Required reading for the budding investor

Tip: this post is really just a long [50-ish items] book list for the aspiring investor

SpreZZaturian’s guide to becoming an investor

You want to work in finance, become a finance mogul?! You want to know the truth? You think you’re entitled to? 

required reading for the budding investor

You can’t handle the truth!

You will not get rich working in finance

Unless you went to the right school, hardly any firm will look twice at your application (more on how to write one here)

Job opportunities in finance are shrinking, and it will get much worse. If hired at all, prepare to be fired soon.

Before being fired, expect long and meaningless hours as a general “resource” (at best collecting data and preparing power point presentations, at worst working as a caterer).

The skill set for getting in has hardly anything to do with the skill set needed to invest. Consequently, if hired at all, you will waste a lot of time collecting and serving instead of learning, understanding and practicing.

You won’t learn much useful on the sell-side (analyst) either. And it will take forever before you make any money on the buy-side (founding partners and seniors will take it all, and you, my friend, are replaceable). Joining a new fund won’t make much difference, since any outfit that would consider you will be sub-scale, potentially forever.

 

DIY investing is a better way

But if you really want to be an investor anyway, do it yourself.

Apart from HFT/algo and bonds, you won’t need any fancy math, high up-front investments in infrastructure or complicated strategies. Investing in stocks (and some other asset classes) is mostly about psychology (not least patience).

You don’t need to get coffee for bosses to learn about investing. You don’t need to prepare giant spreadsheets or power points during the weekends to understand the basics. You need to read good books, and take risk with your own money.

If you are good enough and can prove your results, who knows, maybe after a little while, some hotshot will hire you or buy your operation. If you still want to by then.

You’ll get all the fun of investing, of being your own man, and at least the potential of making serious money sooner or later.

If you are not good enough, how did you ever expect to make money in the finance industry?

Do you want some reading tips for becoming a better investor? Can you handle the required reading list? Here goes…

 

Required reading

To become an investor you need a little bit of money, some basic accounting skills (being able to read an annual report), patience and a bit of luck. And most important of all, you need the right frame of mind, stability and being aware that investing is mostly about psychology, not math and accounting.

Not least you need a frame of reference and perspective.

The following are my best book recommendations for reading up on (mainly the psychology of) investing. And some for historical references and perspective in case you just started investing (less than 15 years ago) and don’t have good sources of long term financial records.

Plus some books to avoid.

First, the ten truly required reads:

 

Margin Of Safety – Seth Klarman (great summary for free here)

It’s really all you need to become aware of the most important pitfalls and opportunities in investing. This one is truly required reading; many times over.

Reminiscences of a stock operator – Edwin Lefevre

This book covers one of the greatest traders/investors ever, from his humble beginnings as a quotation boy to becoming one of the richest people in the world and a stand off against the U.S. government. His mistakes, luck and success imprint the reader with the foundations of investing psychology, technical analysis, macro/micro and sound, productive, investment.

Remember that “technical analysis” isn’t all about drawing arbitrary patterns in a stock chart, it’s about trying to infer the psychology that drives human herd behavior and stock prices.

Technical analysis has been a dirty word since my first finance classes in college, but prices still do hold some information.

Exactly what and how to use it is another story. I don’t think it’s black or white but a lot of shades of grey between macro, micro and technicals.

The Most Important Thing – Howard Marks

Everything you need to know about risk. Marks is a master of breaking down “risk” in components of risk, which clarifies the concept, and educates the reader on how to manage risk. You might think risk is just (historical) price volatility, or earnings volatility, VaR or something similar.

Nope. Marks will teach you about dozens of different risks that will make you see investing in a whole different light. 

Hedgehogging – Barton Biggs

Biggs’ story of how he started a hedge fund, managed setbacks in funding as well as investing (not least in oil). It’s entertaining and very useful. I learned more reading that book, than in my previous 10+ years in the market (I said something similar in an Amazon review way back).

You will literally feel Barton’s angst as he struggles with whether to cut his losses, or hold on to sinking assets that might be about to bounce or turn around. Better him than you.

Fooling some of the people all of the time – Einhorn

The perils of shorting, of being right but early and alone – and drawing fire from the authorities. If you are at all enticed by the dark side of shorting, you need to read this.

