Best Investment books to read

Investment books to read

Subramoney’s recommended books to read

Some of the reviews may also be available online – in the personal finance section of myiris.com. Books have been listed completely at random – and I have intended it to look like an index. Keep coming back to this page – will add short summaries or comments on each book from time to time as well as full reviews. One of the links on the blogroll is a quaint friendly neigbourhood book shop – twistntales. The other place where I have bought most of these books is bookzone.com based in Mumbai.

A Random Walk Down Wall Street by Burton Malkiel.

Jeremy Siegel’s Stocks for the Long Run

Commonsense of Finance – Dr. Prasanna Chandra – get the basics of finance and accounts from here so that you understand concepts like P&L, B/ Sheet, write offs, taxation, etc.

Analysis for Financial Management by Robert Higgins.

Accounting Shenanigans – do not try to read it unless you are a CA or well versed with practical accounting..

Why Smart People Make Dumb Money Mistakes by Gary Belsky and Thomas Gilovich.

Parag Parikhs’ book on Behaviourial finance has brought some Indianness to this science! The book is called Stock to Riches.

Roger Lowenstein’s Making of an American Capitalist.

Benjamin Graham’s The Intelligent Investor is a must-read. But it can be kind of painful for today’s kids who do not like to read about bond valuation. However, if you realise that bond valuation is the basis from which equity valuation evolves, you will appreciate this book better!

Phil Fisher – Common Stocks and Uncommon Profits

Speaking of Phil Fisher leads us to Ken Fisher – and his book “The Only 3 questions you need to know” is also an excellent book to read, and as useful as his father’s book. It clears a lot of cobwebs – turning the PE ratio is a useful example!

Peter Lynch’s Beating the Street is the journal of a successful money manager, who is also a good communicator. CIOs should do their job well and also be able to communicate their skills and strategies. 

You Can Be a Stock Market Genius by Joel Greenblatt –it’s relatively short, full of case studies, and engagingly written.

John Train’s Money Masters of Our Time and The New Money Masters

Reminiscences of a Stock Operator – Edwin Lefevre. Reads like a pot boiler!

Seth Klarman’s Margin of Safety.

Marty Whitman’s The Aggressive Conservative Investor- I personally found this a difficult read!

David Dreman’s Contrarian Investment Strategies.

Munger’s biography–Damn Right! by Janet Lowe. Personally found this difficult to read.

John Kenneth Galbraith’s A Short History of Financial Euphoria.

Devil Take the Hindmost by Edward Chancellor is a fantastic and in-depth history of manias through the ages.

Ron Chernow’s The House of Morgan

Peter Bernstein’s 2 books – Capital Ideas & Against the Gods

The Money Game – Adam Smith

Michael Lewis’s 2 books: Liar’s Poker and Moneyball. Liked Liar’s Poker.

Roger Lowenstein’s When Genius Failed, which chronicles the rise and fall of the Long-Term Capital Management hedge fund in the late 1990s.

Bethany McLean’s The Smartest Guys in the Room,

Kurt Eichenwald’s Conspiracy of Fools

Robert Cialdini’s Influence – good book on human behavior.

Fooled by Randomness, by Nassim Taleb, is more directly about finance, and is thought-provoking. Taleb explores how easily we confuse luck with skill, and the importance of knowing which is which. He has followed this with Black Swan. Frankly if you are planning to read, or have read Black Swan, his earlier book Fooled by Randomness becomes unnecessary.

Bruce Greenwald’s Value Investing

Michael Porter’s Competitive Strategy. Tough to read, reads like a typical textbook, but is useful if you are doing interviews of CEOs and CMOs of the world.

