The 15 best books on stock investing (Jun 21, 2005) Mark Turner Our position in brief The 15 books they selected for your consideration: The Essays of Warren Buffett; Extraordinary Popular Delusions and the Madness of Crowds; Financial Statement Analysis; Good to Great; The Intelligent Investor; Investment Biker; Managing Your Investment Manager; One Up On Wall Street; Searching for Alpha; Stocks for the Long Run; The Tao Jones Averages; Technical Analysis Explained; The Templeton Touch; Trading in the Zone; and When Genius Failed. • As we see it, if a journey of 1,000 miles begins with a single step, then the first step in the journey to become a good investor is to gain knowledge. And there’s no better way to gain knowledge than by reading books. Our portfolio managers/security analysts, for instance, tend to be avid readers. They daily pore over market data, newspapers, magazines, research reports, corporate financial filings, annual reports, and, last but not least, books. Their goal: to acquire knowledge so as to better assess the future financial and equity performance of companies. “To be a portfolio manager is to be perpetually open to learning,” says Bob Turner, chairman and chief investment officer. “And to learn is to read.” So we thought it would be enlightening to ask our portfolio managers/security analysts -- as well as our traders and marketing and client-service managers -- to choose what they believe are the best books on stock investing ever written. Selected were 15 books that can help make you a more knowledgeable investor. The topics addressed range from the reflections of legendary investors Warren Buffett and John Templeton, to the nuts and bolts of financial analysis, to the global views of your everyday multimillionaire investor/biker, to a historical analysis of stock-market risk. By no means can all 15 of our recommendations be classified as how-to, technically-oriented books on stock investing. In some cases, they provide object lessons on what not to do -- knowledge that can be as instructive as knowing what to actually do. In other cases, the investing lessons are presented indirectly, in a somewhat oblique but memorable manner, reminiscent of the approach that Ernest Hemingway took when he wrote a memoir of his years in Paris, A Moveable Feast. When he showed a draft of the early chapters of the book to his wife, her reaction was, “It’s not much about you.” He was working by remate, Hemingway replied, using the jai-alai term for a double-wall rebound. Likewise, some of our recommendations offer lessons about stock investing via the remate principle. All of our choices are works of nonfiction (but some of them read as well as the finest fiction). So instead of reading the latest John Grisham legal potboiler at the beach this summer, may we suggest you crack open one of our 15 books instead? We think you may find it just as, or even more, compelling -- and more likely to increase your net worth ultimately. We think at the very least our list is worth saving for your future reference. The 15 books are identified by their hardcover editions; most are also available in paperback. The books are listed alphabetically by title, not in any subjective descending order of merit. The Essays of Warren Buffett: Lessons for Corporate America Warren Buffett, widely regarded as the greatest American investor of his generation, has never written a book (at least to date). But he has produced wonderful, witty letters to shareholders for the annual report of his holding company, Berkshire Hathaway. Here, the best from those letters is distilled -- Warren Buffett’s musings on subjects such as investment philosophy, accounting, managing, capital allocation, and corporate governance. A few choice nuggets of Warren Buffett’s wit and wisdom:
Extraordinary Popular Delusions and the Madness of Crowds This book, says Dan McFadden, director of client service, “is as relevant today as when it was first published in 1841. It chronicles the fickle and often irrational nature of human beings as investors. It’s a classic reminder of the dangers associated with crowd behavior, groupthink, and following the herd. Its lessons apply not only to investing but to life in general.” The book’s chapter on Holland’s tulip mania of 1634 -- when tulips traded at a higher price than gold, even drawing in that iconic figure of rationality, Sir Isaac Newton -- is often cited as the quintessential example of how speculative investing can foment “irrational exuberance,” long before Alan Greenspan coined the phrase. The book also dissects John Law’s Mississippi Scheme and the South Sea Bubble. This book led to the formulation of what became known as MacKay’s Law of Mass Action, whereby craze-inspired greed becomes so all-consuming that “1 + 1 is often less than 2 and sometimes considerably less than 0,” as one writer put it. Financial Statement Analysis: A Practitioner’s Guide Analysts, including some of ours, say this book should be required reading for anyone who invests in stocks. Says Marc Bianchi, security analyst/portfolio manager: “This is a great book if you’re interested in knowing more about accounting gimmickry and financial shenanigans. The authors use real-world examples to explain in non-technical terms how earnings are manipulated and how to spot symptoms of earnings manipulation. I read the book in a business-school class on financial analysis, but it’s not at all dry or written like a textbook. It was a real eye-opener.” The authors focus on the lifeblood of capitalism -- profits -- and explain how profits can be reported accurately or exaggerated or even fabricated. They provide especially good guidance on making financial projections, the essence of fundamental analysis. Case studies illustrate how analysts