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Top 5 investment books you need to read by Holborn Assets

22nd September 2016

vintage old books on wooden deck table and grunge backgroundSpend just a little time reading up on investing and you’ll be amazed at the difference it makes to your confidence with your whole financial picture. After all, you stand to lose money in the long run if you’re not up to speed on the financial decisions you need to make. So it’s good to be prepared. We’ve put together a list of the Top Five books on investment. They’re mostly classics you can expect other people to know about.

In them are some right gems of wisdom which you can apply practically, as well as some high-quality insight into how the markets work. Some of the material is a little academic, but we’ll let that go on the basis that generally these writers are generous with the practical tips that spring from their theories.

There’s a strong emphasis on long-term investing and the need to ensure that your portfolio is diversified; we would agree with these key strategies here at Holborn Assets.

Indulge yourself with a little background reading and make sure you have the advantage the next time you quiz your IFA on the advice you are being given.

 

#1: A Random Walk Down Wall Street by Burton Malkiel

Famous?                        The author is a Princeton Emeritus Professor famous for his exposition of the theory of “market efficiency.”

Date first published:  1973

Latest edition:             2015

All about:                      How markets are efficient and prices are random.

Accessible?
The ideas are quite sophisticated but always worth understanding. Plenty of practical insight but it’s not a how-to-beat-the-market guide.

Reputation:

This book vies with Irrational Exuberance by Robert Shiller for top spot as THE modern classic in investment theory and practice.

Main Ideas:
The market is super-efficient. It works like a hive mind. This means that all known information is priced into the market at any given time. This means that stock prices cannot be predicted because all known information has already been factored into them. Hence stock prices are random.

Tips for the Small Private Investor:

  • Don’t spend high fees on celebrity managers of active funds, because the markets are so efficient it’s impossible to for anybody or anything to “beat” them, whether it’s a celebrity manager or a computer programme.
  • Just buy a tracker fund instead, and benefit directly from the market’s efficiency.
  • Develop a basic, low-cost index of securities diversified internationally and you will beat all the modern gimmicks and techniques.

Anything else?

Yes, a small proviso when it comes to the theory of efficient markets. Malkiel is clear that, though efficient generally, the market doesn’t always exhibit true prices and can behave freakishly. In exploring the relationship between price and market, Malkiel revisits some famous historical speculation bubbles such as the Dutch Tulip Mania of 1637.

Forecast:

With dividend yields far below their normal historical range, Malkiel doesn’t think that investors nowadays are going to be getting the 10% annual returns for which the long-term equity market is so relied upon.

#2: Irrational Exuberance by Robert Shiller

 

Famous?                       Shiller won a Nobel Prize in 2013 for his work in economics. He is famous for calling boom and bust cycles as they happen.

Date first published: 2000

Latest edition:             2015

All about:                      How speculation bubbles and crashes are driven by psychological behaviour rather than structural market forces.

 

Accessible?

Some of this is quite high-minded and theoretical, but there is also plenty of broad practical guidance in managing your own investments. Like Malkiel’s work, this is a series of  observations rather than a how-to guide.

 

Reputation:
The author’s formidable reputation aside, this very book has a reputation for holding gems of prophetic wisdom in the preface that is renewed with each new edition. In the preface to the very first edition of 2000, Shiller effectively predicted the tech boom and then, in the preface to the second edition of 2005, warned correctly that the contemporary boom in house prices presaged disaster.

In the preface to this third edition, Shiller says rising prices right now in housing and equity is a sign that we’re heading for another crash.

 

Main Ideas:
Shiller says that, when it comes to speculative bubbles (which are driven by psychology), they’ve got to pop. Shiller started publishing controversial research in the early 1980s, which showed the inevitability of price corrections to sudden surges in price.

Shiller showed that very high or low prices will naturally return to a mean. Practically this means that a stock price which is very high in comparison to the stock’s earnings is likely to see a downwards correction. Financial academics back in the 1980s would have predicted the opposite: that the high price was not unnatural, but simply priced in healthy yields that they would see increasing in the future.

Shiller’s work focuses on price/earnings (P/E) ratios. If they are too high, then he predicts that the market is likely to correct itself at some point. The drawback with Shiller’s otherwise brilliant P/E work is that it is not accurate as a predictive tool; you can spot the general trend of P/E ratios above a historical average, but can’t say for certain when prices will suddenly change to correct their imbalance.

Tips for the Small Private Investor:

Expect the worst. If you’re young, get saving. If you’re older, keep saving! And here’s two specific ways to manage risk in the dim light of a generally gloomy prognosis for the global market by Schiller:

  1. Retirement Planning – Check your portfolio is diversified enough
    If the stock market lost half its value, could your portfolio cope? Look at your asset diversification, and make sure you’ve got contrarian products which can balance out a massive equity hit.
  1. During retirement, be stingy with your pension draw downs
    Schiller is clear that stocks are going to be giving disappointing returns over the long-term. So, rather than be drawing down 4% of your pension (plus inflation) every year, maybe play conservative and look at 3%?

Forecast:

Shiller says today’s high P/E ratios mean dividends will be low over the long-term. That, his argument goes, is what history has shown.

 

 #3: The Intelligent Investor by Benjamin Graham

Famous?
As well as being Warren Buffet’s mentor, Graham is known as “the father of value investing.”

