Top 5 investment books for beginners
One of the most asked questions I get are about what books they should read in order to start investing. Although I firmly believe in learning through practice and experience, it is also very wise to learn from other successful investors and learn from their mistakes. This way you have a few sources of education. Also, using the experience of others will most likely give you some new insight into investing. Therefore, I have compiled a list of books that I think are the most useful to the beginning investor. Also, you’ll see one noteworthy book not on the list, and I have my reasons for that. I will share with you at the end of the blog what book is missing and why I decided to omit this one from the list. I will also provide you a bonus book that is just an interesting read, but not crucial in regard to starting to invest.
This is not an analysis or overview of the book, because I think there is more return on effort if you actually read the book on your own. Therefore, in this post I provide you with some basic information about the author and some key points of the books.
1. The Little book that Beats the Market (Joel Greenblatt)
“Choosing individual stocks without any idea of what you’re looking for is like running through a dynamite factory with a burning match. You may live, but you are still an idiot.” -Joel Greenblatt
About the man
Joel Greenblatt is an exceptionally talented man who has had success in multiple aspects of life, including investing. He follows a value investing approach that is tailored to his needs and personality. He is also an adjunct professor at the Columbia University Graduate School of Business and a Wharton alumnus.
About the book
There is a lot of key information packed into this little book with the most important take aways listed below.
Markets are crazy and do not always represent the through value of the business. For example, the stock price of a company might be very volatile and fluctuate a lot during the time span of 6 months, but that does not necessarily mean that the underlying company has changed. Therefore, it is the investor’s goal to determine the intrinsic value of the firm and buy when the price dips underneath this value, with a margin of safety. A good example is Amazon, but make sure you understand the business.
P/E and ROA are important ratios to start your search. You do not want to overpay for a company, which is measured by the P/E ratio, so a lower ratio is better than a higher one. However, that is only 1 side of the coin. A low P/E ratio can always stay low and not provide any return. In order to reduce this risk, you also need to look for the ROA or return on assets ratio. This is a commonly used metric to measure firm performance and a higher ratio is better than a lower. The combination of a low P/E and high ROA could be a potential winner. Joel Greenblatt even calls this the “Magic Formula”
Finally, he provides step-by-step instructions for his formula. Do realize that past performance does not guarantee future results.
I do realize that the last key point sounds like a scam, which is what my original thought was, but maybe he’s just a bad marketer. Also, I tend not to like step-by-step guides, but I think this can act as a good starting point to build on as you gain more experience.
2. Financial Shenanigans (Howard Schilit)
About the man
Howard Schilit specializes in accounting fraud and detecting clever tricks in the financial reports. He is the founder and CEO if Schilit forensics and has written multiple books on the topic.
About the book
A key aspect of investing is doing your research and due diligence and by extension also reading the financial reports. These reports are one of the main sources for investors to make their decisions and management knows this. Some of the key points of the book are:
Why do they indulge in such behavior? Understanding the reasons why will provide you with a framework and the thought processes of these culprits. Therefore, next time you see certain signs, it might indicate shenanigans.
Some of the common signs are tons of acquisitions in a short time period, having a weird executive pay structure, recently went public, recently went through a large change such as a business model or accounting standards.
Some of the common tricks are recording revenues too soon or even recording revenues that are non-existent.
In order to combat these shenanigans or reducing the workload is by reading the auditor’s report. They have already done some of the investigation and assuming that they have a good track record, they provide a wealth of information.
3. Black Swan (Nassim N. Taleb)
About the man
He is a Lebanese-American scholar and statistician whose work focusses on probability and randomness. He is also a former options-trader and risk analyst and has written multiple essays covering these topics.
