Investment and wealth creation
If you want to do well as an investor, whether you seek out advice or not, we 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 we 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!
We highly recommend each and every book here, they are all classics and are the best of their type.
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.
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.