Advice that stands test of time
Investors have more access to information than ever but they still return to classic books for inspiration
Warren Buffett has referred to his best ever investment – a book, one that chang ed forever his investment outlook. Photograph: Nati Harnik/AP Photo
Investors and traders have access to more information than ever before, but classic books continue to inspire some of the world’s top money managers.
Warren Buffett recently referred to his best ever investment, but it wasn’t a stake in Coca-Cola or Goldman Sachs or any other company – it was a book, one that changed forever his investment outlook.
Investors have never had as much access to information as they do in today’s internet age, but certain classic books – some of which, including Buffett’s favourite, are many decades old – continue to inspire investors and traders alike.
Anyone with an interest in markets will enjoy Jack Schwager’s Market Wizards, a hugely entertaining book of trader interviews.
Schwager has written many follow-ups, including Hedge Fund Market Wizards in 2012 and The Little Book of Market Wizards in 2014, but the original 1988 publication remains the best, featuring interviews with Jim Rogers and Paul Tudor Jones as well as lesser-known traders.
Different traders talk of their different approaches, most of which are tailored to their individual personalities, the common thread being the need for discipline, risk management and intellectual flexibility.
Anyone looking for specific strategies will be disappointed, although the book offers genuine insights into market behaviour and psychology. That aside, the stories of fortunes won and lost, of market meltdowns and euphoria, are rarely less than riveting.
The Intelligent Investor
Buffett’s favourite (“by far the best book on investing ever written”), Benjamin Graham’s The Intelligent Investor remains required reading for value investors everywhere.
More accessible than his earlier work, Security Analysis, it argues investors should eschew speculation and ignore the mood swings of “Mr Market”.
Instead, take a long-term approach and look for a “margin of safety” by buying undervalued stocks via a methodical, value-based approach.
Although some examples are dated – the book was written in 1949 – Graham’s emphasis on time-tested principles ensures it continues to be eulogised today, with Buffett writing in his most recent shareholder letter: “Of all the investments I ever made, buying Ben’s book was the best”.
The Essays of Warren Buffett
Although some fine biographies of Warren Buffett have been written, his investment approach is best appreciated through his own annual shareholder letters, most of which can be downloaded from Berkshire Hathaway’s website.
The Essays of Warren Buffett, edited by Lawrence Cunningham, does an excellent job of condensing Buffett’s 700+ pages of letters and arranging them thematically, capturing the investor’s philosophy.
Trader Victor Niederhoffer’s Practical Speculation is an unusual, underrated book that should be read by investors and traders alike.
Not everyone appreciates Niederhoffer’s eccentricities – he sees “infinite poetry and beauty” in market moves, has a chapter on “practical market lessons from the tennis court”, and draws investing inspiration from everything from fishing and skyscrapers to the 1950s horror flick Invasion of the Body Snatchers.
However, Niederhoffer is also an empiricist, backing up condemnations of market “mumbo jumbo and moonshine” (he’s especially disdainful of technical analysis and media market coverage) with data and academic references aplenty. His emphasis on scientific testing, whether related to various indicators of market hubris or to the relationship between earnings and stock returns, leads to eye-popping conclusions.
Global Investment Returns Yearbook
Triumph of the Optimists: 101 Years of Global Investment Returnsjustifiably received rave reviews when published in 2002.
Written by London Business School researchers Elroy Dimson, Paul Marsh and Mike Staunton, it costs more than £100 on Amazon, but the annual follow-up, The Global Investment Returns Yearbook, can be read free online.
The yearbook, which covers 25 countries (including Ireland) and analyses 114 years of returns, shows stock returns are seriously overestimated in most countries.
Equity underperformance can persist for decades, even in developed markets such as Germany, France, Italy, Spain and Japan, which have all suffered 50-year periods where stocks failed to keep up with inflation.
Most investors, used to US-centric data, will be stunned by the figures, which show how important it is to have a global portfolio.
Recent yearbooks have also featured superb research relating to dividends, value and growth stocks, and the impact of economic growth on stock returns. A profoundly important publication and a must-read for any serious investor.
A Random Walk Down Wall Street
Burton Malkiel’s A Random Walk Down Wall Street famously asserted that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts”.
That seemed revolutionary in 1973, when the book was published – then, index funds didn’t exist – but it’s been borne out over the past four decades, with data confirming that most fund managers invariably fail to beat the index.
Critics complain markets are not completely efficient and that prices are not always random and unpredictable. Malkiel concedes as much, but his central contention remains unchanged – markets are not perfectly efficient, but efficient enough to ensure most people will not beat the index. Therefore, save yourself time and money, and stick to low-cost international index funds.
The growth in indexing has cemented the book’s reputation as an investment classic. Readers looking for a shorter introduction to the same concepts should read Malkiel’s The Random Walk Guide to Investing, or John Bogle’s Little Book of Common Sense Investing.
Some terrific work on behavioural finance has been published in recent years, although from an investment perspective, it’s hard to beat that produced by strategist James Montier of the global investment management firm GMO.
His most detailed work, the 700-page Behavioural Investing, is a thoroughly comprehensive analysis. His Little Book of Behavioural Investing does an excellent job at summarising our investing foibles. So does Seven Sins of Fund Management, a 100-page paper exploring the folly of forecasting, investors’ illusion of knowledge and absurdly short time horizons, as well as other behavioural sins. As entertaining as it is eye-opening, it can be freely downloaded. A value investor like Montier would no doubt approve of such penny-pinching.
Reminiscences of a Stock Operator
Edwin Lefevre’s fictionalised biography of speculator Jesse Livermore has influenced generations of traders. A rip-roaring account of Livermore’s Wall Street adventures, Reminiscences is even on the recommended reading list of many long-term investors who eschew Livermore’s momentum philosophy, seduced as they are by the pace of the narrative and the wisdom embodied in its tales of market booms and busts.
A tape reader, Livermore was as comfortable going short as he was long (“a man does not have to marry one side of the market till death do them part”), making a fortune during the crashes of 1907 and 1929, and losing several more in between.
Published in 1923, the book’s reputation as a trading classic is undimmed. Hedge fund billionaire Paul Tudor Jones describes it as a “textbook for speculation”, and gives Reminiscences to every trader who joins his firm. Livermore would not have been surprised that the book is still read. “Wall Street is always the same,” he said. “Only the pockets change.”
Contrarian Investment Strategies by David Dreman; Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay; and Margin of Safety by Seth Klarman (I must confess to not having read Klarman’s value investing book, but seeing as it sells for about €1,000 on Ebay, it presumably deserves a mention).