A Mathematician Plays the Stock Market

List Price: $25.00 Amazon.com Price: $17.50

• Media: Hardcover
• Publisher: Basic Books (13 May, 2003)
• ISBN: 0465054803
• Average Customer Review: Based on 12 reviews.
• Amazon.com Sales Rank: 311
  

What makes the book delightful is his self-effacing sense of humor. I cannot remember reading another book in which a writer is as candid and funny about his own failings as an investor. Only Andy Tobias comes anywhere close. The book's running joke is the professor's disastrous obsession with buying WorldCom stock using borrowed money before it became apparent that the company's reported earnings had more to do with wishful thinking than reality. It is this example that makes the book also insightful for the reader because it shows how easily our emotions and instincts can lead us astray, even when we understand as much about the stock market as Professor Paulos does.

I have read dozens of stock market books that have attempted to explain the "numbers" aspect of stock-market investing. None of them covered as much ground or did so as succinctly as this book does. I was very impressed by the depth of reading that this book reflects. Although it is not an academic book, the rigor is impressive.

The basic point is that the stock market is a lot more complicated than anyone can hope to understand, and likely to be more volatile than almost anyone will be comfortable with. Professor Paulos provides potential remedies for both (index investing, diversifying active portfolios, and using derivatives as insurance against large risks).

One of the many brilliant math examples shows how some games cannot be won with "success" strategies, but if you can combine a certain two "failure" strategies you will be a guaranteed success. With that wonderful point, the idea of being a contrarian was better expressed than in anything else I have read on the subject.

By inserting himself in the book through the WorldCom example, Professor Paulos powerfully introduces the element of individual and market psychology. Although he is neither a psychiatrist nor a psychologist, the book abounds with material about the psychology of how the market works and why investors make mistakes. To me, the ultimate lesson here was that one's stock market approach has to be one that fits emotionally well . . . or you will never execute it successfully.

Ultimately, successful active investing requires you to correctly pick what everyone else will find irresistible not too long before that compulsion hits them. I came away, once again, delighted that index fund investing is available as a sure-fired way to outperform more than 90 percent of all professional portfolio managers while sleeping soundly at night.

After you finish enjoying the book, I suggest that you also think about where else you commit your financial resources in large measure more due to your emotions than to your sense of how to calculate an advantage. How could you change your approach in that other area to be more emotionally and financially rewarding?

Donald Mitchell
Co-author of The 2,000 Percent Solution, The Irresistible Growth Enterprise and The Ultimate Competitive Advantage


It Doesn't Add Up

Anyone familiar with mathematician John Allen Paulos wonderful Innumeracy book from the 1980s will be sorely disappointed with his latest effort.

Innumeracy set a standard for clear and relevant explanations related to math literacy. Even the title Mr. Paulos selected became part of the country's every day lexicon, a simple way to refer to the challenge of understanding the way the world is influenced by probabilities, variables, and equations.

A Mathematician Plays the Stock Market, to use a metaphor Mr. Paulos might use, falls short of that level by a degree of magnitude.

Part of the problem, I will admit, is the high standards set by Innumeracy. If it weren't for that effort, the author's humorous and candid accounts of his own investment failures here (no, math geniuses aren't any better at it than the rest of us) and his clear and easy-to-understand explanations of what the stock market numbers actually reflect would result in a better reception for A Mathematician Plays the Stock Market.

Then again, it may have been Innumeracy's success and critical acclaim that allowed A Mathematician Plays the Stock Market to even be published.

The actual text checks in at just over 200 pages, and yet the book spends a great deal of time beating around the bush, promising to come back to certain points in the future in several instances, making the slim volume feel more unwieldy than it should. And it is repetitive, using the same story about a stock scam based on mass mailings on three separate occasions. It even shows poor editing: the author can't seem to settle on a single spelling for the bankrupt consulting firm Arthur Andersen, or is it Arthur Anderson?

Yes, there are lessons to be learned in A Mathematician Plays the Stock Market: investing is complicated, for example, and a strategy of diversification and investment in simple index funds can yield strong results. But a reader doesn't have to delve into A Mathematician Plays the Stock Market to glean these nuggets of wisdom -- they are just as available in the Sunday newspaper's investment columns and from any number more complete investment guides.

In this book, Mr. Paulos warns again and again that he made an error by not judging the financial results of WorldCom, the company whose failure forms the centerpiece of this book, objectively enough. It's an important point; he wanted the company to succeed and so he failed to recognize evidence to the contrary. And it's a lesson that people who buy this book because of the esteem they have for Mr. Paulos after reading Innumeracy and other efforts will wish they applied to their decisions on book buying as well as stock buying.


For each concept a tale

Each chapter of this book corresponds to a concept in investment theory (for e.g. the efficient market hypothesis, options, risk, volatility -- see the table of contents). The concepts covered easily encompass those dealt in introductory college-level investment theory text books (for e.g. Bodie, Zane, and Marcus' "Essentials of Investments") and a bit more (for e.g. chaos theory applied to finance). As can be deduced by inspecting the length of the book (a mere 224 pages), the author's exposition is succinct and exacting. This is not to say in any sense the book is demanding or dry; quite to the contrary it is leisurely and enjoyable. Every investment concept is furnished with a story, a logical puzzle, and/or a paradox. With the ability to perform rudimentary arithmetic you will be able to understand the underlying concepts and question the "conventional wisdoms" regarding them. Paulos' wit, as with all his previous publications, shines throughout the book.

(Side note. Other things I _personally_ enjoyed about the book: 1) forward references -- I like books that direct readers to jump to a certain paragraph or section should the reader not be interested in certain parts. Inclusion of such directions not only presents convenience, but also implies that the author really thought out what he/she'd write. 2) Subject index -- needless to say it is easier to return to the part you wish to read again!)

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