About the book
The black swan is not a pure investing book. The lessons in this book apply to life in general, but we can extrapolate this to realm of investing as well. It is more of a philosophy about how events occur, why they occur, and how we can possibly interpret these events. N. Taleb argues that we as humans are flawed because we try to see patterns and signs where there are none (think of charting). This behavior can sometimes make us overconfident and underestimate the probability of certain events occurring. Also, after the even occurred we feel the need to categorize this and explain why things have happened the wat they did, things such as the housing market crashing or two once-in-a-century-storms happening in a decade. Taleb states that we don’t necessarily need to predict these events since prediction is near impossible, but that we need to build a system that allows us to whether these storms/events, or as he coins it “We need to be antifragile.” This concept can be applied to investing as well.
In order to have an even deeper understanding of the material covered in this book you should read “Thinking fast and slow” by D. Kahneman, a book on behavioral biases. Even if you are not interested in investing or business, it is still an interesting and easy read.
4. Poor Charlie’s Almanack (Charlie Munger)
About the man
He is an American investor, businessman, and philanthropist, but he is probably most well known as Warren Buffet’s partner and the vice chairman at Berkshire Hathaway. He has a degree from Harvard law school and worked as a real estate attorney.
About the book
This book is a collection of some of the best speeches and talks by Charlie Munger. It is packed with valuable lessons that when used correctly set you up for investing success. However, this is not a book where you can sit down and read it in one go. If you do this, you will miss a lot of the important lessons. I would suggest reading this book slowly and take diligent notes. Here are some of my key takeaways from this book:
Start with a “don’t-list” this is a list of things that you definitely do not do. For example, one of the things on my list is “I don’t invest in tobacco, weapons, and coal.” By doing this you narrow down your investment field and create your circle of competence.
Learn from other people’s mistakes. You will make mistakes and you will make them often. The key is to minimize the downside whilst maximizing the upside potential. However, there is no need for you to make all the mistakes yourself. You can learn from professional investors or even friends. Investigate what they did wrong and what you can do to prevent it.
5. The Essays of Warren Buffett (Lawrence Cunningham & Warren Buffett)
About the man
He is an American investor, businessman, and philanthropist, just like his partner Charlie Munger. Together they run Berkshire Hathaway from a small office in Omaha, Nebraska. He is considered to be one of the most successful investors in the world and has currently a net worth of 72.6 billion USD (this is after Covid-19 hit the markets hard). Depending on the year he has held the title as the richest man in the world a few times.
About the book
This book consists mostly of letters to the shareholders of Berkshire and they provide an excellent insight into the mind of Warren Buffett. These are some of my key takeaways from the book:
Focus on finding a good business, don’t focus on the market. Warren looks for businesses that are well positioned in terms of cash and name recognition. He also wants the business have some kind of barrier to entry, a moat as he calls it. This should deter new competitors from joining the market.
Once you’ve located these well-positioned businesses, make sure to buy them at a sensible price, meaning below their intrinsic value and with a margin of safety.
Look at management and their track record.
Bonus
In the beginning of this post I promised you I would give you a bonus book. That book is
“What I learned losing a million dollars” by B. Moynihan and J. Paul. The book tells the story of the impressive rise and fall of a small-town boy to became the governor of the Chicago Mercantile Exchange and then lost most of it all in the blink of an eye. I like this book a lot because it teaches you about overconfidence, being humble, and how to deal with emotions. This book shares a story that highlight why it is so important to understand the concepts outlined in my 3rd book recommendation, The Black Swan.
Finally, those of you who are already investing or who have seen multiple lists already on the web will notice the absence of a very famous book, one that is on every single list out there.
I am talking about: “The Intelligent Investor” by Benjamin Graham.
Yes, this is an important book, and many put it on their list because Benjamin Graham is the father of value investing and Warren Buffett credits a lot of his success to this book and his mentor. However, the reasons why I decided to omit it are:
It’s a long and boring read. Some die hard might hate me for saying this, but it gets repetitive.
Even though the lessons are still applicable, I recently tried rereading it again and it just seems outdated, even the updated versions with the new commentary.
But the most important reason: almost every single investing book in the world refers to the lessons in this book or cover the same topics but in a much more modern version. I believe that you will find the same lessons spread throughout the 5 books I recommended, especially the Essays by Warren Buffett. However, feel free to read it, if you so desire.