Good Investing Books?

[namknils]

I was just wondering if anyone would like to recommend any good books on investing. I have read a few like Rich Dad Poor Dad, One up on Wall Street, The Millionaire Next Door, etc., but I was wondering what are some of your favorites? I'm looking to get more. Stocks, Mutual Funds, Real Estate...whatever.

[Czech_Razor]

Malkiel's "A Random Walk Down Wall Street" is a must. Bogle's "Common Sense on Mutual Funds" too. Then, depending on whether or not you like math, one of Bill Bernstein's books: "The Intelligent Asset Allocator," (if you like math), or "The Four Pillars of Investing" (if you don't). Bernstein's recommended reading can turn you onto more, as can Investorhome.

Have fun,

@nth

[GeorgeF]

For free and worth every penny.
http://www.berkshirehathaway.com/letters/letters.html

[namknils]

Thanks Zcech and George for the tips and links, very helpful! [img]/images/graemlins/smile.gif[/img]

[adios]

I haven't posted here for a few days so I'll use it as an excuse to get on my soap box. IMO in order to determine whether a stock is a good value or not one must understand the parameters that determine it's intrinsic value. Yes many will claim that they just use the greater fool theory i.e. they don't care what the intrinsic value is, they just want to complete the trade at a better price to some "greater fool." I have no doubt that some are successful doing this but I don't think there are that many that do. Then there's the issue of market effeciency and if you don't understand what that means and it's implications for your money start with a Random Walk Down Wall Street. But eventually IMO one should understand how to place a value on a stock or any asset for that matter and for that I can give no higher recommendation that Aswath Damodaran's opus Investment Valuation. He has an excellent web site at:

Damodaran's Web Site

Here's a reprint of the preface to the book:

Preface
This is a book about valuation - the valuation of stocks, bonds, options, futures and real assets. It is a fundamental precept of this book that any asset can be valued, albeit imprecisely in some cases. I have attempted to provide a sense of not only the differences between the models used to value different types of assets, but also the common elements in these models.

In the process of presenting and discussing the various models available for valuation, I have tried to adhere to four basic principles . First, I have attempted to be as comprehensive as possible in covering the range of valuation models that are available to an analyst doing a valuation, while presenting the common elements in these models and providing a framework that can be used to pick the right model for any valuation scenario. Second, the models are presented with real world examples, warts and all, so as to capture some of the problems inherent in applying these models. There is the obvious danger that some of these valuations will appear to be hopelessly wrong in hindsight, but this cost is well worth the benefits. Third, in keeping with my belief that valuation models are universal and not market-specific, illustrations from markets outside the United States are interspersed through the book. Finally, I have tried to make the book as modular as possible, enabling a reader to pick and choose sections of the book to read, without a significant loss of continuity.

In applying valuation models to real world examples in this book, I have used the capital asset pricing model (CAPM) as my model for risk, and beta as my measure of risk, throughout this book. I am well aware of the controversy surrounding the CAPM, and have discussed its limitations as well as alternative models in the chapter on estimating discount rates. There are four reasons for my dependence on the CAPM in this book. First, the estimation of the cost of equity, which is where I have used the CAPM, is just one component of valuation. The valuation models described in this book require a cost of equity, and any model that provides one can be used instead of the CAPM, without any loss of generality. Second, the data that is available often determines usage. The betas of both domestic and foreign firms are estimated by a number of information services, and are easily accessible. I could have attempted to estimate the parameters of an alternative model for the stocks that I have valued, but that would have diverted me from my primary focus, which was valuation. Third, the CAPM provides a convenient forum for discussing more general issues that are important in valuation, such as the effects of financial leverage on risk and the relationship between risk and growth opportunities. Finally, in spite of all the criticism of the CAPM, I am not convinced that alternative models do much better in predicting expected returns, though there is evidence that they do better at explaining past returns.

Outline of the Book

The first chapter of this book examines the general basis for valuation models and the role that valuation plays in different investment philosophies. The second chapter provides an overview to the three basic approaches to valuation - discounted cashflow valuation, relative valuation and contingent claim valuation. The rest of the book delves into the details of using these models.

Basic Valuation Tools

The first section of the book presents the basic tools needed for valuation, starting with models for analyzing risk and return, and estimating discount rates in chapters 3 and 4. Chapter 5 provides an introduction to financial statements, and the process of estimating cash flows is discussed in chapter 6. Chapter 7 examines the process of estimating growth rates in earnings and cash flows from historical and fundamental data.

