Which three books

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor.

Which three books

Postby travesty » 06 Nov 2011 20:32

If you were to recommend three books for a relatively new investor to read, in the general area of financial planning and portfolio building, which would they be, and (optionally) why?
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Re: Which three books

Postby Peculiar_Investor » 06 Nov 2011 20:57

While technically not books, might I suggest the following:

Why? Cost is free and IMHO provides an excellent starting point for someone starting out. The above links should provide plenty of food for thought and hopefully start a newcomer on the journey to financial education.

Added: Link to Bylo's list of books.
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Re: Which three books

Postby tidal » 06 Nov 2011 21:54

There are many good books, but I think the single most important concept to convey is the power of compounding. I think it was Einstein who called it the 8th wonder of the world.

Even in today's low-interest, low-growth environment, it's still reasonable to think that a diversified portfolio could consistently get an after-tax, after-inflation, after-expenses return of 1%.

Yes, given our starting point, that seems over-optimistic and at the same time depressingly low. But it's ignoring the impressive power of compounding those returns.

Consider a $100,000 investment at 1% for 40 years. Instead of just being worth a final value of $140,000, the compounding effect would boost that to nearly $149,000. That's over 6% extra due to compounding. Which shows why it is so important to start early.
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Re: Which three books

Postby Darrell Greenwood » 06 Nov 2011 22:15

travesty wrote:If you were to recommend three books for a relatively new investor to read, in the general area of financial planning and portfolio building, which would they be, and (optionally) why?


The first book that should be read by anybody who is investing is:

A Random Walk Down Wall Street

http://en.wikipedia.org/wiki/A_Random_W ... all_Street

Why?

"A Random Walk Down Wall Street, written by Burton Malkiel, a Princeton economist, is an influential book on the subject of stock markets which introduced the random walk hypothesis. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages." --Wikipedia.

If one accepts Malkiel's random walk hypothesis (and I do fully) one avoids a lot of expensive mistakes.

Cheers,

Darrell
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Re: Which three books

Postby Rickson9 » 06 Nov 2011 22:24

I started with Beating The Street by Peter Lynch when I was in junior high. It's a good book.
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Re: Which three books

Postby BRIAN5000 » 06 Nov 2011 22:57

There are many good books, but I think the single most important concept to convey is the power of compounding. I think it was Einstein who called it the 8th wonder of the world.



and right behind compounding (maybe # 9, and it was all the rage/style for a few months?), is frugality, cause you need something to compound. No matter how small save money on things you don't really want to spend your money on and spend money on the things you really like.
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Re: Which three books

Postby ockham » 06 Nov 2011 23:35

Darrell Greenwood wrote:
travesty wrote:If you were to recommend three books for a relatively new investor to read, in the general area of financial planning and portfolio building, which would they be, and (optionally) why?


The first book that should be read by anybody who is investing is:

A Random Walk Down Wall Street


I don't quarrel with the importance of reading and understanding Random Walk..... but I think I'd instead recommend anything by Jack Bogle. His thesis is the same as Malkiel's, but Bogle has an enviable gift for simplification without loss that would be particularly valuable for a beginner.
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Re: Which three books

Postby NormR » 06 Nov 2011 23:51

Darrell Greenwood wrote:"A Random Walk Down Wall Street, written by Burton Malkiel, a Princeton economist, is an influential book on the subject of stock markets which introduced the random walk hypothesis. Malkiel argues that asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages."


Strangely enough, the book convinced me that the EMH/CAPM was a load of crap. Keep an eye out for the graph that shows the markets not at all behaving according to theory.
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Re: Which three books

Postby deaddog » 07 Nov 2011 00:15

Firstly I would recommend “The Wealthy Barber” for basic financial planning.

Secondly O’Neil’s “How to make money in Stocks” to give a background in both fundamental and technical analysis.

Thirdly Montier’s “ Little book of Behavioral Investing” so that you will be aware of why you are making the mistakes you are bound to make.
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Re: Which three books

Postby AltaRed » 07 Nov 2011 01:40

The OPs question was associated with the general area of financial planning and portfolio building, Why would stock books be first and foremost?

I agree with P_I's list of references. The starting point is the concept of paying yourself first. Then it is the basics of building a financial plan. Besides Finiki, I would include Sandra Foster's 'Who's minding your money' as an example of building financial knowledge. Perhaps The Wealthy Barber too but feedback I've heard is that it is a bit hokey (many years since I read it and have since forgotten it).
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Re: Which three books

Postby Darrell Greenwood » 07 Nov 2011 14:47

NormR wrote:Strangely enough, the book convinced me that the EMH/CAPM was a load of crap. Keep an eye out for the graph that shows the markets not at all behaving according to theory.


