Effective investment is critical to maximizing our fortune. Making the best investment decisions is not easy and none of the investment experts can give us definite answers on which stock to buy or how much to buy. However, we can learn from those experts about what to consider when making an investment decision and how to avoid or reduce mistakes. Here are five best investment books I recently read and the take-home messages I got from these books.
1. The Elements of Investing by Burton G. Malkiel and Charles D. Ellis
“The Elements of Investing” is a must-read book for anyone who is interested in personal financial investing. It is a simple, easy-to-read book but still covers all the key elements you need to know as an investor. In this book, Charley Ellis and Burt Malkiel combine their talents to produce a guide in five essential elements of investing in a so-called KISS (Keep It Simple, Sweetheart) investing. The two authors recommend investing in the low-cost “total market” index funds as your primary investing vehicle due to their great performance, ease of anxiety in picking stocks and reduce expense.
Take-home message: Focus on the long term, stay the course, and ignore market fluctuations; they are likely to lead to serious and costly investing mistakes.
2. A Random Walk Down Wall Street by Burton G. Malkiel
This book is one of my favorite financial books with a solid foundation of historical analyses and seasoned knowledge in investing in stock market. The author uses examples from the tulipomania in the 1600s, the South Sea bubble to Internet crash in the beginning of this century to demonstrate that his main idea of this book: the market can go irrational but will level out because the market is reasonably efficient.
The author uses a big chunk of his book talking about differences between technical and fundamental analysis and what are author’s views on them. Even though he prefers fundamental analysis over technical analysis, he is fully aware of the flaws of both methods. He argues the stock market is more like a “random walk”, no matter what the past performances are, and explains people can do well as experts if they diversified fund portfolios and held onto them long-term.
Take-home message: Think the stock market as “a random walk” and use past performances to predict the future of the stock market is not reliable. Diversify in low-cost index funds and hold for long-term will serve you better in the long run.
3. The Intelligent Investor: The Definitive Book on Value Investing By Ben Graham
The “Intelligent Investor” by Ben Graham is considered as the most influential investing book by far. Warren Buffet praised this book as the best book ever written on investing. Graham distinguishes the defensive investors from enterprise investors and points out the main difference is investors’ willingness to make the required effort to invest more aggressively.
As the defensive investor is unwilling, or unable, to put in the time and effort required to be an enterprising investor, Graham suggests four rules for the defensive investor: adequate diversification, stick to large, outstanding (top 1/3 of industry group), conservative companies, choose companies with good dividend payments, and limit the price you are willing to pay.
He lays out five elements for the security analysis to consider: general long-term prospects, the competence of management, financial strength and capital structure, dividend record, and current dividend rate. The most important piece in Graham’s investment is the margin of safety, what he calls “the secret of sound investment”. The margin of safety for an investment is the difference between the real or fundamental value and the price you pay. The goal of the value investor is to pay less (hopefully, much less) than the real value.
Take-home message: The investor’s worst enemy is likely to be himself. Don’t become the hostage of Mr. Market. Market fluctuations will happen and always happen, and that the key should always to buy low and sell high. Adding a set amount of money every month to the portfolio, regardless of the price of the securities at the time, so-called “Dollar-cost averaging” combined with a disciplined defensive investor can produce good returns with minimal effort. Investing in the index fund is the best choice for beginner investors as they will help us prevent making big mistakes while securing good returns.
4. The Most Important Thing, Uncommon Sense for the Thoughtful Investor By Howard Marks
In “The Most Important Thing,” Howard Mark, the chairman, and cofounder of Oaktree Capital Management explains the keys to successful investment and the pitfalls to avoid from his four decades investment experience. John Bogle, the founder of Vanguard Group, strongly recommends reading this book if you seek to avoid the pitfalls of investing. Howard Mark introduces 20 most important things such as second-level thinking, price/value relationship, risk management, and defensive investing and utilizes the passages on his memo as examples to illustrate his ideas. The author strongly believes, “if we avoid the losers, the winners will take care of themselves.”
Take-home message: Investing is more like art than science. A deep, complex and convoluted second-level thinking will help you outperform the average investors who are usually first-level thinkers for simple formula and easy answers. Understanding risk and being able to recognize and control risks are three important steps in risk assessment in investing. The critical element in defensive investing is to the margin of safety.
5. The little Book of Common Sense Investing By John C. Bogle
This book was written by the founder and former CEO of the Vanguard Mutual Fund group, John Bogle. He uses his in-depth insights and years of experience to describe what common sense tells us and use history to confirm that low-cost index funds are the simplest and most efficient investment strategy.
John Bogle has plenty of data to support investing philosophy as common sense investing. He compares selecting winning funds/stocks in advance as picking a needle in a haystack. Rather than picking the needle, Bogle suggests we just buy the haystack which is similar to a low-cost index fund and shooting for long-term returns.
Take-home message: The classic index fund that owns total market portfolio is the ultimate investment strategy that guarantees you with your fair share of stock market returns. It holds the mathematical certainty that marks it as the gold standard in investing. When selecting index funds we should search for the broadest possible diversification and the tiniest possible cost. Expenses and emotions are two biggest enemies in our investing.
If you plan to invest your hard-earned money in stock market, I highly recommend reading these five best investment books. It is important to learn what works in the market and avoid the potential pitfalls. Happy reading.