Market Efficiency and the Efficacy of Investment Screens

The next section looks at the issue of market efficiency as a vehicle for developing investment screens and developing investment strategies. Chapter 8 examines the question of how to test an investment scheme, and chapter 9 summarizes the empirical evidence on a wide variety of investment strategies, ranging from those based upon past prices to those based upon financial fundamentals like the PE ratio.

Discounted Cash Flow Models

The next section examines different discounted cashflow models to value both equity and the firm. Chapter 10 describes the basis dividend discount model and its variants. Chapter 11 starts off with a discussion of why free cashflows to equity (FCFE) are different from dividends for most firms. The two-stage and three-stage FCFE discounted cashflow models are described and applied to high growth firms which do not pay dividends. Chapter 12 examines the alternative of valuing the firm by discounting free cashflows to the firm at the weighted average cost of capital. The advantages of this approach are discussed together with caveats on its usage. Chapter 13 is dedicated to the valuation of those firms which do not fit easily into traditional discounted cashflow models. In particular, the problems in valuing cyclical and troubled firms are discussed, and possible solutions are suggested.

Relative Valuation Models

The section on relative valuation covers three chapters. Chapter 14 discusses the use and misuse of price-earnings (PE) and price-cashflow ratios, beginning with an examination of the determinants of price-earnings ratios, and continuing with an analysis of why PE ratios change over time and why earnings multiples are different across industries and countries. Chapter 15 explores the relationship between price and book value, and attempts to clear misconceptions about the relationship. The determinants of Price/Book Value ratios are examined and a rationale is presented for why some firms sell for less than book value while others sell for more. Finally, there is a discussion of how to use price-book value ratios sensibly in investing. Chapter 16 examines the price to sales ratio and reasons for differences across firms and industries on this multiple. The price to sales ratios is also a useful tool to use to examine the value of a brand name and the effects of changes in corporate strategy.

Contingent Claim Valuation Models

The section on contingent claim valuation is presented in two chapters. Chapter 17 develops the basis concepts of option pricing. It describes the payoff diagrams on call and put options and provides the rationale for option pricing models. The Binomial and the Black-Scholes model are presented and contrasted, and extensions on these models and their limitations are described. Chapter 18 applies these models in the pricing of a number of contingent claim securities such as warrants, and explores the use of option pricing models in pricing assets which have option-like features such as equity in a firm, natural resource rights and product patents.

Valuing Fixed Income Securities

The next section looks at the valuation of fixed income securities in two parts. In chapter 19, the determinants of the level of rates, the term structure and the default premia are examined. Chapter 20 looks at special features on bonds, including conversion and call options, as well as the effect of caps and floors on floating rate bonds.

Valuing Futures and Real Assets

Chapter 21 examines the pricing of futures contracts on perishable and storable commodities and extends the lessons to valuing futures on stock indices, bonds and currencies. Chapter 22 provides an introduction to the use of discounted cash flows models and comparables in the valuation of real estate, while chapter 23 analyzes the valuation of other assets including private businesses and franchises.

Choosing the right model

The problem in valuation is not that there are not enough models for valuation; it is that there are too many. Consequently, the final chapter, Chapter 24, may be the most important one in this book. It provides a framework for picking the right model for any occasion, based upon the characteristics of the asset being valued.

Once you understand the theory you'll realize that stocks for instance can trade anywhere and everywhere in price which you probably already know. However, I'll just leave it at saying that knowledge is powerful.

I would also learn as much as I could about financial accounting. In my quest for success I start reading financial reports and was able to teach myself quite a bit about accounting (well a lot more than I knew which was zero) as it was equivalent to the first year of financial accounting at the college level. I'm still learning BTW. I think financial accounting knowledge is invaluable.

If you don't want to do much work which I think is understandable, just buy SPY and hold for 20 years or so as well as re-invest the dividends.

[detox]

Investing is a life long process where one needs to keep up with new developments even if you have a fully passive approach (i.e. dollar cost average into a few index funds at work with 401k money.) You should devote at least an hour a month to the task just to review your mutual fund statements and total up how you are doing.

After this is taken care of, you can read the books below to get an idea about the key areas where you can spend more time to try and enhance your individual portfolio return (often through better stock or mutual fund selection.)

"What are they talking about?"

