| Very good investment and wealth building books |
If you want to do well as an investor, whether you seek out advice or not, I strongly recommend the following books to you. You might think that by seeking out good advice you can get away from needing to read books like this, but I disagree. With so many financial advisers out there ranging from mediocre through to downright crooked, you have no way of knowing if you are getting good advice in the first place! Even if you don't have time to manage all your own finances you should at least read a couple of these books, so when you do get advice you can recognise if it is any good or not!
I highly recommend each and every book here, they are all classics and are the best of their type.
| Books on wealth creation |
How to Ruin Your Financial Life - Ben Stein
From the author of How to Ruin Your Life, How to Ruin Your Love Life and a number of serious finance texts, this book lays out a grand plan for how to lose lots of money and ruin your financial life. It gives such gems as "diversification is for sissies", "don't balance your cheque book" and "make a point of watching those late night financial success informercials" and "convince yourself that you can beat the market without knowing anything about it", his provides a pretty good and funny catalogue of common beginner mistakes. Naturally if wealth creation is your goal, you should do the opposite of what it says.
The Millionaire Next Door - Thomas J. Stanley and William D. Danko
The Millionaire Next Door is one of the rarest kinds of investment book, one that is simultaneously very very good and a best seller to the general public. This is rare, because generally investment books that sell well spout get-rich-quick rubbish. This book talks about good old fashioned frugal spending, hard work and long term investment. If you are looking for a book on wealth to give you a kick off, I suggest this would be a good start. It basically delivers the message that "if you want to be wealthy, invest well and work hard, and don't buy any expensive toys and spend it all until after you make it."
Why Smart People Make Big Money Mistakes - and how to correct them - Gary Belsky and Thomas Gilovich
An excellent book on investor psychology. This book gives the Hannibal Lecter treatment to investors, picking apart their psyche in a manner that will have you squirming with embarrassment when you realise just how much this sounds like you. After you have read the Millionaire Next Door and Why Smart People Make Big Money Mistakes you will then be ready to go on to reading actual investment books.
| Books on managed funds and portfolio construction |
Common Sense on Mutual Funds - John C. Bogle
One of the best, and most sensible books ever written on investment. This book parallels almost perfectly my own views on investment and recommends investors use index funds as much as possible, minimise turnover and costs and take a long term view. He says if you are going to buy an actively managed fund you should avoid conservative index hugging ones but instead go for very active managers with unusual portfolios and low fees.
The Intelligent Asset Allocator - William Bernstein
This is a very nifty book that will change your perspective on portfolio construction. It takes Modern Portfolio Theory and strips it down to a simple and very useful form. It doesn't refer to beta* and the capital asset pricing model* isn't used, thankfully, but instead shows a very practical way of putting together portfolios to minimise risk. It answers the age old question - should you invest in property, shares, bonds, cash or hedge funds? The answer is all of them, but rebalance the portfolio regularly. This is a surprisingly down to Earth book and it has none of the silly assumptions or overcomplicated mathematics that annoy me so much about most Modern Portfolio Theory books. Definitely on the required reading list, it presents only a mild technical challenge because the author seems to be one of those guys that believes an ounce of common sense is worth more than a tonne of computer power. It lacks mathematical complexity because the author thinks you don't need calculus to put together a diversified portfolio.
* If you don't know what beta and the capital asset pricing model are then don't worry about it, you can still lead a complete and fulfilling life without ever getting into this complicated academic mumbo jumbo. Beta is a measure of volatility and the capital asset pricing model is a method of valuing assets based on beta. Both concepts have been thoroughly discredited by more recent research, yet remain staggeringly popular in financial circles, if only because nobody has yet found a technique complicated enough to replace them.
Asset Allocation: Balancing Financial Risk - Roger C. Gibson
Another book along similar lines to The Intelligent Asset Allocator, though it is targeted more at financial advisers than general investors. You should find it a very useful book but if you only want to buy one book get The Intelligent Asset Allocator.
