Book Review:

Adaptive Markets

A Critical Read

5 – 7 minute read

Published October 14, 2022

I graduated from High School in 1988 and couldn’t decide between further studies in finance or ecology. At the time, I was listening to a rebel rock band called U2, had freshly read Our Common Future and Silent Spring, and was highly motivated to save the planet. Meanwhile, I had also watched the movie Wall Street and wanted to become rich—to drive a blue BMW and carry a massive cell phone. In the end, I chose both.

My first career position was as a Provincial Park Ranger/student ecologist. Further studies in finance allowed me to transition into finance, in a move that was actually quite natural because both systems (ecology and the investment markets) work from similar foundations. Both are competitive systems with equilibrium states.

A fox stands on the low end of a seesaw, looking back at the rabbit perched on the high end. Like in an ecological system, financial systems find an equilibrium.

In ecology, a fox population surges, and a rabbit population plummets. Eventually, they find an equilibrium between their populations. In finance, a disruptive technology (Netflix with TV streaming features) quickly takes market share, causing Blockbuster to experience a rapid death. I found that both ecology and finance were two ecosystems worthy of contemplation and, in my case, the focus of a career.

When it comes to the financial markets, I am often asked for worthwhile books to read. Truthfully, I believe few properly explore how the markets function and how stocks are priced, which is the core reason we want to study finance.

For example, Reminiscences of a Stock Operator, written in 1923, sets the stage for modern-day brokerage houses. It’s a terrific read that leaves investors still seeking brokers who offer insights similar to mystic fortune tellers.

Also, the two books by Benjamin Graham (Security Analysis [1934] and The Intelligent Investor [1949]) open a dialogue for stock valuation and portfolio construction. While dense to plow through, they form the basis for today’s Chartered Financial Analyst (CFA) program and many undergraduate finance curricula.

The covers of two financial market books: Reminiscences of a Stock Operator and Security Analysis.

Finally, I would say that Random Walk Down Wall Street by Burton Malkiel (1973) confronts the work of Graham—and Wall Street—introducing both the Efficient Market Hypothesis (EMH) and index funds. I loved this book so much that I used to buy boxes of it and hand them out to new clients just to shake things up. Active managers, of course, are supposed to renounce the EMH and promote a combination of “guru insights” with Graham’s professionalism.

The covers of two more books that cover stock markets: The Intelligent Investor and A Random Walk Down Wall Street
The cover of Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew Lo. The cover is black and depicts the evolution of man from his primate ancestors, overlaid on the image of an American bill.

I now add a fourth book to my critical read list in finance. In 2014, Andrew Lo wrote a book that is just as significant as these just mentioned. His book Adaptive Markets: Financial Evolution at the Speed of Thought presents a new perspective on how the stock market works and, I believe, will win him the Nobel Prize in Economics.

If he is correct in his hypothesis, market bubbles and corrections are not radical anomalies but part of a coherent market ecosystem. New avenues of research could be considered when investing, synthesizing the instinctual and biological human with the intellectual and rational one.

This book binds the two systems that split my early career and studies by taking ideas found in ecology and neurology and then applying them to the financial markets. Adaptive Markets begins with a comprehensive review of finance and the acrimonious camps that have spent nearly fifty years competing to explain how the markets price.

Then, it explores in the following chapters the uniqueness of the human condition and we have evolved to become who we are. Using that information, the Adaptive Market Hypothesis is presented and, in the final chapters of the book, pushed into action.

In Conclusion…

I have no hesitation to launch Qube’s first Book Club with this book. While the book is a heavy twelve-chapter read, we will break it into four parts. Together, we will explore it on a bi-weekly basis starting Tuesday, October 18. If you still haven’t joined the club, you can become a member by signing up here. You can also get the book from Amazon or by reaching out to Qube.

During the first virtual meeting, we will cover the first three chapters, where Lo brilliantly recounts the history and evolution of finance. He sees himself as an outsider and reconciler between the two major camps in finance. These two opposing sides battle over how markets are priced and why they bounce up and down from time to time. After a 20-30 minutes review of the material, we will discuss, explore, and share what has been learned. Class participation is not required.

Watch this video to get a taste of what’s in store.

Let me know if you have any questions, and if you want to join us, I look forward to seeing your digital face on Tuesday, Oct. 18 at 7 p.m!

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.

Book Review:

Adaptive Markets

A Critical Read

5 – 7 minute read

Published October 14, 2022

I graduated from High School in 1988 and couldn’t decide between further studies in finance or ecology. At the time, I was listening to a rebel rock band called U2, had freshly read Our Common Future and Silent Spring, and was highly motivated to save the planet. Meanwhile, I had also watched the movie Wall Street and wanted to become rich—to drive a blue BMW and carry a massive cell phone. In the end, I chose both.

