It pays to invest in reading

2007-04-27 12:52:50 Source : Moneycontrol.com

Being a good investor is hard work. And, you can't be one without reading -- a lot. Buying stocks that outperform the market is an immensely competitive task. And not being armed with insight from investment literature is a serious handicap.

I have compiled some investment reading that could help you stay way ahead of the pack, when it comes to investing. I can personally vouch for this literature, though some of it includes recommendations by friends.

Let me start with a personal experience. A big portfolio management company asked me if I would help set up their library.

I said, “Yes, provided you give me four or five of your employees who will ‘own’ the book. They should know the book, have read it, understood it, and be able to make a presentation on the book.”

This was in 2005; I am still waiting!

Attitude towards money

If you need to check your own attitude towards money, read Ayn Rand’s Atlas Shrugged and see who your sympathies lie with. However, keep in mind the Bhagwad Gita attitude towards effort, and the result seems better than Ayn Rand’s “Virtue of selfishness”. But Ayn Rand, you must read!

Starting Out

Random Walk Down Wall Street by Burton Malkiel is a solid and wide-ranging survey of finance that's as good a place to start as any.

Jeremy Siegel's Stocks for the Long Run, though sometimes criticised as a product of the bull market, is also a good general overview of stocks as an asset class.

Analysis for Financial Management by Robert Higgins, is one of the best (read, least painful) introductions to accounting that I've found. Yes, you simply have to be able to understand how cash flows through a company if you plan on picking stocks. In the Indian context you could read Finance Sense by Prasanna Chandra. Accounting isn't exciting. But it is the language of business. And investors must be able to talk the talk before walking the walk.

The Five Rules for Successful Stock Investing is an accessible overview of fundamental analysis, and covers some topics that aren't always emphasised elsewhere, such as economic moats.

Why Smart People Make Dumb Money Mistakes by Gary Belsky and Thomas Gilovich is the best entry-level book I've found on the fascinating topic of behavioral finance.

Great managers

My favourite of the many Buffett biographies is Roger Lowenstein's Making of an American Capitalist, after which you should read the insightful annual letters written by Buffett to shareholders of Berkshire Hathway (visit their web site).

Benjamin Graham's The Intelligent Investor is a must-read, and the recent edition has copious – and excellent – footnotes that bring Graham's classic ideas into the modern age. Phil Fisher is in many ways the original growth investor, and his Common Stocks and Uncommon Profits should also be high on any investor's reading list. It's the perfect compliment to Graham.

However, though Fisher may have been a great investor, his book does not exactly make for easy reading. If you use his ‘criteria’ for selecting a company, you may not end up being the richest man on earth. But you will definitely NOT lose money.

Moving to the more recent stars of the investment firmament, Peter Lynch's Beating the Street is essentially the journal of a very successful money manager, which is what makes it so readable and informative. His other book One up on Wall Street is also good, and both these books are a must read.

John Train's Money Masters of Our Time profiles about a dozen successful investors of wildly varying styles. This will tell you why a Chandrakant Sampat, a Nagnath, a Vallabh Bhansali, a Rakesh Jhunjhunwala, a Prashant Jain or a Madhu Kela might have different stategies, but are good in results. Knowing how you will behave in a particular investment situation might save you a lot of angst.

Marty Whitman's The Aggressive Conservative Investor, and David Dreman's Contrarian Investment Strategies. In the Indian context, Contrarian investing is not easy and not too many fund managers have any track record doing it. But at least you will understand the concepts when you hear the Mutual fund managers talk about their strategies.

Poor Charlie's Almanack, collects Buffett partner Charlie Munger's major speeches and writings over the past couple of decades. Munger's biography, Damn Right! by Janet Lowe was good. So, I imagine a collection of thoughts from Munger himself should be even better.

Looking for history?

John Kenneth Galbraith's A Short History of Financial Euphoria is a slim volume that's a fine place to start. Devil Take the Hindmost by Edward Chancellor is a fantastic and in-depth history of manias through the ages.

Peter Bernstein's Capital Ideas has been often recommended to me as an interesting and accessible history of academic finance. While on Bernstein, one cannot forget Against the Gods, easily one of the finest books I have read on risk. A recent book that I read on this is Innumeracy, a book showing how people are mathematically illiterate.

On the lighter side, two classics by Michael Lewis, stand out; Liar's Poker and Moneyball. The former, featuring some laugh-out-loud episodes, tells the story of the larger-than-life characters who made the Salomon Brothers the kings of bond trading in the 1980s. The latter chronicles how the Oakland A's parlayed one of baseball's smallest payrolls into a winning track record.

I have not read Moneyball but I have heard that it has more lessons about investing. Liar's Poker is a great read and gives an insider's view of life inside an investment bank during a bull market.

In all fairness, that may be because I've yet to read even one of the many books that have come out since the firm Enron's demise. The two that have been recommended to me most often are Bethany McLean's The Smartest Guys in the Room and Kurt Eichenwald's Conspiracy of Fools.

Will make you think

The final category on the ultimate investment reading list are volumes that force you to think more deeply, or in a different way, about investing.

Robert Cialdini's Influence is written on the lines of (though it is more sophisticated) of Why Smart People Make Big Money Mistakes, and shows how and why we are susceptible to persuasion by others. If you think this doesn't sound like it has anything to do with investing, think again – following the herd is one of the easiest investment traps to fall into, and Influence will help you realise when you're being led astray by the crowd for irrational reasons.

Fooled by Randomness, by Nassim Taleb, is more directly about finance, but is no less thought provoking than Influence. Taleb explores how easily we confuse luck with skill and the importance of knowing which is which. Taleb is more of a quantitative analyst and a trader than the other authors on the reading list, which adds to the book's appeal.

Finally, I would be remiss if I didn't recommend Michael Porter's Competitive Strategy, which is still the best primer for thinking about competitive advantage. It can be repetitive and dry in parts, but it's still a worthwhile read.

You can't understand economic moats without being familiar with Porter. Another good book, perhaps to start your personal financial planning exercise is The Richest Man of Babylon, a classic, and like all classics, easily forgotten by the new kids on the block.

Conclusion


Needless to say, this list could have been much longer. Shareholder letters in particular, I only mentioned in the passing. They are a great (and free) resource – a good starting point for your investment education.

For lay investors, I have a simple take. In the US markets, professionals underperform the INDEX by a margin. Let us say the average fund manager underperforms the index by a percentage or two. See how much you under-perform, and you could be surprised.

So, if you think you can change – and change you must – start reading!

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