applied financial ratios and public information that weren’t part of corporate financial reports to reveal that certain companies’ fiscal health was fragile. Good to Great: Why Some Companies Make the Leap . . . and Others Don’t To produce this book, Jim Collins and a 21-person research team at his management-consulting firm analyzed more than 1,400 companies and identified 11 elite companies such as Walgreens and Wells Fargo that generated “the magical alchemy of great results.” (Ironically, in a somewhat sobering indication of how tenuous success can be, some of the 11 great companies -- Fannie Mae and Circuit City, in particular -- have faltered, at least temporarily.) Be that as it may, their transformation from good to great typically involved a period of about 10 years in which profits were mediocre at best, followed by 15 years of increased profits -- and stock-price gains that beat the market sevenfold on average. A key to greatness is what Jim Collins calls “the Hedgehog Concept” -- a product or service that helps a company surpass its competitors, revs up a company’s economic engine, and ignites employee passion. “One of the most rewarding investment approaches can be to look for great companies with products and services that have a sustainable competitive advantage,” says Chris McHugh, senior portfolio manager/security analyst. “This book highlights the characteristics that make companies excel, which investors can use in their own hunt for great companies.” The Intelligent Investor This book, which has sold more than 1 million copies in hardcover, provides readers with a foundation for building successful investment results in the long run. It’s decidedly oriented toward value investing, with a philosophy that’s defensive in nature -- concerned more with minimizing losses than with maximizing gains. Benjamin Graham advocates buying cheap stocks of companies with sound financials, using a “margin of safety” between a stock’s price and its intrinsic value to protect your investment. He notes: “In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.’ Confronted with a like challenge to distill the secret of sound investment into three words, we venture the motto, MARGIN OF SAFETY.” Says Anthony Wilson, regional sales director: “The Intelligent Investor places great emphasis on the difference between investing and speculation. Before the book came out, the idea that stocks could actually be prudent investments, especially after the stock-market crash of 1929 and the Great Depression, was considered ludicrous by many people. This book helped refute that notion.” The most recent edition has been updated by Money magazine Senior Writer Jason Zweig to reflect changes in types of investments and market developments since the book was first published in 1934. Investment Biker: Around the World with Jim Rogers Investment Biker offers some savvy international investment ideas and an engaging adventure yarn in one package. Jim Rogers retired at age 37 after managing the wildly successful Quantum Fund with George Soros. For middle-aged male readers, the book may have elements of a bachelor’s picaresque fantasy: Jim Rogers’ traveling companion on this 22-month, 52-country, 57,354-mile global motorcycling odyssey was Tabitha Estabrook, his 23-year-old great and good friend, whom he describes as “tall, leggy, and blonde.” To be sure, it’s a bona fide original, a volume that Kirkus Reviews joked “might well have been entitled International Investment and the Art of Motorcycle Maintenance.” Says Robb Parlanti, senior portfolio manager/security analyst: “With some justification, Jim Rogers has been called the Indiana Jones of finance. In this book, his good-ole-boy charm and personality are evident. For example, he observes that his hometown in Alabama was so small that his family’s phone number was just a single digit. And he offers perceptive opinions on the long-term prospects of many international economies.” It’s clear as he rides from country to country that he is no fan of Big Government (or even Little Government): he rails against excessive government regulation (which he calls “statism”) as a depressant on business efficiency and productivity. In his view, China, South Africa, and New Zealand present especially compelling investment opportunities. Managing Your Investment Manager Managing Your Investment Manager is “as good a primer for plan sponsors as I know of,” says Glenn Dever, chief marketing officer. “It was practically the first book on investing that I read in my first job, and it had a huge impact on me. The book lays out the roles and responsibilities of an institutional client and how to best establish investment goals, create an investment policy, and measure investment performance.” If clients have cogent investment goals and policies, the book concludes, the more likely their needs for capital appreciation will be met, the less anxiety they will have about the future, and the less likely they will make counterproductive knee-jerk changes to those goals and policies. Setting investment goals and policies is one thing; living with those goals and policies can be another, however. Some clients quixotically tend to have absolute objectives in bear markets and relative objectives in bull markets. That is, they want to meet their assumed rate of return when the market falls apart and to shoot the lights out when the market soars. But, as Arthur Williams observes, they can’t have it both ways: “If your objective is to meet your assumed rate of return, you can’t complain if you are up 10% when the market is up 50%. On the other hand, if you want to be up 50% when the market is up 50%, you have to be prepared to be down 20% when it is down 20%.” One Up On Wall Street: How To Use What You Already Know to