Following Charlie Munger’s advice to “develop into a lifelong self-learner through voracious reading; cultivate curiosity and strive to become a little wiser every day” this article presents my recommendation as to what books to read to learn more about financial market history and the basic math skills you need to be a good investor.
So says Ben Carlson (awealthofcommonsense.com) in edited excerpts from his original article* entitled An Investing Master’s Degree in History & Math.[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Carlson goes on to say in further edited excerpts:[While] there are no surefire ways to use quantitative and historical market patterns to create an investment strategy that works in all environments, the point of learning about these aspects of the financial markets is to gain a greater understanding of the different risks involved when investing and how you can use this information to increase your chances for positive results.
Here’s my list to help get you your master’s degree in market math and financial history:
Siegel shares reams of historical information in his books and even goes back to the 1800s with his stock data. These are great books for a long-term perspective on what’s worked in the past and why. Siegel also does a nice job showing why it’s important to understand the dynamics of inflation and compounding through his data. Many mistake Siegel’s message by assuming he these books mean stocks always and forever make sense as investments. Actually what he shows in these books is that stocks have always been your best best over multi-decade periods, but they can be cyclical over shorter time frames.
These are two of my favorite books on Buffett. You get a nice sense of market history with a look back at some of Buffett’s most successful investments (and biggest mistakes), but it’s not that you’ll learn how to buy stocks like Buffett that makes this history informative. The most important lessons are learned through a greater understanding of the temperament it takes to be a great investor. Both of these books also devote an entire chapter to probability theory which is at the heart of Buffett’s investing style. He always says he would rather be roughly right than precisely wrong, which is all we can do in the absence of being able to predict the future.
Hagstrom covers Charlie Munger’s lattice of mental models approach to worldly wisdom in this book. Munger likes to combine history, math, physics, biology and economics to be able make wiser decisions. There’s a chapter on each of these subjects to provide a broader perspective on how to view complex systems. Having a varied skillset is not only important in when investing, but in many other aspects of life as well. If you’re a fan of Munger, also check out Poor Charlie’s Almanack, one of my all-time favorites in an homage to Benjamin Franklin.
You can probably get away with reading just two chapters of this classic. Chapter 8 is Graham’s thoughts “Mr. Market” analogy. It’s the most simple yet effective description I’ve ever read about the differences between the short-term and long-term moves in the market. Chapter 20 covers the concept of having a margin of safety. You could take this to mean simply buying value stocks, but a margin of safety in your investment process allows for the inevitable mistakes and uncertainty we get when investing.
There are so many lessons we can learn from the most recent financial crisis (many of which have already been completely forgotten). Lewis wrote the definitive book on the subject. It’s one of the best finance books ever written.
Although a basic quantitative skills are vital for investors, it’s important to remember that you must balance your numbers with a heavy dose of humility. It’s impossible to perfectly predict future risk factors, but even those people that do occasionally make precise forecasts have a huge amount of luck involved. Mauboussin does a great job laying out the differences between skill and luck in a number of endeavors.
The Intelligent Asset Allocator goes over the important math behind portfolio theory (diversification, correlation, asset allocation, risk controls, etc.). That one is a little dry, so The Investor’s Manifesto is a good follow-up that goes over the entire portfolio investment process in much simpler language.
Galbraith covers all of the classic bubbles in going back hundreds of years including the Tulip Craze, the South Sea Bubble and the Crash of 1929. Understanding the history of herd mentality and investor emotions is one of the most important aspects of learning about financial history. This short book does a great job detailing the fact that every cycle is different yet human nature is not.
No market math lesson is complete without an understanding of effects of compound interest from long-term returns and expenses. Bogle is by far the best in the business at explaining these concepts.
An underrated book that’s packed full of data and historical examples to explain why many investors general assumptions about the markets are wrong. The myth-busting on market timing, economic growth, stocks vs. bonds and volatility are all helpful. Another short read, but packed full of useful information.
This one is a nice combination of market history and probabilities in relation to risk. Bernstein goes way back to show how risk has evolved over the centuries into the current risk management construct that many use in the investment industry to try to understand and quantify risk. It shows how uncertainty can lead to mistakes, errors in forecasting and irrational decisions as we try to predict the future.
I’m sure I’ve missed a few books here, but these ones should get you well on your way.
