First Books on Investing

Book Recommendations for New Investors

Savings equals investment, no matter how you hold them. Since I started ASM, I have been surprised by the number of people who claim they don’t invest their savings. If you have savings, you are invested. Unfortunately, it may mean you are “invested” entirely in US dollars. Nonetheless, many people are comfortable with this due to the money illusion, which states that humans take great comfort in watching their account balances grow in dollar terms even if their aggregate purchasing power is falling relative to the prices of goods and services. In short, you have increasingly more of something that buys you less of the things you want.

For this reason, it pays to learn about investing (quite literally). But investing books, including those written for beginners, can be tedious and dry. So, for those new to the subject, I highly recommend the three books below (which can be purchased here). Each is relatively short on page count and easy to read. And the first book on the list provides for a highly entertaining read.

1. The Psychology of Money by Morgan Housel

The first book on the list will likely be the most captivating for new readers. It dives into the psychology of investing to demonstrate that knowing the right thing to do doesn’t necessarily guarantee the right outcome. This is because we are easily fooled. The best way to protect yourself is to understand how and why this happens, which Housel explains. The book is also filled with entertaining anecdotes that make otherwise abstract concepts like risk easier to grasp.

2. The Elements of Investing by Burton Malkiel and Charles Ellis

This book and the one to follow get a bit more technical but remain easy reads. The original versions were written long ago, and the reason is simple: really solid investing advice doesn’t change much. Yale’s Chief Investment Officer, David Swensen, introduces The Elements of Investing with a troubling reality:

Having already written two of the finest books on financial markets, Ellis’s Winning the Loser’s Game and Malkiel’s A Random Walk Down Wall Street, why should the authors revisit the subject of their already classic volumes? The sad fact is that in the cacophony of advice for individual investors, few sane voices are raised.

Savings, fees and passive strategies are the focus of this book, and for most individuals otherwise occupied by a non-financial career, it is spectacular advice:

  1. Without savings, there is no potential for investment.
  2. Fees create perverse incentives, and they encourage investment professionals to create complicated solutions when simple strategies would outperform. Fees also make yield more difficult to achieve.
  3. Finally, most investors should seek a low-fee passive strategy that they contribute to regularly and avoid attempting to time the market.

The authors wrote this book “to provide individual investors … the basic principles for a lifetime of financial success in savings and investing, all in 208 pages of straight talk that can be read in just two hours.” It does an incredible job of introducing all of the necessary elements without any unnecessary jargon. It is simple, unsexy, and incredibly relevant. (Note: Perhaps the only quibble I have with the book is that I don’t believe home ownership is always a brilliant idea. My thoughts on this topic: What are the most common mistakes that home buyers make?)

I genuinely believe that unless you want to commit yourself daily to the practice of investing, a passive strategy is best. Should you require further proof, Warren Buffett provides similar advice in Berkshire Hathaway’s 2013 investor letter:

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will be fully distributed to certain philanthropic organizations over the ten years following the closing of my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers. [1]

But as famed professor Bruce Greenwald points out in a Barron’s interview, while that may be Buffett’s advice for others, it is not what he practices himself:

Buffett isn’t telling you the full story, because he doesn’t want to create competition for himself. He is saying yes, by all means do passive investing, but [he isn’t saying that] to people who understand and apply these principles in a disciplined way. Is he going to do passive investing himself? Of course not. [2]

If this (mild) controversy piques your curiosity, I would suggest pursuing the passive strategy Malkiel and Ellis advocate, while continuing to educate yourself should you later decide to explore a more active form of investing.

Note: Burton Malkiel is also the author of A Random Walk Down Wall Street, a best-selling investment guide that was recently updated. It is not as concise, but if you are looking for a more thorough introduction, I recommend starting here.

3. The Little Book That Still Beats the Market by Joel Greenblatt

My next recommendation is Joel Greenblatt’s The Little Book That Still Beats the Market, which introduces the author’s “magic formula” for investing. Whether you want to take his approach or not, Greenblatt does an excellent job explaining what he believes are the most important metrics: earnings yield and return on capital. This is described in an incredibly simple and insightful way. (Note: Greenblatt is an extraordinarily successful investor. He managed an annualized return of 50% over the course of a decade at Gotham Capital.)

As a caveat, I cannot emphasize enough that most investors do best pursuing a passive strategy, while continuing to educate themselves on possibly becoming more active in the future. Education is critical, because eventually something will go wrong – even with a passive strategy – and doubt will lend an ear to bad advice and greater fees.

For that reason, if you don’t spend a substantial amount of time studying investment opportunities, you will likely underperform the market as an active investor. I would further add that if you do not educate yourself, you will even fail to identify active managers who can make fees worthwhile. Yes, there are exceptions, and frankly I believe I have been lucky enough to work at several firms where we managed to generate exceptionally good returns. But these opportunities will be impossible to identify if you do not, at a minimum, know which questions to ask. The three books above are a great way to start learning.

As a bonus, these footnotes are excellent educational reads as well:
[1] Berkshire Hathaway Annual Letters
[2] Bruce Greenwald: Channeling Graham and Dodd

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