Not long ago, there were news about an old man, Ronald Read, who worked as gas station attendant and janitor for his life amassed a fortune of $ 8 million by the time he passed away at the age of 92. He, besides being frugal, spent time reading financial news and picking stocks during his free time.
There is also another case, this time an old lady, Grace Groner, who died 5 years ago at age of 100 leaving an estate that was worth $ 7 million. She worked as a secretary for 43 years and she bought $ 180 worth of her company share and never sold since 1935.
As it turns out, being financially wealthy doesn’t matter whether you are a man or a woman, a business man/woman, an average person or an employee or how old you are, as long as you are financially literate, you could accumulate large fortune over long period of time. A mere 3 % return on $ 8 million is about $ 240 000 income per year. That’s way more than 10 times my annual salary. It really worth the effort to be financially educated.
Below I list down the must-read books that I find useful on investment. They are the investment books that could make you rich. I group them into different categories.
Introduction to investing (beginner)
The Neatest Little Guide to Stock Market Investing: Fifth Edition
The Neatest Little Guide to Stock Market Investing introduces readers to the language of stocks. It answers some of the common questions like: What are stocks? How to trade stocks? What are preferred and common stock? How to make money owning stocks? It also touches about the stocks splits, why company issues stocks, what are the exchanges, what is the market, etc. It also explains the types of brokerage firms and commission.
It teaches readers how to evaluate stocks. It studies growth investing and value investing. It covers 2 types of analysis: fundamental and technical. The author also goes into detail explaining about the most frequently used financial ratios like earnings per share, current ratio, dividend yield, price/book ratio, return on equity, etc.
He analysed the masters of investing like Benjamin Graham, Philip Fisher, Warren Buffett, Peter Lynch, William O’Neil and Bill Miller. He looked into the history and helps you build a permanent portfolio. A full list of resources for research is provided so that readers can do their own research.
A recommended read for beginner.
Legendary investors
The Warren Buffett Way brings you into the mind of the world’s greatest investor. Although the author is not Warren Buffett himself (after all, Buffett never wrote a book by himself except the annual shareholder letters), he talked about Buffett’s history, education, people who influenced Buffett (including Benjamin Graham, Philip Fisher, John Burr Williams and Charles Munger), Buffett’s stock performance and investment decisions.
Buying a business is the Warren Buffett way of investing.
The author gave tons of specific real examples for case studies that happened throughout Buffett’s investment life. It all revolves around the 4 investment guidelines which are business, management, financial and value. How Buffett came to an investment decision and how that relates to the guidelines.
A compounded annual return of 22.2 % for nearly 40 years (1965 – 2003) is not an easy feat to achieve.
One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
One Up On Wall Street, contrary to The Warren Buffett Way, was written by the legend himself – Peter Lynch. It first hit the bookstores in 1989! Its timeless investment advices still hold true to this day.
The book is really easy to understand in layman terms and interesting to read. I didn’t expect that from a financial professional. Peter Lynch told his stories on how he got started to invest in stocks when working as a caddy in a golf course at the age of 11. He showed us how to pick good stocks based on our common knowledge by giving an example where he got his investment idea from his wife who loves shopping.
By reading the book, you will realize that good investments are everywhere. That was why Peter Lynch was holding 1400 stocks when working for Fidelity Magellan fund because he saw bargains everywhere!
Lynch averaged a 29.2 % annual return for 13 years (1977 – 1990) when he was managing the Magellan Fund before he retired at the age of 46.
Over centuries of researches in stock markets and findings
Stocks for the Long Run was written by professor Jeremy J. Siegel. He studied over two centuries of stock and bond data since 1802. He compared the risks and returns from both stock and bond. He found that stocks have an edge.
Then he focused on stocks. He delved in to the relationships between GDP growth vs stock returns, economic growth vs stock returns, small vs large cap stocks, growth vs value stocks, etc. He looked into the global investing and emerging markets.
He also studied the impact of economic environment on stocks like the gold standard, stocks and the business cycle, what moves the market, inflation, etc. After all the data crunching, finally, he recommends readers to go for long term due to stock fluctuations in the short run.
I learned a lot from this book.
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
A Random Walk Down Wall Street was written by another big name in financial market – Burton G. Malkiel. He explained what is a random walk. It means that short-run changes in the stock prices are unpredictable.
The author illustrated the madness of crowds using the tulip-bulp craze and the South Sea bubble that happened in 16th and 17th-century respectively. He went on to suggest that “the consistent losers in the market are those who are unable to resist being swept up in some kind of tulip-bulb craze.”
