The world of investing has an endless array of books. You just have to search for investing books in Google or Amazon and you will get a list running into hundreds of pages. How do you pick among these scores of books, considering that time is limited?
If you have not read the Berkshire Hathaway letters…
We have identified five books that every investor must read. These are extremely popular and most investors would have either read or at least heard of these books. But, to me, any list of investment books begins from the second level. The primary guide to any investor has to be the annual newsletter that Warren Buffett publishes along with the Berkshire Hathaway annual report.
Buffett writes an eloquent letter to his shareholders each year where the broad investment strategy of Berkshire Hathaway is laid out. In a way, the annual newsletter is like a book on Warren Buffett’s strategy in instalments. That is also the reason we have not included any book by Warren Buffett in our list. Your initiation into investing must begin with a reading of Buffett’s annual letter to shareholders. Now for the list of books!
Common stocks and uncommon Profits by Philip Fisher, 1958
This book was first published in 1958 and is among the books that Buffett admires. This book is as much about financial planning as it is about investing. It talks about how investors in different age groups must set their goals and invest to achieve these goals. The book addresses some basic questions that every investor has; what to buy, when to buy, what to sell and when to sell. Fisher’s 14-point Scuttlebutt strategy is not only useful in your investment journey but also in meeting life’s challenges. The general consensus is that people with diverse goals and contrasting personalities can read this book and find it equally useful. You got to start your journey with this book.
Intelligent Investor by Ben Graham, 1949
This is another book that formulated the investment philosophy of Warren Buffett. The book was first published in 1949 and has been updated several times since then. What refuses to go away is its eternal charm. Intelligent investor looks at equity investing from a true-blue fundamental investment perspective. Ben Graham highlights in his book why value is different from price and why they will eventually converge. From analysing income statements, to ratios, to balance sheets and cash flows statements; you find everything in this book. If you really want to understand how to read the annual report of the companies you have invested, this is the book must read and absorb.
Competitive Advantage by Michael Porter, 1980
This book does look a little out of place in an investment list. But, this book has enabled investors and analysts to understand the importance of strategy in the success of a business. A good business is normally underlined by a solid management and a solid management is about combining sound strategy. The competitive analysis model best explains why some business succeed and some don’t. Why does a Vodafone struggle for valuation in the market while Reliance gets value from the digital business? Strategy is about understanding entry barriers, exit barriers and the bargaining power of suppliers and customers. In one elegant model, this book captures the relevance of strategy in valuations.
Common Sense on Mutual Funds by Jack Bogle, 1999
Jack Bogle is to passive investing what Ben Graham and Warren Buffett are to active investing. Jack Bogle bases his book on 3 simple principles. Firstly, it is tough for a majority of the active funds to consistently beat the index. Secondly, it is impossible for investors to pin-point a fund that can beat the market. Thirdly, a low cost index fund can actually outperform majority of the active funds in the long run. In his 2016 annual report, even Warren Buffett admitted that no investor in his knowledge had created so much wealth for small investors as Jack Bogle. It is estimated that Vanguard saved more than $1 trillion in fees for its unit holders. That is the common sense that flows from the book.
When Genius Failed by Roger Lowenstein, 2000
Our last pick is different for two reasons. Firstly, Lowenstein is a journalist and not a strategist like the others. Secondly, this book talks about how high octane finance is evolving with a heady cocktail of risk and leverage. This book is about a fund floated by Nobel Laureates called Long Term Capital Management (LTCM) which imploded under the weight of 55X leverage. In case of LTCM the strategy was still good on paper. However, markets showed the ability to be irrational longer than the investors could remain solvent. For all investors who are trading in derivatives and exotic products, this remain an enduring lesson!