December 17, 2013
3. 12 Books that EVERY Financial Advisor – and Investor – Should Read
While the average amateur investor may be excellent in their own career field, it doesn’t mean they know what to invest in, or how to pick stocks. In fact being very good at your field can give you the false sense that whatever stocks you pick or your broker picks for you must be good, because after all, you picked them and you picked your broker — and you’re smart so, no doubt, those stock prices will go up. Unfortunately, the smart and talented stock-picking neophyte is not investing at all but speculating. Words: 924
VIX is the ticker symbol for the volatility index that the Chicago Board Options Exchange created to calculate the implied volatility of options on the S&P 500 index for the next 30 calendar days. The formal name of the VIX is the CBOE Volatility Index [and informally as the investor fear gauge]. Below is some introductory material on the VIX offered up in a question and answer format: Words: 915
Remember, the trend is your friend and now you have an arsenal of such indicators to make an extensive and in-depth assessment of whether you should be buying or selling. If ever there was a “cut and save” investment advisory this article is it. Words: 1579
It is hard to know what to buy or sell let alone just when to prudently do so. Thank goodness there are indicators available that provide information of stock and index movement of a more immediate nature to help you make such important decisions. This article describes the 6 most popular Momentum Indicators. If ever there was a “cut and save” investment advisory this is it! Words: 1234
There are many indicators available that provide information on stock and index movement to help you time the market and make money. Market strength and volatility are two such categories of indicators and a description of six of them are described in this “cut and save” article. Read on! Words: 974
Technical Analysis is the discipline of finding reliable patterns, trends, indicators and formations, mainly in price, for buying and selling assets…To a large degree, technical analysis is a self-fulfilling prophesy [in that] it is effectively an unofficial agreement amongst market participants to impose more order on what would otherwise be more random. The key is to understand which patterns, formations and indicators are widely adhered to, so as to become useful predictors of price action [and this article does just that. Let me explain.] Words: 470
When it comes to valuing stocks, the price-to-earnings (P/E) ratio is the number one metric for investors that want an instant fix on what the market thinks of a company. [That being said], there are health warnings to heed if you don’t want to be left exposed by its limitations. [Let me explain.] Words: 1101
History has shown that investors who stick to disciplined, fundamental-focused strategies give themselves a good chance of beating the market over the long haul and James O’Shaughnessy has compiled data that stretches back to before the Great Depression, back-tested numerous strategies, and has come to some very intriguing conclusions. [Let me share some of them with you.] Words: 1325
People choose certain stocks for many different reasons: business location; sector strength; product innovation, but some investors choose what to buy based on company size, or market capitalization [believing that size does matter. Yes,] understanding the difference between small-cap, medium-cap and large-cap companies is the first step to making the right choice. [Let me explain.] Words: 600
Protect your money by steering clear of these 10 most dangerous investing mistakes. Words: 716
Buying on margin can mean potentially higher returns – but it can also lead to large losses very fast. [This article outlines 6 things to know about buying on margin and 3 key risks of doing so.] Words: 848
You can make money short selling a stock if its price goes down – but if its price goes up, your losses could be unlimited. [This short article outlines the theory behind short selling and what you need to know before doing so.] Words: 333
Math class seemed pointless back in the day, but it turns out all those confusing equations are quite useful….We’ve rounded up 11 math equations that can be used every single day. Write them down, whip out your pencil, and prepare to budget like a genius.
18. Don’t Invest in the Stock Market Without Heeding These “Rules of Trading”
I’m not going to candy coat it for you: making serious money in the stock market is a ton of hard work. It takes patience, savvy, and a certain level of market smarts – and the cold, hard truth is that if you don’t have them, the big boys will drain your portfolio dry. Unfortunately, those are the three areas that most retail investors need to work on the most. Otherwise, they will simply end up in a cat-and-mouse game where they are the mice. Don’t fool yourself for one second into believing that your “due diligence” can be done by watching a show or two on CNBC. It just doesn’t work that way but if there is one voice from the markets that should grab your attention every time you hear it, it belongs to Dennis Gartman, founder and author of The Gartman Letter. He’s sort of a guru’s guru. [Here is] a glimpse into how he views and trades the markets. Words: 10619. Insights into the Bond Market and How to Trade Them
Although the stock market is the first place in which many people think to invest, the U.S. Treasury bond markets arguably have the greatest impact on the economy and are watched the world over. Unfortunately, just because they are influential, doesn’t make them any easier to understand, and they can be downright bewildering to the uninitiated. [This article provides you with an excellent understanding of what bonds are, the advantages of owning them and how to go about trading them.] Words: 1325
Since there is such a wide range of emotions, it might be helpful for you to do a ‘gut-check’ before you actually buy or sell any type of security. Knowing how you “feel” about investing might turn out to be just as important as knowing what you “know.” Words: 737
One of the hardest things for individual investors to do is to know when to sell a stock. Many times, you might sell simply because a stock has gone up and you’ve made some money. More often than not, though, this is not a great reason to sell [because, as mentioned in the title of this article,] you will never – ever – have a 10-bagger if you sell a stock after a 2-bagger. That being said, what things should one consider before selling? Words: 912
Regardless of the size of your financial pyramid, without a core-holding foundation, you are building it on sand. Core holdings are for protection, not for profit. They function as insurance against a catastrophe. [Let me explain.] Words: 754
80% of my investable income is in cash, precious metals and a small number of stocks. That might seem crazy, but the Pareto Principle, Zipf’s Law and the bell curve have convinced me that it’s a waste of time and money to get any more diversified. [Let me explain why that is the case.] Words: 396
The “Dogs of the Dow” is a simple and effective strategy that has outperformed the Dow over the last 50 years and generates almost 4% in yield. Here’s how it works. Words: 486
Individuals are long-term investors only as long as the markets are rising. Despite endless warnings, repeated suggestions and outright recommendations – getting investors to sell, take profits and manage…[their] portfolio risks is nearly a lost cause as long as the markets are rising. Unfortunately, by the time the fear, desperation or panic stages are reached it is far too late to act and I will only be able to say that I warned you [- unless you take the time to read, and study the contents of this article]. Words: 1945; Charts: 10; Tables: 1