Monday, June 16, 2008

Investment and Finance Books 
From time to time, I get a request for my favorite investment and finance books, which I usually answer via email.

I'm always afraid to post this list publicly, because as my own understanding evolves, my list of favorites changes, and some books that were my early favorites would not make the list now.

Nevertheless, here goes. It will be interesting to me to look back at this list some years hence and compare and contrast it.

For mass consumers

The Millionaire Next Door - I give this as a gift to young people just starting out. Essentially, the authors interviewed thousands of wealthy people to find out how they got that way. The results aren't what many would think.

Eric Tyson's Financial Planning for Dummies. Nothing fancy, and I haven't read it in years. But well-presented, basic stuff to get you started.

For investing enthusiasts

The Intelligent Investor, by Benjamin Graham. Written in the 1970s. Get the updated version, edited by Jason Zweig, who illustrates Graham's timeless principles with recent examples.

Common Sense on Mutual Funds, by John C. Bogle. The founder of the Vanguard group, and the guy who brought index funds to the world, fills you in on why mutual funds, in the aggregate, must fail to beat their indexes over time by the amount of their costs. The solution: Cut expenses, using index funds! For years I was a dedicated Boglehead. Not so much now... I can see a place for active management and active manager selection, and I've written as much here on this blog from time to time. But I think before playing the active game, I think everyone should first have a firm grasp of the beauty and logic of passive management.

A Random Walk Down Wall Street - by Burton Malkiel. An efficient markets guy, Malkiel continues Bogle's thesis and introduces you to the math and logic behind it.

The Superinvestors of Graham and Doddsville. Not a book, but a speech by Warren Buffett.

The Warren Buffett Way - by Robert C. Hagstrom. There are a lot of books on Buffett, and I've actually read most of them. Short of plowing your way through Security Analysis (see below) and the Chairman's Letters from Berkshire Hathaway themselves, this one is the best I've seen at actually cracking open the fundamentals of the companies that Buffett has chosen in the past (note: in the past), and exploring why Buffett may have selected them. The others are much better at portraying Buffett's character. But for the individual who's asking himself "well, how do I actually apply these ideas?" Hagstrom does a pretty good job, I'd say.

For advanced readers and people with a serious interest in finance and economics (but not serious enough to read the trade journals)

Security Analysis, by Benjamin Graham and Chris Dodd. 1934 edition. It takes discipline to read, but it's pure gold. A great next step after reading The Intelligent Investor. Learn about the investing approach that made Warren Buffett famous and many others wealthy. The Internet bubble, technology, the mortgage crisis, junk bonds...Graham and Dodd forsaw everything in 1934 and described it to a T. Brilliant. Drop the cash and keep it on your book shelf. The Intelligent Investor also belongs in this list. Just because it's relatively accessible doesn't mean it isn't brilliant!

The Intelligent Asset Allocator. William Bernstein. Explores the math behind diversification! Surf the efficient frontier by mixing asset classes with low correlation coefficients. Is there a such thing as a "free lunch" after all?

The New Financial Order, by Robert Shiller. Rather than investing, Shiller places his focus on risk management - and completely turned around my thinking from an investment/mutual funds focused writer to an insurance and risk management focus. Shiller explores ways that the individual and family and small business, with next to no capacity to absorb financial and economic shocks without disaster, can transfer risk to the capital markets, which can absorb those risks.

People I would NOT recommend: Kiyosaki. Dave Ramsey for anything other than people on a debt reduction plan and budgeting advice. Suze Ormond, for serious thinkers, though I have gifted her book to young women just starting out, on the theory that the mediocre book that gets read is better than the perfect book that doesn't.

My favorite columnists:

Jason Zweig, Jean Chatsky, Eric Joffe, and Sandra Block. Mark Hulbert. Alan Ableson. Stanley Bing is very good. Greg Carlson at Morningstar (a good friend, former colleague, and straight up guy - and a devoted mutual fund analyst.) And Nancy Opiela at the Journal of Financial Planning.

Hope this helps get you started!

Splash, out


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What is your take on Gary Kaltbaum?
Kaltbaum is one of the better practitioners of the art of technical analysis, a discipline I'd put up there with alchemy, augury, and the manufacture and discipline of snake oil and Kickapoo Joy Juice. :-)
What is technical analysis that makes it such a pseudo financial science?
If you spend some time thinking about how markets work, the idea that future stock prices can be predicted by looking at charts of past prices becomes more and more ridiculous.

I'd refer you to the Wikipedia page on technical analysis for more.
I think I've given out a hundred copies by now of The Wealthy Barber, since it's in a story format, each chapter is fairly self-contained, and it's got basic info in there.
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