Here is a short list of some of my favorite books on personal investing, and a very brief overview of three of them.
- 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.
- Winning the Loser’s Game, Charles Ellis, 2002
- 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
- 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.
Invest using low-cost, no load, index mutual funds (or ETFs).
- 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
The key to successful investing is to avoid blunders. For example, avoid high costs, market timing, and excessive trading.
- 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.
- 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.