Possibly, but the hypothesis that "...asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages." is not a load of crap.

Cheers,

Darrell
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Re: Which three books

Postby NormR » 07 Nov 2011 15:08

Darrell Greenwood wrote:
NormR wrote:Strangely enough, the book convinced me that the EMH/CAPM was a load of crap. Keep an eye out for the graph that shows the markets not at all behaving according to theory.


Possibly, but the hypothesis that "...asset prices typically exhibit signs of random walk and that one cannot consistently outperform market averages." is not a load of crap.


The quote requires a bit of parsing.

If the random walk part = Gaussian, then it is a huge pile of crap. Btw, what is a sign of randomness? Seems like it either is, isn't, or one doesn't know. Then we get into the question of how one can really know that something is random. But when it comes to the markets, enjoy the momentum which is a big counter example.

Consistency is also an odd requirement. After all, the market does not consistently outperform X (where X can be another benchmark, fund, etc.)

Overall, it's a very bad mental model. Bogle's CMH is much better. IMHO
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Re: Which three books

Postby Darrell Greenwood » 07 Nov 2011 17:31

NormR wrote:The quote requires a bit of parsing.

If the random walk part = Gaussian, then it is a huge pile of crap. Btw, what is a sign of randomness? Seems like it either is, isn't, or one doesn't know. Then we get into the question of how one can really know that something is random. But when it comes to the markets, enjoy the momentum which is a big counter example.

Consistency is also an odd requirement. After all, the market does not consistently outperform X (where X can be another benchmark, fund, etc.)

Overall, it's a very bad mental model. Bogle's CMH is much better. IMHO


I totally agree with Bogle's CMH (I had to look that acronym up). My annual costs are less than one basis point.

We seem to be coming at this from different directions. I never gamble. I know the house always wins (ok, there are fascinating edge cases but they have minimal practical consequences.)

I take the same approach with investing. None of the techniques to 'beat the house' will consistently win (insert long list of techniques here, momentum, technical analysis, best fund manager, LTCM, etc) so I don't waste time or money with them. Reading A Random Walk Down Wall Street gave me that insight. I tried to share that insight with the original poster.

Cheers,

Darrell
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Re: Which three books

Postby Brix » 07 Nov 2011 21:59

Charles D. Ellis, Winning the Loser's Game, which is a sexed-up retitling of an earlier edition called simply Investment Policy. Only about 140 pages, i.e. says what it needs to say without padding.
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Re: Which three books

Postby Bylo Selhi » 08 Nov 2011 10:36

Three investment books writen by amateurs - moneyville.ca Blogs
I'm always looking for good books to recommend to people who want to manage their own investments. I like to see excellent design, clear writing and as little jargon as possible. Here are three I like, written by Canadian authors who are self-taught and work outside the industry. All are in soft cover. All are short (less than 200 pages)...
Sedulously eschew obfuscatory hyperverbosity and prolixity.
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Re: Which three books

Postby Insomniac » 09 Nov 2011 01:36

All of my investment books, except one, have gone to the thrift store. I was a fan of Gordon Pape a few years ago. Now pretty well everything I need is online (I see some good links in this thread to check out).

The one book I kept was The Smartest Investment Book You'll Ever Read (Canadian Edition) by Dan Solin. For the most part, you don't need Dan's book; Google "couch potato portfolio" and read on. Yes, I do follow the couch potato strategy. I kept the book because it makes sense and is really easy to read - perfect for lending out to the young people I work with.
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Re: Which three books

Postby ghariton » 14 Mar 2012 01:41

Antti Ilmanen, Expected Returns: An Investor's Guide to Harvesting Market Returns.

Ilmanen manages to reflect the points of view of both theorists/academics and practitioners. The result is 550 very dense pages of advice on active investing. But he covers a lot of ground in a very informative way. To give you an idea, the bibliography is 24 pages in rather small type -- and he references all of that in the text.

Lots of insights. But the organization of the book is less than clear, and the result is that there is some repetition. Plus it becomes obvious that the author's mother tongue is not English.

All that said, this is far and away the best guide to active investment that I have seen.

From his summary of his summary on how to improve portfolio performance:
Risk

The simple way to boost long-run returns is to raise the weight of riskier assets in the portfolio. The more complex but better rewarding approach requires leverage. Within each asset class, buying the riskiest assets almost invariably gives worse long-term returns than levering up lower volatility assets. Even across asset classes, investors can reduce portfolio volatility by smart diversification and then convert improved risk-adjusted returns into higher raw returns by applying moderate leverage.

