Summary: Here’s a list of our favourite investing and business books. Contributors have recommended a number of classics, particularly focusing on the Oracle of Omaha, Warren Buffett. A number of newer publications, particularly with a focus on technological change, also make the list.
Key take out: For investors who are interested in keeping up to date with changes to technology, The Second Machine Age and Zero to One: Notes on Startups, or How to Build the future come highly recommended.
Key beneficiaries: General Investors. Category: Economics and investment strategy.
Wondering what to read over the Christmas break? Looking to learn more about investing, or stay up to date? We’ve put together a list of our contributors’ most highly recommended books on investing and business, including both classics and works published during 2014.
Among the recently published recommendations, contributors have highlighted the importance of keeping up to date with changes in the technological landscape. Our international equities analyst Clay Carter has picked Peter Thiel’s Zero to One: Notes on Startups, or How to Build the Future. Thiel criticises the goal of building a business that beats the competition, saying instead that the goal should be to become a monopoly, Carter explains. Managing editor James Kirby has also recommended an analysis of technological progress: The Second Machine Age by Erik Brynjolfsson and Andrew McAfee. Investors who are keen to understand this area may also be interested in Clay Carter’s forecast today of the year ahead in technology disruptors (see Investing offshore in 2015, December 22).
Another much-discussed book this year was French economist Thomas Piketty’s Capital in the Twenty-First Century. Piketty is concerned with inequality and the concentration of wealth. Contributor Percy Allan nominates this work, pointing out that the question of whether the profit share of GDP can continue to rise will have implications for investors.
There are also several classics among the list, with contributors singling out books by and about Oracle of Omaha Warren Buffett, as well as one work by his mentor, Benjamin Graham. Closer to home, editor-in-chief Alan Kohler has chosen Australian financial journalist Trevor Sykes, with his tome Two Centuries of Panic, and co-founder Robert Gottliebsen has picked Michael Cannon’s The Land Boomers, about the 1890s Melbourne land boom, issuing a warning on the present glut of city apartments.
Two Centuries of Panic, by Trevor Sykes
Trevor is a friend of mine and he is one of Australia’s best financial journalists, especially when it comes to history.
This is one of my favourite business books. It has all the biggest panics up to, but not including, the GFC. And what you learn is none of them are that much different to each other – in fact, they are much the same.
I must confess that for someone aged in their seventies I have had an incredibly busy year. My activities cover family, the privilege of having people want to read what I write at my age, a school board, a church board and many other pursuits. As a result my book reading has suffered. I aim to rectify that in 2015 and The Menzies Era by John Howard and the biography Kerry Stokes: The Boy from Nowhere by Andrew Rule are high on my list.
But during the year I read Doug Ackerly’s book on the great John Coleman – Coleman: The Untold Story of an AFL Legend – who had talents unique in the world of AFL football. But he had a weakness – he could be provoked and Essendon lost the 1951 Grand Final (I was there) because Coleman was suspended. Carlton’s Harry Casper hit Coleman in a late game of the season knowing Coleman would hit back and be suspended for the finals. Losing your temper is a weakness most of us have but it needs control.
And the boom we are seeing in Melbourne apartment towers caused me to go to the shelves and take down and re-read an aged copy of Michael Cannon’s The Land Boomers on the incredible Melbourne land boom of the 1890s. It was based in debt and bad practices and I hope that the Asian investors who are glutting the city with one- and two-bedroom apartments are not part of a similar debt structure back home in China. The Land Boomers is also a reminder not to follow the crowd. All the “best” families were into the boom. That’s always a danger sign.
I don’t read many investment books each year. I do, however, re-read a handful of books which I believe are imperative to understanding investment success. These investment books are then supplemented on a regular basis by books that either bring me up to speed with broader political affairs or, more pertinently, changes in technology.
There are several classic books I believe stand out from the crowd. Outstanding among the genre is the collected annual report essays from Warren Buffett which go a long way towards telling you all you need to know about the essential elements of investing: The Essays of Warren Buffett: Lessons for Corporate America by Lawrence A. Cunningham.
The second is The Millionaire Next Door by Thomas Stanley which to a large extent is as much about frugality as it is about investment, but obviously if you could combine the principles from Buffett with the hard lessons from Stanley you would be in a very good position.
For the wider issue of success in all its forms it is very hard to beat Stephen Covey's The Seven Habits of Highly Effective People, largely because it is in itself a distillation of a century’s worth of success literature.
In recent times I’ve become more convinced that investment success is getting every more closely linked with the companies that best use the remarkable advances we are witnessing in technology. I try to read the best books that emerge on the theme of new technology. This year there was The Second Machine Age by Erik Brynjolfsson and Andrew McAfee. This is a very good, deeply considered analysis of where we are now in terms of technological progress and its ramifications for the economy and society at large. Earlier books which served a similar purpose for me included Information Rules by Carl Shapiro and Hal Varian and before that New Rules for the New Economy by Kevin Kelly.
