My favorite books on what makes commodities traders tick and what you can learn from them

Of all the books about trading written over the decades, perhaps none is still so beloved, revered, and followed as this 1923 classic by journalist Edwin Lefèvre. Although technically a work of fiction, the book really is about the life and trading style of one of the greatest speculators of all time, Jesse Livermore (told under the guise of “Larry Livingston”).

What makes this book such a treasure is not just its fun prose, and interesting glimpse into what the process of investing in old exchanges and “bucket shops” was over a century ago, when ticker-tape and board boys with chalk and ladders were one’s only information about market prices, but also how the mind of one of the world’s greatest traders worked.

This book offers many gems of knowledge about trading—based upon the general principle that, although methods and technologies change, human nature does not and therefore “there is nothing new on Wall Street”. Indeed, many of the trading techniques and strategies Livermore aka Livingston describes in this book have been taken to heart and applied by some of the world’s most successful investors and traders to this very day.

The book’s longevity is a testament to its value even now, one hundred years after it was published. This is the work I first recommend to anyone interested in learning about trading, and the psychological/emotional components involved in successfully playing the markets year in and year out. 

One of the first “tell-all” Wall Street books, this 1989 treasure tells the story of the rise and fall of Solomon Brothers bond trading firm as witnessed from one of its salesmen, Lewis, from the inside.

It is a tale of greed and egos and men with little understanding of the products they sold, let alone scruples to care one way or the other, getting filthy rich in a system that even, at times, rewarded failure and penalized success. It tells how egos ran Solomon, once the most powerful firm in finance, and headed by its venerable CEO John Gutfreund (dubbed at one point “The King of Wall Street”), into the ground.

What makes the book so appealing is Lewis’ tongue-in-cheek and even self-deprecating voice that cuts these Wall Street demigods down to size and exposes them for the flawed and often petty individuals they could be, even as they amassed fortunes that far out-stripped their worthiness to attain such wealth…Lewis includes himself as one of the unworthy.

And who can forget the great characters Lewis introduces us to along the way, including Dash Riprock, Herman the German, and the “Human Piranha”. A book that will make you laugh while also shake your head, if you believe in a just world, read at your peril. But if you like to laugh, read at your delight.

Though not a book about trading per se, this chronicle of the craziness surrounding the 1986 leveraged buyout of RJR-Nabisco is certainly worth a read.

It centers around the machinations of RJR-Nabisco’s breezy CEO, F. Ross Johnson, and how, apparently, being the head of one of America’s great companies wasn’t enough. The book really is as much a study of greed and ego as it is about what was, at the time, the most expensive LBO in history.

One gets the feeling the company in play, and its employees wondering what would be the impact on their lives once the negotiations way up in the New York corporate high rises were completed, were ancillary concerns to the players involved—Ross Johnson, American Express CEO and power publicist Jim and Linda Robinson, Shearson-Lehman head Peter Cohen, buyout specialist and anti-junk bond crusader Ted Forstmann, and the coldly menacing Henry Kravis and George Roberts of KKR to name a few. 

The book takes us through the backroom dealing and personality clashes of highly credentialed, arrogant, type-A personalities for whom winning mattered more than anything else. And it shows how once ego gets in the way of judgment, all sorts of mayhem and back-stabbing and back-room deals result.

In the end it’s a fun read that gives us a glimpse inside the corporate board rooms with all the excesses and intrigue when one gets into the c-suite. And it shows us what happened when the business sense of the deal eventually was outstripped by the bragging rights for landing the biggest fish in the LBO pond.

A relatively new arrival on the list, Dreyfuss’s diligently crafted book is the most in-depth look at one of Wall Street’s most spectacular, if lesser-known, collapses in 2006.

The book takes us through the rise of two forces in energy trading embarking on a collision course that would be the ruin of one and an immense windfall of the other. Amaranth hedge fund was an up-and-comer and darling of the hedge fund space. Boasting stellar returns on its several billion in capital, it was able to raise massive sums to hand over to its wunderkind energy trading guru, the Canadian Brian Hunter.

Hunter had set out to dethrone John Arnold at Centaurus (the former Enron whiz kid and youngest member of the Forbes 400) as the biggest energy derivatives trader on the Street. Hunter’s ego soon got him into trouble when a series of disastrous and massively overleveraged bets collapsed, taking Hunter and the entire Amaranth hedge fund with it in a matter of weeks.

A classic tale right out of Icharus, Hunter’s is a precautionary tale, and emblematic of the expression, “pigs get fed, hogs get slaughtered.”

This fascinating read tells the story of the rise and then spectacular fall of the once celebrated hedge fund Long-Term Capital Management.

What made LTCM so attractive to Wall Street investors was its stable of "dream team" quants and financial minds, led by the laconic John Merriweather. Merriweather (featured in the opening Chapter of Liar's Poker) was a former Solomon Brothers bond-trading guru, who after leaving the firm amid a scandal managed to assemble a team of financial powerhouses that included two Nobel Laureates as well as a cadre of respected traders.

From 1993 to 1997 LTCM's returns were first-rate; the sky seemed the limit for this small band of supertraders, professors, and modelers who arrogantly considered themselves a cut above the rest of The Street.

But in 1998, it all came crashing down...and right quick. Having believed their financial models could accurately predict price action not just in bonds, their forte, but other asset classes, they confidently took on enormous positions whose massive leverage left them dangerously exposed to adverse price action. And that is exactly what happened.

This was due to their reliance on models that assumed rational/predictable behavior among market participants. But traders are people, not machines. They had forgotten, as Lowenstein says, "the human factor." Soon all of Wall Street, knowing LTCM was in a precarious bind as one position after another blew up in their faces, (even as in theory they believed they were on the right side of the trades) and margin calls mounted, gunned for them, compounding their losses.

Within months, the one-time bond king Merriweather was forced to turn to the Fed for a $3.6 billion bailout to prevent the contagion from spreading to the entire Street and overall economy beyond. The partners lost billions. And LTCM, once the toast of Wall Street, shuttered its doors in 2000. The book is a lesson in hubris right out of Greek mythology. And a sharp reminder that markets can remain irrational longer than traders can remain solvent.