Global Investing: The Professional's Guide to the World Capital Markets - Roger Ibbotson and Gary P. Brinson
One of the most comprehensive books on the subject, gives detailed information about asset class returns and relates these returns to risk, marketability, taxation and information costs. Gives plenty of information about asset allocation and practical advice on building portfolios. Because of the heavy nature of this book, it is recommended for more advanced readers and financial advisers.
Mutual Funds: Risk and Performance Analysis for Decision Making - John A. Haslem
This is another book for professionals. This is probably the most complete text book yet written on mutual funds (the American name for "managed funds") and should be of interest to investment advisers and serious investors. It covers just about everything you need to know about the subject: appraisal, selection, asset allocation and portfolio construction, value vs. growth, passive vs. active. This book received high praise in the Vanguard Diehards forum.
A Random Walk Down Wall Street - Burton G. Malkiel
I could summarise this book by saying that Malkiel attacks virtually every known piece of Wall Street wisdom and exposes it all as bunk. This book takes a hard look at technical analysis, fundamental analysis, actively managed share funds and a whole lot of other stuff and basically says that everything you think you know about investment is a lie. How could you not want to read a book like that? Even if you don't entirely agree with all of his conclusions this book still contains so much scientific scepticism that I recommend you read carefully - all 500 pages of it. (This is one of those books that bashes the capital asset pricing model etc, as I alluded to in the previous paragraph.)
Global Bargain Hunting - Burton G. Malkiel and J.P. Mei
A highly enlightening book on emerging market investing. The authors build a very strong case for investing in "emerging markets", documenting the much higher growth rates as well as generally lower valuations in such markets (as well as their higher risks!). They discuss the value premium and indexing and asset allocation and a variety of other topics closely related to the books listed above.
| Books on direct shares investment |
One Up on Wall Street and Beating the Street - Peter Lynch
Peter Lynch ran the Fidelity Magellan Fund for many years, and though now retired will be remembered as one of the greats. Some very good general stock investment advice on a number of different types of stocks and the strategies that work with them. His approach to investing is surprisingly simple, and basically revolves around the idea that "if you like the product, you'll probably love the stock, so it is best to buy shares in a company you know is doing well rather than take a flier on some biotech startup".
The Zulu Principle and Beyond the Zulu Principle - Jim Slater
Two excellent and thorough books on fundamental analysis and how small investors can do very well investing in small growth companies. Beyond- is the newer book, and is essentially a rewrite of the first. You will benefit from both books because they don't completely overlap but the newer one is the better book if you only want to buy one. There are chapters in the first book that aren't repeated in the second, maybe you should buy Beyond- and look for the other one in the library. Another book by the same author, Investment Made Easy is more of a beginner's primer, covering a variety of investment topics but not in such fine detail. The Zulu books are only an intermediate challenge and will not be too difficult for anyone with some moderate experience buying and selling shares. Some people have reported that they can't find this book anywhere in shops. I bought my copies at the Boffin's Bookshop in Perth a few years ago. If you can't find it don't worry - the other books here are all good as well, but I do think these are excellent books. Amazon usually has used copies of the books.
What Works on Wall Street - James P. O'Shaughnessy
O'Shaughnessy was the first outsider ever to gain access to the Standard and Poors Compustat database, the ultimate resource for investment researchers containing an overwhelming amount of price and fundamental data for many thousands of securities over many decades. Using computer simulations he backtested a variety of trading and investment strategies and made some interesting discoveries on which strategies work the best. This book contains the results of his findings and is essential reading.