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk – by William J Bernstein

Asset Allocation: Balancing Financial Risk by Roger C Gibson

Rich Dad Poor Dad – Robert Kiyasaki

Market Wizards – Jack D Schwager

The Warren Buffet Portfolio – Robert Hagstorm

Future for Investors – Jeremy Siegel

Common Sense on Mutual Funds – John Bogle

New Perspectives for the Intelligent Investor – John Bogle

The Art of Short Selling – Kathryn F Staley (never used the short strategy personally, caveat)

Barbarians at the Gate – Bryan Burrough and John Helyar

Beating the Dow – Michael O’Higgins and John Downes

Buffet – the Making of an American Capitalist – Roger Lowenstein

Extraordinary Popular Delusions and the Madness of Crowds – Charles Mackay

45 years in Wall street – WD Gann

Great crash of 1929 – J K Galbraith

How to lie with statistics – Darrell Huff

John Maynard Keynes (Volumes 1 and 2): Robert Skidelsky

Soros on Soros – George Soros with Byron Wien and Krisztina Koenen

Technical Analysis of Stock Trends – Robert D Edwards and John Magee

Think like a Tycoon – W G Hill

Where are the Customer’s Yachts – Fred Schwed Jr.

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Really tough…stop listening to the experts!

It is a whole long list of lies that I can enumerate (some American, some Indian, some generic)…some are partially true, some are completely wrong, some are….but nothing is a completely true statement.

Today will make a few such statements..as time goes by will explain them!

1. But for the subprime crisis, the American economy was strong and resilient.

2. This is just a subprime crisis, and once it is solved, America will be strong again

3. The Fed (Rbi) sets the interest rates in the economy.

4. Diversification is a fantastic wealth creation tool. If everybody had a well diversified portfolio, there would have been no crisis at all.

5. Buy low-sell high is a sure fire, time tested and workable Investment strategy.

6. The stock market in the US will bounce back to original levels as soon as the Fed bails out all the industries.

7. The dollar is really strong and is currently in a small blip.

8. Obama wants change! (please give it to him)

9. A buy-and hold long term investing strategy yields superior results over trying to sell ..and buy.

10. Re-balancing is a fantastic wealth creation strategy.

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Almost all literature we have read on equity markets is American. The great American investors have written all this literature in the past 50-100 years. This was the time when American companies (fairly or unfairly) dominated world markets. Whether it was Boeing, Coke, McDonalds, General Motors, Citibank….so all of them sent back a lot of money home and helped the US. This meant you could have a portfolio of 80% American stocks and still look smart.

Things are changing. Obama’s 10 faces are looking like Ravana’s 10 faces!  Will Narendra Modi ban Mc Donalds for filling stomachs with lousy nutrition? Will more schools ban Coke and Pepsi? Will my daughter think Pepsi can be used as a pesticide? Whatever happens American domination will reduce. Banking, Insurance, Food, Oil…

This means all of us will have to create a portfolio with European, Japanese, Chinese, Indian companies if we are talking of  a world portfolio.

However all the American heavy weights still suffer from recency bias and ‘ownership’ bias. Most of them like Warren Buffet and the others are still suffering from an American hegemony bias, ignore them.

Be Indian, buy Indian will help here. Then Euro, Chinese, Brazil….you need more variety in at least 30-40% of your portfolio.

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The S&P was below 700, the Great Goldman Sachs was predicting a Dow less than 400, Cnbc was saying the world has already fallen in New zealand and now it is the turn of the US. In India Shankar Sharma was telling us how a Dow below 600 was a given. He painted 2 scenarios – one the dollar weakening and the other Dollar strengthening..but in both cases he saw doom.

GM was at its bankruptcy, Michelle Obama’s biceps was the only American show of strength.

Of course Jon Stewart was rubbishing CNN – and said ‘Of course I would have had a few million if I had heard / listened to cnbc – only I should have started with 100 Million $!

A nice article on this can be found at http://www.forbes.com/2010/03/06/march-bear-market-low-personal-finance-march-2009.html?partner=investing_newsletter

Now a year later …ha we know it was the time to buy!

