Investing
29-Sep-01
Nanowyatt asked for pointers to good, basic (but not dumbed-down)
books on investment/finance/the stock market. This prompted me to
write down some of the investing-related books and online resources
I've found helpful.
Books
- A Random Walk Down Wall Street by Burton Malkiel
- Bogle on Mutual Funds: New Perspectives for the Intelligent Investor by John Bogle
- The Intelligent Investor by Benjamin Graham
-
Common
Stocks and Uncommon Profits by Philip Fisher -
The
Essays of Warren Buffett: Lessons for Corporate American by Warren
Buffet and Lawrence A. Cunningham -
Market
Wizards: Interviews with Top Traders by Jack Schwager -
Your
Money or Your Life Joe Dominguez and Vicki Robin Although marred by environmentalist rhetoric, and poor investment advice, this is the
best book I've read about how to think about how you spend your time
and money, how to save, and how to become financially independent.
If I had to pick two, I would suggest A Random Walk Down Wall Street
and The
Essays of Warren Buffett
Malkiel's book illustrates how difficult it is to beat market indices
over a long period of time. For example, Malkiel found that the S&P
500 beat 70% of all equity managers retained by pension plans over the
1975/1994 20-year period. He makes an eloquent case for investing in
index funds. Bogle's book is also similarly excellent.
(Indeed, unless you enjoy spending a lot of time investigating companies and
stocks, I would recommend buying shares of a no-load index fund.)
Buffett is the greatest investor of all time, of course. His essays
are valuable for that reason alone. You should also read his
http://www.berkshirehathaway.com/letters/letters.html>letters
to shareholders. Buffett once described himself as 85% Graham/15%
Fisher, hence the presence of their books on the list above.
There may be something to technical analysis, but it seems mostly
like voodoo to me. However, if that interests you, the Turtle Trading site has a number
of useful resources. (I wouldn't buy their $1000 course though. If
they're making so much money trading, why are they forgoing the
opportunity cost of time spent trading? If it's out of benevolent
desire to see other people succeed, why do they charge so damn much?)
Jack Shwager's books are fun to read (he has several sequels to Market
Wizards listed above).
If you want more suggestions, Michael Burry of ValueStocks.net reviews a
number of outstanding books.
Useful Online Resources
Christopher Browne makes some good points about why actively managed funds in
general do so poorly relative to index funds:
In a soon-to-be published paper, authors Lakonishok, Shleifer, and
Vishny examine the holdings of managers who are labeled value or
growth, and arrive at the same conclusion we have. Most portfolios are
concentrated around the axis of growth and value and large and small
cap. In other words, the value or growth characteristics of the
typical manager do not deviate much from the Standard & Poor's 500
Index. This topic has yet to be dealt with in a published paper, but
is one we have observed for several years. The reasons for this are
two-fold, one being a practical reality of managing large sums of
capital, and the other related to behavior. As the assets under
management of an advisor grow, his universe of potential stocks
shrinks. In the view of most advisors, it is simply not worth the
effort to research companies in which it is not possible to invest a
substantial amount of capital. This results in a much smaller universe
of large cap stocks, which will, in large measure be in most stock
market indices. If you are going to construct a portfolio selected
mostly from stocks in the index, it is very difficult to produce a
result that is significantly different from the index. Moreover, the
larger stocks are, in general, well covered by the analytical
community and, therefore, are not as prone to have their stock prices
fall to the extreme ends of value.
The second, and perhaps more important reason, is more directly
related to behavioral psychology. Investment performance is generally
measured against a benchmark, and claims to being long-term investors
aside, the typical institutional client tracks performance on a
quarterly basis versus the benchmark. Performance that deviates from
the benchmark becomes suspect and can lead to a manager being
terminated. Consistency of returns relative to the benchmark is more
important than absolute performance, especially in a world dominated
by the hypothesis that asset allocation is more important than stock
selection. Once the advisor has figured out how he is being measured,
he realizes that if he tailors the portfolio to look like the
benchmark, he is at much less risk of underperforming the benchmark
and losing the account. Unfortunately, the chances of significantly
outperforming the benchmark are also greatly diminished.In “Are Short-term Performance and Value Investing Mutually Exclusive?
The Hare and the Tortoise Revisited” (an article in the Spring 1986
issue of Columbia Business School's Hermes Magazine), V. Eugene Shahan
analyzed the investment records of seven investment managers with
exceptional long-term track records which were described in an article
by Warren Buffett, “The Super Investors of Graham-and-Doddsville”, in
the Fall 1984 issue of Hermes Magazine. The common characteristic of
all seven investment managers in Warren Buffett's article was that
they practiced a value-oriented investment approach. His sample of
managers had results which exceeded either the Dow Jones Industrial
Average (the “DJIA”) or the Standard & Poor's 500 Stock Index (the
“S&P 500″') by between 7.7% and 16.5%-per year over periods ranging
from 13 years to 28.25 years. None of the seven managers out-performed
the S&P 500 every year. Six of the seven managers underperformed
either index between 28.3% and 42.1% of the years covered. By today's
measurement standards, the majority of the managers in Warren
Buffett's sample would have been terminated at some point in the term
of their management. It would be virtually impossible for any manager
with an eye towards the benchmark to produce the outsize returns of
the managers in Warren Buffett's article.
Christopher Browne's company, Tweedy, Browne and Co. also present a number of fascinating research
reports and articles on their website. See especially What
Works In Investing and Ten Ways to
Beat An Index.
From Ten Ways To Beat An Index:
“…Another study by Robert Kirby, former Chairman of Capital Guardian, indicated that out of 115 U.S. equity mutual funds that were in business for 30 years or more, only 41 (36%) beat the S&P 500 by some margin, and only 23 of the funds (20%) beat the index by 1% per year or more. Seventy-four of the funds (64%) failed to produce a record equal to the S&P 500 s 10.25% return since 1961. Using information from CDA/Cadence, Tweedy, Browne found that over the December 31, 1981 December 31, 1994 13-year period, the S&P 500 beat 81% of the surviving equity mutual funds…
The Motley Fool website has some
nice discussion boards:
-
Berkshire
Hathaway -
Retire
Early -
Living Below
Your Means
The Retire Early Home
Page An excellent set of resources prepared by John T. Geaney, a
chemical engineer who retired financially independent in 1994 at the
age of 38. Has the results of a survey of the personality types
(Meyers Briggs scale) of those
with an interest in early retirement. He found that most Early
Retirement devotees fall into these three categories: ISTJ, INTJ, and
INTP.
Chris Leithner, a
value-oriented investment manager in Australia, has written a
number of useful Newsletters and Circulars.
Uncovering Quality in Small-Cap Stocks
Reprinted from the September 1996 Better Investing�
A Learn & Earn Feature
by Robert A. Schwarzkopf, CFA
Serving Up Small-Cap Research: How Hard Is It for Individuals to Do?
Reprinted from the February 1998 Better Investing�
by Craig Nankervis
BI Editorial Staff
Outstanding Investor Digest.
Newsletter with interviews of Buffett, Ruane, Templeton.
Focus Investor
Value-oriented articles and links.
