We should all know more about prudent investing. You’re saving for retirement, right? If you are (and if you aren’t, you should be), then you’re investing in something. You’re not just letting that money sit in a checking/savings account. Here are some books you should read to optimize your financial success and happiness.
[TL;DR: For the impatient crowd, go read The Four Pillars of Investing right now. For the super-impatient, here’s a grossly inadequate four-word summary of modern personal investment advice: low-cost index funds. Don’t have a clue what I’m talking about? Read on.]
I’ve been fascinated with Financial Mathematics ever since I took a (gruelingly difficult) class in it in graduate school. Since then, I’ve read a few more books on the topic. It remains the only field of Mathematics other than Discreet Math that truly interests me.1 But these are merely hobbies; I hold no delusions of grandeur in my abilities in these areas.
Knowledge of Financial Mathematics prepares one for investing in much the same way that Computer Science prepares one for Software Engineering. In other words, not at all. There are many, many reasons why investing is an altogether different beast. Those of you who have read more than one Financial Math university textbook, quick, how many references did those books make to taxes and investment costs?2
So FM textbooks are naturally out. There’s a ridiculous number of investment books out there, most of which are less than stellar. Some of the good ones are also out of date, and a lot of them are tailored to institutional investors. I’ve picked out a nice selection of sage advice for the personal investor in the following list; I’ve read all of the listed books and quite a few I’m not listing. None of the books I’m recommending should be controversial and I’m not affiliated with any of them; there are no referral links here and I have no skin in this game.
There’s a very good reason why I’m giving you a list of books to read instead of just summarizing the great advice that’s in them: never take investment advice you don’t understand. You need to understand why portfolio X makes sense, why investment Y doesn’t, why actively managed funds underperform etc. You need depth here, not superficial “I think I get it” understanding. Your financial future depends upon you fully grasping these concepts.
These are must-read books. I’m presenting them in a sensible reading order that will slowly teach you more and more, building on what you have previously read. None of them are difficult reads; in fact, all of them are surprisingly well written and entertaining.
The Only Investment Guide You’ll Ever Need by Andrew Tobias: Yes, I know, the title is terrible (and patently false). To the author’s credit, he apologizes for it in the preface and says it was the publisher’s idea. But no matter; it’s a really good book.
It covers a very wide area and spends a considerable amount of time on Personal Finance. If you’re young and just out of college (or soon to be), this is where you should start. If you think you have a firm grasp of Personal Finance, then you should definitely start here. This book also describes in detail many different investment vehicles (with pros & cons of each); it also covers planning for retirement, differences between the various retirement accounts (401k/Roth 401k/IRA/Roth IRA), annuities, insurance, tax laws, estate planning, ESA’s, 529s, SEP’s, SIMPLE’s and the kitchen sink, too. Seriously, start here.
The book is also well written and remarkably funny. You will enjoy reading it.
Make sure you get the latest edition of the book. It’s been out for nearly thirty years now, but the author updates it every three or four years as the tax and investment landscape changes. The latest editions have little in common with the earlier ones.
The Four Pillars of Investing by William Bernstein: This is a brilliant book and the one I recommend the most out of this bunch. It does require the reader to be comfortable with math to a minute extent.
It will teach you how to think about investment returns and it will provide a brief history of investment folly. It will provide mountains of data on how (and why) actively managed funds fail to beat low-cost index funds and why individual stock-picking is a loser’s game. It will teach you how to tailor an investment portfolio that matches your financial situation (and personal risk disposition) and why you should avoid investment banks, brokers and preferably the entire investment industry, lest it eat up considerable portions of your returns.
If you come away from this articles with one book in mind, let it be this one. It’s the best and the most important one I can think of.
I cannot recommend this book highly enough. Instead of peddling vague and anecdotal advice based on some random guy’s experience (which is what most investment books do), Bernstein approaches personal investing as a science. He backs up everything he says with sound data and references to modern investment research. All of his advice is practical and actionable. Read this now.
A Random Walk Down Wall Street by Burton Malkiel: This book will teach you how to “think” about the market. It will cover pretty much all the stock market bubbles throughout history and what caused them. This will help you recognize similar craziness in the future. It’s also chock-full of more proof on why actively managed funds underperform index funds and why stock-picking is something only monkeys with darts do. It will teach you about the Efficient Market Hypothesis and why it still makes sense after all these years (well, the semi-strong variety at least… and it makes sense the vast majority of the time, except when it doesn’t, for reasons that I will not go into right now). This book is absolutely worth your time.
After reading the Guide, the Pillars and the Walk, you can confidently stop. This is my three-book list for investment newcomers. After completing this book bundle you’ll know more about investing than most “professional” money managers. If you implement the advice in these books, your returns will also beat the returns of ~80% of actively managed funds, over the long term (20+ years).3
If you can read only two, go with the Guide and the Pillars. If just one, then the Pillars. But preferably all of them. That’s it, you can stop reading this article if you wish.