The Black Swan – Taleb

More about hidden risks and how to take them into account. Taleb’s epic book about the unknown unknowns that risk undoing everything unless you manage the fat tails of (im)probable outcomes.

BULL! – Maggie Mahar

The breathtaking story of the worst stock market mania ever in the late 1990s. Read and compare the IT bubble 1995-2000 with the central bank bubble of 2010-2015.

The great crash – Galbraith

The only objective recount of the markets and the economy in the early 1930’s. Did investors actually commit suicide? Didn’t anybody warn before. What responsibility did the Federal reserve have? Back then, the world’s greatest economist right before the crash claimed stock prices had reached a permanently high plateau. Should celebrity pundits like that be trusted?

How an economy grows and why it crashes – Peter Schiff

It’s about macro, I know, but it’s also about the foundations of entrepreneurship, investment, productivity and wealth creation. It’s the best book on economics ever written. It’s required reading on every book list. Here, it might just keep you a little more level headed when feeling the urge to buy into the Snapchat or Uber IPOs.

The death of money – James Rickards

What might happen to fiat money when the current money printing era draws to an end. Also, why you might want to buy gold instead of most stocks. Perhaps a bit dystopian and scary for a young investor, but nevertheless a good reminder that stocks are not all about stocks…

The Retarded Hedge Fund manager – Karl-Mikael Syding

My own honest tale about taking risk, and the importance of realizing the difference between luck and skill and avoiding hubris.

 

Very useful and readable, but perhaps not required per se

Thinking Fast And Slow – Kahneman (About the limitations of the human mind. Economic psychology and behavioral finance 101. You’ve already read it all if you have a masters degree in finance, but it’s a good summary nevertheless)

The user illusion – Norretranders (insightful and important regarding the interplay between the conscious and the subconscious; the real self and the narrating I). Learn to trust your intuition (which is the 1m times faster subconscious way of trying to communicate important things to your slow I) and be fascinated to learn that your “I” actually live half a second in the past, which is how long it takes the self to filter and sort and communicate the info (as well as make a fake time stamp -0.5s).

The Logic of Life – Tim Harford (a new slant on homo economicus, how superficially illogical decisions actually are super rational. It can help explain why some unlikely companies prosper and some ‘sure things’ fail)

Abundance – Diamandis & Kotler (about the wonderful future of technology and mankind [not sci fi; very concrete actual technologies]. Great for insulating yourself against doomsayers and perhaps understanding which new new things are more likely than others, and what kind of competition they will soon face)

Tomorrow’s gold – Marc Faber (Macro. Power centers and currencies you thought would last forever didn’t. None. The dollar and the U.S. won’t either, and definitely not the euro. Please note though that the time scale is in the hundreds or thousands of years, not next Monday)

Lords of finance – Ahamed (important lessons from central banking’s early days, not least the quick-step dance between currencies, real estate, stocks and bonds required to protect your savings during the Weimar hyperinflation)

Manias, panics and crashes – Kindleberger (everything you ever needed to know about the history and dynamics of manias and panics. The book is unfortunately a bit of a slow read, but the information is important and useful to gain perspective on what a bubble is, how it forms, the psychology behind its build-up and its bursting, what parts are fundamental and what parts are irrational feed back loops, how long to ride a bubble and how to trust a strong advance actually isn’t a bubble at all)

Endgame – Mauldin (not as good as I had hoped, but interesting macro take on the future for various [all] geographies. China, Japan, Russia… here is a prescient look into the future of geopolitical risk)

Irrational exuberance – Shiller (bubble theory from the man behind the Shiller cyclically adjusted price earnings ratio: CAPE)

Holy grail of macroeconomics – Koo (what really happened in Japan, and what was done about it, albeit not updated for the last few years’ insanity)

Animal Spirits – Akerlof/Shiller (the micro behind the macro of recoveries and bubbles)

The return of depression economics – Krugman (believe it or not, it was actually quite good – I read it in 2001 but he’s released an update including both crashes since then)

The great reflation – Boeckh (perhaps it’s over now, but here Boeckh shows the opportunities created by reflating the world after a trough. For next time, perhaps.)