“Not only one of the best investors who ever lived; he was also the greatest practical investment thinker of all time.” That’s the verdict of investment pundit Jason Zweig who writes the prologue to the 2003 edition.

Date first published:          1949

Latest edition:                      2003

All about:                               Trusting common-sense and logical financial analysis.

 

Accessible?

This is a real classic. The style is arguably antiquated but very charming and quite accessible. Graham’s insights are also entirely applicable to today’s markets, and this relevance is supported by the extensive modern notes integrated into the latest edition. To be well-informed in investment, you at least need to have opened this book!

 

Reputation:
This book is widely held to contain the golden rules for practical, sober investment.

Graham was very much a hands-on investor, and a successful one. Between 1936 and 1956, the mutual fund that Graham ran with fellow investor Jerome Newman consistently beat the stock market annual gain of 12.2% with a yearly value increase of 14.7%.

Main Ideas:

  • You can’t beat the market, but you can tip the odds sensibly. Being meticulous with details and margins means you can minimise the odds of getting it all catastrophically wrong and maximise the odds of repeatable gains.
  • “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
  • Expect volatility; develop the emotional disciplines to sit out the worst of bear markets.
  • Know what kind of investment style suits you: active or passive.

 

Tips for the Small Private Investor:

  • Think yourself lucky. Unlike a professional investor, as a private investor you can afford to be out of the market when pricing is not favourable. The power to say “no” to too high a price is something you should not be scared to exercise.
  • Always think long-term.
  • Always have a margin of safety.

careful accounting and investment work reflected in red mug, united states money, books, and pencils. selective focus on currency. white background with copy space.

 #4: The Successful Investor Today by Larry Swedroe

Date first published:            2003

Latest edition:                        2006

All about:                                 Passive investing; and, also, how the Investment Establishment serves itself and not the consumer.

 

Accessible?                             Hard truths, both theoretical and practical, are outlined clearly here in a very systematic way, so this     makes a genuinely practical addition to your personal finance library.

 

Reputation:

The author of four impassioned books, Swedroe has a reputation for being on the side of the small investor and showing it by making his ideas very simple and accessible. He is, too, a proponent of Efficient Markets Hypothesis (EMH). Like Burton Malkiel in A Random Walk Down Wall Street, Swedroe says you can’t beat the market but you CAN take advantage of its inbuilt efficiency if you are prepared to be patient.

 

Main Ideas

Here are five of Swedroe’s “14 simple truths you must know when you invest:”

  • “Truth 1: Active Investing is a Loser’s Game: It Must Be So.”
  • “Truth 3: If Skilled Professionals Don’t Succeed, It Is Unlikely That Individual Investors Will.”
  • “Truth 7: The Most Likely Way To Achieve Above Average Returns Is To Stop Trying To Beat The Market.”
  • “Truth 10: The Forecasts of Market Strategists and Analysts Have No Value, Except as Entertainment.”
  • “Truth 12: Knowledge of Financial History is Critical to Successful Investing.”


Tips for the Small Private Investor:

  • Remember that the Investment Establishment is not on your side. The banker professionals are the only winners when it comes to sales hype.
  • Know your limits, and gain exposure to the market non-aggressively.
  • Spotting patterns from past market behaviour doesn’t mean that you have a crystal ball, just a very helpful overview.

 

Forecast:
In terms of a general thesis, Swedroe continues to support the idea of ignoring forecasts altogether, bypassing the speculative activity they create and concentrating instead on passive exposure to the market. Swedroe continues to write online at etf.com on a range of topics.

#5: The Little Book of Common Sense Investing by John C Bogle

 

Famous?                                 The author founded the world’s first index mutual fund in 1975 and is the man behind US investment giant The Vanguard Group. Writer of the classic Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor in 1999.

Date first published:          2007

Latest edition:                      This book is actually the 26th of 52 books in a series called 52 Personal Finance Books in 52 Weeks.

All about:                                Gaining exposure to the market at low cost through Index investing.

 

Accessible?                             Very. This is not about wide-ranging market theories, but about why you should invest in indexes and how to do it.

 

Reputation:
Bogle is known to be a fan of Warren Buffet and Benjamin Graham, author of The Intelligent Investor.

 

Main Ideas

  • Cut out the costs of active management and let the market do the work.
  • Fees last forever: performance comes and goes. It never works out to pay for performance with high fees because performance averages out whereas fees stay high!
  • Forget about market expectations – what matters with stock-picking is dividend yields and growth in earnings.
  • Gain exposure to publicly-held businesses at as low a cost as possible and hang onto them.
  • Compounded returns are great; but don’t forget about compounding costs.
  • Don’t under-estimate the power of costs, taxes and inflation to turn a decent portfolio into a turkey.


Tips for the Small Private Investor:

Bogle had some basic rules for investors which he laid down in Common Sense on Mutual Funds:

  • Go for index funds with low costs.
  • Is advice worth the cost that comes with it?
  • When looking at a fund, don’t be swayed by past performance.
  • Look at past performance to evaluate risk. Is it a stable stock?
  • Don’t be swayed by the celebrity status of any fund manager.
  • Watch out for how large assets are.
  • Concentrate your fund ownership; not too many.
  • Hold!
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