April 30, 2015

Best Investment Books

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It's a fool's errand to do any investing without doing your research. Most likely, you realize that already or you wouldn't be reading this article. No matter what level you are on the maturity scale for investors, it's smart to check in every once in a while and do some homework, brush up on the terms and remind yourself of some stock-market truths.

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Best Book on Value Investing

The Intelligent Investor by Benjamin Graham
If you’re even remotely familiar with investing, you know about billionaire Warren Buffett. So when it comes to learning about investing, it only makes sense to read the book that led Buffett on perhaps the most successful investing career path ever known. “Benjamin Graham had been my idol ever since I read his book The Intelligent Investor,” Buffett told Forbes. According to U.S. News, Buffett called it “the best book on investing ever written.”

Graham is considered the father of value investing. The philosophy is based on identifying stocks that are currently trading for less than they should be worth and purchasing them in hopes the market will realize the company is undervalued and correct accordingly, giving you a return on your investment.

Best Book on Growth Investing

Common Stocks and Uncommon Profits by Philip Fisher
While Graham was a major influence on Buffett’s investing strategy, Fisher’s investing philosophy also played a role in how Buffett built Berkshire Hathaway into a successful investing conglomerate. Buffett says he is “85 percent Graham and 15 percent Fisher,” according to CNBC. Differing from value investing, Fisher’s philosophy is known as growth investing, which does not care so much about the specific valuation of a stock but rather looks to identify strong businesses that try to outperform their current valuations, even though they might not be considered “value” buys. Typically growth investors will look to identify rapidly growing companies, hence the name. Such companies are usually on the small size but heading upward in a hot industry or on the tails of a hot technology. This book “enables one to make intelligent investment commitments,” says Buffett, according to Forbes.

Best Books on Understanding Market Bubbles and Crashes

The Great Crash by John Kenneth Galbraith
Understanding what causes market bubbles and market crashes is an important defense mechanism when it comes to investing. If you understand what factors and signals point to these events happening, you can either protect yourself against the downfall or take advantage by investing in the inevitable downswing and reaping the rewards when the market swings back up again. As Buffett says, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Galbraith wrote this book in 1954 to examine the factors leading to the stock market crash in 1929, with the belief that the knowledge would help prevent future crashes from similar circumstances. He argues that rampant stock speculation led to a bubble that burst and ultimately started the Great Depression. Although the book was based on the events leading up to 1929, the factors are the same for any market bubble and serve as a great educational resource.

Best Book on Mutual Funds

Common Sense on Mutual Funds by John Bogle
Bogle founded The Vanguard Group in 1974 and the Vanguard 500 Index Fund a year later. It was the first index mutual fund available to the general public. During his watch, Vanguard grew to be the second largest mutual fund company in the world. When investing in index funds, your investments are pooled into the companies that make up a particular index, such as the S&P 500. This reduces the costs of the fund (since there is no need to have analysts maintain the fund), and it also allows your investments to keep pace with the stock market.

In this book, Bogle breaks down the complexities of the vast array of mutual fund offerings. He believes common sense and simplicity beat complex investing, and keeping your costs down and diversity up will help you outperform much of Wall Street in the long term.

Best Book on Passive Investing

A Random Walk Down Wall Street by Burton Malkiel
Malkiel’s book delves into how the stock market works and how you can successfully invest in it. Although the book has had several updates since the original edition in 1973, his advice has remained the same, according to this Businessweek summary: “Spread your investments among various asset classes and countries; keep fees low; and favor index funds over active managers who claim they can beat the market.”

Malkiel believes in passive investing and not trying to time the market, as many respected investment minds will tell you. This follows the name of the book, by suggesting that the performance of the stock market cannot be predicted, just as what you come across during a random walk cannot be predicted. Malkiel advocates rebalancing your portfolio once per year by selling off overperforming stocks and buying underperforming stocks.

Best Book on Magic Formula Investing

The Little Book That Beats the Market by Joel Greenblatt
Everyone says they are looking for the magic formula to win at investing. According to Greenblatt, he has created that formula. The founder and managing partner of Gotham Capital wrote this book to give the common investor a chance to succeed at investing in the stock market. According to him, over 70 percent of investors are beat by index funds, as discussed above, but he also claims that index funds are severely flawed and don’t take advantage of opportunities in the stock market as they should. As Greenblatt told Forbes about his magic formula, “It’s actually more diversified than the S&P 500 or Russell 1000 index. It has the same volatility and has the same beta, yet over the last 20 years you would earn 7 percent more a year following that strategy.”

Greenblatt’s formula is similar to value investing and focuses on investing in what he calls “good companies,” which have low price-to-earnings ratios and achieve high returns on capital. Gotham Capital has produced an average annualized return of 40 percent for more than 20 years, according to Greenblatt.

Best Book on Determining the Value of an Investment

The Theory of Investment Value by John Burr Williams
Originally written as a Ph.D. thesis at Harvard in 1937, this book is still considered the authoritative work on how to determine the value of financial assets. Williams is famous for his dividend discount model, which values an investment by predicting future dividends and discounting them back to their present value. This model is used to determine if a stock is undervalued. It is still widely used today and is a great tool for you to implement into your investing repertoire.

Past histories do not always reliably predict which way the stock market will go, but they sure do give an indication. When you need some reminders about what has happened before or need an extra dose of sophistication for your investment strategy, pick up one of these books and gain some perspective that could help you as you make big decisions with your money.

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