Someone close to me came to me the other day with a question.
She works in our business, but she didn’t come from our business. She wasn’t a trader. She wasn’t a portfolio manager.
She didn’t spend 20 years on Wall Street. She didn’t study finance in college then march straight onto a trading desk.
She sort of backdoored her way into this world through operations.
But now she spends every day around technical analysts, fundamental analysts, traders, portfolio managers, former Wall Street guys, CFAs, CMTs, accountants, and people who’ve been doing this stuff for decades.
And somewhere along the way, something happened. She started to really like it.
Not just working around the markets. She wanted to understand them.
So without really telling anybody, she signed up for Level 1 of the CMT exam.
For those of you who have no idea what that means, CMT stands for Chartered Market Technician.
It’s a professional designation focused on technical analysis and the study of markets. There are three levels. I was going through this process more than 20 years ago, just to give you some perspective.
She didn’t tell anybody she was doing it until eventually she had to say something. I think she told me and maybe one other person.
And then she passed.
Now she’s already studying for Level 2. That’s just the kind of person she is. She doesn’t like procrastinating. Once she decides she’s going to do something, she wants to get it done.
So there’s no victory lap here. She’s already studying for the next exam, which she’ll probably take in a few months. Then Level 3 could come next summer.
Think about that. Someone who didn’t grow up in this business and wasn’t formally trained in markets could potentially have her CMT designation around this time next year.
That’s pretty cool.
Then she came to me with another question.
Basically, she wanted to know what else she needed to do. How does she get to the point where she can start talking publicly about her own trades?
How does she start writing about markets? How does she go from working with all of these portfolio managers and analysts every day to being one of the people actually putting her ideas out there?
In other words, what she was really asking me was:
How do I join the club?
You Have Some Homework To Do
I told her she’s already doing the most important thing. Finish the CMT. Get through all three levels.
Having that designation and understanding that body of knowledge is going to put you ahead of the vast majority of people when it comes to technical analysis.
To be perfectly honest with you, it’ll probably put you ahead of a lot of the people walking around talking about markets too.
But I told her there are some other things she can do.
You have some books to read. You have some movies to watch. Finish your CMT, read these books, watch these movies, and then come call me.
That’s basically what I told her.
Back when I was studying for the CMT, there wasn’t this nice organized curriculum like there is today. They basically gave you a giant list of books to read and said, “Good luck.”
I actually loved that.
I got to read all these books. Today there’s an actual curriculum. Funny enough, I’ve even written chapters for it after the CMT Association asked me to contribute.
So if you’re studying for the CMT today, at some point you’re going to run into my work, which is pretty funny considering I was the kid reading all those books trying to pass these exams more than 20 years ago.
But if I were starting from scratch today, there are still certain books I would want on my shelf.
I’d start with Technical Analysis of the Financial Markets by John Murphy.
That’s Technical Analysis 101. If you’re going to speak the language, start there.
Then I’d read Technical Analysis of Stock Trends by Robert Edwards and John Magee.
This is one of the old textbooks of the business.
The thing was first published before most of our parents were born, and we’re still talking about a lot of the same concepts today.
Next I’d read Technical Analysis Using Multiple Time Frames by Brian Shannon.
You guys know how much I talk about timeframes. A stock can be going up on a weekly chart and going down on a daily chart at the exact same time.
Both things can be true. Understanding that will save you a lot of headaches.
Then go back to John Murphy and read Intermarket Analysis.
Stocks don’t live on an island. Neither do bonds, the dollar, gold or oil. These markets are all talking to each other every day.
You don’t have to become an expert in every market on Earth, but you should understand that they’re connected.
Then there’s Reminiscences of a Stock Operator by Edwin Lefèvre.
This book is more than 100 years old, and somehow traders are still making the exact same mistakes.
Maybe humans haven’t changed as much as we’d like to think.
And obviously there’s Market Wizards by Jack Schwager.
Really, you should read all the Market Wizards books, but at least read the first one.
One of the great lessons from that entire series is that there isn’t just one way to make money in markets.
Different people have different strategies, different timeframes and different personalities.
The point isn’t to copy somebody else’s game. The point is to figure out yours.
I’d also add a couple of books about psychology and decision-making.
The Psychology of Money by Morgan Housel is a great place to start, and so is Thinking in Bets by Annie Duke.
Markets are filled with uncertainty.
Sometimes you make a good decision and lose money. Sometimes you make a terrible decision and make money.
If you can’t understand the difference between the decision and the outcome, this business is going to mess with your head.
You Should Know the Stories
If you want to work in markets, I also think you should understand what happened during the financial crisis.
Not because I think another 2008 is around the corner. Quite the opposite. I think too many people have spent the last 15 years waiting for another 2008. That’s no way to live.
But it was one of the most important financial events of our lifetimes. You should understand what happened.
There are three books I particularly enjoyed: Bailout Nation by Barry Ritholtz, A Colossal Failure of Common Sense by Larry McDonald, and And Then the Roof Caved In by David Faber.
I liked all three because you get different perspectives.
You get Wall Street. You get the financial system. And with Faber’s book, you get much more of the real estate side of the story. I found that fascinating.
Read all three and you’ll have a much better understanding of what actually happened.
But books aren’t enough. You have movies to watch too.
Start with Wall Street. The original one from 1987. Gordon Gekko.
If you want to join the club, you need to understand why people are still quoting a movie that came out almost 40 years ago.
Then watch Trading Places. Eddie Murphy. Dan Aykroyd. Commodities trading. Orange juice futures.
