Reading your way to prosperity

PORTFOLIO POINT: Some investment books can be a great cure for insomnia. They can also awaken people to smarter investing.

The market is a great teacher, but its lessons can be very expensive to learn. For far less cost, I suggest you seek wisdom from others including from this, my Top 10 list of the most important investment books written, arranged by topic.

Let me say from the outset that these may not be the Top 10 best books ever written. I have purposefully prepared this like a self-study, reading list across topics I feel are critically important for the savvy private investor. My apologies to my fellow Australian authors, including best-selling authors such as Paul Clitheroe, Noel Whittaker and David Koch, who have written broadly on personal finance and ably about the local nuances of our market and regulatory complexities, such as superannuation.

It’s just that on balance other more focused works are more worthy of entry into this modest hall of fame. Their works provide a solid general introduction to personal financial management.

This list is also modern investment market-specific, which means my oldest selection was written in 1925. That said, we could have gone further back in time, including to the Torah, which offered 3000-year-old asset allocation advice suggesting you should diversify your investments equally between shares, property and cash (phrased slightly differently of course).

The Four Pillars of Investing
William Bernstein, 2002
(Portfolio strategy)

If you were only going to read one book on investing, this is the one. Former physician turned investor, William Bernstein helps you build a robust investment strategy on four scientific pillars: theory of how markets work; a respect for history; a primer on behavioural finance; and a warning about becoming the revenue stream of undeserving others.

This book focuses on your first, most critical investing step, which is designing portfolios and choosing a style of investing right for you. It includes content from Bernstein’s highly praised earlier technical piece The Intelligent Asset Allocator, saving you having to buy that. You can also read an earlier summary of this work here. In addition to Bernstein, there are some excellent books on the same subjects written by Jeremy Siegel, Bowen & Goldie, James O’Shaughnessy and of course Burton Malkiel.

The Intelligent Investor
Benjamin Graham, 1949
(Stock selection and value investing)

I’m not one to argue with Warren Buffett, who believes this is “the best investing book ever written”. Benjamin Graham arguably invented security analysis, including co-authoring the more technical work, Security Analysis, which Alan Kohler is fond of referring to. The Intelligent Investor teaches readers to be value investors – that is, to buy companies at prices below their true value and to hold them for the long term. This is an investment style generally followed or offered by fund managers here like Maple-Brown Abbott, Perennial, Perpetual, Tyndall and others.

Out of favour, value companies sold on low price/earnings ratios can reward investor in two ways: their earnings can go up and they return more to the shareholder or the price that others are prepared to pay for the stock can also rise while stocks with high price/earnings ratios are more likely to suffer from the reverse.

For a local interpretation of this work read Chris Leithner’s The Intelligent Australian Investor and, for a shorter read, try Christopher Browne’s The Little Book of Value Investing. You could easily fill a library with books about Buffettology, but you might as well start at the source.

One up on Wall Street
Peter Lynch, 1989
(Growth-style investing)

Peter Lynch ran funds management giant Fidelity’s famously successful Magellan fund from 1977 to 1990 where, unlike most managers, he demonstrated a statistically validated track record of beating the market. He did this by looking mostly for growth stocks, including small stocks, which he thought had the potential to become “10 baggers”, that is, increase in value by 10 times. Have a couple of these in your portfolio then you too can beat the market.

Lynch popularised the concept of local knowledge, which suggests individuals can spot opportunities among companies they interact with in their daily lives before Wall Street even hears about them. Next time you are in an unusually long shopping queue, consider whether that company deserves your investment capital, not just your income. For a local perspective on investing, you can also read Hughes, Geoff Wilson and Matthew Kidman’s Masters of the Market, which includes interviews with fund managers Robert Maple-Brown, Peter Morgan, Sir Ron Brierley, Anton Tagliaferro and others.

Reminiscences of a Stock Operator
Edwin Lefevre, 1925
(Speculating)

This first-person fiction book is generally accepted to be the biography of the legendary stockmarket trader and speculator Jesse Livermore. Most successful traders hold this book out as the most instructive book on the behaviour of markets and, more importantly, about the traders participating.

If you think buy-and-hold is too boring a way to make money, or you fancy starting your own hedge fund, then read this classic first before you wade into more modern books extolling specific trading or charting strategies. And don’t be put off by the date it was published. It is still in print or, like me, you might find a copy at a second-hand book shop.

