This is a book about trading (and capital allocation more generally), not personal finance. Still, I think the rigorous thinking in the book is a good way of looking at life decisions, as well as trading decisions, and I hope some of you (cough,
http://forum.mrmoneymustache.com/profile/?u=9308)
I've waited for a while before writing this review of Alex Gurevich's
The Next Perfect Trade: A Magic Sword of Necessity. It is one of those books where I considered the ideas within important enough for them to stew around in my head a bit. Most of them were completely new to me after all (and perhaps actually somewhat original in the world - although I cannot judge this due to my ignorance), which I haven't thought to be the case recently after finishing many of the investing classics.
I'm ignorant because I don't know much about leveraged macro trading, but I was interested enough to pick up and read
The Next Perfect Trade. One of the personal catalysts was reading a thread on a certain message board with lots of value investors from Canada and Europe. Many of them talked about how good their returns were year to date in their home currency. Actually, it turns out that their stockpicking was rather minor compared to the effects of the strengthening dollar on their home currency returns. At the same time, I also listened to a podcast with Leon Cooperman where he talked about how he would always first define the macro environment in the world, then think about ways to express those trades in actual securities.
This was not how I used to think about the world.
It occurred to me as if knowingly or unknowingly, "macro" things (which I don't know too much about, but have been trying to learn more about), are the actual drivers of things that appear to be independent decisions. (And actually,
The Next Perfect Trade has a vocabulary to describe this relationship in a more detailed sense - it is the formal logic language of "dominance" and "concurrent necessity," hence the odd title of the book, which refers to the advantage given to a trader by thinking through trades in that language of causality and dominance among them.)
So I decided that I must learn more, and
The Next Perfect Trade seemed like a good way to do that written by someone who I knew to have clarity of thought (and who I personally greatly enjoy reading - something that may be a matter of taste) from his online writings on his blog and on Twitter.
And I think
The Next Perfect Trade is a bit like Joel Greenblatt's
You Can Be a Stock Market Genius, in that it is a clear, fun and logical explanation of an investing approach, something of a manual for intelligent dummies (of which I am one). But it is of course no replacement for the smarts, skills, and expertise (knowledge and connections) to actually carry out that approach successfully (no book ever is).
Gurevich is a discretionary macro trader (he seems to currently "play a lone hand" a la Livermore, but he was currently an institutional trader). According to what he writes, his edge in the end is not from superior data or technological infrastructure, or from superior information, but from a superior perception of the relationships among different concurrent causalities that can be expressed with financial instruments. Thinking things through properly, when others aren't, rather than reading all the filings or having helicopters, satellites, and researchers uncover superior data from the external world.
It is wide as opposed to deep analysis. The sources are secondary (Gurevich mentions that he keeps up with economic data through his personal and online social networks) not primary, with the value added in the formal analysis of the picture of the world presented by that data. Price (and the relationships and concurrences within different sets of prices) is a very valid input in this mental model.
Though Gurevich's time orientation is long-term (the trends he describes in the book, such as systemic deflation and low-interest rates, and the strengthening dollar, play out over years or decades), he is a leveraged trader, as opposed to a long-term "investor" in the value investor sense (although he did reference investing in the equity of cheap companies - though not using the framework of value investing). This carries its own set of priorities and costs - and totally shapes the way one thinks.
Leverage enables strategies such as funding levered treasury bonds through the repo market, or for individual investors unable to replicate this institutional strategy with that instrument, taking the economically similar position of that through the futures markets. (One of the best things of the book for me was learning about the mechanical aspects of such strategies, using the footnotes explaining even basic concepts - some of them I didn't need and were indeed overly simplistic, such as explaining the meaning of a P/E ratio, but others helped me a lot, as for many things I am the most ignorant part of the audience.)
The book also added to my thinking about the actual importance of having a great "process." Many of the great discretionary macro traders (who knows if Gurevich is amongst them in the end - I have no idea what his historical returns are like, but he certainly operates in that style) aren't at all like someone like Walter Schloss who did the exact same things every day and with every allocation of capital. It is a serendipitous and virtuosic style.
At the beginning of the year, I did not consider myself a discretionary macro trader. But I am more and more in the point of view that every allocator is, either explicitly or implicitly. My views are evolving. I think that
The Next Perfect Trade is a great introduction to this point of view, along with books such as the
Market Wizards series. I actually think this is a better introduction as compared to those or other books, because it is written by the practitioner himself, and the chapters flow in a rational and systematic function, as opposed to being anecdotal in structure (although there are a few interesting anecdotes in the book, too).
And even if one is of the Peter Lynch school of thinking about macro, that it is basically unknowable and a waste of time in a practical sense (I understand this viewpoint as well), I think
The Next Perfect Trade should be read simply for the mental framework of thinking through capital allocation decisions with formal logic - as Gurevich mentions, it's not as if no one else thinks of it in those ways, but I found the way he described the basic concepts extremely clear and very useful to me. The concept of dominant (or strictly superior, a term that may be familiar to some) or inferior trades, and all the other permutations of this realization, are extremely important. So much so, that I am curious why this is discussed so little in the formal sense among many capital allocators. Perhaps it really is an advantage to think about things in this way when others are not (as it was for things like P/E/G, ROIC, platform value, and the like...).
One quibble (that is more or less significant depending on how you look at things) - the presentation on Kindle (the version I read) of
The Next Perfect Trade was subpar (I do not know if this was later fixed or if that is technically possible). The Next Perfect Trade was at first available only on Kindle, so that was the version I got. The graphs and charts (of which there are many) are by default small and unreadable when read on a Kindle (although a bit better on iPad, with its color and higher-resolution display). The line spacing and layout in general is also not terrific, and there are a few typos. I suspect many of these issues may be "fixed" on the paperback or hardcover versions, which came out later, but I have not read them yet (I can't bear buying anything twice).