 

Esoteric

Gödel Escher Bach – Hofstadter (A heavy and dificult tome about recursivity, reflexivity, self reference and feed back loops. No market talk at all, but a very important book about the limitations of math, where consciousness comes from, and related to the circular issue of central banks basing their decisions on variables that are affected by earlier CB decisions).

 

 

More fun than important, but still offer some psychological insights into markets and its participants

Cityboy – the ugly truth about financial analysts (you’ll never trust a recommendation again)

Wall Street Meat – A great book for understanding the immoral machinations that underpinned the IT mania (good IPOs go to insiders, bad go to you)

Liar’s Poker – Early days of the stock market’s comeback from the dead in the 1980’s. My guess is we could very well end up in a “death of markets” situation again in a few years; the early 2020’s?

The new new thing – Lewis’ story about the IT mania in the end of the 1990’s

Trading with the enemy – Jim Cramer’s colleague recounts Cramer’s borderline illegal antics at his hedge fund’s office and in the stock market

 

These you can do without:

The Intelligent Investor – Graham (Boring, dated, methods still works though but it’s way too long for saying keep stocks and bonds in your portfolio, buy more of whatever falls in proportion to the other)

Market Wizards – Schwager (Wtf?! Utter junk. Some fun stories, but nothing actionable – just hundreds of recounts of gut feeling and luck)

Wealth, War and Wisdom – Barton Biggs (I learned a few things about WWII, but the market stuff is borderline ridiculous – almost religious)

 

I haven’t read the following myself but they are probably worthwhile:

Antifragile (what is actually new here vs. The Black Swan?)

The little book of sideways markets (expect sideways markets for decades, with huge swings… this book might come in handy) 

Flash boys (Lewis is always entertaining and educational, here in a scary tale about HFT front running and rigging. Do you really want to invest in that environment?)

When genius failed (interesting tale about the Nobel prize winners that almost broke the financial system, by miscalculating the thickness of financial tails)

The big short (Lewis’ narrative of the house price boom and bust, its main characters and companies)

 

School text books I’ve kept but you easily can do without

Statistics – Newbold (way too much formulas for most, albeit some important lessons on which statistics to trust and which not to) 

Basic Econometrics – Gujarati (some regression analysis techniques can be useful, but mechanistic investing on this level is useless anyway)

Futures and Options – Hull (skip this one and take market prices for granted. You won’t be doing any option arbitrages anytime soon, or ever)

Principles of Corporate Finance – Brealey & Myers (here’s what you’ll learn: companies take on debt, and issue equity. Some proportions are expensive and/or risky. Sometimes companies acquire each other. Sometimes too dearly)

Valuation – Copeland (not completely useless, but do you seriously think you’ll forecast cash flows 20-50 years out and discount them with some arbitrary factor? And then invest your own money based on what comes out of the model? I don’t think so)

Macroeconomics -Dornbusch and Fischer (among all the laughable [EMH] charts and graphs there are some insights into economics, but you’ll learn so much more in Schiff’s book)

 

Online resources

Memos from Howard Marks (quarterly write-ups from the master of risk)

Ray Dalio’s principles (a very long list of guiding principles in life as well as on the markets)

Hussman weekly (weekly updates on market risk tolerance/aversion and valuation)

Contrarian edge (Vitaliy Katsenelson’s somewhat philosophical musings on the market, companies and products)

Wall Street Week (interviews with financial moguls)

Financial Orbit (Chris Bailey’s market updates)

HORAN (useful market charts -and thoughts)

Zerohedge (fast, frequent, news comments – unfortunately with a paranoid and bearish bias that seldom has any bearing on current events, even if it might hold true in the long run)

GMO (Legendary investor Jeremy Grantham has researched bubbles, all bubbles, defined them and followed their conclusion (all crash). Register for free and read his quarterly letters, including his past ones). Please note that he doesn’t quite think that we’re in a stock market bubble (yet).

Gloom Boom Doom by Marc Faber (“there is always an opportunity somewhere, perhaps in Vietnam”)

The high tech strategist monthly newsletter by Fred Hickey (originally a letter about high tech companies, sales and earnings developments and investment opportunities, but lately more and more about central bank shenanigans and opportunities in gold)

 

Other

You probably should read up on marketing and accounting too, even if I think it’s a bit overkill. I suck at marketing, always have, and it didn’t hurt my investing.

