Investment books I have read

A reader  recently asked me for a list of books that I’d recommend for other investors. Flattered that anyone would care what I though, I’ve decided to do a post on that very subject, and here it is. This is a list of the books and studies that have most influenced my thinking so far, both positively and negatively.

Secrets for Profit in Bull and Bear Markets (Stan Weinstein)

This is a book about technical analysis. I spent a short while trying to apply technical techniques and failed miserably. Of course this means I now think this approach is of no value.

How to Make Money in Stocks (William O’Neil)

Covers both technical and fundamental analysis, including things like earnings, new products, management, growth, that sort of thing. It also covers technical strategies to help time your purchase, like “buy on a new high from a properly formed base”. I tried this approach for a while but found the chart aspects too ambiguous and too much work.

Various books by Jim Rogers of the Quantum Fund

I got into macro economic predictions for a while, playing the game that almost everybody else plays (which is why it’s such a bad game to get into). It didn’t take me long to see that this was either a game for short term traders or for people who wanted to bet on decade long themes… neither of which was me.

The Intelligent Asset Allocator (William Bernstein)

This book is awesome (dude). Just about everything I know now is down to this book. It very clearly lays out the ideas behind Modern Portfolio Theory and easily sold me on it since it requires almost no effort to apply. After reading this I adjusted my portfolio to a split between US, UK, European and Japanese index trackers and I think a bond tracker too. I’m still on the side of the efficient market to a large extent, certainly for people who don’t have an interest in stock picking. However, this book also covers bubbles in history and how markets may be predictable. It also talks about how value investing has the best long term results, how good companies are usually bad investments and bad companies are usually good investments.

The Intelligent Investor (Benjamin Graham)

I was moved to by this book because it is mentioned in The Intelligent Asset Allocator. This is my favorite investing book so far. It clearly demonstrates how the market swings from one extreme to another, extrapolating the last year’s earnings off into the distant future instead of taking them as part and parcel of any normal business cycle. I have the 1946 version and will at some point get the newest version to see what the differences are.

What Has Worked in Investing (Tweedy Browne)

This booklet is largely responsible for my current approach to value investing. The studies go over and over the idea that portfolios made up of low PE or low PB small companies are the best performers. It talks about debt levels (lower is often better) and past earnings growth (the more past earnings growth the less there is likely to be in the future and vice versa). It is a very compelling read if you like academic studies that are tested in the real world.

Time and The Payoff to Value Investing (Rousseau, Rensburg)

This study looks at high and low PE portfolios held over various time periods. “The conclusion is that on an annualised basis the returns to value portfolios become noticeably higher at time horizons extended beyond 12 months”. In other words, value investors can take advantage of the short time horizon of the average investor by taking a longer view.

Corporate Turnaround (Stuart Slatter)

I guess by this point I’d invested in Ennstone and watched it crash into the ground like a dart. So understandably I became interested in what killed companies, what sort of thing you’d do to turn a company around and what sort of thing a turnaround specialist would be looking for in a company before he decided if it was doable or not. From my point of view this is important as I’m looking to invest in struggling companies which can quite often be classed as borderline turnarounds.

Financial Control (David Irwin)

This is a book for someone running a small business or doing the books for a small business (which I had recently become). I found it useful for learning about some accounting ratios, specifically balance sheet ratios like quick, current, credit and debt turnover rates, how long a company can survive without sales etc.

Testing Benjamin Graham’s Net Current Asset Value Strategy in London (Xiao, Arnold)

This is another study of low PB stocks, but in this case specifically the classic net-net Graham stocks. The results are compelling and motivating and possibly astounding. If you have the guts to invest all of your capital in perhaps less than 5 companies (see 1997), all of which are basket cases, then you are welcome to the excess returns and you’re a more brave than I.

Saying that, I still would like to set up a portfolio based on net-net stocks, but I’d mitigate the extreme risk by holding a portion in cash depending on the value of the overall market. That way when the market is cheap and there are more net-nets around you are more diversified and need less cash, but when the market is expensive and net-nets can be counted on one hand, you hold a lot of cash so even if they all blow up you aren’t burned too badly.

The Superinvestors of Graham-and-Doddsville (Warren Buffett)

A well written set of arguments against the efficient market and in favour of value investors (of course).

Wall Street Revalued (Andrew Smithers)

This book, along with The Intelligent Asset Allocator, is where I really formed my current ideas on the timing and valuation of markets. Smithers shows, as others have done, that sensible measures of value do exist for markets. It is therefore possible to say something about whether a market is over or under priced and by how much, at least relative to historic norms. This allows you to estimate expected future returns based on history and produce some nice bell curves. In the future you can compare these with the return distribution predicted by the standard model (a distribution that does not change over time as far as I’m aware, or at least does not change with market value) and see who was right.