Zero to One: Notes on Startups, or How to Build the Future, by Peter Thiel
This is the best business book of 2014 – in my opinion, anyway. Serial Silicon Valley entrepreneur, venture capitalist, and arch disrupter Peter Thiel, one of the co-founders of PayPal, was an early backer of Tesla Motors and Facebook and currently runs cybersecurity juggernaut Palantir Technologies. He has written a fascinating and iconoclastic book on startups and their place in society.
This is not “Startups 101”. Thiel encourages would-be entrepreneurs to ponder, “What valuable company is nobody building?”, not “What has worked in the past?” This is an illuminating and irreverent critique of business schools and corporate culture as well as the goal of building a business that beats the competition. Rather, he theorises, the goal should be to become a “monopoly” such as Google or Facebook, that is so ubiquitous and powerful that it provides early investors with outsize returns and the financial resources to ensure its long-term viability.
Bulls, Bears and a Croupier, by Matthew Kidman
Author Matthew Kidman was a former journalist and then a successful fund manager. He was with Wilson Asset Management for over 13 years, with an annualised return of 18% versus the market’s 8% return. His specialty was small capitalisation companies.
The value in this book is Kidman's explanation of his unique style and experience in the market. He also shoots down a number of commonly held views, and talks openly about the domestic funds management industry.
The Mining Valuation Handbook, by Victor Rudenno
My book of choice is The Mining Valuation Handbook. For those investors who are interested in the mining industry, the book provides a number of essential tools including commodity values and forecasting, valuation and pricing techniques and, more broadly, information behind how the industry operates.
Though the resources sector may be depressed at the moment – with no signs of relief concerning certain commodities – this makes now the perfect time to become educated on the topic to ready yourself for the next upturn in the cycle.
Kerry Stokes: The Boy from Nowhere, by Andrew Rule
I’m reading the official biography of billionaire Seven chairman Kerry Stokes, which was commissioned in response to the news of plans for an unauthorised biography. Stokes agreed to tell his story with some reluctance, and his memories of his childhood are sketchy in parts, but master storyteller Andrew Rule weaves them together with his own detailed research to illustrate his subject’s early poverty and meteoric rise.
At the biography’s Melbourne launch, one guest asked Stokes who had been the greatest influence on his life. With some emotion in his voice, Stokes replied that it had been the older friend who noticed his lack of vocabulary, evident after leaving school aged 14. The friend bought him a dictionary and told him to learn a few new words every day. The value Stokes places on education is an important lesson for any investor.
Stocks for the Long Run, by Jeremy Siegel
Stocks for the Long Run by Wharton Professor Jeremy Siegel (summarised here) is both an important message and a comprehensive read for investors. After central banks have proven their willingness to repress defensive investors in order to ease the burden on indebted sovereigns and leveraged banks, I have reluctantly taken the view that higher risk shares are more fundamentally priced than the cost of defensive debt. Earlier I suggested that conservative investors need to consider having more shares for the long run (see Your returns in 2024, October 22), which I still believe despite recent reminders of the volatility in share prices.
Steve Jobs, by Walter Isaacson
This is probably the best biography of Steve Jobs, as it’s an official work, commissioned before he died. The book covers the corporate battles Jobs faced and it was interesting to hear about how Jobs was kicked out of Apple, the company he co-founded. He then came back and reinvigorated the company, which shows the power of his talent.
Benjamin Franklin: An American Life, by Walter Isaacson
I read this after reading the Steve Jobs biography by the same author. Benjamin Franklin was an amazingly intelligent guy. He not only helped draft and sign the Declaration of Independence, but was also the first US ambassador to the French court. He was also an inventor. The book really showed the amazing talent of some of these eminent people.
Money Mavericks: Confessions of a Hedge Fund Manager, by Lars Kroijer
This book tells the story of Lars Kroijer, from working on Wall Street to setting up, running and finally winding up his own hedge fund. I enjoyed this book as a narrative of one person's struggle to establish a hedge fund. The competitive nature of the industry, the way money flows based on short-term returns and the impressive salaries required to hire talent all make for interesting reading.
From an investment perspective there are interesting lessons to take away, not least the volatile nature of the hedge fund industry. Kroijer makes some interesting concluding comments on the lessons that he took away following his time working in the industry, seeing him now advocate for more basic investment strategies such as diversification, long-term exposure to volatile asset classes such as shares, and scepticism about the high fees charged by some investment managers, including hedge funds.
The Warren Buffett Way, by Robert Hagstrom
It was February 1995 and I was a second-year, somewhat unfulfilled graduate economist at the Department of Finance in Canberra. My mind often turned to my real love: share market investing, which I was learning at my grandmother’s knee after she began investing in the 1960s.
In The Australian Financial Review one day I found an excerpt from The Warren Buffett Way by Robert Hagstrom. Enthralled, I bought a copy of the book and read it from cover to cover. I went on to read what must have been every word written about Warren Buffett at that time, as well as Benjamin Graham’s The Intelligent Investor and other value investing lore. I enrolled in a finance and investment qualification and a year later went to London to begin my funds management and equities research career.
