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Investment Books
Loyal reader Kenneth MacDonald writes to ask for advice on investment books. I'm a fan of A Random Walk Down Wall Street, but the bottom line there is pretty simple--diversify, buy and hold, and avoid high fees. Ken is looking for "a more focused book on how to research stocks," something that explains P/E ratios and other fundamentals that can be used to look for value. So to answer Ken I turned to two more knowledgeable investors:
Felix Salmon is also more of an index fund guy but for those willing to bear the risks he recommends the classics:
- The Intelligent Investor by Graham, Zweig and Buffett.
- Value Investing by Greenwald (frequent Stiglitz co-author) et al.
Bartley J. Madden has a wealth of experience in investing and is unusually analytical. He developed the cash-flow-return-on-investment valuation model which is widely used around the world today. His recommendations are:
- Equity Valuation edited by Viebig ("...an excellent overview of valuation models used by institutional investors. The section written by David Holland and Tom Larsen is a particularly useful and up-to-date technical explanation of the CFROI model.")
- Driven: Business Strategy, Human Actions and the Creation of Wealth by Litman and Frigo ("...a very good job of linking business strategy to long-term levels and changes in stock prices.)
For an advanced treatment of the CFROI model I'd also recommend Bart's own book Maximizing Shareholder Value And The Greater Good (free download here). Readers?
Posted by Alex Tabarrok on March 19, 2009 at 07:19 AM | Permalink
Comments
Winning the Loser's Game followed by The Intelligent Investor, followed by The Little Book that Beats the Market followed by re-reading them.
The key is to get excited about investing, then have the Efficient Marketers beat that emotion out of you rather than the almost efficient market beating it out of you.
Posted by: Andrew at Mar 19, 2009 7:31:56 AM
Take a look at Investment Valuation by Aswath Damodaran and Financial Models Using Simualtion and Optimization by Wayne Winston.
Posted by: bdwnnc at Mar 19, 2009 8:44:30 AM
"diversify, buy and hold, and avoid high fees"
Right...and for the last 10 (ten) years if you had been in a no-load mutual fund tracking the S&P 500 you would have earned...say, -3.5%? All while losing half of your money twice (00-02 and current market), yes that's a great strategy.
It absolutely boggles the mind the obsession people have with picking stocks, no matter how intelligent and value oriented they are (a la Graham/Dodd/Buffet). You can *not* beat the market, you can only hope to profit from black swans or lose *less* than the next guy in downward trending markets.
The better path is (I believe) one of two ways: 90% in TIPS and 10% in wildly OTM options (a la Taleb) or spend some real time doing research on allocation research, where returns are really derived (ok, gosh, I know its the vol' of returns that are mostly explained by asset allocation research, but c'mon).
Posted by: Alex at Mar 19, 2009 9:04:05 AM
Random Walk is still a fine book, however....
Individual investors have almost no chance on Wall Street. The insiders, the pros and especially the shorts have ruined whatever integrity there was.
Accurate financial analysis has little value in a dishonest market.
Live within your means, pay down debt, and diversify - best right now.
Posted by: save_the_rustbelt at Mar 19, 2009 9:41:28 AM
Stephen Penman's Financial Statement Analysis book explains an earnings, rather than cash flow, based approach to valuation (Full disclosure - he was my accounting teacher at UC Berkeley)
Chapter 20 of John Cochrane's "Asset Pricing" is worth reading to shed some light on market efficiency.
Posted by: Robert Bell at Mar 19, 2009 9:52:12 AM
Confessions of a Speculator, by Victor Niederhoffer. A biography that talks more about how to approach the market than precisely what to do. Niederhoffer was a Math Phd at Harvard who ran a hedge fund and made (and lost) fortunes.
Posted by: Andrew Berman at Mar 19, 2009 10:07:19 AM
Agree with Andrew, read anything by Joel Greenblatt.
Posted by: michael webster at Mar 19, 2009 10:20:44 AM
Read Fooled by Randomness by Taleb and you'll be a much better investor (i.e. you will stay away from the stock-picking game).
Posted by: dave at Mar 19, 2009 10:42:14 AM
For one that hasn't been mentioned yet (at least as of when I type this), I would add Jeremy Siegel's Stocks for the Long Run to the list - aside from the basic premise, it provides a really good survey of a lot of different investing theories, which gets better with every edition.