The Snowball (Alice Schroeder)

Not really an investing book but it’s still a great read if you’re interested in Buffett and has a lot of ideas about investing and perhaps most importantly to me, the idea of building your snowball as early and as fast as you can. The most important factor in personal investing, orders of magnitude more important than investing style, is to start saving more money earlier, the more and the earlier the better.

Value Investing : The Use of Historical Financial Statement Information to Separate Winners From Losers (Piotroski)

Richard Beddard is a big user of the F-score (the subject of this paper) and it does seem to have some merit. I have started to integrate this into my screens and am also going to watch my current holdings to see if there is any evidence that high F-score companies turn around quicker than low F-score companies.

Determining Value (Richard Barker)

Finally, my chosen approach doesn’t really pay too much attention to things like discounted cash flows or dividend growth models etc. So I’m working through this book to gain a better perspective of how more mainstream value investors do their work and come up with their values. That way I’ll be able to have a more meaningful conversation with them and perhaps it will add to my understanding of value.

Well that’s one man’s journey from indexer to deep value, feel free to outline some other books that you’ve found useful in shaping your investing worldview.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

19 thoughts on “Investment books I have read”

  1. Let me be the first to comment on this effort. I must apologise for the OTT title, it was a draft title but the new desktop editor I'm using decided to create a live post rather than the 'post-as-draft' that I selected. Either I've got a setting wrong somewhere or Post2Blog has some flaws.

  2. Interesting list. For me too "The Intelligent Investor (Benjamin Graham)" is a great simple book which has converted me to value investing.One thing I took from this read is that large market capitalisation companies are safer than small capitalisation companies. Are you comfortable with many small cap companies in the portfolio? If say Aviva has a Price-to-Book of 0.9, isn't this safer than a small cap which might have a better p-b of 0.5?

  3. Hi TaitamIf you mean safer as in there is likely to be less uncertainty as to your returns, then I'd probably say yes large caps are safer. But that is why historically large caps give a lower rate of return, because there is less risk.I'm comfortable for now with so many small caps because I think on average the balance sheets of my holdings are very strong, so there is relatively little risk of being wiped out. My opinion on ROE is that it is largely unknowable but likely to be some reasonable level eventually, so I don't really consider the risk to earnings and so that doesn't affect my opinion on company size. Finally I don't worry (too much) about volatility in any one share price since I have 10 companies which is a fair amount of diversification so the specific downside risks to any one company should be largely countered by upside risks in another. From an efficient market point of view I'm guessing that my holding's average beta is relatively high. Not that I think the market is completely efficient though.Regarding your Aviva example, it may well be that Aviva is safer at 0.9, i.e. has returns that more closely match your expected returns, than some small cap at 0.5, but I'm not after that sort of safety. In fact I want less safe, or less certain, returns. It is uncertainty which is largely responsible for value investing's out-performance.

  4. Hi, thanks for the reply. Yes, I see, and I should say I'm impressed with your website. It is great to see the thoughts of a UK specific value investor, as often there is lots of information on US shares – whereas I only intend to buy in my home UK market. My value investment approach has been 90% similar to yours, although one thing I believe I picked up from the great master – Warren B – is that is it good for the company to be simple and large and with a 'moat' around it. So for example, Coca Cola or a large train company. The small cap ones are more at risk from competitors. I have been attempting to buy large companies, e.g. Aviva at 0.9 price-to-book, and waiting until the p-b is 1.5 then selling (rather than buying a small cap at 0.5 and selling at 1.0.) I don't know what the right approach is, just thought I'd put this approach up for debate.A related question is, I wonder what the long term average UK p-b ratio is, I assume it should be higher than 1, perhaps it should be 1.5, but I don't know.

  5. I doubt there is a 'right' approach in terms of specific metrics, but just the general approach of buying as much assets and/or earnings as you can for your money. The buffet approach is to try to buy companies where the risk (uncertainty) about future returns is as small as possible for the given expected rate of return. I'm not smart enough for that so I just assume that any half decent management will produce a conservative ROE at some point, which will hopefully be enough to entice more risk averse investors to buy my shares from me at a higher price.I've been meaning to look into trends in PB, perhaps high, low, mean or median, to get an idea of what it is and what it has been. I would expect it to correlate quite closely with things like PE10 (price divided by average earnings over past 10 years) which have proven to be quite useful for valuing the market.I'd also expect the average to be somewhere north of 1 most of the time, but exactly where I have no idea.

  6. Just bouncing an idea – I have just picked a share:Premier FoodsP/B ratio 0.5Mar Cap £500mMade a profit last year, but not in the years before that.But seems to have a low amount of cash.Produces a few well known good products.Just wonder if you might have considered this one, or have I made a big mistake???

