Favorite Books on Investing


Here is a short list of some of my favorite books on personal investing, and a very brief overview of three of them.

Favorite Books

Introductory

  • The Elements of Investing,  Burton Malkiel and Charles Ellis, 2010 -- The absolute best book for novice investors to begin with.
  • The Little Book of Common Sense Investing,  John Bogle, 2007 -- Bogle basically invented index funds, and founded Vanguard.
  • The Millionaire Next Door, Thomas J. Stanley, 1996 -- The mindset required to accumulate wealth. Most millionaires in America are everyday people who work hard and live frugally.

Intermediate

  • Winning the Loser’s Game, Charles Ellis, 2002

Advanced

  • Stocks for the Long Run, Jeremy Siegel, 1994 -- If investing time period is longer than 10 years or so, invest in stocks.
  • A Random Walk Down Wall Street, Burton Malkiel, 1973 -- Past stock movements or patterns are NOT predictors of future stock direction. Stock movement up or down is basically random.
  • Unconventional Success, David Swensen, 2005
  • The Intelligent Asset Allocator, William Bernstein, 2001
  • Four Pillars of Investing, William Bernstein, 2002

 

1. The Elements of Investing

A.Save  

  • Begin saving regularly, i.e. monthly.
  • Consider automatic withdrawal from your paycheck and deposit directly into a savings or investing account.
  • Start early, i.e. now. Waiting has significant impact on the amount of wealth you can accumulate.
  • Establish an Emergency Fund to meet needs such as repairing the washing machine, replacing tires on the car, etc.
  • Avoid debt. Always pay off the balance on your credit cards.
  • If already in debt, make paying it off your priority.

B.Index Funds 

Invest using low-cost, no load, index mutual funds (or ETFs).

C.Diversify

  • Determine how much to invest in 3 broad categories: stocks, bonds, and cash
  • Determine how much, if any, to invest in foreign stocks or bonds
  • Utilize Dollar Cost Averaging (e.g. routine monthly investment, regardless or price)
  • NEVER invest very much in any single investment; too risky

D.Avoid Blunders  

The key to successful investing is to avoid blunders. For example, avoid high costs, market timing, and excessive trading.

Avoiding blunders:

  • Driving:     avoid serious accidents
  • Tennis:      simply hit the ball back, consistency
  • Investing:  use index funds, keep fees low, diversify, slow and steady wealth accumulation

E.Keep it Simple

Own your own house; pay off the mortgage. Invest in one broad stock fund, and one broad bond fund.

 

2. Common Sense Investing

A simple strategy is best.  Own broad suite of stocks in an index fund, while keeping costs / fees low.

Picking individuals stocks is like gambling.

  • No one consistently picks winning stocks.
  • Paying someone else to pick stocks for you is like throwing money away.
    • Like paying someone to gamble for you!
    • Brokers make money on your activity:  “Don’t stand there.  Do something!”

Use low-cost, broad-based index mutual funds.

  • Stick with one good fund; don’t chase “hot” performance
  • The less you do, the higher your return; activity increases costs

Use Dollar-Cost Averaging

Low expenses are crucially important

 

3. Winning the Loser's Game

Winner in the One who Makes the Least Mistakes (e.g. amateur tennis)

Best Strategy = Play to Not Lose; Avoid Big Mistakes

  • Market timing fails; ignore daily ups and downs
  • Concentrate on long term “Climate”, not the daily “Weather”
  • Few active mutual funds (i.e. stock pickers) consistently beat the market
  • Picking the right “Stock Picker”, ahead of time, is essentially impossible

Beating the Market Requires “Benign Neglect”

  • Individuals should use low-cost, no load index mutual funds
  • Invest in stock index fund if you won’t needs the funds for at least 10 years
  • Short Term Risk:  that you need the money when the market is down
  • Long Term Risks:  i) inflation and ii) excessive caution

10 Commandments for Individual Investors

  • Don’t speculate. 
  • Save. 
  • Don’t invest for “tax reasons”. 
  • Your house is not investment. 
  • Never do commodities. 
  • Don’t use stockbrokers. 
  • No “interesting” investments. 
  • Bonds are not safe (due to inflation). 
  • Write out your goals. 
  • Don’t trust your emotions.