Posted by: Ironman at Mar 19, 2009 11:16:35 AM
If you're on the side of the efficient marketers, doesn't that make all other considerations (equity pricing etc) a waste of time?
Posted by: a_c at Mar 19, 2009 11:24:15 AM
Dhando Investor
Anything by Greenwald or Greenblatt, any Green really
One up on Wall Street
Posted by: John at Mar 19, 2009 12:04:18 PM
For at least a decade I have been asking myself, what happens to stock prices when all the boomers like me, and I'm on the leading edge, start selling stocks (most don't pay dividends it seems) to pay for retirement. The response I got indicated a blind faith that there was always going to be more people buying than selling so the price of stocks would keep going up.
In contrast, the same people were saying that the Social Security system was going to collapse because there were going to be more money being paid benefits than the incomes of workers to pour money into the system, and the workers couldn't afford the higher taxes to keep up the payments.
So, we have the workers not being able to afford to pay into Social Security, but they are going to be able to afford to pour more money into the stock market than the retiree are pulling out, even tho more retirees are pulling money out than are working to earn money to buy stocks.
I did look for economist to explain the conflicting points of view, but other than the doomsday guys who thought socialism was going to over run the nation along with all the computers going up in smoke 00:00:01 Jan 1, 2000, I didn't see anything. And my investment strategy was to pour as much as I could into my 401K and bank account, because I was and still am with Tyler.
But I ran across a remaindered book at my favorite used book store and the title and price were right: What if Boomers Can't Retire? by Thorton Parker. He is a government/business administration technocrat, not an investment banker, not an economist, not a stock adviser. Hardback in 2000 and paperback 2002.
The reviews on Amazon are mixed, but a couple make a reference like "the market isn't going to collapse in 2008" which I can't find a reference to in the book. These reviews were written in 2002! I don't know whether the reviewers inferred or maybe in an interview he said 2008 or 2008 is the year boomers retire at age 60.
Parker makes some vague recommendations that I translate into
1. buy/build a really energy efficient home/community
2. buy/build a really sustainable local food production cooperative
3. build a really local sustainable craft community
Then when the boomers all retire and stock market collapse you and your community are self sufficient and can get by with a small amount of cash and goods coming from outside it, while all the things you need to live are provided by the community you bought/build and share ownership in.
I'm not a carpenter/plumber/farmer, but I can piddle around for hours doing those things without commuting, while no one lets me piddle around working as a computer systems engineer - they want me in this economy to work 50-60 hours a week because the old days of easy jobs are gone, those good old days when I was half my age and worked 60-80 hours a week....
I any case, I would like the "economist class" to comment on the idea that rising stock prices are not sustainable and so buying stocks is not a way to invest for retirement.
Posted by: mulp at Mar 19, 2009 12:05:06 PM
i agree with a_c.
i advise to skim through random walk, buy your index funds, and get back to enjoying life.
Posted by: nate at Mar 19, 2009 12:10:38 PM
Ah, I found the 2008 reference in Parker's book; it is in a survey of books and in particular of Harry S Dent's The Roaring 2000s Investor: Strategies for the Life You Want. As Dent nailed it with a collapse in consumption hitting in 2008 and that ensuing stock market collapse, that clearly is the best investment book you can find.
Now all you need is a time machine so you can send that book recommendation back to yourself in 1998.
Can someone provide a convincing argument that the stock market isn't a three orders of magnitude larger Ponzi scheme than Madoff ran?
Posted by: mulp at Mar 19, 2009 12:35:46 PM
To the sophisticated indexer, investing in equities is not about sticking your money into an S&P500 fund and forgetting about it.
Over the last ten years, while the S&P500 index saw a negative return of -3.2%, other segments of the equity market were showing a positive return. An index for emerging markets returned a bit more than 7% over the last ten years. REITS? 3.1%. Did your portfolio hold a little gold by owning a precious metals and mining fund? About 13%. Commodities like energy? 14%. Did you take advantage of the French/Fama research showing a risk premium in small-cap value funds? 3.2%.
And since these asset classes were often uncorrelated, or even negatively correlated, with the overall U.S. equity market, there would have been a small additional benefit by holding them together in a portfolio which was rebalanced annually.
