Six investing books that never left my bookshelf

by Pop on November 27, 2010

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I’m not one to do round-ups…

…but over the last couple months, I’ve gotten a dozen or so e-mails asking about investing and behavioral economics and where to read more about it. One of the problems with learning about this stuff is that unless you’re still an undergrad, it might seem like you missed your chance to learn about these topics. Nothing could be further from the truth.

In fact, unless you went to school within the last decade or so, there’s a good chance you wouldn’t have even had a behavioral economics course on the menu. How emotions sway economic decisions was just a footnote in a larger, rationally-governed framework of how markets work. It’s just the crashes of the dot-com and home markets that got everybody interested in the things that seem so obvious now.

Luckily, there have been a bunch of economics books that try to explain how investing and behavioral economics works to lay people, and I’ve read many of them. But the thing is, I only keep one bookshelf at home, so most investing and economics books are given away. These are the ones that never left that shelf.

This is definitely a reading list meant for people who already know something about the stock market. If you’re really starting from a blank slate, check out Understanding Wall Street by Jeffrey Little and Lucien Rhodes. However, if you’ve been reading personal finance blogs for years and feel like you never learn anything new, check these out.

Laying the foundation of investment knowledge

The Intelligent Investor: This has been referred to as the “value investor’s Bible” and the title is deserved. In it, Benjamin Graham, a former Columbia professor and the mentor of Warren Buffett, outlines his value-investing philosophy. Graham understood behavioral economics even though he didn’t articulate it in the same way we do today.

The book won’t teach you how to analyze specific stocks, but does teach you about the basic emotional problems lay investors run into and outlines an investment philosophy that emphasizes sustainable gains and avoiding losses. The notes are by journalist Jason Zweig and, especially for new investors, are a must read.

Security Analysis: This is also by Benjamin Graham, though I don’t recommend reading it unless you’ve read the Intelligent Investor and understand it. Security Analysis answers all those questions that were raised by the Intelligent Investor. Now that you have an investing philosophy, how do you go out and evaluate actual stocks and bonds that are on the market for sale?

Fair warning: It’s long, and it’s dense. You need a fair amount of investing knowledge just to understand what Graham, and his colleague David Dodd, are writing. But if you do get through it, you’ll have an incredibly deep understanding of investing. Markets are a lot different today, but this is a great foundation to build upon.

The Essays of Warren Buffett: Warren Buffett hasn’t written a tell-all investing book. Maybe he’s saving that for when he retires. Instead, he’s written a series of letters to the investors in his company, Berkshire Hathaway, that value investors have mined for investment wisdom for decades. Let me be clear: You can get nearly all the materials in this book for free, right here. What you’re paying for is a good editor to order more than 30 years worth of material in a way that can increase your investing knowledge without having to sort through extraneous detail or the repetition of points that Buffett likes to use every year.

Homing in on behavioral finance

Irrational Exuberance: Now we start to get into behavioral economics and our emotional reaction to money matters. Yale professor Robert Shiller published the first edition of this book right as the dot-com bubble was cresting and gave his theories as to why prices of companies continued to rise even in the face of small or non-existent profits. The second edition adds info on the real estate bubble and its similarities to the crisis from just 10 years before. It’s easy to recognize bubbles in retrospect, but this guy did it twice before they popped. That there hasn’t been a third edition talking about gold makes me concerned that I might be wrong in my continually bearish view on that one (kidding).

The Black Swan: Awareness of ones own ignorance is powerful. In this book, Nassim Nicholas Taleb explores humans’ propensity to assign “reasons” for events, when simple randomness might explain them better. His philosophy could be summarize in two sentences: Just because you’ve observed many instances of something, it doesn’t mean it will happen again. And just because you’ve never seen something before, it doesn’t mean it couldn’t happen. His writing style is pretty arrogant, but if you can tolerate it, you have a good chance of avoiding investors’ biggest pitfall: overconfidence.

Predictably Irrational: I’ve used the work of Duke professor Dan Ariely as fodder for a number of blog posts and with good reason. As “pop economics” goes, Ariely is one of the best. His books neatly tie-up behavioral theories, like why we’re willing to pay certain prices or items or sometimes prefer paying to free, as told through experiments on his hapless college students.

That’s it. I know there are a lot of other books out there that are worth reading and that I’ve enjoyed myself. I know some of you might be surprised I didn’t keep Freakonomics by Steven Levitt, which is a fun look at how previously unexplainable phenomena might be explained through statistical analysis. But as I’ve continued trying to downsize the “stuff” I have sitting around the house, these are the only ones that haven’t bitten the dust. Hope you find them useful too.

Note: You might have noticed I didn’t post yesterday as I’m supposed to. I admit it. I blew it. Part of the learning process I guess. Also, those are all affiliate links.


{ 2 comments… read them below or add one }

Rob Bennett December 2, 2010 at 9:42 am

I would add “Stock Cycles” to the list. And “Valuing Wall Street.” I would also add a book that I do not believe has yet been published — “Bubble Logic,” by Cliff Asness. I saw a long article that was a prep for a book; the article was amazing. Chapter Two of Bernstein’s “The Four Pillars of Investing” is incredible — you just have to be sure not to read any of the other chapters!

I have one quibble I want to note re your description of Shiller, Pop. Everybody does what you did, which is what makes it a pet peeve of mine. Shiller just happened to publish Irrational Exuberance just as the tech bubble was crashing. In no way, shape or form did he anticipate the pop of that bubble. Shiller does not believe that it is possible to anticipate the pop of a bubble. So it’s not right at all to suggest that he did this thing that he believes no one can do (he was of course aware of the danger of the bubble going back several years, the timing of publication of his book was pure coincidence).


Pop December 4, 2010 at 1:06 am

I don’t know if we just have different ways of saying the same thing, but I’m just saying that Shiller recognized two bubbles right before they popped, not that he put a date on when they would pop. Sorry if my language wasn’t specific enough there.

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