I’m not particularly good at accounting either, but you won’t learn the necessary skills in school anyway – just some shallow mechanics.

Actually, accounting is one of few areas where sell side analysts are good to have around. They know a lot about accounting tricks and valuable key ratios.

Anyway, you’ll get pretty far by following, albeit somewhat blindly, my 50-step formula presented in an earlier post (called The magical 2-step formula).

And here is more on how to screen for stocks to invest in.

In a future post, I’ll add a beginner’s guide to stock screening (i.e., how to go from thousands of available stocks to just a few dozen relevant to choose from).

 

Summary

Start investing. If you can’t get a boss (a job) in finance, do it yourself. 

Read, read a lot, re-read. Start with Margin Of Safety, at least two times. Then the other 9 required reads.

Sign up for newsletters and updates from Grantham (GMO), Howard Marks, Contrarian Edge (Katsenelson) and check in on Hussman Weekly every Monday. Read their historical production as well. Just keep reading backwards in time.

Trade/invest with real money. Start with a little. Increase your stakes slowly.

Make a check list of what to consider before pouncing, and what you need to cut a holding. Follow that plan. When in doubt get out. Then restart. That goes for the upside as well; don’t be afraid to take a profit and a pause.

Keep a log of exactly what you do and why – in particular your feelings. You’ll want to get back to those notes when in trouble.

Read more; read Hedgehogging by Biggs… and my book The Retarded Hedge Fund Manager (subscribe to get it for free)

Most important of all: There is no rush whatsoever to invest. Markets will be there tomorrow too. Do not make an investment or hold on to it unless you know what you are doing. Keep a margin of safety.

Study, Wait, Pounce.

Margin of Safety

admin

20 Comments

  1. Fascinating!

    I have gone from “finance is a scam and societally useless” to “finance is a complex and interesting subject, worthy of study” in a relatively short while, thanks heavily in part to your writings. Perhaps I will return to the first standpoint later :)

    My feeling now is that a master of high finance such as yourself possesses a set of skills and experience somewhat on par of that with an advanced programmer (which is a comparison I know how to “grok”). Would you say that is correct?

    • I haven’t quite made up my mind either. Programming is definitely a skill where you build layer upon layer. Investing does have some similar qualities, but still complete newbies, 3-sigma events and mid term movements (7 years) can make any seasoned investor look worse than a beginner.

      Sometimes I think I know something about markets and investing. Sometimes I feel completely lost. programming is not like that.

      • You could argue both ways (scam vs valuable), surely.

        My visage of “high finance” stems much from the call-centre type world portrayed in “Wall Street”; cowboys working hard sucking up funds to dump on the markets.

        To believe this representation would be a mistake. However, it demonstrates the reason why many young, testosterone-filled men (& women?) would be drawn to that enterprise -> relatively high salary, endure a few years then bail to a countryside villa. Not to mention the quasi-notoriety large swathes of society seems to have attached to these swashbuckling “deal-makers”.

        Similarly with computer programming – the romantic ideal of facebook-esque “hackathons” in order to get another billion users, which somehow fuels another $100,000,000,000 valuation, is the ideal many “startup” kids have in the forefront of their minds.

        The reality is very much different.

        In “web world”, audience counts. Without audience, or revenue, you’re a nobody. It doesn’t matter what “technology” you use, people won’t give a shit. Most companies which are successful started with free technology (open source). They don’t invent anything new, they just use what’s already been made to provide some service in a different way than before.

        “Programming” (as many “web developers” can attest) today is nothing like the 80’s. Now a library is a cli call away, dependencies updated in real time, latest builds deployed & compiled automatically. Manuals & documentation a thing of the past.

        In both respects (programming / finance), you’ve got the double-edged sword. On one hand, the slow, steady, wholesome approach (where billionaires come from); the other the impetuous feeding frenzy which only comes from people whose only goal seems to be the enrichment of themselves.

  2. Wow this is absolutely gold! Currently an undergrad studying in Computing & Stats. Looking to apply to SSE to do an Msc in Finance.

    Going to spend some of the summer munching through these books! Still not sure whether I should do Investment Banking focused on the tech space or Asset Management focused on the tech space.