An asset allocation that was 60/40, equity to U.S. government bonds, and which diversified the equity portion of the portfolio into international (including emerging markets), REITS, value stocks, as well as a small portion put into gold or commodities, would have done okay. Not great, mind you, but okay. You would have almost certainly at least kept up with inflation.
Authors who follow this approach (more or less) include Larry Swedroe, Rick Ferri, and William Bernstein.
Posted by: Pincher Martin at Mar 19, 2009 12:49:32 PM
If he is serious about learning how to trade then Trading and Exchanges: Market Microstructure for Practitioners is a must. Here is Victor Niederhoffer's review.
Posted by: Dan in Euroland at Mar 19, 2009 1:22:23 PM
Gotta put a good word in for Fred Schwed's great book from long ago "Where Are The Customer's Yachts?." This should be basic reading for all. If only those Bernie Madoff clients had read this...
Posted by: Richard at Mar 19, 2009 1:57:27 PM
To all: what if every American needing to invest for retirement invested as you do or recommend?
How would you perform better then "the market"?
Posted by: mulp at Mar 19, 2009 2:07:12 PM
"Buy and hold" is more risky than buy and sell, and random walk is a counsel of despair.
The best for learning to read a balance sheet and cash flow statement:
Learn to Earn, Peter Lynch
Best on reading charts:
How Charts Can Help You in the Stock Market, William Jiler
Best on investing:
How To Invest Like a Shark, Rev Deporre
Posted by: bjk at Mar 19, 2009 2:32:45 PM
Richard, even the title does good work. I assumed that Madoff's yachts were relatively modest for exactly that reason.
Posted by: Bunbury at Mar 19, 2009 2:34:06 PM
bjk,
"'Buy and hold' is more risky than buy and sell, and random walk is a counsel of despair."
Wrong on both counts.
"Buy and hold" is a recognition by the investor that the market will go up over the long run and that market timing is a fool's game.
Don't believe me? Listen to Peter Lynch, the man whose book you recommend: "[Most investors] should buy, hold, and when the market goes down, add to it."
Posted by: Pincher Martin at Mar 19, 2009 3:27:57 PM
I'm pretty convinced that market-timing can be done and stock-picking can be done. I'm just not convinced I can do it. But what I find most odd is the people who think one thing works, will work for everyone, and only that thing works. It's almost like religion.
Posted by: Andrew at Mar 19, 2009 4:37:33 PM
Buy and hold of stocks at bubble peaks is a terrible investment -- you can determine times to sell by looking at trailing P/E ratios and when they are excessively high shift to high quality bonds (or cash if you like). Wall Street should be tarred and feathered for the nonsense of buy-and-hold after the past 18 months -- this will be especially clear when the S&P resumes its plunge and sets some more new lows later this year or early the next.
As for the "random walk" / efficient market hypothesis, I refute it thus.
Posted by: Matthew C. at Mar 19, 2009 4:45:41 PM
"Buy and hold" is a recognition by the investor that the market will go up over the long run and that market timing is a fool's game."
The market will go up over the long term due to dividends, compounding, and inflation. Gold will go up over the long term too, I wouldn't buy and hold gold. Stocks are an asset class just like gold.
"Don't believe me? Listen to Peter Lynch, the man whose book you recommend: "[Most investors] should buy, hold, and when the market goes down, add to it."
This is a Martingale betting strategy, one of many betting strategies. For a good examination of money management, see Trade Your Way to Financial Freedom, by Van K. Tharp. Also
http://tradermike.net/2004/05/trading_101_expectancy/
is a good discussion of money management.
"Listen to Peter Lynch, the man whose book you recommend: "[Most investors] should buy, hold, and when the market goes down, add to it."
Posted by: bjk at Mar 19, 2009 4:50:00 PM
Margin of Safety by Seth Klarman. It's a framework for value investing. Exceedingly hard to find, but worth it as he makes unbelievable amounts of sense from simple observations (i.e., index funds are overvalued by nature - if a stock is added to an index, index funds have to buy it, thus driving the price above it's fundamental value...leaving you with a portfolio of overvalued stocks).
Posted by: EJShue at Mar 19, 2009 4:56:19 PM
