The longer version of my two part guest article in subramoney.com
“Investing success does not accrue to those with savant-like expertise in one field of intellectual endeavor, but rather rests on four pillars: a command of financial theory, a working knowledge of financial history, an awareness of financial psychology, and a solid understanding of how the financial industry operates. Like the decathlon winner, the successful investor is rarely the world champion in a single event, but rather someone who excels at all.” writes William J. Bernstein in the foreword of Jason Zweig’s book ‘The Little Book of Safe Money’.
I have arranged the recommended investing books for mutual fund investors and advisers in four categories –
Books on Financial Theory
Books on Financial History
Books on Financial Psychology
Books on How Financial Industry operates
I have excluded books that are more relevant for direct equity investors.
Books on Financial Theory
The Intelligent Investor – Benjamin Graham
‘The Intelligent Investor’ makes a distinction between two types of investors – the “defensive” (or passive) and the “enterprising” (or active). The defensive investor places his chief emphasis on the avoidance of serious mistakes or losses; and aims to be free from effort, annoyance, and the need for making frequent decisions. The enterprising investor is willing to devote time and effort required for the selection of securities that are sound and more attractive than the average. Most investors lack the knowledge and time required for successful enterprising investing. It is therefore more sensible for them to learn and follow the time-tested principles of defensive investing.
‘The Intelligent Investor’ brings structure and logic to investing. e.g. Benjamin Graham recommends defensive investors to never hold less than 25% or more than 75% in equity. He suggests that the simplest choice is to maintain 50-50 equity-debt allocation and to rebalance if market developments disturb the allocation by as much as 5%.
Do not begin with this book if you know nothing about stocks and bonds; you could find it difficult to read and understand. If you are not a direct equity investor, read Chapters 1 to 10, Chapter 20, and Jason Zweig’s commentary on these chapters the current edition comes with.
A Random Walk Down Wall Street – Burton Malkiel
Money management is 9 parts what not to do and 1 part what to. But as long as you do not understand with clarity what not to do and why, you can never stick to what to do with discipline. ‘A Random Walk Down Wall Street’ discusses inadequacies of various investment strategies and concludes that investors are better off sticking to a low-cost index fund. This book covers all four important aspects of investing.
The Four Pillars of Investing – William Bernstein
This book also covers all important aspects of investing and arrives at the same conclusion as that of ‘A Random Walk Down Wall Street’. ‘The Four Pillars of Investing’ is more comprehensive and covers almost everything from William Bernstein’s earlier book ‘The Intelligent Asset Allocator’.
Bogle on Mutual Funds – John Bogle
First published in 1994, this book is still as relevant and a must read for all mutual fund investors. It covers all the basics of mutual fund investing in great detail. Model portfolios John Bogle recommends in the book are heavily tilted towards equity. Most investors lack the emotional muscle required to handle such high equity allocations. Bogle also recommends higher weightage of long-term and intermediate-term bonds on the debt side. The volatility of such bond portfolios is too high for most investors to stomach. William Bernstein recommends a shorter duration bond portfolio in his book ‘The Four Pillars of Investing’.
Common Sense on Mutual Funds – John Bogle
Many investors and advisors waste too much time and energy in fund analysis and fund selection. This provides intellectual stimulation but brings little value to the investment process. In ‘Common Sense on Mutual Funds’, John Bogle discusses futility of the search for winning funds of the future and makes a compelling case for index funds. This is a must read book if you want to build conviction in indexing; a superior strategy than holding actively managed funds.
Asset Allocation – Balancing Financial Risk – Roger C. Gibson
This is an excellent book oriented towards financial advisers. A must read especially for financial planners.
Stocks for the Long Run – Jeremy Siegel
This is a good book on equity investing. It is an optional read if you have read ‘A Random Walk Down Wall Street’ and ‘Bogle on Mutual Funds’.
Fooled by Randomness – Nassim Taleb
Far too many investors, advisers and bloggers take past data too seriously and draw concrete inferences from it; never realising that the data could be too inadequate or too random to draw inferences. ‘Fooled by Randomness’ discusses limitations of past data; and makes you aware about the role luck plays in highly random environments of financial markets and how often it is mistaken for skill. This is a must read for all investors and advisers.
The Blacks Swan – Nassim Taleb
The Black Swan is a must read for its core message about the limitations of our knowledge and unpredictability of the future. This book improves your understanding of risk and changes the way you look at the world. Both Taleb’s books could also be put under the must read books on financial psychology.
Unveiling the Retirement Myth – Jim Otar
This is one of the best books on financial planning. No other book educates readers about the sequence of return risk (arguably the most important concept in financial planning) as ‘Unveiling the Retirement Myth’. It is oriented towards financial advisers and should be a mandatory read for all financial planners.
Books on Financial History
A Short History of Financial Euphoria – John Kenneth Galbraith
The study of the history of manias and market crashes is an important part of investor education. It informs us, like nothing else, about the psychology of the investing crowd. ‘A Short History of Financial Euphoria’ is a small book that briefly covers Tulip Mania, Mississippi and South Sea bubbles, the crash of 1929 and the meltdown of 1987. The language is easy to understand, and the book is full of insights and wisdom. But these episodes are unlikely to stay in your memory for long unless you read their detailed accounts.
Extraordinary Popular Delusions and the Madness of Crowds – Charles Mackay
This classic first published in 1841 is a must read for its three chapters on Tulip Mania, Mississippi bubble and South Sea bubble. It is a fascinating book that provides detailed accounts of these three economic bubbles better than all the books that followed.