If you want to know even more about sound investing, here are some other books I’d recommend:
The Intelligent Asset Allocator by William Bernstein: This was Bernstein’s first book. It’s very good, but Pillars covers everything that Allocator does and much more. This book goes into more detail about asset allocation, but frankly Pillars gives you all of the really meaty parts. Allocator will go into more data, graphs, proof and math on why the things Bernstein recommends in Pillars make sense. A worthwhile read, certainly, but if you’ve read his second tome you’re not going to get that much from it. Read it if you want some extra in-depth data on asset class behavior, otherwise skip it.
Some people will tell you that understanding this book requires knowledge of advanced mathematics. Nonsense. It’s certainly more math-heavy than Pillars, but if knowledge to understand it passes for “advanced math”, someone please shoot me now.
Common Sense on Mutual Funds by John C. Bogle: Mountains upon mountains of data on why index funds beat active funds in the long term. Truly, mountains. The biggest complaint is that the book is extremely repetitive; the same message is repeated over and over again. And then some more. And did you know that index funds beat active funds? They do. You didn’t know that? Fine, here’s evidence item #892374984.
After a time, it tends to grate a bit. But convince you of its message it will.
Also, Bogle famously shares some disdain for foreign market diversification. He’s an absolute giant of finance and this is his only major flaw. The book is still a worthwhile read.
The Intelligent Investor by Benjamin Graham: This is Warren Buffett’s mentor. If you want to know more about the stock market and what makes certain companies better stocks than others, read this. But keep in mind that you shouldn’t be buying individual stocks at all. Index funds were invented after Graham died; had they been around when he was, he would have probably been all over them. But this book will broaden your horizons if you read it, so it’s not a bad read, even if you don’t end up using the knowledge in it.4
Here are some other good books on investing I don’t usually recommend (they make sense, but the alternatives are better and cover the same areas):
The Investor’s Manifesto by William Bernstein: This book is a dumbed-down version of Pillars. If you’ve read that book, ignore this one. It offers virtually nothing new, merely a rehashing of Bernstein’s old (still perfectly valid) advice without the data backing it up. Read this book if you’re scared of graphs, charts and tables. I recommend it only to people who can’t handle Pillars because they’re frightened of the most basic high-school level math.
The Bogleheads’ Guide to Investing by Taylor Larimore, Mel Lindauer and Michael LeBoeuf: This is a pretty good all-around book on investing and retirement planning, but Pillars + Guide is a better option. There’s no bad advice here.
Investing and Finance, Broadly
And now that we’ve reached the end, here are some books that may not teach you much about investing, but will teach you plenty about the specific areas of finance that they cover:
Liar’s Poker by Michael Lewis: If you ever wanted to know why brokers and investment banks are the biggest enemies of their customers, read this book. It chronicles Lewis’s life as a broker for Salomon Brothers in the ‘80s. It’s not pretty (but it is a fun read). Little has changed since then; the finance industry may have become just a shade5 more unethical. Keep in mind, the book starts out a bit slow.
The Big Short by Michael Lewis: Another great book from Lewis, this time about how and why the 2007 recession started. You get to learn just how bat-shit crazy with greed Wall Street can become. If you ever wanted to know “the real deal” behind the Great Recession, read this. It’s a peculiar mix of laugh-out-loud funny and blow-your-brains-out depressing.
When Genius Failed by Roger Lowenstein: Covers the fall of the Long Term Capital Management hedge fund in 1998. You may have heard of this event, it damn-nigh brought the financial industry to its knees (much like the recent recession in fact did). The fund had derivative positions with a notional value of ~$1.25 trillion, and had to be bailed out by the Fed of New York. Does this perhaps sound familiar? We never learn.
Buffett: The Making of an American Capitalist by Roger Lowenstein: A biography covering Warren Buffett. Very well written. It’s an entertaining read with sensible investment advice sprinkled throughout.
If you’re confused about personal investing even after reading the books in the Basics list, a great place to ask questions is the Bogleheads online forum. It’s a collection of some of the nicest and most investment-savvy people you can meet. Their wiki is also filled with great advice.
By “interest”, I mean “I could conceivably see myself doing this for a living.” Not that I have any intention to, of course; I love Software Engineering far more. ↩
If you have a CS background, compare this with the number of references to version control systems, software testing, code style guidelines and code readability (among other things) in all of the CS books you have read. ↩
We’re talking real returns here, not nominal returns (you “eat” real returns). Also, after-tax (again, you don’t “eat” pre-tax money). In other words, we’re talking about money you end up caring about. ↩
It’s a lot like reading Structure and Interpretation of Computer Programs for programmers who will never write a line of Scheme in their professional life. Still worthwhile, gives you depths of understanding. This is the SICP of investing. ↩
Did I say “just a shade”? I meant “you couldn’t possibly imagine how much more.” See The Big Short. ↩