This book was loaned to me by a friend, and it provides useful information and warnings to people interested in or involved in stock market investing It was edited by Michael Lewis, as described on the front flap, is about “…the crash of 1987, the Russian default…the Asian currency crisis of 1999, the Internet bubble, and the ongoing subprime mortgage disaster.” The book is composed of more than fifty articles that were written by numerous authors, and several are by Lewis himself. The approach had both positives and negatives. The chapters are usually short and to the point, but there is obviously no consistency of style. Also, the articles often have redundancies.

I recommend scanning the reviews on Amazon. Many reviewers warn that the book is edited by Michael Lewis, and is not a “Liar’s Poker,” “Money Ball” or “Blind Side.” I will say in Mr. Lewis’s defense that the front cover clearly says at the top “Edited by…” (although in relatively small print). Another point in his defense is that he mentions in acknowledgments that proceeds from the book will go to Katrina victims (and the first person he thanks is himself).

I found the most interesting sections to be about the Internet bubble and the real estate collapse. Perhaps the most interesting theme in the book is that crises often find their beginnings when smart people begin running complicated but legal versions of Ponzi schemes. The nice thing about Ponzi schemes is that early investors can make lots of money if they get out in time. The bad thing is that those getting out late can easily result in losing everything. Overvaluation results from sellers looked for “the greater fool” to buy what they had bought for too high a price. They hope someone else would give them an even higher price before the price collapses. Another theme is that we think of the people who are involved in mind-numbingly complicated financial schemes and “instruments” as geniuses. The author often reminds us those revered experts often don’t understand any better than others. One statement worth remembering is, “The longer the bull market goes on, the more believers there are.”

The book gets to the heart of the real estate collapse early in the book when it tells us “…that millions of ordinary people ignorant of high finance have lost billions of dollars, but so have the biggest names on Wall Street, and both groups made exactly the same bet: that real estate values would never fall.” It is also observed that this collapse was different that those previous. The others were devastating to those who were on the wrong end and seemed to change the world. However, the real estate crash harmed vast numbers of people including innocent by-standers including senior citizens depending on certificate of deposit (CD) yields to provide their living expenses. One year CD rates have dropped to one percent or less as the Federal Reserve has driven interest rates to near zero in an attempt to artificially prop up the economy.

Many of the panics described were studied in depth after the panic. In too many cases the causes could never be isolated or described. The message, I think, is that people who are thought of as financial geniuses push new ideas too far. When prices begin to drop the herd heads for the exit, no one is left to buy, and the collapse is rapid and stunningly devastating.

The book does not dwell on the Dutch tulip bubble of 1637, but that bubble seems to me to an excellent example how greed creates an unsustainable price for something that suddenly becomes worthless when “the greater fool” can’t be found to make the next purchase. There is a common theme. People become willing to pay more than something is worth because they think they will be able to make a profit. Lewis himself describes getting burned with the purchase of stock in an Internet company that failed.

I’m not going to go into details of “Black Monday” in 1987, the Asian currency crises, or Russian default. Lewis provides articles by some smart people, including himself. Many of the smart people you’ve perhaps heard about in either reading financial journals or watching CNBC were involved on the wrong side of the crash when it came, which makes you wonder whether they are really that good, or if anyone truly understands the emotional aspect of financial markets. Jim Cramer of hedge fund and Mad Money fame is mentioned as advocating, for example, that Lehman Brothers was a buy after it had declined quite a bit. His recommendation came well before stock bottomed and required a bailout. I’m certain Mr. Cramer has given ample good advice.

The Internet Bubble description is quite interesting. Pages 206-207 lists 207 Internet stocks with a ranking on which one would burn through all the cash first through last. Most of the companies did burn through the millions they had and failed. A very few survived, to include Amazon and E * Trade. There are probably others, but I didn’t notice them in my quick scan. I do know that almost all of them were gone after surging to unsustainably high stock prices. Several of them spent a good share of their available cash on 30 or 60 second Super Bowl advertisements. Many of the CEOs had their faces on the televisions of millions of people taking bathroom breaks, but marketing studies found that most the ads were not remembered the next day.

There was a statement that “It seems obvious that money-losing companies created by twenty-six-year olds should never have been worth billions.” The game was to try to guess when sanity would set in and buying dried up while everyone who owned stock tried to sell. The target price in the prospectus for Netscape was $12-$14.The initial public offering of Netscape was originally priced at $21-$24 a share and it finally went on the market at $28. The number of shares offered was raised from 3.5 million to 5.75 million. The fifteen month old company that reported a six-month loss of $4.31 million opened at $71 and surged to $74.75. The volume of trading was 13.88 million shares. The closing price was $58.25. Netscape made many more people aware of the World Wide Web (and AOL paid billions for it before Microsoft drove it out of business).

Note: I have studied stock market investment since the early 1970s, have done quite a bit of “individual investing,” and have a few success stories and a few on the other side. I lost money on speculative investments early, became much more conservative, and did not join the dot.com frenzy despite the stories of immediate wealth from friends and fellow workers. My greatest regret is from watching an under thirty CEO of a dot.com company telling a reporter on CNBC who had asked when his company would become profitable, “You don’t understand the new economy.” I knew I should sell the company short, but didn’t. It isn’t in my nature to want to profit from failure. As the book observes, the traditional story was for a company to persuade “…people to invest in it by making profits. Now it persuaded people to invest in it first, and hoped the profits would follow.” “In this new world skepticism was not a sign of intelligence. It was a sin.”

There are many interesting side notes, including that Elliot Spitzer gained a reputation for investigative excellence for uncovering information that was already public.

I recommend the book to people who are interested in investing, especially if they enjoy “chasing the new thing.” This book provides a strong warning against that approach, although I don’t expect many to take note.