A reader recently asked me for a list of books that I’d recommend to other investors. Flattered that anyone would care what I thought, 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 macroeconomic 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, and 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 favourite 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, 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 braver than I.
Having said 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 underpriced 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.