategist and CEO at Waddell and Associates. “A bet against global equities is quite simply a bet against human progress. The best way to survive bear markets is to zoom out!!!”
Recommended by: David Waddell, chief investment strategist and CEO at Waddell and Associates
15. “A Short History of Financial Euphoria” by John Kenneth Galbraith
In “A Short History of Financial Euphoria,” economist John Kenneth Galbraith proves the age-old adage of history repeating itself by exploring major market collapses over the last 300 years in the US economy.
“When you talk about volatility, this classic never goes out of style,” said Dan Kimerling, founder of venture capital firm Deciens Capital. “There are cycles of irrational exuberance throughout history in all kinds of assets and those bubbles are not permanent.”
Recommended by: Dan Kimerling, founder of Deciens Capital
16. “Too Big To Fail” by Andrew Ross Sorkin
In “Too Big to Fail,” esteemed financial journalist Andrew Ross Sorkin recounts a gripping retelling of the 2008 economic crash, presenting the crisis from two points of view: both the regulators and the most powerful leaders of the biggest investment firms. One of the book’s highlights is that it reads just like a novel without slipping into over-technical territory for readers who may come from an extensive finance background, said Robert Johnson, CEO of Economic Index Associates.
Recommended by: Robert Johnson, Creighton University finance professor and CEO of Economic Index Associates
17. “Irrational Exuberance” by Robert J. Shiller
Originally published in 2000, Nobel laureate Robert Shiller wrote “Irrational Exuberance” to explain the stock market’s cyclical peaks and troughs and make the case that the US stock market was significantly overvalued – one month before the historic burst of the dot-com bubble. Since then, two editions have been published: one in 2005, prophetically warning readers of an impending housing bubble crash, and one in 2015, cautioning against holding long-term bonds.
Recommended by: Robert Johnson
18. “Boom and Bust: A Global History of Financial Bubbles” by John D. Turner and William Quinn
In “Boom and Bust,” authors Quinn and Turner dive into the history of financial busts to explain the actions investors and speculators took leading up to these crashes.
“The authors use creating fire as an analogy to bubbles. Just as fire needs fuel, heat, and oxygen, the necessary elements for a bubble are; excess money, easy liquidity, and speculation. Oftentimes, new technology acts as the spark to set things in motion,” said Garrett Aird, Northwestern Mutual Wealth Management Company’s vice president of investment management & research.
By providing this historical context, the book highlights the three key elements of a financial bubble to help future investors predict an upcoming economic decline.
Recommended by: Garrett Aird, vice president of investment management & research at Northwestern Mutual Wealth Management Company
19. “Extraordinary Popular Delusions and the Madness of Crowds” by Charles MacKay
Charles MacKay’s book, written over 150 years ago, is a classic early case study of crowd psychology. In “Extraordinary Popular Delusions and the Madness of Crowds,” MacKay dissects historical market crashes like the Dutch tulip mania and the South Sea Company bubble in the early 1700’s to prove that market speculation has always been around.
“The underlying causes may be different, but human nature hasn’t changed,” Aird explained to Insider. “The book is helpful in understanding herd mentality and avoiding groupthink.”
Recommended by: Garrett Aird
20. “The Dow Jones-Irwin Guide to Modern Portfolio Theory” by Robert Hagin
Robert Hagin’s “The Dow Jones-Irwin Guide to Modern Portfolio Theory” is an encyclopedia of risk management, portfolio strategies, and asset valuation. Hagin, a former executive director at Morgan Stanley, breaks down investing and financial concepts, recalling lessons he learned in his 40-year career on Wall Street.
“In my opinion, it’s a master class of individual investment analysis and portfolio allocation, which was really pivotal in my growth as an investor and capital allocator,” Franzen told Insider in a statement.
Recommended by: Caleb Franzen, senior market analyst at Cubic Analytics
21/21 SLIDES
Lies, damned lies, and statistics
Data is at the center of any economist’s work; it provides crucial insights on the state of the economy and can be useful in helping to gauge what will happen next in the markets. But there are a few types of data points that investors should look out for when trying to identify shoddy analysis. In many cases these data points seem sophisticated or a perfect catchall, but in reality they paint a deceptive or overly simplistic picture of the economy.
One type of data point to be wary of involves vehicles for confirmation, which use old data to confirm what an analyst already believes. Take the popular Leading Economic Index. The idea behind the LEI is simple: It bundles up a series of disparate economic data points and tracks whether they are getting better or worse — promising to signal coming turns in the business cycle. But all the information in the LEI is already stale. The individual data components are released days or weeks before the composite index is published. For example, the most recent LEI was a summation of data from December, which an analyst could point to as a sign of an impending recession. But if you look at January’s data, we’ve already seen positive signs, so there is good reason to expect the LEI to bounce this month — confirming what we already know.
