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

Mindset

  • How to Think About Money, Jonathan Clements, 2016 -- Before you read about investing, you should read this short book about how we should think about money. It discusses five key steps that should be central to the way we handle money.
  • 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.

Beginning Investing

  • 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.

Intermediate Investing

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

Advanced Investing

  • 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.