My first career position was as a Provincial Park Ranger/student ecologist. Further studies in finance allowed me to transition into finance, in a move that was actually quite natural because both systems (ecology and the investment markets) work from similar foundations. Both are competitive systems with equilibrium states.

A fox stands on the low end of a seesaw, looking back at the rabbit perched on the high end. Like in an ecological system, financial systems find an equilibrium.

In ecology, a fox population surges, and a rabbit population plummets. Eventually, they find an equilibrium between their populations. In finance, a disruptive technology (Netflix with TV streaming features) quickly takes market share, causing Blockbuster to experience a rapid death. I found that both ecology and finance were two ecosystems worthy of contemplation and, in my case, the focus of a career.

When it comes to the financial markets, I am often asked for worthwhile books to read. Truthfully, I believe few properly explore how the markets function and how stocks are priced, which is the core reason we want to study finance.

For example, Reminiscences of a Stock Operator, written in 1923, sets the stage for modern-day brokerage houses. It’s a terrific read that leaves investors still seeking brokers who offer insights similar to mystic fortune tellers.

Also, the two books by Benjamin Graham (Security Analysis [1934] and The Intelligent Investor [1949]) open a dialogue for stock valuation and portfolio construction. While dense to plow through, they form the basis for today’s Chartered Financial Analyst (CFA) program and many undergraduate finance curricula.

The covers of two financial market books: Reminiscences of a Stock Operator and Security Analysis.

Finally, I would say that Random Walk Down Wall Street by Burton Malkiel (1973) confronts the work of Graham—and Wall Street—introducing both the Efficient Market Hypothesis (EMH) and index funds. I loved this book so much that I used to buy boxes of it and hand them out to new clients just to shake things up. Active managers, of course, are supposed to renounce the EMH and promote a combination of “guru insights” with Graham’s professionalism.

The covers of two more books that cover stock markets: The Intelligent Investor and A Random Walk Down Wall Street
The cover of Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew Lo. The cover is black and depicts the evolution of man from his primate ancestors, overlaid on the image of an American bill.

I now add a fourth book to my critical read list in finance. In 2014, Andrew Lo wrote a book that is just as significant as these just mentioned. His book Adaptive Markets: Financial Evolution at the Speed of Thought presents a new perspective on how the stock market works and, I believe, will win him the Nobel Prize in Economics.

If he is correct in his hypothesis, market bubbles and corrections are not radical anomalies but part of a coherent market ecosystem. New avenues of research could be considered when investing, synthesizing the instinctual and biological human with the intellectual and rational one.

This book binds the two systems that split my early career and studies by taking ideas found in ecology and neurology and then applying them to the financial markets. Adaptive Markets begins with a comprehensive review of finance and the acrimonious camps that have spent nearly fifty years competing to explain how the markets price.

Then, it explores in the following chapters the uniqueness of the human condition and we have evolved to become who we are. Using that information, the Adaptive Market Hypothesis is presented and, in the final chapters of the book, pushed into action.

In Conclusion…

I have no hesitation to launch Qube’s first Book Club with this book. While the book is a heavy twelve-chapter read, we will break it into four parts. Together, we will explore it on a bi-weekly basis starting Tuesday, October 18. If you still haven’t joined the club, you can become a member by signing up here. You can also get the book from Amazon or by reaching out to Qube.

During the first virtual meeting, we will cover the first three chapters, where Lo brilliantly recounts the history and evolution of finance. He sees himself as an outsider and reconciler between the two major camps in finance. These two opposing sides battle over how markets are priced and why they bounce up and down from time to time. After a 20-30 minutes review of the material, we will discuss, explore, and share what has been learned. Class participation is not required.

Watch this video to get a taste of what’s in store.

Let me know if you have any questions, and if you want to join us, I look forward to seeing your digital face on Tuesday, Oct. 18 at 7 p.m!

DISCLAIMER

Qube Investment Management Inc. has authored the material presented above for the promotion of financial literacy and professional development. Qube makes no warranty for the accuracy, validity, or completeness of the above information. It is not intended to provide specific advice with respect to individual financial, investment, tax, legal or accounting matters.

 For advice specific to your situation, consult appropriate investment, legal or accounting professionals.

PLANNING FOR YOUR INVESTMENTS SHOULD NOT BE OVERWHELMING.

Book a quick chat with us to see if we can help you plan for your goals.