The index is also revamped after every recession — given new weights and components so the new index perfectly signals the recession that just happened. But if you go back and look at the LEI prior to each recession, it typically doesn’t signal a clear peak. Instead of being a useful measure to gauge the future health of the economy, the LEI is simply an index built around the latest recession that provides scary signals based on old data.
Other hackneyed data points are deliberately ambiguous or sweeping to the point of abstraction. Take another popular freak-out indicator: monetary aggregates, a measure of how much money, such as cash and bank deposits, is floating around in the economy. The aggregate is painted as a perfect summation of the economy — what better way to track its health than by measuring all the money changing hands among the government, businesses, and households? But the correlation between money growth and the health of the economy has broken down over the years, and scaremongers have been able to fit any change in the supply of dollars into whatever narrative suits them. Weak money growth is a problem, they argue, because having fewer dollars moving around the economy could signal that the system is seizing up. On the other hand, a rapid growth of the money supply has been used by doomsayers as a sign that the only thing supporting the economy is the Federal Reserve handing out new dollars. When a measure is so broad that it becomes a choose-your-own adventure, it is hardly useful for quality analysis.
The third type of much-loved, often-dubious tool is the overly fickle indicator. These data points are prone to large swings that produce a lot of false signals but make it easy for analysts to spin up a warning of impending catastrophe.
Take the ISM Manufacturing PMI, which has a near-mythical reputation on Wall Street. The ISM is convenient to use: It is released early in the monthly data cycle, broadly tracks the swings of the economy, and is easy to understand. The ISM is a survey of 300 purchasing managers at a wide variety of manufacturing companies who are asked whether conditions are better or worse relative to the prior month. Are customers ordering more or less? Is it easier or harder to find workers? Are prices for parts higher or lower? If the index falls below 50, then things are getting worse — above 50, and things are improving.
Let’s assume the ISM signals a turning point in the business cycle when it runs below 50 for three consecutive months. Even with that broad reading, the ISM tends to send more false signals than correct ones. For example, in the 1990s the ISM had several dips below 50 that lasted longer than three months and no recession popped up. In fact, the ISM is three times as likely to be late in signaling a trough as it is early in signaling a peak. A recession prediction indicator this is not. Plus, the ISM is telling us only about the momentum of the economy. If GDP growth is 4% in January and 4% in February, the ISM would be 50 because things are staying exactly the same. Is that bad? No, 4% growth is pretty good. But the ISM would be interpreted by some to mean the economy is on the verge of a major slowdown.
Doomsday preppers
Ultimately statistics are only as good as the analysts and economists using them. Sifting through the hundreds of indexes, surveys, and economic measures requires a discerning eye and willingness to be humble about the unknowns.
One of the most basic tenets of statistics is that correlation is not causation. Most things in the macroeconomy are correlated. When people are getting more jobs, it usually means businesses are selling more products. Just because two lines on a chart are moving in a similar direction doesn’t mean they explain everything happening in the wide world.
I cannot tell you the number of analysts I have come across in this industry who believe they have stumbled on something groundbreaking by publishing a chart of industrial production — a measure of how active factories are — against the ISM — which is, again, a measure of how factory executives feel about the economy. In many cases, the folks who break everything down into one or two “simple” explanations tend to have a conclusion in mind first.
A lot of this low-quality research is also tilted toward a negative bias — the economy is getting worse, the markets are about to tank, a recession is around the corner. Research shows that humans are hardwired to think negativity sounds smarter, and financial media is also tilted toward a focus on the downside. This makes a perverse incentive for lazy analysts to consistently beat the doom-and-gloom drum. It also makes it hard to discount them. In a bull market, when rising stocks lift all boats, these analysts are still making money while arguing the downside just “hasn’t happened yet.” And when the market shifts and stocks sink, they can crow “I told you so!” Heads I win; tails you lose.
In the end, the people most hurt by this are ordinary investors. People just trying to save for retirement or sock some of their paycheck away are discouraged from making solid, stable investments and pushed into more defensive positions — or in the most extreme cases away from investing altogether. The people who fall prey to these low-quality analysts end up leaving gains on the table and end up with a smaller stable of savings.
In my view, what makes someone worth listening to is whether their thought process makes sense. It is not enough to point to this indicator or that one. Rather, is the analyst laying out a sequence of events that follows logically? For example, if retail sales cratered in a month but gas prices fell, employment rose, and confidence picked up, would it make sense that sales sank? No, it’s more likely to be an anomaly since all of the indicators point to Americans having more cash in their pocket. A good analyst would note those other trends and attempt to explain the discrepancy; a cheap analyst would declare that a recession is nigh. In this business, it is important to take a holistic approach.
There is no single summary statistic that gets you the right “call” — if it sounds too easy to be true, that’s because it probably is. No single data point is a substitute for good judgment, which is the best leading indicator of all.
Neil Dutta is Head of Economics at Renaissance Macro Research.