Make Money in the Market This financial bestseller, now in its 30th printing, has a simple thesis: average investors can do well by using the information they come across in their daily lives -- at work, the mall, the local car dealership, a restaurant, wherever. Readers are cautioned that merely liking a business, though, isn’t reason enough to buy the stock. “Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth,” the authors advise. Not every stock you select has to be a winner for your portfolio to flourish. The authors observe that in their experience, six good stock picks out of 10 are sufficient to produce market-beating results over time. That’s because “your losses are limited to the amount you invest in each stock (it can’t go lower than zero), while your gains have no absolute limit,” they write. “All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out well.” Searching for Alpha: The Quest for Exceptional Investment Performance Alpha is the portion of a stock’s return arising from non-market risk -- i.e., the amount of return that can be attributed primarily to the skills of the portfolio manager. As long as there have been financial markets, investors have searched for a dependable source of alpha. This rollicking tour-de-force of a book can help you in your own search. “Searching for Alpha is highly recommended for investors who want to have portfolios that are compatible with their own particular risk/reward profiles,” says John Lehning, director of intermediary business development. “Among other things, the book tells you how to profit in investing from the quirks in human behavior and how to identify appropriate mutual funds and investment managers.” The text is notable for its erudition, touching on subjects as diverse as the Civil War, the founding of professional football, Dom Perignon champagne, whaling, and the mathematician who helped defeat Napoleon’s army in Russia. One point in the book that we endorse heartily is that an investment firm’s natural desire to increase assets under management may not be in the best interest of clients, because performance can suffer if a portfolio grows too large. We concur that money managers should routinely set asset limits for their stock portfolios, so as to try to preserve their ability to generate superior returns. Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies This book has played “a prime role in the dramatic reassessment of the riskiness of stocks that has occurred in modern times,” says Tom Anderson, director of managed accounts. “It provides a reasoned perspective on bull and bear markets that’s needed if investors are to maximize their returns in stocks over time.” Like beauty, risk lies in the eye of the beholder. And traditionally risk was perceived as the chance of a loss in a given year. Based on that criterion, stocks have been, and are, exceedingly risky. But Stocks for the Long Run makes a convincing case that, yes, stocks are risky because they may suffer a big loss in the short term, but lower-returning investments like cash and bonds are more risky in the long term, in that they may not provide sufficient wealth to meet investors’ needs and outpace inflation over time. In that light, stocks have proven the least risky asset class. For instance, over the 60 20-year rolling periods in the past 79 years, stocks have performed best 100% of the time. As the author concludes: “The principle of this book is that through time the after-inflation returns on a well-diversified portfolio of common stocks have not only exceeded that of fixed-income assets but have actually done so with less risk. Which stocks you own is secondary to whether you own stocks, especially if you maintain a balanced portfolio.” The Tao Jones Averages: A Guide to Whole-Brained Investing Tom DiBella, chief investment officer of core/value stocks, read The Tao [pronounced Dow] Jones Averages more than 20 years ago, and “it has helped me time and again in managing portfolios,” he says. “The message is that investors would do well to accept the market the way it is, not the way it’s supposed to be. For instance, it’s never wise to fight the tape. The book was valuable to me because it reminded me -- and with my accounting background, I definitely needed reminding -- that not all moves in the stock market are rational or can be explained by crunching the numbers.” In this savvy and amusing little book, Bennett W. Goodspeed paints the stock market with dark strokes, as a sometimes irrational, illogical beast -- although predisposed to logical factors. He recommends using both the left (logical) and right (intuitive) hemispheres of your brain to anticipate market fluctuations, be comfortable taking risks, and achieve better investment results. Although perhaps permeated with a bit too much touchy/feely mysticism for some tastes, the book sounds a valuable alarm about the perils of succumbing to the tendency to rationalize rather than to see an often-surprising market as it truly is. One of the distinguishing characteristics of the stock market is what has been called its unyielding existentialism: it is what it is, and it will do what it will do, to the detriment of your investment results if you stubbornly deny reality. Technical Analysis Explained: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points If the stock market is prone to overreact to short-term events (and we think it is), then it seems only sensible to attempt to recognize and exploit recurring market patterns stemming from those events. That’s the province of technical analysis. If you want to increase your understanding of technical analysis and how technical analysis can enhance your investment returns, then Technical Analysis Explained is for you. Says Bill McVail, senior portfolio