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Keep emergency cash, keep long term money in equities or real estate, in the long term equities will give the best returns – are all very old thoughts. Do we need to change anything now? Have things changed so much now? 2008 has seen the simultaneous collapse of the share market, housing market, commodities market – and thus threatening the theory of ‘asset allocation’. We forgot co-relation graphs are nice to see, but difficult to use as a prediction tool! The collapse of the credit markets – even a credit card company would not increase limits!

And to think that the ‘financial economy’ was a huge percentage of the ‘American economy’ you wonder what would happen! So how do you adjust? First, think hard about the risks you face, because they may not be what you thought they were. This has to change how you save, invest, borrow, plan and retire.

Financial Planner: Risk will be rewarded. Risk is measured in your stomach – this is fine, but what it measures is volatility, not risk.
What you should do: You have to be lucky about timing for your goals. If your daughter’s wedding is 18 months away, withdraw fully, if you have the money.

Risk is not just ‘loss of income’ it is also freezing of assets. If you are not happy selling an asset whose price has fallen how will you react? Risk is also freezing of assets!

Whether you’re investing, borrowing, planning a sabbatical, having a child, buying a home, or making a business decision, you know you have to consider risk. But what is risk?

Well, it is surely a four letter word! It is also a difficult question to answer than what many individuals think. Many of us have learned to think of risk as synonymous with volatility. You always thought that technology stocks, bio stocks, pharma stocks – which are product based (and has a lumpy cash flow) are risky. By definition such companies will give sharp ups and downs. However Biocon has given far greater downs – not ups! No serious investor could have made money in Biocon, sorry to say! For years we thought share prices went down and came up. However some changes by SEBI and IRDA will force the financial services companies to dramatically re-look at their business model.
As you now know, the word “long run” part of equity investment is the real risk of relying too heavily on equities. The longest period of negative returns for U.S. equities is 16 years, according to Jeremy Siegel. In India too Investing on a one time basis in 1992 would have meant a 10 year wait for getting your capital back – you would have at least doubled your money in public provident fund.

If you hit a slump in returns at the moment you need the cash, the eventual upside of volatility won’t do you much good. After all like Buffet says to be there first, you have to first be there! If your equity portfolio keeps falling for the first 10 years of your retirement, your mind set will crush you. If you have to live by selling falling assets (remember in 2008 ALL asset classes fell) on in the early years, your portfolio may be insignificant to participate in the rebound. This might lead to an unfortunate situation of running out of money by the time you are 78 – and a potential 12 years to go. Unfortunately, many of today’s retirees are especially vulnerable to today’s downturn.

You shouldn’t run from risky investments just because they lost money – the horse has bolted already. For too many risk managers the risk is after it has happened! In fact the asset class which gives the worst returns (prima facie) is perhaps the best place to invest. Cash looks attractive – but runs the risk of inflation. At this point a SIP in equity looks risky but to me seems to be a better idea than to stick to a bond fund or a RBI bond kind of investment. The Indian equity market has really rebound but the signals from the real economy are not too great.

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If you or your kids have not read – The diary of Anne Frank – you must. Not because it is the greatest book ever written, but because it is a great story told without self pity. Scared yes, pitied no.

Anne Frank is a spirit. Do not let the spirit die. One day the oppressive machinery will fail – it is surprising that the Germans left behind a small red diary (which her father found and gave it to a couple of American film makers) – and the truth will prevail. There is after all the universal law “Good will bring good, and bad will bring bad”. Once in a while we feel that God forgets this law – that is our weakness, not God’s failure. Like in investing, in the long run price and value shall merge.

A good place to buy this book is Twistntales – a nice shop in Gaikwad Nagar, Aundh, Pune

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In a new study, Age Wave, found that only 4% of respondents strongly agree that Americans behave in a financially responsible manner. An overwhelming 95% of respondents said financial management should be a standard part of high school curricula. Eighty-one percent said that to live within ones means was the most important financial advice that parents could pass on to their children.