And it’s actually funny. Imagine that.
Watch Boiler Room, too. That’ll give you some insight into some of the nonsense that used to go on behind the scenes.
Then watch Rogue Trader. This is the story of Nick Leeson, the trader whose losses eventually brought down Barings Bank, one of the oldest banks in Britain.
It’s a great reminder that blowing up doesn’t always happen because somebody made one terrible trade.
Sometimes it starts with a small loss, then another trade to try to make the money back, then another one after that.
Before you know it, you’re not trading anymore. You’re just trying to survive.
That’s a lesson worth learning from somebody else’s money.
Then there’s Floored, the documentary about the old Chicago trading floors.
I really like this one for someone trying to understand the culture of markets because that world barely exists anymore.
Guys standing in pits, screaming at each other, throwing hand signals around and risking their own money.
Markets look very different today, but you should know where a lot of this culture came from.
Then watch Trader, the old Paul Tudor Jones documentary from 1987.
This one is different because you’re not watching actors pretend to be traders. You’re watching one of the great traders actually trade.
You get to see how he thinks about risk, losing money and, maybe most importantly, being wrong.
It’s old, it’s weird, and parts of it feel like they came from another planet. That’s exactly why you should watch it.
And of course you have to watch The Big Short.
That’s probably the easiest way for someone who wasn’t around this business in 2008 to start understanding how completely insane the housing bubble became, how the mortgage machine worked, and how a handful of people figured out that something was very wrong before almost everyone else did.
Just be careful.
Because I’d also have her watch Too Big to Fail, and I need to put the same warning label on both of these movies.
A lot of people watch movies about the financial crisis and suddenly decide they’ve discovered their life’s calling.
They become short sellers. Then they spend the next 15 years waiting for the world to end.
Every bank is about to fail. Every rally is fake. Every recession is the next Great Depression. Every Tuesday is September 2008.
Don’t do that.
Watch the movies. Learn what happened. Understand why it happened. Appreciate the people who saw it coming.
Then go outside and get some fresh air.
Nobody wants another permabear.
Then Come Call Me
Here’s the important part. I am not telling you that if you pass three CMT exams, read these books, and watch these movies, you’re suddenly going to become a great trader.
It doesn’t work like that.
I’ve met plenty of successful traders who haven’t done all of these things. And I’ve met plenty of people who have read every book ever written about markets and still can’t make money.
There’s no diploma that guarantees profits. There’s no movie that teaches you how to trade.
And there certainly isn’t a reading list that magically turns you into a portfolio manager.
Markets don’t care how many letters you have after your name.
But I know a lot of really good traders. I know a lot of really good portfolio managers. I’ve been around these people my entire adult life.
And I’ll tell you this: A whole lot of them have read these books.
They know these stories. They understand the history. They’ve studied the great traders who came before them. They know what happened in 1929. They know what happened in 1987. They know what happened during the dot-com bubble. They know what happened in 2008.
They understand that markets have been making people look like geniuses and idiots for hundreds of years, and human nature hasn’t changed much along the way.
Most importantly, they’re curious.
I think that’s the part that matters more than people realize.
This particular person happens to be somebody I know will actually do the work. That’s why I gave her the list.
I’ve given people reading lists before. They don’t read the books.
I’ve told people what they should study. They don’t study it.
I’ve told people what they should watch. They don’t watch it.
That’s fine.
But she’s different. If I give her 10 books, she’s going to read 10 books. If I give her eight movies to watch, she’s going to watch all eight.
And if I tell her to finish all three levels of the CMT, I have a pretty good feeling she’s going to finish all three levels.
That’s really why I’m sharing this with you.
Maybe you’re in the same position.
Maybe you didn’t go to school for finance. Maybe you didn’t start your career on Wall Street.
Maybe you’ve found yourself becoming more interested in markets and you’re wondering what you’re supposed to do next.
This isn’t the only path. It’s certainly not a guarantee of anything.
It’s just the advice I gave somebody I care about who asked me how she could get better at this.
And I would never intentionally steer her in the wrong direction.
So I’ll tell you exactly what I told her.
Finish the exams. Read the books. Watch the movies.
Then come call me.
You want to join the club?
There’s your homework.
This Week in Everybody’s Wrong
On Monday, we wondered where everybody’s hiding.
We looked at the bond market, and we talked about credit spreads.
Bottom line, there’s no evidence investors are running for safety right now.
On Tuesday, we broke down the kind of setup where we should be willing to take a stab in this market.
One of the most famous companies in the world was trading 79% below its highs and testing a level that’d rarely been touched in 25 years.
Is Nike (NKE) finally cheap enough?
On Wednesday, we asked what seemed like a ridiculous question.
And then we got into the recent history and the charts.
So let’s rephrase: Will interest rates keep falling after the Fed started raising interest rates?
On Thursday, we talked about all the money sitting in the world’s No. 1 cryptocurrency.
Bitcoin is a gigantic boulder, and hardly anybody’s pushing it.
Here’s what the weight of the evidence says about what comes next.
On Friday, we took another extraordinary trip back in time.
Somebody has to pay for the magical technologies that make industrial revolutions work.
All we want to know is where the money is going.
On Saturday, Sam Gatlin shared a great lesson on one of the most misunderstood markets on Earth.
Yes, we’re talking about energy.
Have a great Sunday.
We’ll see you Monday morning…
Stay sharp,
JC Parets, CMT
Editor, Everybody’s Wrong