Have you been looking for a good book about how to invest your money? I have a big collection of such books, but most aren’t required reading. Here’s my short list for anyone who has recently become interested in personal finance and investing.
First, read “The Only Investment Guide You’ll Ever Need; Expanded and Updated Throughout” (the latest edition) by Andrew Tobias, for the Big Picture of personal finance. This takes the wide-angle view about how to deal with money. In particular, it will help answer your first issue about investment, namely, how much money should you be investing in the first place? It’s very easy and fun to read; Tobias is about as engaging a writer as you could imagine. If you can’t get this edition, get the “Revised and updated”, probably almost as good.
Second, read “Unconventional Success: A Fundamental Approach to Personal Investment”, by David F. Swensen, 2005. This book answers your second question: given how much I’m going to invest, how much should I put into each asset class. The book points out that deciding how to divide your money among asset classes is the most important investment decision you can make. It’s something you can control and customize for yourself. Security selection and market timing are much harder games to win, especially since you’re playing a zero-sum game against people who spend their entire lives doing nothing else.
He also explains why most mutual funds are bad news, and how to find the ones that are good news. In particular, pay attention to his high recommendation of Vanguard, which explains clearly why they’re so great. I take this opportunity to thank John C. Bogle and Burton Malkiel, the individual investor’s best friends, for creating Vanguard and its valuable and innovative products. (I have no connection with Vanguard at all; I’m just a satisifed customer.)
Swensen goes over a wide range of asset classes (different kinds of stocks, bonds, real estate, as well as exotics like hedge funds and venture capital), taking a hard look at each one and why you should or should not invest in them. It’s written somewhat dryly sometimes, but it’s well worth reading anyway.
You can stop now; you’re all set. However, if you insist on being interested in security selection, or just like this stuff (I do):
Your third book is “A Random Walk Down Wall Street” by Burton Malkiel. Be sure to get the latest edition, as Malkiel carefully updates this book periodically; there is a Ninth Edition coming out soon (so the hyperlink above might not be the best one; look around). Before you think about security selection (e.g. deciding which stocks to buy) you must, must, must understand the concept of efficient market (random walk) theory. Markets are not efficient, but the best way to look at them is to start with the model of an efficient market and then look at how real life differs from that. Malkiel covers some of the same ground as the first two books, with his own take on the issues. Very readable and fun, just like Tobias.
In earlier editions, Malkiel proposed the concept of index funds: a mutual fund that would never underperform the Standard and Poor 500 because it would actually invest in the Standard and Poor 500! This was such a good idea that it was implemented, and nowdays you can find index funds for all kinds of indexes. The management fees (which matter a lot to you) are very low, since the buy/sell decisions are pretty much automatic. Google for “bogle malkiel” for more about all this.
Here are some others, but please read the above three first and only go into these afterward:
“What Works on Wall Street” by James O’Shaughnessy, 1997. (Thanks to Rick Tompkins, who told me about this book about ten years ago.) A hard and scientific look at how stocks have behaved in the past, and what stock selection strategies have worked over the very long haul. Lots of data but quite easy to read and understand. I have read many of the source materials of this kind, such as articles in the Journal of Financial Analysis (it’s so great that anyone can walk right into the MIT libraries!), and everything he says is consonant with the best research, as best I can tell. If you are convinced, there are mutual funds based on his principles, formerly the O’Shaughnessy funds, currently known as the Hennessey Funds (Cornerstone Growth and Cornerstone Value), in which he puts his money where his mouth is. I did very well with one of these for some years. However, the big problem is that it’s not clear that the strategy still works. Things change, and the record of their funds has not been so great lately.
“The Intelligent Investor” by Ben Graham, the classic 1949 book on value investing. A lot of the details are no longer up to date, but it’s a good explanation of the concept of value investing. Warren Buffet, currently the world’s second richest man, was Graham’s principal disciple. I think the biggest problem with following his advice is that these days, accounting allows so much adjustment of “income” that the “bottom line” means a lot less than it used to. (See Jack Welch’s record of steadily-increasing quarterly earning at General Elecric for quarter after quarter; I mean, come on!)
If you get through those and want to know more, tell me what you want to know more about and I’ll recommend more in the comments. Please add comments with your own favorites, along with explanations of why they’re worth reading to someone who has read the above books. Thank you!