When I first wanted to learn about investing, I found that the field was full of unique words and phrases that I didn’t understand. Understanding words and phrases like "book-value", "bottom line", "profit margin" and "annualized rate of return" are key to understanding and comparing investments.

Wall Street Words : An Essential A to Z Guide for Today's Investor by David Logan Scott

Synopsis: Wall Street Words features nearly 4,000 terms including hundreds of new entries that accurately and clearly explain the language of the world of finance and investment. Contemporary case histories offer real-world applications of investment concepts, how to manage money in today's market, and more.

This is a great, inexpensive reference book to help you understand investing.
Mutual Funds

I recommend that all investors start out with a good, no load, low expense mutual fund as their first investment. At the top of my list of favorite mutual funds are "index funds". Some of the best index funds are found at Vanguard.

John Bogle who wrote "Common Sense on Mutual Funds" founded Vanguard to give investors his vision of how to make money for themselves and not for the investment advisors. Bogle is one of the most respected persons in the industry and his ideas are a MUST READ for all that want to invest.

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor
by John C. Bogle
Hardcover - 468 pages (April 1999)
Review from Amazon: He begins with primer-like essays on investment strategy, championing mutual funds for their inherent investment value, and then grinding each point home with a bevy of graphs, charts, entertaining anecdotes, and common sense. He repeatedly stresses time as a basic tenet for investing, listing these simple rules: "Time is your friend"; "Impulse is your enemy"; "Stay the course." And then he proceeds to blast fund managers, who have become marketers rather than managers.

The trade-off between the profits that accrue to fund shareholders and the profits that accrue to the fund management companies seems subject to no effective independent watchdog or balance wheel, despite the fact that the shareholders actually own the mutual funds.
You just have to love a guy who can say it like that. I find it VERY hard to consider any mutual fund other than index funds after learning what Bogle writes of.

Individual Stocks

Once you have read Bogle's book and have a good index fund in your portfolio, you may want to consider adding some individual stocks. Berton Malkiel's "A Random Walk Down Wall Street" is a book to start with. He makes a strong case that a "blindfolded monkey" would have as much luck selecting a stock portfolio as a pro.

A Random Walk Down Wall Street : Including a Life-Cycle Guide to Personal Investing
by Burton Gordon Malkiel
In his updated "life-cycle guide to investing," Malkiel offers age-related investment strategies that consider one's capacity for risk. (A 30-year-old who can depend on wages to offset investment losses has a different risk capacity from a 60-year-old.) In his assessment of rocketing Internet stocks, Malkiel defends his "random" position well, explaining how "the market eventually corrects any irrationality--albeit in its own slow, inexorable fashion. Anomalies can crop up, markets can get irrationally optimistic, and often they attract unwary investors. But eventually, true value is recognized by the market, and this is the main lesson investors must heed." Malkiel concludes " individual investors are better off buying and holding onto index funds than meddling with securities or actively managing mutual funds."

I believe one can profit finding these anomalies, but it is time consuming. This book should be read to see if you want to invest that time or just put your money into an index fund. Personally, I have far outperformed index funds for two decades, but I spend a good deal of time at it plus I may have some luck working with me.

IF you decide to buy stocks on your own, I highly recommend David Dreman's "Contrarian Investment Strategies".

Contrarian Investment Strategies: The Next Generation: Beat the Market by Going Against the Crowd by David N. Dreman

This is one of my favorite investment books! All stock-market investors embrace the motto "Buy low, sell high." Few act accordingly. This book teaches you how. Your job is to execute!

Some great historical charts of returns are presented in the book. It shows that stocks have outperformed ALL asset classes since 1802 if you take a 20 year period, even if you bought just before the Great Depression. Now if you can buy stocks that are out of favor, the books shows strong evidence that you will outperform the index funds!!!

My personal style is to look for stocks that have strong growth in growing markets and to try to buy them on major dips, rather than as they hit new highs. Dreman's book explains why this can work so well and offers tips on how to do it.

Finally, I like Graham's "The Intelligent Investor"

The Intelligent Investor : A Book of Practical Counsel by Benjamin Graham, Warren E. Buffett (Preface)

Graham teaches about "price/earnings ratio", the current ratio or working capital-to-market capitalization and many other key terms to separating investments from speculations.

"Intelligent Investor" is considered a classic and the preface is by one of the better value investors of today, Warren E. Buffett.