Devil Take The Hindmost – Edward Chancellor
This is an excellent book on the history of financial speculative manias over the centuries. It covers junk bond mania and leveraged buyout (LBO) craze of 1980s, the Japanese bubble of the 1980s and the Long Term Capital Management (LTCM) fiasco; besides the Tulip mania, Mississippi bubble, South Sea bubble, railway mania and the crash of 1929. Some readers could find this book difficult to read.
(Read John Kenneth Galbraith’s ‘The Great Crash 1929’ for a detailed account of the crash of 1929. Bryan Burrough and John Helyar’s ‘Barbarians at The Gate’ provides a fascinating account of the leveraged buyout of RJR Nabisco. Roger Lowenstein’s book ‘When Genius Failed’ is on LTCM fiasco.)
Triumph of the Optimists: 101 Years of Global Investment Returns – Emroy Dimson, Paul Marsh, Mike Stauton
The majority of investing literature uses US market history. But the US emerged as the most successful economy in the world. Drawing inferences based on the market history of the most successful economy could be misleading. For a more balanced view, we must also look at markets outside the US. Triumph of the Optimists does this job. It analyses the markets history of 16 markets for which a reliable 100 year market history is available. Though not in the Subramoney must read books list, this is an important book since it provides a global and more realistic perspective.
Capital Ideas – Peter Bernstein
Many investing ideas and theories we use today were not always available for investors. There were men who developed these ideas and brought them into the mainstream. ‘Capital Ideas’ chronicles the history of these ideas and tells stories of the men behind them. It is a difficult book to read.
Books on Financial Psychology
Why Smart People Make Big Money Mistakes – Gary Belsky & Thomas Gilovich
This book is a good introduction to behavioural economics. The awareness about psychological factors like mental accounting, sunk cost fallacy, confirmation bias etc. can change the way you think about money and help you form better thinking habits related to money.
Your Money and Your Brain – Jason Zweig
Human brain is not wired for investing. Emotional circuits deeply ingrained in our brains often overpower our ability to make rational investing decisions. To do well as an investor, it is important to understand how our brain takes shortcuts, how it reacts to actual and expected monetary loss and gain; and then train it to counteract the emotional impulses. ‘Your Money and Your Brain’ is an interesting and easy to read book that helps you understand your investing brain and provides tricks to avoid investing mistakes.
Influence – Robert Cialdini
The title of one popular Subramoney article is ‘One word that can make you rich…’; the word is NO. An ability to say ‘no’ when confronted with a good salesman can save us tons of money. But good salesmen are trained in the psychology of persuasion. They use certain tricks that get kind of automatic, mindless compliance from us. It is difficult to say ‘no’ when these tricks are used. Robert Cialdini’s ‘Influence’ covers six basic psychological principles that direct human behaviour and which are frequently used against us. This is a must read.
Poor Charlie’s Almanack – The Wits and Wisdom of Charlie Munger
While I am including this book under the books on financial psychology for the excellent essay ‘The Psychology of Human Misjudgement’; Poor Charlie’s Almanack is too good a book to put under any one category. You would hardly find any other book with so much wisdom in it. Don’t miss it. The biography of Charlie Munger, ‘Damn Right!’ is also worth reading.
Parag Parikh’s book ‘Stocks to Riches’ is on behavioural finance. You may not find anything new in it if you have read other books in this list.
Books on How Financial Industry operates
Where Are The Customers’ Yachts? – Fred Schwed Jr.
Though this book exposes the financial community of the 1930s in the US, it remains relevant today because not much has changed in the investment business. This is a funny book that entertains as well as educates. There is more wisdom per page of this book than any other book in this list.
How To Smell A Rat – Ken Fisher
‘How To Smell A Rat’ provides five warning signs that can help detect potential financial embezzlement. This is an easy read. The Madoff scandal is at the center stage of the book.
How to Lie With Statistics – Darrel Huff
It is easy to deceive investors by throwing numbers and graphs at them, since only a few understand statistics. ‘How to Lie With Statistics’ is a funny little book that helps you understand when someone is lying using statistics.
The Money Game – Adam Smith
This is an interesting book full of wisdom into the working of financial markets and different actors playing their part in it. The author is different from Adam Smith of ‘The Wealth of Nations’. Adam Smith is the pseudonym the author uses. This is an optional read.
Enough – John Bogle
Advisor community celebrates money making above the quality of advice and the fiduciary duty. Serving clients is not the priority but maximising the revenue. Bad practices are continued without guilt because everyone else is doing it. In doing so, the financial industry extracts more cost from investors than the value it delivers. In ‘Enough’, John Bogle emphasizes the importance of honesty, integrity, ethics, character and unyielding loyalty to the client as the key to success. This book should be compulsory reading for everyone in the finance industry for training in business ethics and professional standards.
P.S. There is a lot of overlap in the content of the books in this list. But I would recommend you to read as many books as you can, since no one book covers all the important aspects of investing equally well. Also, not all these authors agree with each other on all points. It is important to understand different perspectives before forming your own investment approach; instead of blindly trusting one book or author.
If you read all books in this list, you are unlikely to use actively managed funds. But if you use actively managed funds, it helps to read books on stock investing. When you understand stock investing, you don’t have unrealistic expectations from the fund manager. You appreciate that all investing styles and fund managers go through periods of underperformance. You don’t expect your fund manager to outperform peers and benchmark every year because no fund manager can.
It is difficult to put some books in any of the four categories. But these books are worth reading since they increase your wisdom and make you a better thinker. Some of these books are Rich Dad Poor Dad, Freakonomics, Superfreakonomics and Against the Gods.