For a modest sum, a would-be investor can buy a collection of investment books and benefit from the life’s experiences or stories of some of the great investors. In our latest Featured Article, we profile a selection of investment classics and have bundled them into distinct categories. Our selections are subjective and undoubtedly there are many other books worthy of being profiled here. The phrase ‘no one learns in a vacuum’ applies equally to the stock markets and this collection of books should assist anyone who wishes to learn more about investing.
Trading / Speculating
‘The Intelligent Investor’ – Benjamin Graham
A sequel to Security Analysis, written in 1934, The Intelligent Investor is considered by many to be the all-time investment classic. Author Benjamin Graham is considered the dean of value investing, the art of finding a share which is worth a dollar but is on offer for 50 cents. Born in New York in 1894, he spent his life on Wall Street, mainly on the investment as opposed to the stock broking side. Graham lived through the 1929 stock market crash and the subsequent depression in the US, which saw the US stock market fall by 89% by July 1932. To supplement his income during those dark years, Graham started to teach finance and stock market investing in Columbia University at that time. His course became the ‘must attend’ course of the time.
In 1949, Graham wrote the The Intelligent Investor, which remains the most authoritative book of stock market investing and ‘value’ investing ever written. There were five updated editions in subsequent years with the 1976 version carrying a Foreword by Warren Buffett.
‘The Warren Buffett Way’ – Robert Hagstrom (1996)
Buffett is without question the most successful investor of all time. He is unique for having built his fortune entirely through his stock market investment activities. Buffett is Chairman of Berkshire Hathaway, his investment company, which is quoted on the New York Stock Exchange like any other company. Coincidentally, Buffett’s stock market education started when he attended Benjamin Graham’s finance course at Columbia University in the late 1940s. In the 1950s, Buffett established his own investment partnership, and concentrated on buying companies with a significant ‘margin of safety’. This approach stood him well and between 1955 and the end of 1968 he compounded his monies at nearly 30% per annum. By the late 1960s, he was already a wealthy man. He ended the investment partnership in early 1969 because he felt he could no longer find the value he was used to. In his own words, he was out of touch with the times. In fact, he was a shrewd judge of value, as the US Stock Market entered a bear market shortly thereafter.
In the book ‘The Warren Buffett Way’ (published in 1996), Robert Hagstrom examines the Buffett phenomenon and provides a brilliant analysis and understanding of how Buffett identifies his investments. The book and a sequel (published in 2004) can be bought on-line at any of the recognized on-line book retailers.
‘Way of the Turtle’ – Curtis M. Faith (2007)
I’m not sure if the film ‘Trading Places’ was based on the truth behind this book but the parallels are striking. In 1983, two highly sucessful US commodity traders decided to undertake an experiment to see if they could hire complete novices and turn them into seasoned traders within a few weeks by teaching them systematic trading techniques that they, as traders, had used for many years.
Thirteen complete novices from all walks of life were hired and, after a three-week induction period, were given real money to trade, increasing to one million dollars, if they could show that they were adhering to the trading rules taught.The results were fascinating and although all they had to do was follow the rules they had been given many could not do so in a real life environment. The pressure of emotional noise in the market place together with a lack of discipline saw many break the rules at critical stages in the mistaken belief that judgement was called for.
This book together with ‘Reminisces of a Stock Operator’ are two great reads on the opportunities and pitfalls of trading markets and how difficult it can be in real life. Both are cracking yarns.
‘Reminisces of a Stock Operator’ – Jesse Livermore
‘Reminisces of a Stock Operator’ is a fascinating portrayal, in the form of a series of interviews, of the life story of one of Wall Street’s legendary traders, Jesse Livermore, who operated from 1890 through to the 1940s. Livermore was a speculator with a difference.
Livermore’s basic strategy was to judge when a share price or commodity price was ripe for a strong move in either direction. As he said himself, he sought ‘the line of least resistance’ and followed it. When he was confident that he had found a trend, he would perhaps invest 20% of his intended position. If his judgment was confirmed by the price of the share or commodity moving in the intended direction then he would continue to buy. If, on the other hand, the price moved against him, he would sell immediately on the assumption that his earlier analysis had been wrong.
‘Reminisces of a Stock Operator’ can still be bought on-line, almost 80 years after it was first written.
‘Invest Like the Best’ – James O’ Shaughnessy
‘Imagine yourself in a room with the quarterly reports for 1600 companies. Assuming each of the 6400 reports is about an eight of an inch thick, stacking them would build a 66-foot-high tower of information. The reports would include myriad data on the companies, such as earnings, dividends, stock prices, and price-earnings ratios. If each report covered just 59 individual pieces of information for each of the 1600 stocks, you’d have more than 377,000 different pieces of data, just for one year.
Now imagine your response if your boss walks into the room and tells you to sift through each of these reports and isolate all the stocks that meet just four criteria, telling you to make sure that only the stocks that meet each of the four criteria are included. You’d probably quit on the spot. Isolating a handful of stocks from 1600 is overwhelming for people. But it’s simple for a computer.