The Bear Book
John Rothchild, 1998
(Bear market investing)

Recent events remind us that markets don’t always go up. Your strategy and those of other authors may need rethinking when pessimism and not greed, reigns supreme. Journalist John Rothchild presents various experts’ practical ideas on how to “bear-proof” your portfolio, including identifying stocks which should hold up in a down market and those best poised to recover.

Another worthy read on this rare subject is Russell Napier’s Anatomy of the Bear, which studies in detail the four big market bottoms since 1900 and optimistically concludes they are the best times in history to invest new monies.

Why Smart People Make Big Money Mistakes and How to Correct Them
Gary Belsky and Thomas Gilovich, 1996
(Behavioural finance)

Perhaps new investors should not be allowed to swim beyond ASIC’s flags until reading Belsky & Gilovich’s excellent summary of seven major detrimental behavioural biases (dare we say sins).

These include: mental accounting, loss aversion, decision paralysis, innumeracy, anchoring, over-confidence and herd behavior. You’ll need to read the book (or this summary) to learn what these mean. However, by way of warning, you’ll probably find you are guilty of several of them by virtue of being human.

The Millionaire Next Door
Thomas Stanley and William Danko, 1999
(Wealth)

It is rumoured this worldwide bestseller grew out of a rejected report commissioned by a very well known luxury goods manufacturer, which refused to believe that millionaires lived unassumingly next door, drove a pickup truck and owned a small business in town – in short they need to look elsewhere to sell expensive whisky, cigars and handbags.

This book is a demographic study of American millionaires, which powerfully reinforces that excessive consumption early in life robs future wealth. This book was the inspiration for my popular internet-based study of wealth in Australia, in which many Eureka Report readers participated.

Devil Take The Hindmost
Edward Chancellor, 2000
(History)

Fortune magazine called this book the The Greatest Hits of Financial Silliness [Speculation]. Since the collapse of every bubble creates the seeds of another bubble some where else, it is important that you learn from history how to spot periods of speculative excess. Otherwise you will pay to hear again Sir John Templeton’s famous quip that, The four most expensive words in the English language are 'this time is different’ .

Pioneering Portfolio Management
David Swensen, 2000
(Learning from institutional investing)

Successful Yale University endowment fund manager David Swensen created modern “endowment envy” and more specifically kindled large Australian super funds’ love affair with illiquid investments in infrastructure, private equity and hedge funds.

Yale’s investment outperformance relative to other endowment funds was held out to have come from privileged access to these types of investments as well as an overall higher equity bias. We’ll have to wait to see if later institutional herding was appropriate. While far less notable, retail investors can also learn from institutional investors Trone, Allbright and Taylor’s The Management of Investment Decisions, which can help you with decisions and processes you need to employ to manage your endowment.

The Battle for the Soul of Capitalism
John C Bogle, 2005
(The financial industry)

The retired founder of US mutual fund Vanguard believes that traditional “owner’s capitalism” has “pathologically mutated” into “manager’s capitalism” whereby company executives and colluding intermediaries (bankers, lawyers, product engineers and marketers) strip away legitimate returns you as investors should earn on your precious invested capital.

While written about post-Enron and late-trading, mutual-fund America, there are too many local and recent examples of Australian retail investors coming second for this not too apply here. Other popular works are Michael Lewis’ Liar’s Poker and Fred Schwed’s Where are the customer’s yachts?

The localised nature and regulations of property investment, for instance, make it hard to identify a global best, however, locally you could look to Monique Wakelin’s Streets Ahead on capital appreciating, negatively geared property (available from Eureka Report’s online bookstore).

Books on bond investing, aside from being a possible cure for insomnia, often are also country specific. Crescenzi’s Strategic Bond Investor is an important work, nevertheless. Retired investors can also take warning from Canadian mathematician and adviser Jim Otar’s study on the challenges of retiring successfully in High Expectation & False Dreams.

Finally, Scott Pape’s The Barefoot Investor offers great personal finance advice for your young adult son, daughter or grandchild.

No doubt there are some absences from this list and I would love to hear your suggestions. In the meantime, I hope that by standing on the shoulders of others you can see just a little bit more over the horizon and more safely navigate your investment portfolio.

Doug Turek is the principal adviser of private wealth advisory firm Professional Wealth.