It was once said to me that if you read five books on any given topic, you will know more than 95% of the population on that topic. I am not sure where that statistic comes from or if there is any accuracy to the claim, but I like it either way. However, with so many options out there to choose from, how do you determine where to get good relevant information. Thankfully, I’m here to help! This is the first of a series that I will be doing of top five book lists. Each list will target a specific area and offer 5 books of sometimes varying complexity that will help anyone better understand that topic.
My first book list is Five Books for Beginning Investors. This list is a mini crash-course on investing and it starts at the very basic and increases in depth from there. You can read as much as you like depending on your needs and interest. Here we go!
This book is the best beginner’s guide to investing in a practical real-life manner. It’s not filled with fluff or academic theory, just useful information about how to go about the task of investing from a logical point of view. It boils down the whole process into the answering of five questions and gives you common sense perspective to help you answer those questions. The best thing about it is that it can be read in just a couple of hours because its short and gets right to the point.
Topics: Personal investment planning, asset allocation, beginning investors
Best for: People who look at their 401k election forms and ask “what the hell do I do with this?”
Best Quote: “…the outcome of a bet on the Superbowl has no correlation to stock market returns, but that doesn’t mean betting on sports should be part of your investment portfolio!”
This book goes a little deeper and covers more of the investment spectrum than The Investment Answer. Its basic premise (with plenty of well researched evidence to support) is that “beating the market” is nearly impossible and should not even be attempted by most investors. It suggests that investors are best off buying low-cost index funds in a manner suited to their risk tolerance. Still very friendly to the uninitiated, Malkiel does a great job making these concepts understandable and relatable through great story telling. Finally, this book is filled with great one-liner pearls of investment wisdom.
Topics: Investment management, asset allocation, behavioral finance
Best for: People who are advised on how to fill out their 401k election form and ask “Why?”
Best Quote: “A mine is usually just a hole in the ground with a liar standing in front of it.”
While Burton Malkiel argues that beating the market is next to impossible, Joel Greenblatt says it’s not only possible, but that he came up with a “magic formula” that will beat the market over the long-term. I read this book a very long time ago when first starting out in my investing career and was very skeptical of its claims, however, it lays out a simple case for using common sense, and basic financial analysis to invest in companies that will provide value on an ongoing basis. Funny that that is considered “magic” when it comes to investing.
Topics: Stock investing, financial analysis
Best For: People who have maxed out 401k contributions and have a little money set aside to invest and want to “see what I can do.”
Best Quote: “the high-return-of-capital company chosen by the magic formula are more likely to have the opportunity to reinvest a portion of their profits at high rates of return. They are more likely to have the ability to achieve high rates of earnings growth. They are also more likely to have some special competitive advantage that will allow them to continue to earn an above-average return on capital.”
This book recommendation will get me endless grief from the “serious” investment folks out there who think of Jim Cramer, the host of CNBC’s Mad Money, as nothing more than a hyper-active charlatan. I happen to like Jim, for the most part. He used to work at Goldman Sachs and ran a hedge fund for several years, so you can’t call him a fake. He has been a professional investor for a long time and the process he lays out in the book is a little more intensive than just following a magic formula. His biggest mantra is a take on the “buy and hold” of the passive investing crowd but modified to “buy and homework.” He stresses the need to understand the businesses you invest in and know why you are investing in them. So while his stretch for entertainment value on television can be a put-off, this book is filled with good insights.
Topics: Stock Investing, stock trading,
Best For: People who have maxed out 401k contributions and have additional money on the side to invest and desire to take up a new hobby in the form of stock investing.
Best Quote: “There are forces and emotions that determines how markets function that are not susceptible to academic logic. Often to figure out how the market is valuing things we have to go outside the balance sheet and income statements, because the emotions of the market can blind you in you are strained by those.”
#5 Berkshire Hathaway Annual Letter to Shareholders 1977 – 2014; Warren Buffett
I know, this isn’t a book, but the collective letters to Berkshire Hathaway shareholders, written by CEO and the world’s most famous investor, Warren Buffett, is a master class on investing. I have printed copies of every letter going back to 2003; the first year I read the letter. I remember being blown away at how simple he made everything sound. In the letters, Warren goes through each of Berkshire Hathaway’s lines of business and explains how they performed for the year and then gives his thoughts on the general state of markets and the economy; always surrounded by great investment wisdom. I still wait for it every year, and as soon as it comes out I send it out to a few friends and clients that I know share an appreciation for the Oracle of Omaha. When it comes to investing, these letters are the cannon that are read by hedge fund billionaires and hot shot traders; yet still accessible and helpful to retail investors.
Topics: Stock Investing, Business, Markets
Best For: Anyone who is serious about managing their own investments.
Best Quote: On the fluctuation of stock prices from the 2013 letter “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations paced on their holdings – and for some investors, it is. After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefitted by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”
These are my top five books in terms of becoming a better investor. Remember these are not sorted by favorite, or most useful, but going from the most basic to the most advanced. Sometime in a few weeks or months I will post the master class edition of this list. That will include five more books that will take your investment knowledge deeper than you ever knew you wanted it to go. Before we go there, however, there are a few other areas of knowledge we need to explore. Just like you can’t take a masters level business class without first getting through your undergrad pre-requisite courses. Those are coming soon. In the meantime, let me know the books I missed. Any investing favorites that you feel should have made the list? I would love to hear your thoughts.
Until next time ……
“A formal education will make you a living; self-education will make you a fortune” – Jim Rohn
Further Reading – The Five Best Books on Risk
*Cover photo by Austin Kirk at Flickr.com