5 books every investor must read
Becoming a good investor is more than just learning how to read a company’s annual report and profit and loss statements. Oftentimes understanding market psychology and macroeconomic forces are just as important. Fortunately there is a wealth of knowledge waiting to be unlocked in books by investors.
Written in 1989 but remaining as relevant today, this book by Peter Lynch, the former Magellan Fund star manager, shows how individual investors can outperform the professionals by finding their edge in stocks they understand, that is, products or services they use or encounter in their day-to-day life. What I like about this book is its emphasis on simplicity. Picking a stock should be no different from analyzing a local laundromat, drugstore, or apartment building you might want to buy. You don’t have to have proficient financial knowledge in order to beat the market. But you do need to avoid some common pitfalls. This is where the author lays out simple rules on which stocks to avoid, as well as investing wisdom such as ignoring the noise, the futility of market timing and the value of independent thinking. A required reading for all investors.
You’ve probably heard of the 80/20 rule — 80% of the effects come from 20% of the causes. In investing, a large part of an investor’s success can be attributed to getting a small number of big things right. Or what Howard Marks calls “the most important thing”. And no, finding the next profitable stock is not it. Rather, it is about managing risk to avoid losing money, understanding psychological biases, cultivating a good thinking process and having a dose of humility to know what you don’t know. This is far from a how-to book but the investment lessons from Howard Marks’ 30 years experience as an investor makes this one of the most important books to read.
What stock should I buy? Philip Fisher answers that question by using a 15 points checklist to help individual investors ‘scuttlebutt’ and identify stocks that possess above-average growth potential. He provides investing advice on when investors should buy and sell their stocks, how to think about dividends, and what to avoid in investing. Philip Fisher’s investing philosophy is far from easy to apply, for me at least, but that’s one of the reasons that make it so important.
Companies that can create long-term wealth are often ones that can generate above-average profits. But most companies fail to do that consistently in the long run because above-average profits attract competition. Competition erodes profitability. However, some companies have managed to fend-off competition by building a barrier around their business. Commonly referred to as “moats”, these barriers are structural characteristics of a business that makes it hard for competitors to replicate. In this little book, Pat Dorsey uses real company examples to show how these moats deter competitors, as well as some common pitfalls investors should avoid such as overpaying for a stock. If you’re interested in finding and owning quality companies, this is a book for you.
Part memoir, part psychological self-help book, Jim Paul tells the story of his meteoric rise as a commodity trader at the Chicago Mercantile Exchange and how he lost everything in the span of 3 months. His situation is far from unique. Most investors lose money in the stock market, not because of missed opportunities, but because their ego and overconfidence get in the way when making decisions. Our tendency to confuse net-worth with self-worth and associate our own identity in the stock market makes it hard for us to make the right decision when our ego and pride are on the line. The author offers several solutions on how investors can avoid personalizing the stock market to improve decision making.
These five books are only scratching the surface of what’s available and what I’ve read to date. We would love for you to share the investment books you recommend with the Sharesight community to benefit other investors like you. Happy investing!
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