Contrarian Investment Strategies: The Next Generation - David Dreman
A cross between What Works on Wall Street and A Random Walk Down Wall Street. He attacks conventional wisdom just like Malkiel does and gives detailed arguments to show Wall Street analysts in a rather ridiculous light but also runs an equity fund and shows a variety of strategies that have worked in the past. His backtesting, based on Compustat just like O'Shaughnessey comes to similar conclusions but does not reveal anything you didn't know after reading O'Shaughnessey's book. He argues just like Malkiel does that a blindfolded monkey, lubricated with sufficient alcoholic beverages could pick stocks as well as any analyst, but takes an interesting approach in that he actually regards this as an exploitable phenomenon to make money! Dreman's systems, which are basically just value investing techniques work on the idea that analysts are far too bullish on growth stocks and far too pessimistic on "dogs", therefore you can do very well by buying stocks that analysts are exceedingly bearish about and have sold down to the point that they trade very cheaply. When earnings recover, as they usually do, the stock will "surprise" Wall Street and rally nicely. Dreman's own investment record is excellent, which indicates to me that he may be onto something. He advises people to buy very oversold stocks, provided that the company is still in one piece and not likely to die completely, so unlike both Malkiel and O'Shaughnessey he does value qualitative factors like management and business prospects.
John Neff on Investing- John Neff
This guy is considered to be one of the greatest fund managers of all time, right up there with Buffett, Templeton and Lynch. His Windsor fund beat the market in most of the 30 years of his tenure and his final score was more than 3% higher than the market. (If beating the market by 3%pa over 30 years doesn't sound like much of an achievement to you, you probably are underestimating how hard this feat really is! Lots of people make high returns by using risky strategies, but most lose it. This is one of the people that just kept consistently performing well over a long period of time. An investor in Windsor when Neff took over would have turned $1,000 into almost $30,000 if he held until Neff retired (12%pa return), but someone getting 9%, roughly the same return as the market over the same time, would have turned $1,000 into only $13,300.) This book has three sections. The first is autobiographical, talking about Neff's early life and how he came to be running a mutual fund. The second section deals with Neff's value approach and "Measured Participation" portfolio construction strategy. The third section is something of a historical account of what it was like to run Windsor.
Blueprint for Investment: A Long Term Contrarian Approach - Richard Fitzherbert
Another good book on contrarian investment, it includes more bashing of the Efficient Market Hypothesis, gives lessons from history (some very recent) about speculative bubbles and how to avoid them and gives a general wrap-up of value and contrarian investment. As a bonus it is an Australian book published by Wrightbooks. I thought this book was excellent.
How to Pick Stocks Like Warren Buffett - Timothy Vick
The Essays of Warren Buffett - Lawrence A. Cunningham
Buffett : The Making of an American Capitalist - Roger Lowenstein
The Warren Buffett Way, The Warren Buffett Portfolio and The Essential Buffett- Robert G. Hagstrom
A Wonderful Company at a Fair Price - Brian McNiven
Some very good books about Warren Buffett and his methods. You can't call yourself an investor until you can write an off-the-cuff two page essay on Warren Buffett and his methods! I think How to Pick Stocks Like Warren Buffett and The Essential Buffett are probably the best of the lot. Warren Buffett is the undisputed king of investors, the greatest investor of all time. If you are looking for a guru to learn from I'd say this guy, a self made billionaire who made his money entirely through stock market investment, would be a great start! "Wonderful Company" is a new book by an Australian author, and gives a very good perspective on Buffett style investing for Australian investors.
| Books on property investment |
Confessions of a Real Estate Agent - Terry Ryder
Real Estate Mistakes - Neil Jenman
Don't Sign Anything - Neil Jenman
Realistic Real Estate Investing - Austin Donnelly
Good books on real estate. Ryder's book warns about shonky operators in the real estate industry, Neil Jenman is famous for starting Australia's self-proclaimed "most ethical real estate group" and gives the inside scoop on how crooked the real estate industry is, Donnelly's book is more of a "reality check" book, he shoots down some of the wilder claims about property being extremely profitable with no real risk and focuses on more negatives than the other books do.