Hagstrom provides a brief biography of the Oracle of Omaha and a history of Berkshire Hathaway covering all the important investments and stages in the company’s development until 1994. Benjamin Graham’s influence on Buffett, the use of invested insurance premiums as float and the early investments are all covered, as are the larger and more famous investments and little-known but hugely profitable investments in fixed interest securities.
Nearly 20 years on, my February 1995 copy of The Warren Buffett Way remains a great read. The blueprint for rational investing is all there and striking in its simplicity: be sceptical of the efficient market theory, prefer simple and understandable businesses with consistent operating histories and favourable long-term prospects, prefer rational and candid management, look for high profit margins and focus on return on equity, value the business fairly and look to purchase at a discount to value.
Making Money Made Simple, by Noel Whittaker
While in Year 10 at high school, I devoured this book’s common-sense advice on life (“why only 8% make it financially”), compound interest (“appreciate the effects of time and rate”) and debt (“never borrow for objects which lose value”). The basics of tax, investing, retirement, having a love of learning and staying out of financial trouble were also covered. Noel is extremely readable and the worked examples of basic investment and debt arithmetic were compelling.
I continue to live by Noel’s principles in 2014 and have given copies of the book to grateful family and friends who wonder why this is not taught in schools. Every new parent, school leaver and engaged couple should read it.
Berkshire Hathaway Letters to Shareholders, 1965-2012, edited by Max Olson
By 2013 I had read every Berkshire Hathaway shareholder letter since 1995. One for the serious Buffett fan, this textbook-sized tome enables me to fill in the gaps in my knowledge of Berkshire’s history since the earliest days of Buffett’s involvement.
Today the annual shareholder letters are world-famous and eagerly awaited by the investment community but the contemporary, lengthy format of opinions about the investment year just ended combined with reports from Berkshire’s operations took some time to develop. The early letters were shorter but also drier and less colourful than recent missives.
Every letter contains lessons in rational investing and corporate finance, all of it in Buffett’s homespun, accessible style. The Oracle’s disdain for greed, momentum and herd investing, overpaid management and the mis-selling of leveraged complexity ahead of the financial crisis are all there, as is his enduring faith in America and capitalism.
The Four Pillars of Investing, William J. Bernstein
This book, although it does not have all the answers, is a great read to help understand that asset allocation adds more value than stock picking. Although a US-centric textbook, the principles put forward by Bernstein equally apply to us in Australia.
I have chosen three books that challenge our complacency.
Capital in the Twenty-First Century, by Thomas Piketty
This major work raises a critical question. Can the profit share of GDP, which is already at a record high, keep rising inexorably? Or will mean reversion set in?
Piketty is worried about wealth concentration. Investors should be wary of price-earnings ratios for bonds, property and shares if the denominator is unsustainable.
The Next Economic Disaster: Why It’s Coming and How to Avoid It, by Richard Vague
Most major economic crises were preceded by a spike in privately held debt. Since the private debt spikes in China and Australia have not subsided, are they the last dominos in the GFC? Since private debt has not fallen significantly in America, will that stunt its growth?
Vague offers a way to spot the making of a financial crisis and also a solution – rather than bail out banks, governments should dissolve consumer debt. But it begs the question why central banks should tolerate households running up excessive debt in the first place.
Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, by Gary Antonacci
Most investors try to reduce downside risk by holding a mix of shares and bonds. But with interest rates at record lows, will the traditional passive bond/share mix prove lethal this time? If so, a dynamic share/bond switching strategy may be the solution.
Antonacci demonstrates that holding 100% in shares (through ETFs) and switching to 100% in bonds (via ETFs) whenever the share index’s 12-month momentum turns negative is much safer and more profitable than a static 60% share/40% bond portfolio.
These books won’t make you merry, but the last one does provide Christmas cheer – a way to obtain good returns with downside protection. Anyone who got burnt by the GFC and vowed never to go through such an event again should include these books on their wish list.
Barbarians at the Gate: The Fall of RJR Nabisco, by Bryan Burrough and John Helyar
This book is widely regarded as a classic – and is easily the best book about mergers and acquisitions I have ever come across. First published in 1989, it hasn’t dated a bit. The personalities are incredible, the quotes are eye-opening, and it’s very easy to read. From an investment perspective, I keep coming back to it as the perfect example of how much fat there can be to trim in a business and how quickly times can change. Emotions, gut feeling and herd mentality play a major part in so much investment, and here you can see all those elements writ large.
A Frolic of His Own, William Gaddis
If you can track a copy of this novel down, and don’t mind a bit of a dense and difficult read, it’s well worth the effort. Tragic and blackly hilarious, it tells the story of several long-running court cases and some petty, childish people surrounding them. Most of all, this is a book about privilege and money and the ugly process of wasting both those things. I found it to be a deeply moving lesson in care and compassion when it comes to the money we save and spend. The often-neglected flipside to investing is choosing how to invest our time or spend our wealth when we are able to. This book offers a cautionary tale about how people look when they get that bit wrong.