Since taking up investment in a determined and serious manner several years ago, I’ve been an avid reader and collector of books on investment written by those with a demonstrable record of outstanding success in the markets.
Does it help? You bet it helps. I’m certain that my returns are better as a direct result of studying the published works of the investment greats and applying their hard-won wisdom and techniques to my own market activities.
Here are my five favourites — the books that influence me the most and why I swear by them:
Margin of safety
Legendary US investor Warren Buffett reckons that when he was 25 years’ old, he’d accumulated all the money he’d ever need — and he did it by investing. Luckily, he enjoyed investing so much that he didn’t stop, which is why he became the one-time richest man in the world and we all heard about him.
Mr Buffett claims that, in the early fifties when he was 19, he read the first edition of a book called The Intelligent Investor by Benjamin Graham. He thinks it’s “… by far the best book about investing ever written.” According to Buffett, what he learnt from the book guided all his investment decisions ever after.
In The Intelligent Investor we learn to approach investment in a business-like manner, to gain a good grasp of the intrinsic value of a company’s business and, crucially, to profit from the manic/depressive outbursts of ‘Mr Market’ by buying quality enterprises when the shares under-price the underlying business — this margin of safety is extolled as ‘the central concept of investment’.
If you are new to the world of investment books, start here. If you’ve been investing for a while and haven’t read this book yet, what are you waiting for?!
Potential, not just cheapness
Later on, the writings of fellow investor Philip A. Fisher influenced Warren Buffett. Fisher penned the classic tome Common Stocks and Uncommon Profits, in which he urges us to avoid shares that are simply cheap. Instead, he recommends investing only if they give promise of major gain to us over the longer haul.
In fact, if a firm has attractive growth qualities, Fisher advocates that a high rating, such as the P/E multiple, should not necessarily put us off. He argues that a high P/E ratio may be a reflection of intrinsic quality and not a discounting of future growth. Shares that at first glance appear highest priced may, upon analysis, be the biggest bargains. The key is quality of enterprise and forward prospects. Identify those things correctly and the rating becomes a mark of quality.
In Fisher, we apparently see the origins of Warren Buffett’s later penchant for holding quality companies forever. On the other hand, Fisher warns that a low price-earnings ratio in itself is no guarantee of investment safety. He cautions that a low rating is apt to be a warning of a degree of weakness in an enterprise — flirt with a low rating and we risk falling into a value trap!
The six categories
Many know of Peter Lynch for extolling the virtues of the fast-growing ten-bagger. However, the one-time US fund manager owns up to making most of his money for Fidelity’s Magellan fund by trading stalwarts for gains of typically 30% or so.
The great revelation for me from his classic book One Up On Wall Street is the way his six categories of shares help me to understand the characteristics of different businesses. From Lynch, we learn to categorise stock-market-listed firms as Slow Growers, Stalwarts, Fast Growers, Cyclicals, Turnarounds or Asset Plays. The categories are not mutually exclusive as businesses can move from one classification to another or occupy more than one category at a time. As a mind model, though, Lynch’s six categories are second to none.
Here’s a bonus read: Peter Lynch’s follow-up publication, Beating the Street, provides the best framework for trading cyclical shares that I’ve yet to come across. I heartily recommend both publications to investors.
Run your own hedge fund
Australian investor Richard Farleigh became a multi-millionaire by backing his own judgement and ideas and by being consistently right. Luckily, he generously wrote a book about his techniques called Taming The Lion.
Through what he labels his One Hundred Secret Strategies, Farleigh delivers proven techniques for running an investment portfolio in a similar way to a hedge fund. He has it, for example, that markets tend to move further in either direction than we tend to expect. Acting on just that one insight has made me thousands so far — perhaps by holding on to a winning share, even though I thought it overvalued, or by waiting for a trend to change before buying a share with a falling price.
Here are some of the core beliefs from which Farleigh builds his strategies:
- Markets tend to under-react, not overreact.
- Big, obvious ideas offer great opportunities.
- It is safe to invest with a consensus view.
- Contrarian trading is usually irrational.
- It is best to time market participation rather than remaining invested at all times.
- Price trends are well known but under-utilised.
- Investing and trading are increasingly similar.
Farleigh shakes things up for the investor. I reckon he does it in a way that helps us make more money from the markets than we might otherwise.
Applied investing
Finally, my list of top-five investing books ever written includes a British book written by a British investor about 12 other highly successful investors (most of them British) who spill the beans about how they made there fortunes in the very recent past in the markets.
Guy Thomas’s Free Capital is a must-read for investors operating now. The pragmatic tips, strategies and insights, from 12 different perspectives, are invaluable. There’s something to accommodate most investing styles in the book, which also reveals where the 12 investors agree on strategy.