The above was the opening paragraph in the classic investment book ‘Invest Like The Best’, written by James o’ Shaughnessy in 1994.
‘Beating the DOW’ – Michael O’ Higgins
‘In the complex and often intimidating world of stock market investment, the idea that an approach so simple could result in superior returns must surely intrigue any investor trying to save through the stock market. Yet this is exactly the proposition put forward by Michael O’ Higgins in a landmark book written in 1991- ‘Beating the DOW’. His approach has often been referred to as ‘The Dogs of the DOW’.
O’ Higgins’ essential point was that by buying the 10 highest yielding DOW stocks on an annual basis, any ordinary investor had a chance to outperform the DOW index itself, perhaps not every year but certainly over time. The DOW Index is made up of 30 of the largest corporations in the US. His point is that the DOW companies are giants, which makes them different and less risky. The companies in the DOW Index have enormous diversity, immense asset backing, unequalled financial resources, adaptability and resilience. The key to O’ Higgins approach is that it forces investors to buy DOW stocks when they are low and sell when they have recovered, and a portfolio of 10 DOW stocks provides sufficient diversification.
Dividends Still Don’t Lie – Kelly Wright
‘Dividends Still Don’t Lie’ is the sequel to the 1988 classic ‘Dividends Don’t Lie’ . The latest version was written by Kelly Wright, manageing director of Investment Quality Trends, an online investment newsletter and investment management house in the US. Investment Quality Trends is dedicated to identifying high quality US companies with strong balance sheets and buying them when their dividend yields have risen to an historical extreme relative to their own history.
‘Relative to their own history’ is an important caveat. The approach is not buying high-yielding stocks per se. Rather, the approach diversifies across many sectors and simply buys individual companies when they appear cheap, as measured by the dividend yield, relative to each compaies own history. So, the approach could identify value in one stock with a dividend yield of 2.0% and another at 5.0%.
This disciplined approach to ‘value investing’ has an excellent long-term record over many decades, although individual years of underperformance are common.
Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life (2021)
Author William Green spent time with many of the greatest investors from Charlie Munger, Vice-Chairperson of Berkshire Hathaway, to Indian born Mohnish Pabrai to Sir John Templeton to Howard Marks to Joel Greenblatt to Tom Gaynor (Markel) and Bill Miller among others. Green was interested in what motivated them, how they lived their lives and what traits they showed that made them different. The book provides a fascinating insight into investors we have all heard about and each of the investors profiled followed their own path rather than a prescribed formula.
The book is a masterpiece in pyschology as well as investing and it’s a hugely informative read.
‘The Most Important Thing’ – Howard Marks (2011)
When an investment book is endorsed by Warren Buffett, Jeremy Grantham, Seth Klarman, John Bogle and Joel Greenblatt you just know it is most likely a classic.
Howard Marks is Chairman and Co-founder of OakTree Capital Management in the US and specialised in investing in the credit and corporate bond markets. The book is all about understanding and controlling risk. As Marks also says throughout the book, we seek returns but we must control risk. I consider this one of the very best investment books and I think you will enjoy the read. The book is written around a series of letters Marks wrote to his firms clients over many years.
‘Big Money Little Effort’ – Mark Shipman (2008)
A deceptively simple book containing a very useful market timing indicator. The market is always volatile both on the way up and on the way down. Using a moving average trend line helps us to see which way the trend in heading. In rising markets, set-backs look scary but when judged against something like a 30-week moving average the near-term oscillations are seen for what they are, normal sell-offs in a rising market. Likewise, strong rallies in a declining market often fail to make it above the declining 30-week moving average highlighting that despite the near-term rally in prices the trend most likely remains down.
Shipman shows how to combine the 30-week and 50-week moving averages to create market buy & sell signals. And the signal has, on average, a 67% success record i.e. it is right two out of three times. It’s a useful indicator and can assist you to avoid a deep bear market. The book is good on facts and produces good historical evidence to back up its claims. We use this indicator in the subscribers’ area of the GillenMarkets website.
‘Dow Theory for the 21st Century’ – Jack Schannep (2008)
Dow Theory for the 21st Century, written by Jack Schannep in early 2008, is a terrific book on market timing. Dow Theory was originally formulated by Charles H. Dow, the first editor of the Wall Street Journal. Dow posited that there were three movements in markets (i) the primary trend (ii) secondary movements against the primary trend and (iii) the daily movements. This 120-year old technical indicator is all about identifyimg changes in the primary trend i.e. when a bull market turns into a bear market and vice versa. It’s aim is to keep investors out of deep bear markets and fully invested during bull markets.
The book assumes some market experience by the reader, so that it is not for everyone. Nonetheless, we all have to start somewhere. Dow Theory is one of the oldest methods of ‘timing the market’ based on price action alone and Jack Schannep provides his own take on this ancient science (some would call it an art). In the subscribers’ area of the website, we keep a very close eye on the market signals provided by Dow Theory on account of its excellent long-term market calls. The book can be bought via most of the online book stores.