How I Turned $1,000 into Five Million in Real Estate in my Spare Time - William Nickerson
Long before the present day mania for "zero down" real estate seminars with flashy gurus making wildly exaggerated claims about real estate there was a book defined the basic formula for wealth building with real estate. Although the title of this book seems a bit corny, this book is a genuine real estate classic. The first edition of this book was called "How I turned $1,000 into One Million in Real Estate", the second was "..Three Million.." and now the third edition "..Five Million..", this wasn't just marketing hype - he actually did grow very wealthy using his techniques. This book doesn't talk about lease options and weird financing arrangements, it doesn't talk about the mythical "motivated seller" and try to tell you you can buy houses for one half of market value by finding these guys. Instead it tells you something far more basic, something far more boring and simple. He tells you to buy slightly run-down properties, renovate them cheaply and sell in a couple of years for a 25% profit, using standard loans provided by lenders, secured against equity in your own house or other properties. If you look at John T. Reed's excellent real estate site and see where other famous real estate authors ended up, Nickerson is one of the few famous real estate gurus that didn't end up broke or jailed. I'd be inclined to follow this guy's advice rather than the more exotic techniques taught at those seminars.
Renton's Understanding Investment Property - Nicholas Renton
Renton is a genuine real estate book by someone with professional qualifications and broad knowledge of many areas of real estate investment. Renton has written many other books, including various books on the stock market, so you won't get any of that "shares are highly risky and the returns are so bad you won't even beat inflation but property is a completely fool-proof way to become a gazillionaire" stuff that most real estate authors put out. This book, just shy of 500 pages long goes into far more detail than most about property investment, and covers risk a lot better than most. It goes into the finer points of negative gearing and other topics, and talks about property as an investment class worthy of inclusion in a portfolio - as opposed to extolling its virtues while bashing all others as many real estate books do - and is one of the best real estate books I've ever read. Don't invest in property until you have checked this one out.
Investing in Residential Property - Peter Waxman and Dennis Lenard
Waxman and Lenard is another book that takes a similar "serious" approach to the subject matter. It goes on about economic cycles and tax laws and various things that will bore most real estate fanatics to tears, but I think such a text is important to shake investors out of the get-rich-quick spell cast by most real estate authors who spin some dangerous nonsense about borrowing to the hilt to buy a huge property portfolio so you can retire a millionaire in ten years.
| Books on finding good advisers |
Good Advice - Austin Donnelly
I just love the way Donnelly sticks it to dodgy advisers. This is another book of his where he suggests ways of finding a good adviser, and if you are an adviser yourself, ways to ensure that you are giving good advice.
I don't absolutely 100% agree with some of the things Donnelly says, for example he says you should get your adviser to provide risk disclosure that includes the worst this investment has performed in the past, (I disagree because past performance is no guarantee of future results, I usually tell my own clients that the worst case scenario could be much worse than the worst result from the last 20 years or so, I do let my clients know about past performance ranges but go much further by pointing out the potential for results to be even worse than that. I fear that disclosure based just on past results would allow salesmen to data mine to find funds with low volatility in their past performance and run around flogging these as low risk investments - for example a mortgage trust with low quality borrowers or a hedge fund could well do much worse than past results might suggest.) On the other hand, Donnelly and I think alike on many things and share the goal of having every (or nearly every) dodgy salesman removed from the financial advice industry. Another book on the subject is Renton's Understanding Stockbrokers and Financial advisers by Nick Renton.
| Some more advanced books, read these if you really want to get serious |
Against the Gods: The Remarkable Story of Risk - Peter Bernstein
I found this to be a fascinating book, it is a historical exploration of the development of the mathematics of economics and risk management, discussing the origins of statistics and probability theory, game theory, regression to the mean and modern economics. It won't teach you how to value a company or recognise an "oversold" stock, but if you read it from cover to cover you will become a more sophisticated investor with a deeper understanding of the way markets and risk function. The mathematics discussed are sophisticated, but the book doesn't go into these concepts in any great depth, it is more a narrative on how we arrived at modern theories and thus you can read it without needing a background in economics or maths (instead, this book is supposed to give you that background).
The Birth of Plenty : How the Prosperity of the Modern World was Created - William Bernstein
This isn't really a book about how to invest, it is another book like Against the Gods which studies the history of finance. In this book William Bernstein, author of The Intelligent Asset Allocator (no relation to Peter Bernstein) explores why it is that some countries are wealthy and some are not and how the wealth of nations is created.