All of these responses underscore the need for guidance and education among financial services clients, and financial planners are positioned to provide those services, said industry professionals. “There has not been a moment in history when more people need to be coached, guided and educated about how to create a long-term plan,” Dychtwald said. “What you’ve got is a population of people who have been spooked. They don’t know who to trust, who’s lying, or what people’s intentions are.” This is absolutely true in India too. Ajit Dayal of Quantum Mutual fund and Personal fn (one a full cost asset management company and the other a mutual fund and life insurance distributor!) writes a column titled “Honest truth”.

The study, called “Retirement at the Tipping Point: The Year that Changed Everything,” gathered opinions from more than 2,000 Americans from four generations. The study was conducted with Harris Interactive.

Nearly 60% of Americans lost money in mutual funds, 401(k) plans or the stock market. Respondents believe that it will take about seven years, on average, to recover losses. Among respondents 55 and older, 46% say that medical expenses not covered by insurance is a top financial worry for their retirement phase. Four out of ten respondents said they believe they will have to help support their parents, in-laws or siblings eventually. In light of their financial situations, respondents believe, they might need to postpone retirement by 4.2 years, on average.

“Personally, I think it would be a shorter recovery time, more like three to five years,” Diachok said. Of course, he acknowledged, “that is a significant amount of time if you were planning to retire in two years.”

In the survey, some Americans did express optimistic attitudes about retirement, and even saw working during their retirement years in a positive way. Seventy percent say that working in retirement is a way to remain stimulated and pay bills.   Many of them will not have a choice!

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A good environment, stability, growing income etc. are sure signs of a successful organisation (company, country or a human being) – this allows him/ the organisation to borrow ASSUMING that the success of his past will continue. Similarly the USA now continues to borrow continuously. This could be harmful. Allowing the market to solve the problem is a far better solution than the US government print notes and bail out the ‘toxic’ banks.

The fact that the government is ‘trying’ to solve the problem is a big hassle – the market does not understand what to buy and what to sell! If Warren Buffet’s cost of funds is higher than Citibank (TARP) – this is a big noise in the market. It sends out a poor signal about Buffet and makes Citi look healthy. Some of this mess will be sorted out easily – but the more jumbled signals remain.

So be careful. In such times gold is a good asset. However, gold may be in the midst / end of a great 3+ years of a bull run.

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The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash” by Charles R. Morris

One of the earliest books that I spotted on the sub-prime it is written in a racy and un-put-down-able style!

In crisp, gripping prose, “The Trillion Dollar Melt down’ explains the arcane financial instruments, the policy misjudgments, and the delusions that created the greatest credit bubble in world history.

A persistent reader should be able to make sense of all that Morris, a lawyer, former banker, and financial journalist, says in this book because he explains them in clear, non-technical language.

The Economist called it “the first big book on the credit crunch ….a provocative book ..well aimed opening shot….”

Paul Steiger Ex – The Wall Street Journal called it “an absolutely excellent narrative …”

It was a long time coming – reduction of “own” money to buy a house – right from 40% in post WW-II to about 3% today! Governments have been able to say “we are helping the common man buy a house” non-sense to expensive tax breaks. However, in this case the government has gone over-board and made a big mess by almost abdicating the responsibility to monitor lending to “sub-prime”.

Then the typical American habit of putting everything on the credit card! When Bush had no money to fight the war, he just put the expenses on a credit card. Now the time for payment is up – and Bush has transferred the problem to Obama!

The war in Iraq and Afghanistan costs billions of dollars with no end in sight–a war that already has cost more than World War II- and Morris’s view that the restructuring needed will be at least as painful as the “difficult period of 1979-1983.”

Things that he says in the early part of the book are quite clear and unambiguous to all non-American readers. America has for far too long assumed its supremacy. Even now, they may not accept Morris’s statement “ Like flightless birds on a predator-free island, American companies had no defenses when hungry competitors came”.

