If you read just one useful book on finance per year, you’ll be better informed, and your fiscal health will improve markedly. Here are my top 10 in no particular order. They are all very well written and a pleasure to read.
#1 : The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk by William Bernstein
Knowing nothing about investing, I stumbled upon this gem at a local bookstore. It introduces the basics of investing and modern portfolio theory with force and clarity. This book contains the essential foundations for any long-term investment strategy. Stephen Hawking remarked that each equation added to a book halves its sales. Taking this to heart, Bill subsequently published two further books to take his message to a wider audience: The Four Pillars of Investing: Lessons for Building a Winning Portfolio and The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between – they mostly cover the same ground, but they are all worth your time.
#2 : Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition by Jack Bogle
Now that you know how you’d like to build your portfolio, what building blocks are you going to use? John Bogle is the founder of the Vanguard Mutual Fund Group and creator of the first index mutual fund—an industry pioneer. This book makes the compelling case for a passive-investment approach. The cumulative impact of high fees, high transaction costs and taxes on your portfolio are incontrovertible. The sooner you are aware of them in your investing career the better. An equally rewarding read in this area is Burton Malkiel’s A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Tenth Edition).
Keep it Entertaining
#3 : Financial Reckoning Day Fallout: Surviving Today’s Global Depression (Agora Series) by William Bonner and Addison Wiggin
As engaging as it was prescient this book originally appeared in 2003. It’s an entertaining and educational romp through recent financial history, economics and where current central bank policy and demographics are taking us. Well written and irreverent, it is laugh-out-loud funny in places (plus they predicted the US housing bubble and GFC 5 years out).
The Big Picture
#4 : The Birth of Plenty: How the Prosperity of the Modern World was Created by William Bernstein
There are very few books that will change the way you look at the world forever: this is one of them. This is not a how-to book on investing – it is a tour de force through economic, political, military and institutional history. It shows why we invest and the role investing has played in bringing prosperity to mankind. It examines how the confluence of property rights and the rule of law, science and technology, capital markets, and efficient communications ushered in a new era of ever-increasing living standards. Fascinating, illuminating, brilliant.
The Psychology of Investing
#5 : Thinking, Fast and Slow by Daniel Kahneman
As investors, we are all too frequently our own worst enemy. This brilliant book by Nobel Prize Winner Daniel Kahneman shows just how dire the situation is. One of the founding fathers of behavioural economics, Kahneman’s fascinating experiments into human thinking will shatter any illusions you may have about yourself being a rational human being. Incredibly well written, this book will amaze you. Importantly for investors, it has some methods and techniques for dealing with the innate floors in our thinking and reasoning. If you find the topic as interesting as I do, Jason Zweig’s Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich is a worthy companion to this.
I’d Rather Be Lucky Than Good
#6 : Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim Taleb
The first and (in my opinion) best of the “Angry-man” trilogy, trader turned academic and philosopher Nassim Taleb demonstrates what an under appreciated role chance plays in our lives and investment markets. Later books in the series such as The Black Swan have introduced new phrases into the investment lexicon, particularly in the wake of the global financial crisis. The Black Swan and the third instalment, Antifragile, are worthwhile and entertaining reads that contain very important ideas, but be warned: they border on polemic at times and there is no shortage of ego on display.
#7 : Fooling Some of the People All of the Time, A Long Short (and Now Complete) Story, Updated with New Epilogue by David Einhorn
This book covers the story of hedge fund manager David Einhorn’s battle to expose the fraud and corporate malfeasance taking place at US company Allied Capital. If you’re not deeply interested in finance, this one will be heavy going. If you are, it’s an absorbing and astonishing story – one of greed, fraud, deceit and cloak and dagger antics. The amount of effort and energy expended by Einhorn and others to bring this all to light is extraordinary. If you’ve ever thought that short-selling serves no useful societal purpose, this one will change your mind.
#8 : Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor
Perhaps the most under-appreciated skill of an astute investor is a strong working knowledge of financial history. In professions such as the sciences, knowledge is cumulative; in finance, it’s cyclical. Because human beings and emotions like fear and greed are such central actors in financial markets, being able to put today’s events in perspective and say “I’ve seen this before, I know how this story ends” is absolutely vital to long-term investing success. In fact Sir John Templeton’s famous quote introduces one of the book’s chapters:
The four most expensive words in the English language are ‘this time it’s different.’
Templeton’s words sum up the most important lesson to be learned from this outstanding history of speculation, which focuses in particular on those manic episodes called bubbles, in which the prices of assets are driven to levels far above those justified by the assets’ underlying fundamentals. Markets may be efficient, but history shows that about once in a generation they become anything but rational. Forewarned is forearmed.
The Nature of Markets
#9 : The Misbehavior of Markets: A Fractal View of Financial Turbulence by Benoit Mandelbrot
This is a fascinating take on financial markets by mathematician Benoit Mandelbrot, a key player in the field of Chaos Theory. To make the mathematics simpler, finance practitioners (and academics) make several assumptions about markets and the distributions of their returns that do not hold up well to scrutiny. Nonetheless these simplified models are used pervasively. Benoit convincingly argues that this dangerously understates the risks investors take. Wildness lies in wait – is your portfolio ready for it?
Underpinning it All
No man acquires property without acquiring with it a little arithmetic also.
– Ralph Waldo Emerson
#10 : Mathematics: From the Birth of Numbers by Jan Gullberg
Investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra or the ability to tinker with a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. If you’re a little rusty, this beautiful book is not only a remarkable reference but takes you through the evolution and history of the underlying mathematical discoveries.