manager/security analyst: “The book is not exactly Technical Analysis for Dummies, but it is good at explaining how technical patterns develop and what they mean.” The book provides pointers on how to recognize technical patterns (like money flows into a stock and resistance levels) that indicate advantageous times to buy or sell. As the legendary economist John Maynard Keynes observed, investing is like anticipating which contestant will win a beauty contest; the key isn’t to necessarily pick the contestant you think is the most beautiful but the one you think the judges will choose. Similarly, the techniques outlined in Technical Analysis Explained can help you in picking stocks that other investors think may be winners. The Templeton Touch This biography of John Templeton, one of the investing giants of the 20th century, stresses the principles that he has applied not just to investing but to living that can help lead to prosperity and happiness. “The Templeton Touch makes clear that what separates the successful investor from the unsuccessful investor is a devotion to ethical and spiritual principles, such as truthfulness, perseverance, thrift, enthusiasm, humility, and altruism,” says Bob Turner. “For instance, if an investment business -- or any business -- isn’t ethical, it will fail, perhaps not right away, but eventually. It reinforces ideas that I believe in strongly, such as finding the positive in every negative and investing yourself in your work.” The Templeton Touch addresses 15 key traits that John Templeton believes can contribute to investing success. A particularly powerful trait involves what he calls “the doctrine of the extra ounce.” When John Templeton was growing up in Winchester, Tennessee, he realized that people who are moderately successful do nearly as much work as those who are markedly more successful. The difference in effort is small but noteworthy -- a matter of giving the extra ounce. Those who tend to succeed most are those who “give 17 ounces to the pint instead of 16,” as he puts it. “And the success they achieve thereby is out of all proportion to that one ounce.” Trading in the Zone: Maximizing Performance with Focus and Discipline Professional tennis players and golfers talk longingly about being in the zone -- a state in which they play superbly, seemingly effortlessly and with confidence. Stock traders have their own zone -- when every trading decision they make works out remarkably well. “Trading in the Zone is a must-read if you’re interested in learning more about the psychological game that must be won to make good decisions in buying and selling stocks,” says Matt Topley, senior equity trader. “It can help you to set trading goals, trade boldly or conservatively as warranted, and cut losses to preserve capital.” As the book makes clear, emotional control is vital to successful trading, and psychological factors such as anxiety can diminish trading effectiveness. The book offers tips on how to overcome those factors and how to cultivate a focused mindset, so that you can enter the zone and stay there long and often. When Genius Failed: The Rise and Fall of Long-Term Capital Management When Genius Failed received the most votes within our firm as the best book on investing. Typical was this comment from Frank Sustersic, senior portfolio manager/security analyst: “It’s a cautionary tale about the dangers of an investment process that lacks proper risk controls. A lack of risk controls is what doomed the Long-Term Capital Management hedge fund to eventual failure.” Roger Lowenstein is a masterful writer, and he creates a riveting, detailed portrait of how human arrogance and a refusal to admit mistakes can have dire investment repercussions. The highly credentialed managers at Long-Term Capital relied on ultrasophisticated computers to find historical relationships between related securities. If those relationships became skewed, if one security traded above its historical pattern, the managers would anticipate that prices would get back into line, using derivatives and other risky forms of leverage to exploit the anomaly. “They had programmed the market for a cold predictability that it never had,” Roger Lowenstein writes. “They had forgotten the human factor.” It was an investment approach that worked for years -- until it spectacularly no longer did so. Adds Don Smith, security analyst/portfolio manager: “When Genius Failed provides insight into how risk should be assessed and how even Long-Term Capital’s ‘geniuses,’ including a couple of Nobel Prize winners, can blunder. It made me more aware of the ‘fat tails’ on the bell curve of potential outcomes in investing -- unanticipated, extremely rare events that can produce an investment windfall or, in Long-Term Capital’s case, an investment disaster.”
Turner Investment Partners, founded in 1990 and based in Berwyn, Pennsylvania, is an investment-management firm that’s employee-owned. As of February 28, 2005, we managed about $15 billion in growth, value, and core stocks in separately managed accounts and mutual funds for institutions and individuals. You can get free copies of other Turner position papers by calling us at 484.329.2329; e-mailing us at marketing@turnerinvestments.com; faxing us at 610.578.0824; or visiting the Turner Position Papers section of our Web site, www.turnerinvestments.com. As of May 31, 2005, Turner's stock investments held 5,525 shares of Wells Fargo, 150 shares of Fannie Mae, and 330 shares of Circuit City. Turner held no shares of Walgreens. Turner Investment Partners provides its services in Australia through its subsidiary, Turner Investment Partners Pty. Ltd. (ACN 104 439 045), which holds Australian Financial Services license #239167.
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