He also mentioned the relationship between technical analysis and the random-walk theory. What can charts tell you? The final answer after studying all forms of technical analysis is that none has consistently outperformed the placebo of a buy-and-hold strategy.
He talked about the new investment technology: modern portfolio theory and behavioral finance and their limits. Finally, he put together a practical guide for random walkers and investors. Do some exercises following the guide for better financial health.
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
The Four Pillars of Investing are the theory of investing, the history of investing, the psychology of investing and the business of investing. The author, William Bernstein, was not a financial professional when he started out. But he was not happy with the conventional explanations that practicing physicians are miserable investors. So he went on and debunked the myth.
The theory is about risk and return. The higher the risk, the higher the return. And the biggest risk of all is failing to diversify properly.
The history shows from time to time the markets and investing public go barking mad. It is rewarding to be able to recognize the manias and crazes. Also, technology plays a big role in shaping the history.
The psychology is the key to better performance. The fascinating area of behavioral finance explains how the individual investor’s state of mind affects his or her decision making.
The business of stock-brokers and mutual fund companies is to earn commissions. So don’t fall into the trap.
The Most Important Thing provides 20 useful and timeless investing advices that would help every one becomes a better investor. It was written by Howard Marks who has more than 20 years of experience working and writing in the financial markets.
His advices shed lights on a few key areas in investment, notably the thinking of the individual investor, value, risk, cycles, contrarianism, patience, know yourself, luck, avoiding pitfalls, etc.
It is a collection of author’s writings throughout 20 years of career. It provides many delicious food for thought.
Indexing – the lazy man way of investing
With all the researches done on stock markets, it is clearer and clearer that indexing is the way to go for average busy people to preserve their hard-earned capital with minimal work. The following books praise the beauty of investing with index.
The Elements of Investing: Easy Lessons for Every Investor
The Elements of Investing is a really short and to the point kind of investment book that targets the general public. It was written by the famous Burton G. Malkiel (author of A Random Walk Down Wall Street) and Charles D. Ellis.
In around 200 pages, the authors emphasized on the importance of saving for investment because it all starts with saving. Start early and little things add up.
The index fund solution is effective for everyone because no body knows more than the market itself. It also diversifies away from investing in single company. The authors showed how to diversify further across asset classes, markets and over time with dollar-cost-averaging and re-balancing.
The summary is – Keep It Simple, Sweetheart.
The Little Book of Common Sense Investing is another short book on indexing that was written by the father of the index fund – John C. Bogle. He created the world first index mutual fund in 1976. He is the founder of the famous Vanguard Group.
He believes in “the relentless rules of humble arithmetic” that low cost investing is the best investment. The high cost of other investment vehicles is the main reason why people get low returns. Large part of the returns is eaten up by the cost.
Even Warren Buffett confirmed his view.
Winning the Loser’s Game, 6th edition: Timeless Strategies for Successful Investing
Winning the Loser’s Game was written by Charles D. Ellis. In the author’s point of view, the market was used to be a winner’s game where only those with skills have an edge like in playing a tennis game. An amateur playing against an expert? The professional institutions have all the great tools and brilliant talents working together to exploit the market. The ordinary individual investor has no chance of winning the game.
However, as more people joining the market, the game becomes a loser’s game where those who make the least mistakes win the game, again, just like the tennis game. An amateur playing against another amateur. In this case, in order to turn the game around to become a winner’s game where every investor can be a real winner, each investor has to ignore the “beat the market” hype and work with Mr. Market.
They are in competition with themselves but not with each other. Each investor defines his or her own policy considering the risk, time horizon, etc.
The Power of Passive Investing: More Wealth with Less Work
The Power of Passive Investing is another book loaded with tons of research data comparing the passive and active investment styles. Richard A. Ferri showed that active management adds no additional value to investment returns.
He found the 1 to 2 win-loss ratio that is consistent across most mutual fund returns. That means only one out of three mutual funds outperform the passive low-cost index fund which is as good as a random distribution.
The results are conclusive: a portfolio of low-cost index funds provides the highest probability for meeting your long-term financial goals. “Passive investment is power investment.” said the author.
Millionaire habit
The Millionaire Next Door: The Surprising Secrets of America’s Wealthy
The Millionaire Next Door talks about the surprising truth of the majority of the millionaires. Their living style is not very different than the average Joe and they don’t spend on expensive items as opposed to what we usually thought.
The main secret to their wealth is being frugal. They spend more time managing their finance than the rest of us which makes them rich.
The book contains a lot of interviews and examples from the multimillionaires that don’t look rich that could get you inspired. I do find out that most of them are actually business owners. Probably I need to own a business too?