    Very different fields but only time will tell if I get into or am good at either!

    Thank you for the time! Quality of writing has drastically improved.

  3. The irony of life (born to die) strikes again!!!!

    “If you are good enough and can prove your results, who knows, maybe after a little while, some hotshot will hire you or buy your operation. If you still want to by then.”

    “Start investing. If you can’t get a boss (a job) in finance, do it yourself. ”

    Funny how if you don’t “need” something, you get more of it.

    EVERY time people have listened to me, it’s been because I actually DID something — I knew it could somehow be successful (likely because someone else has already done something similar). Only when I had, in my own mind, realized that it was possible, did I summon the courage to actually do it properly.

    Contrary, when I’ve been a little bitch, people have just walked all over me. Their favourite is to just not reply to any correspondence. The next best is to jeer. They may send consolatory responses, but nothing serious. You’re just a little mosquito, trying to suck their blood.

    Ironically, a courageous act (even something as simple as sending emails to notorieties), is what builds your credence & attracts those who matter. By doing enough “courageous acts”, real players will start returning your calls.

    Further ironic is why you should start young. Although you’d like to save for a house, it’s MUCH better to risk what little you have in “courageous acts”; you’re really buying influence which compounds with time :)

  4. John Mauldin’s “thoughts from the frontline” are also pretty good:

    http://www.frontlinethoughts.com/

    In his latest letter (loooong as always) he and his partner go through the arguments for and against whether the secular bear market finally has turned into a bull.

  5. Hej Karl-Mikael.
    Tack för en nyttig lista. Jag har gjort misstaget att köpa en del am. Litteratur direkt från USA. Fraktkostnaden översteg bokpriset. Jag upptäckte att ad-libris och cdon.com hade
    Böckerna till betydligt bättre priser. Något för de svenska läsarna att beakta.
    Nu till något annat. Jag får prenumerationserbjudande från en am firma som heter The Motly Fool. Namnet låter litet plojartat i mina öron. Har du någon erfarenhet av dom?
    Undrar
    Kenneth

  6. Hi Mikael,

    What are your thoughts on Michael Covel (www.trendfollowing.com) and the performance data of trend following traders? (especially Richard Dennis’s “turtle traders”)

    I appreciate your insight and posts.

    Thanks

    • Trend following depends exactly on how you do it, i.e., what trend it is you are following and how.

      I’m going to guess that you mean purely price trend following.

      In that case you can distinguish between adaptive and static models. Adaptive models have performed better for some. Static models always break down sooner or later.

      There are a lot of parameters to consider: leverage? (don’t!) frequency? (quite low is better) commission? stop-loss? pause length before re-starting after a stop-loss? market breaks (trading suspension e.g.), short/long or long-only? And so on and on…

      Given human psychology and innate herd behavior I am inclined to say trend following should work, at least as good as buy the dips, buy and hold and similar models. Many successful algo funds are trend followers. It’s just that they haven’t really been put to the test yet.

      Personally, I wouldn’t dare go for a static, 100% price based trend following investment model. I would freak out during the 50+% draw downs, questioning my model. I just have a hard time speculating rather than investing in things with intrinsic value. When I buy a stock I want to be able to live off its dividends, not be dependent on selling it to a bigger fool.

      I hope this added some kind of value for you.

      • Interesting to see your perspective..

        Thanks for taking the time to answer!

  7. Hey Mikael,

    Curious about your views of math/quant as a career move in the recent future, how redundant would you reckon quant jobs will become in the coming 10 years? Thinking of using the skills afterwards to set up something which will push society into something more ‘space age’, such as asteroid mining, depending on the coming years and its profitability.

    Regards,

    Perry

  8. Mikael, thanks for these recommendations.

    After working in seed-stage tech VC (entry level), I got curious about where our money comes from, and that started a quest to ‘figure out how the financial system works.’ My first exploration into answer that question was, unfortunately, to read a lot of narrative-heavy books (Hatching Twitter, Elon Musk bio, Paul Graham, etc). I appreciate that these are more philosophical and psychological. I find myself laughing aloud when reading Reminiscences or The Great Crash, for example – the authors’ observation of human nature is spot on.

Leave a Reply

Your email address will not be published.