  7. Unfortunately you can't spot big mistakes before the event! I have seen Premier Foods before but for me, it just has too much debt and yes the cash or quick ratio is a bit on the low side, IMO. However, whether it is a good or bad investment is another matter and it depends entirely on whether you can sell out at a suitable profit or if you hold and the company pays you a fair return. Again I think these things are almost impossible to know before hand which is why diversification is a very good idea.

  8. Thanks. Uh-oh, maybe I was too quick to select that share. Whilst the p-b ratio and the products are good, I have just noticed that the asset side balance of the balance sheet contains a very large amount for goodwill. I suppose this goodwill is an imaginary asset included after an acquisition, so maybe a fairer view of a p-b ratio would not be so good. Yes, the cash is low, lower than I had previously thought. Hmm, I had planned to hold this for about 3 years, now I am having second thoughts…

  9. Hi UKVIAgree with you on Graham's work. That has to be the daddy of all value investing books. I also rate Bernstein and Smithers highly.For UK Investors trying to set up a portfolio and look at risk vs return profiles I'd also rate Hale's book Smarter Investing: Simpler Decisions For Better Results.

  10. Hi UKVI. Really entertaining list, and loads of books I haven't read. It leads to more thoughts than I have space for in this box! I too dabbled in technical analysis when I started. The best book was Charters on Charting by the amazingly named David Charters. I met him once, and he really seemed to know his stuff. His company made a ton of money on silver way back. I own the big two Graham books The Int. Inv. and Security Analysis but I've never read them cover to cover. I find them really heavy going. The combination of the old-worldly style and American terminology overwhelms me. I couldn't put down The Rediscovered Benjamin Graham though, by Janet Lowe, a selection of magazine articles and speeches by Graham in which he was forced to be concise. The other frustrating thing about Graham is he lived so long! And there are so many editions of his books, and each edition is different. The Rediscovered BG spans his whole career though and you really get a feeling for how he moved away from detailed fundamental analysis (market share, earnings estimates etc.) and towards simple quantitative screening. I think Montier's books, Value Investing and Behavioural Investing are terrific too. Finally I too am considering learning more about the 'dark side' – which effectively means forecasting. Domadaran is very good, and he has a great, but slightly sprawling website.Penman's book 'Financial Statement Analysis' has the best first chapter of any finance book I've read. However I keep shying away from reading the rest of it as I'm not sure my competitive advantage could ever be being able to out-forecast the hordes in the City! Anyway, thanks for the list. I really love the fact you included books that put you off a particular method, and the slightly offbeat books, which I will surely look up.Richard.

  11. Thanks Chaps. I'll take a look at 'smarter investing' and 'rediscovered BG' at some point.

  12. I would add "one up on Wall Street by Peter Lynch", "investing against the tide by Anthony Bolton" and Common Stock and uncommon profits by Philip Fisher to that list.

  13. Hi there, excellent list, but I would add the following books as well:"Security Analysis" – Graham & Dodd"The Essays of Warren Buffett" – LA Cunningham"Value Investing" – James Montier"Financial Warnings" – Mulford & Comiskey"Competitive Strategy" – Michael Porter

  14. Thanks cautiousbull & Serko, some more real classics in there that I have yet to read.

  15. Must agree with you on the Intelligent Investor.Mr Market is indeed a psychotic. However, I feel that I haven't had the dicipline to take advantage of that over the last few years. My portfolio is generally down.Great Blog – Just Subscribed. Keep up the good work.KickAssBaby

  16. Thanks KAB. Unfortunately discipline is probably the most important bit of investing and the hardest to master, especially when you're doing it 'value' or 'contrarian' style. Just keep your head down, do your research, understand the investment case and perhaps hedge your bets by also running a simple index portfolio!

  17. I'm reading Security Analysis at the moment… it's excellent… some of it feels very distant in terms of time, but it's interesting historically all the same. The best thing I've got from this and The Intelligent Investor is how to avoid stupid mistakes, which is worth more than how to spot multi-bagger stocks for me. Obviously we still all make mistakes, but I already make less for reading these books.

  18. Also, the thing Warren Buffett says about buying stocks that let you sleep easily at night… I've taken that to heart.

  19. Hi Shocker. I'm re-reading The Intelligent Investor at the moment and it backs up what you're saying about avoiding mistakes and sleeping easy at night. My portfolio currently has quite a few speculative stocks after trying out a quantitative formula for a while. Blind mechanical screens have a tendency to pick up a lot of rubbish which it's probably best to diversify to 50 stocks or more when using them. Apparently Graham used to hold over 100 net-net positions at a time. Personally I like to hold fewer stocks where each on its own is a relatively strong stable platform for earnings and dividend growth, bought at a fair price. Re-reading the Margin of Safety chapter in The Intelligent Investor really brings home the key points about avoiding too much speculation.

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