The Investor’s Christmas Reading List

If somebody on your gift list this year is a serious investor, they probably read investment-related books voraciously.  I know I did when I was first learning and although I’ve slowed my pace a bit, I always enjoy good investing read.  Even if nobody on your gift list is an avid investor, they could probably all benefit from a good book on personal finance basics.  It may not be as exciting as a new Ipod, but it’s far more useful.

Former Vanguard CEO Jack Brennan’s entry-level book, Straight Talk on Investing, was actually my first introduction to the world of stocks, bonds, and mutual funds so it holds a special place in my heart.  The book is relatively short, well-written, easy to understand, and informative.  Not surprisingly, Brennan touts the advantages of index funds in general and Vanguard in particular, but that doesn’t detract from the book’s message in any way.  As an introduction to investing for absolute beginners, this book is as good as any and would be especially suitable to any teenagers on your list since it stresses the importance of starting early.  Investors with a bit of experience under their belt probably won’t get much out of it, though.

Investors who already have the basics under control will get a lot out of William Bernstein’s The Four Pillars of Investing: Lessons for Building a Winning Portfolio.  Bernstein’s books focus on the practical aspects of building a diversified portfolio to weather any market condition using the principles of modern portfolio theory.  He advocates sound investment strategies such as using index funds, broad diversification among several non-correlated asset classes, and the buy-and-hold approach.  Bernstein’s Four Pillars is a good all-around investment tome for the budding investor on your gift list. And if you like Four Pillars, check out my review of another excellent Bernstein book, The Intelligent Asset Allocator.

Burton Malkiel’s classic A Random Walk Down Wall Street should be on every investor’s bookshelf.  The prevailing theme of the book is the randomness of financial markets.  That is, market returns constitute a random, unpredictable walk.  Since nobody can predict what stocks will do in the future, the best course of action is to remain diversified and hold on for the long haul.  The ninth edition includes a new chapter on behavioral finance which delves into the psychology of investment decisions.  As much a history book as an investment book, Random Walk will appeal to a broad range of investors, and non-investors, alike.

History and economics buffs will love Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation.  Starting with the famous tulip bubble in Holland all the way up to the tech bust (this book was published in 1999), Chancellor details the circumstances of all the major financial bubbles throughout modern history all over the world, drawing stark contrast between them while revealing a common thread throughout history’s narrative at the same time:  greed.  If only more real estate investors had read this book after its publication, perhaps we wouldn’t be in the situation we are today.

Probably the most interesting book on this list (to me), Peter Bernstein’s Against the Gods: The Remarkable Story of Risk offers a fascinating glimpse at the evolution of mankind’s understanding of the concept of risk.  Early gamblers in ancient Greece instinctively grasped the idea of risk, yet could not define it.  Bernstein follows prevailing ideas and attitudes about risk throughout history, culminating with modern portfolio and chaos theory.  Special attention is given to great minds like Pascal, Fermat, et all who laid the mathematical framework for modern probability theory in 17th century France which subsequently made possible advancements in modern engineering, physics, chemistry, and practically every other aspect of our lives.  You will walk away from this book with a sense of awe of the accomplishments of the great minds who have come before us and a more intimate understanding of how risk permeates our lives and defines us as human beings.

Moneyball: The Art of Winning an Unfair Game by Michael Lewis tells the story of Oakland Athletics general manager Billy Beane in his attempt to put together a winning baseball team in spite of having one of the smallest budgets in the league.  Since the conventional wisdom of signing big-name hitters and young, dynamic pitchers carried too high a price tag, Beane and his team were forced to improvise.  Careful statistical analysis convinced Beane that other statistics, such as high on-base percentage and pitcher who got a lot of ground outs, could lead to a winning team at a much lower price.  The result?  The 2002 Oakland Athletics won first in the American League west with a record of 103-59, a spectacular record.  While not explicitly about investing, Moneyball conveys important lessons to investors such as the importance or careful analysis and courage to go against the crowd.  Sports fans and investors alike will love this book.

Gary Belsky’s breakthrough behavioral finance book Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics deals with the psychology of decision making as it relates to personal finance and investing. In classical economics, it is taken for granted that individuals and firms always move to maximize their utility and act in their own economic best interest. Behavioral Finance disagrees, countering that households and firms are, surprise, human after all and suffer from the same biases and psychological blind spots you and I do in everyday life. They are suseptible to manipulation, confirmation bias, anchoring, and advertising. They often do things directly counter to their own self-interest for often unpredictable reasons. This book will teach you to recognize these irrational behaviors and hopefully innoculate yourself against them.