In fact he starts the book with the statement “For connoisseurs of misery, the ten years from 1973 through 1982 are a feast of low points”.

The second chapter titled “Wall street finds religion” – traces America’s recent history – talking about the contribution of Nixon, Carter, and Reagan. He also talks of how measures which looked good on paper – like Nixon’s “price controls” damaged the economy no end. The biggest losers in most of these cases have been the people holding the green back as a “safe heaven”. In the 1970s it was the Japs who lost, this time it is the Chinese and the Japs!

The author describes the arcane financial instruments, the chicanery, the policy misjudgments, the dogmas and the delusions that have created the greatest credit bubble in world history. The worries about a credit bubble is it goes into every market – thus affecting the credit cards, car loans, home mortgages, – the works. He warns early on that we are used to thinking of bubbles based on overpriced assets as resembling poison mushrooms. “You eat them, you get sick, you learn to avoid them.” But, alas, “a credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.”
Morris goes back in time to explain how US got into this state. Apart from the greed theory, the slack in supervision, Chicago School hands-off economic policy and Federal Reserve laxity under Alan Greenspan. Together they took the police off the beat and let financial malefactors treat America the way the looters treated Baghdad. To quote Moriss, “Alan Greenspan deserves full blame for his feckless money creation through most of the 2000s, but he would have been subject to a huge undertow of pressure in that direction from his friends on Wall Street. Alan Greenspan has of course now gone on record admitting that he may have made a mistake, but Morris’s book was already one year in publication by the time the “Me culpa” came!
His hero is Paul Volcker, the Fed chairman (1979-87) who treated a less dire emergency with much stronger medicine. His prescription is thorough regulatory reform, a return to sound-balance-sheet business practices, an end to crony capitalism and an expanded role for government in protecting the public from predation and in doing those things in the public interest that free enterprise can’t adequately handle. Paul Volcker is slew the inflation dragon in the early 1980s, and set the stage for a high performance economy of the 1980s and 1990s.

Morris calculates that $1.1 trillion dollars is the figure that will be required for rescuing the American economy…money that will be borrowed from the Chinese, the Japanese, and the Middle East! It will destroy wealth, hammer investors and the working man alike, tank many economies and take years to recover from. If mishandled, it could be much worse. Already it has undermined the position of the dollar in what The Economist magazine has called “the biggest default in history.” How long will the foreigners continue to lend is difficult to say. The situation is scary because Global confidence in American securities has been shattered, the dollar debased, and the crown jewels of American industry put on auction to foreigners!

The new American President will perhaps preside on a new economic order where the Sovereign funds will play a more active management role.

It is almost stupid to ignore Moriss’s predictions – he has been accurate far more than what his detractors may like to believe. He has to say “ The American financial sector today is far more powerful than it was in the 1970s. And to date, its response to the looming crisis has been, overwhelmingly, to downplay and to conceal.”

Moriss rounds this off by saying “this will be a path to a decade – long tragedy.” For people hoping to see a V shaped recovery in the world economy, this is not great news.

He then criticizes the private equity players quite squarely when he says “ the rewards, in other words, flowed to people who excelled at raising funds and executing deals, not to down and dirty turnaround specialists”.

He continues his attack on the financial services industry – “in financial services industry, although the high profits accrue to managers and shareholders, their losses are usually partly socialized”. We have seen this happening in US and parts of Europe already and more may be underway. Even in India we can see the media hysteria over a 0.5% change in the lending rates of banks by RBI! Steel, cement, shipping, agriculture are all industries who do not even realize change of such a small magnitude! However, the media (almost wholly) driven by the broking industry can create full day programs on insignificant rate changes!

“American health care is also extremely wasteful …and the problem stems from the insistence that health care is just like any other consumer market. It is not!”