The Intelligent Investor - Benjamin Graham
An advanced book, definitely not the sort of thing you would plough into straight away, but rightly called "the best investment book ever written". It isn't so much that the material is difficult, on the contrary his approaches are fairly intuitive if you "get" value analysis, but it is dry and pretty hard to get into, the sort of book you may have to force yourself to keep reading. Every couple of pages though he makes a statement that is so profound and quote worthy that you'll want to take notes, worth reading but don't say I didn't warn you! Warren Buffett learned investment from this man, and in the later editions an appendix and introduction by Buffett make interesting reading.
Security Analysis - Benjamin Graham and David Dodd
Graham's other book, another milestone in investment writing. This one leans more toward being a textbook than a book. The Intelligent Investor should be read cover to cover, but this one will remind you of your old economics textbooks from school. This is definitely a book for serious investors only, it is a thick, dry, rather boring book on picking apart company accounts and value investing. If you aren't interested in becoming a hardcore stock picker then you might not get much out of this book.
There is also a new version out called Graham and Dodd's Security Analysis by Sidney Cottle, Roger Murray and Frank Block. It is supposedly just a new edition but is in fact a radical rewrite. If you feel up to it you can read both, they are similar books, but they aren't quite the same book. This book should not be approached lightly, it is a comprehensive treatise on the analysis of company accounts and could easily take you a year to finish if you study it in great depth.
In terms of which edition you should get, the original 1934 edition is liked by many but the 1940 edition was, like many second editions, improved somewhat with new chapters and better editing. The later edition with Cottle, Murray and Block is also very good, so if you have the money I like the 1940 and the 1988 (5th) editions. I haven't seen the 1951 (3rd) and 1962 (4th) editions so I can't comment on what those are like.
Common Stocks and Uncommon Profits and Other Writings - Philip A. Fisher
You can save yourself a great deal of reading on Warren Buffett simply by reading the books in this volume. The "other writings" alluded to in the title are two short works that are bundled into the one cover with Common Stocks and Uncommon Profits. These other works are "Conservative Investors Sleep Well", which deals with the subject of how to identify a safe company with powerful competitive advantages, as opposed to a speculative company, and "Developing an Investment Philosophy", which goes at length into such things as being a contrarian, focusing on businesses instead of stock markets, market timing (and why you shouldn't do it) and an argument against the Efficient Markets Hypothesis. When I read the volume for the first time suddenly the penny dropped about Warren Buffett, all of Buffett's talk of "margin of safety" and "value" comes from Graham, but Fisher is the one that promotes the idea of the super business franchise, the buy and hold forever doctrine for quality companies and all of that stuff about competitive advantages. If you study your Ben Graham and Phil Fisher you'll have virtually the entire foundation that Buffett drew on, in fact after a good read of Fisher I came to the conclusion that most books on Buffett are simply Fisher ripoffs with a bit of value investing thrown in.
A Short History of Financial Euphoria - John Kenneth Galbraith
Galbraith is an eminent Harvard economist one of the more interesting authors on economics and history. This relatively short book deals with the subject of booms and busts. He identifies common threads that all booms and busts have in common and proves that "the one thing we learn from history is that we do not learn from history". This book was written before the Dot Com boom and bust but if you changed only a few names and dates around you'd get a very good description of that bubble as well. The main message of this book is that one should not get swept up in the crowd and believe the hype about the "new era". The book describes numerous bubbles going back a few hundred years though to the crash of 1987 (the first edition was written in 1990).
| Suggested books for a self-study course in investment and wealth creation |
Level zero, haven't got a clue but want to start somewhere
Level one, getting off to the best possible start
Level two, learning the truth about the way markets work
Level three, the stock picker
Level four, the serious personal investor
I'm working towards the CFA exam at the moment. For those interested in becoming a professional investor or studying for a business degree, CFA or MBA I have made another list of books for professionals and aspiring professionals. These include the official readings required for CFA students as well as other more advanced text books on financial analysis and related topics.