Horizon

Investors with a long time horizon can exploit it by over-allocating to illiquid asset classes and reaping related illiquidity premia. Other possibilities include contrarian market timing and opportunistic reinsurance underwriting.

Skill

Active investors may try to add value through skillful security selection and market timing, either in house or externally. [Note: This book is written for institutional investors.] Even when markets are not fully efficient, they are competitive enough to make the task challenging. Building an active management culture and resources internally is not easy, nor is it easy to identify consistent outperformers among external managers.

Costs

Reducing fees and other implementation costs is often the easiest way to enhance net returns....


Each point is supported by a wealth of detail and examples.

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Re: Which three books

Postby Spidey » 14 Mar 2012 08:28

The Four Pillars of Investing by William Bernstein
What Works on Wall Street by James O'Shaunessy
Stocks For the Long Run by Jeremy Seigel

But to add a little balance, I would then suggest, Your Money or Your Life by Viki Robin and Joe Dominguez.
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Re: Which three books

Postby gsp_ » 14 Mar 2012 11:03

ghariton wrote:Antti Ilmanen, Expected Returns: An Investor's Guide to Harvesting Market Returns.

The result is 550 very dense pages of advice on active investing. But he covers a lot of ground in a very informative way. To give you an idea, the bibliography is 24 pages in rather small type -- and he references all of that in the text.

Lots of insights. But the organization of the book is less than clear, and the result is that there is some repetition. Plus it becomes obvious that the author's mother tongue is not English... [Note: This book is written for institutional investors.]


Thanks for the review but this thread was about recommendations for a relatively new investor. I doubt .1% of that subset could get through this book.
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Re: Which three books

Postby ghariton » 14 Mar 2012 12:53

gsp_ wrote:Thanks for the review but this thread was about recommendations for a relatively new investor. I doubt .1% of that subset could get through this book.

Yes, but that was five months ago. By now our beginner should be ready and able to move on to more solid fare. :wink:

In my case, I read a number of introductory DIY books long, long ago. But they were all too elementary -- David Chilton level is the best way to describe them -- and I didn't take them seriously. So I tossed the books, dismissed their advice -- whatever it was -- aqnd became an uneducated speculator instead. If I had started out with a book wsith some meat in it, I would have stopped to think about it. I could have been rich today. :wink:So yes, for a few people, Ilmanen's book might not be such a bad starting place.

In any event, I welcome a move of my post by a moderator to a more appropriate thread.

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Re: Which three books

Postby Profit not Prophet » 15 Mar 2012 19:31

I have not seen the investment zoo listed yet.... it was pretty good by Stephen Jarislowsky
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Re: Which three books

Postby Thorn » 15 Mar 2012 23:43

Over the past few years, as a neophyte investor, I read a number of books and online articles, but most never really clicked with me. Probably what works for you won't strike a bell with others. My favorites are:
(1) A New Pension Plan for Canadians by Springett, which outlines a broader agenda starting with personal goals and continuing on with 5 interlocking plans - financial (saving), investing, taxation, risk (insurance) and estate. Also a nice description of key investment risks and some suggestions for managing them.
(2) The Intelligent Investor by Graham (orginally published in 1949 with the latest update commentary in 2004), the origin of value investing with a clear description of two basic approaches - defensive and enterprising. Very dense.
(3) In Your Best Interest by Cunningham, a basic introduction to the bond market for government and corporate fixed income.

Also, Devil Take the Hindmost by ?, a short but excellent cautionary tale about investor psychology in market bubbles and crashes over the past 400 years.

The random walk math suggests that market pricing mechanisms are NOT suitable for forecasting future behavior. In short, you know as much about the future as any expert. There has been a great deal of math and stats published over the past decades - in general, the more esoteric the theory, the less it has to do with real market behavior.
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Re: Which three books

Postby travesty » 16 Mar 2012 02:10

Thanks all for the continued suggests. George - I definitely appreciate your suggest of more advanced material since as you point out, after novice comes something else. In any case, I might pick it up for myself!
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Re: Which three books

Postby ClosetIndexer » 02 Apr 2012 03:22

Spidey wrote:The Four Pillars of Investing by William Bernstein
What Works on Wall Street by James O'Shaunessy
Stocks For the Long Run by Jeremy Seigel


+1
Sounds good to me, although I haven't read WWoWS yet. Four Pillars is my #1 recommendation. Next on my reading list is The Intelligent Asset Allocator, Bernstein's first, more in-depth book.

For the less-novice investor, I recommend this collection of resources by Robert T at bogleheads: http://www.bogleheads.org/forum/viewtop ... collective
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