He kicks at the very base of the American economy (and we should remember that Indians love to copy the Americans!) when he says “ France has a hourly rate comparable to America…but the French middle classes have smaller houses and cars then their American peers, but better diets, considerably more leisure time,….”

Some of his suggestions towards the end of the book in a chapter titled “Recovering Balance” are:

“Congress should seriously consider restoring some version of the old Glass-Steagall separation of commercial and investment banking. …..implicitly using depositors’ money to drive investment banking fees and is the kind of abuse to be targeted by an updated version of the Glass-Steagall…page 163 of the book.

He also criticizes the health care industry…and calls for an over haul.

Though the book looks at the American industry – especially the financial services industry, this book will also help us look at the Indian industry. There are pockets of the Indian industry which have surprisingly not benefited the Indian consumer. The number of new banks, bank branches, etc. have not improved the customer service no brought down the costs. Mutual funds, life insurance companies are all operating in a world of their own. The Indian financial industry will also go through a grind during this “slowdown” in the world economy. Perhaps our valuations had also run ahead of its time – we will all take healthy steps towards a more sober economy and more cash flow based valuations.

“The Trillion Dollar Meltdown” is an important book and an indispensable read that should be read by everyone concerned with the world’s economy. This brief book should be required reading for anyone with a hand in policy making or handling the risk of a financial institution.

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Or so goes a story. If you think there have been excesses in the American economy, please re-think.

Top executives at Bear Stearns, Lehman Brothers, AIG (which put client’s premium money into aircraft leasing!) and other financial giants received hundreds of millions of dollars in compensation (as salary, bonus, esop, etc.) just before their firms went to the Fed with a begging bowl!

Many people find this terrible and shameful. Galling as an American would say. But the excessive and unwarranted compensation at Bear Stearns and Lehman doesn’t bother me, personally.

Why?

Simply because I do not own any equity share in any of these companies!

However, unfortunately, we all have a stake in the future of the U.S. economy as much as we have in the Indian economy.

What about the Indian companies in which many of us have a stake? Do we have any idea of the kind of stunningly stupid decisions that they have taken in the past?

You need to be in a particular company to get a closer picture. Satyam deal will look like a picnic. Corporate governance, my foot!

First started this “mind-share”, and “market-share” game. So pharma companies, FMCG companies and public sector companies were raided for people. Then the salaries were raised from Rs. 2 lakhs to Rs. 10 lakhs. Then regional managers were being hired for Rs. 40 lakhs. This meant national level positions went for Rs. 80 Lakhs. CEOs were hired first for Rs. 1 crore, and then for US $ 1 million.

Strategies were copied – branches were opened all over the place.

“How many policies have we sold in pin code 9001234? How come we do not have a branch there? So a branch was opened. A branch here and a branch there. After all Rin and Liril and Wills sold only because there were so many shops. So every where there was a railway station they opened a branch. Only problem was they extended it to local stations also. In cities like Mumbai the right side of the station was “East” and the left side of the station was “West”. So Rabale station got a “Rabale East branch” and a “Rabale West branch”.

Ha ha we have now opened 2300 branches they announced. Obviously 2300 branches meant 2300 branch managers, 23000 business development managers, 23000 sales development managers, 4600 clerical assistants, 7500 air-conditioners, 4600 tea vending machines, 6900 security guards, …..it was a employment exchange’s delight.

Obviously the sales had to go up proportionately. That did not happen. So “products” which looked profitable with “only” 50% upfront load and 1% asset management charges, were no longer profitable. So new products were launched with “only 40% up front load – but for the first 2 years” and the asset management fee was raised to “only” 1.94% p.a.

However, the client who had put Rs. 10,000 in a ulip in the year 2006, 2007 and 2008 found that there was only Rs. 16,000 left in the fund.

The question that the life insurance industry – and the financial services industry is asking is – did we overpay?

The answer is of course not. The client overpaid. Now he is not willing to. That is all.

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