Non-professional investors may be tempted by the latest new trends in investment philosophy, or fall prey to sales pitches promising returns that seem too good to be true (because they are). There is a simple way to avoid this – read the investment classics.
There are a number of classic books regarding investing and market philosophy that make excellent primers. Whether you are new to the field or want to refresh your memory, you cannot go wrong settling in with your favorite beverage and one or more of these old favorites.
- A Random Walk Down Wall Street by Burton Malkiel – Written in an easy to read style, this book highlights the long-term averages and trends that can be lost within short-term market randomness and suggests that timing the market is unwise. Market timing is difficult to do and most investors — professional and amateur alike — are relatively poor at it. Malkiel advises to stick with the long-term view and prefers index funds with minimal management. (Interestingly, Warren Buffett, founder and Chief Investment Officer of Berkshire Hathaway, preaches the same philosophy, and he is arguably the most successful equities investor of the last half-century.)
- The Little Book of Common Sense Investing by John Bogle – Bogle, the founder of Vanguard, has put out a series of excellent books on investing, including the equally worthwhile read Common Sense on Mutual Funds. As you may have guessed, the major theme is the use of common sense. Bogle covers the foolishness of investment fads with a very clear style.
- Common Stocks and Uncommon Profits by Philip Fisher – An excellent summary of how to evaluate individual companies’ potential for profits, with fifteen points to consider when evaluating a common stock.
- The Intelligent Investor by Benjamin Graham – While this book was written in 1934, it has positively influenced a large number of investors – including Warren Buffett, for whom Graham was a mentor. It provides excellent advice in spotting value and limiting losses that is still valid today.
- One Up On Wall Street by Peter Lynch – The former Fidelity and Magellan leader gives excellent advice on how to size up a company for investment potential and engage in long-term thinking.
- The Essays of Warren Buffett: Lessons for Corporate America – Excerpts from his annual letter to Berkshire Hathaway shareholders contain the usual nuggets of Buffett’s wisdom with a liberal sprinkling of humor. You may not be a fan of Buffett’s approach but you cannot argue with his results.
- Irrational Exuberance by Robert J. Shiller – Shiller shows how so called “irrational exuberance” and the hair trigger of mob mentality can lead investors and the market awry in the short term.
- The Four Pillars of Investing by William Bernstein – This book focuses on the underlying principles that lead to successful investing, encapsulating them within the “four pillars.” Of course, we are not going to play spoiler and tell you what the pillars are.
- How Markets Fail by John Cassidy – Further insight into the psychology — and irrationality — of the market’s behavior on certain occasions. You may recognize some of these behaviors from recent economic times.
If you read a few of these books, you are going to spot recurring themes. While they bring home their points in different ways and do take different approaches to certain elements of investing, the common threads are: use common sense, do not blindly follow the herd, apply sound investing principles, and take the long view.
It is important to do research to understand any endeavor you undertake in life, and investing is no different. However, like most of those endeavors, in the end you will learn the most by doing. Soak in the collective knowledge of these writers, then go forth and invest with greater confidence.