MOST PEOPLE would like to find an easy way to get rich, just as they might want a quick way to get thin, or play a musical instrument. But it is a mistake for novice investors to assume that they can find instant success in achieving high returns when professionals, armed with extensive research and sophisticated technology, struggle to do so. Of course, just as people might get lucky at roulette, they might pick a wonder stock, but the odds are against them. Long-term prosperity can best be achieved by investors who save as much as they can afford in a low-cost fashion and in an asset class that reflects the long-term growth of the economy and the corporate sector. Even then, investors can be unlucky if they start saving in the wrong era (1920s America or 1980s Japan) or if governments seize their assets. These five books provide useful lessons on what approaches to take and, just as importantly, what steps to avoid.
The Intelligent Investor
By Benjamin Graham. (Revised edition, updated with new commentary by Jason Zweig.) HarperCollins; 640 pages;
This is the foundational text for serious investors, written by the mentor of Warren Buffett, arguably the most successful investor of the modern era. Ben Graham was the archetypal “value investor”, looking for bargains in the market. He honed his skills after the Wall Street crash of 1929 when equity valuations had plunged. Accordingly, some of his methods for finding bargains are difficult to apply today when stocks are more expensively valued. But his principles remain sound. Much depends on the price paid for stocks, so beware of fashionable industries. As he notes “obvious prospects for physical growth in a business do not translate into obvious prospects for investors” whereas “a sufficiently low price can turn a security of mediocre quality into a sound investment opportunity”.
The Clash of the Cultures
By John Bogle. Wiley; 385 pages;
Like Ben Graham, Jack (as he was usually known) Bogle focused on the difference between investment and speculation. But rather than buy individual stocks, Mr Bogle believed that investors should have exposure to the broad stock market. He was thus the father of the tracking fund which mimics the behaviour of benchmarks like the S&P 500 index. He also set up the Vanguard group, a mutually-owned company which offers low-cost trackers and is one of the world’s largest institutional investors. Mr Bogle was the author of many books but this one, published in 2012 towards the end of his life, sums up his message. Too many investors pursue hot stocks and hot funds; they buy high and sell low, and pay high fees to the financial sector in the process. As he writes: “investors need to understand not only the magic of compounding long-term returns, but the tyranny of compounding costs.” Read our full review of the book.
Lying for Money
By Dan Davies. Scribner; 304 pages; $28. Profile Books; £10.99
Trading too often, and paying high fees, are two pitfalls faced by the average investor. The third is succumbing to financial fraud. This entertaining book, published in 2018, describes some of the most common scams. If there is a shared theme, it is that investors simply can’t be bothered to check the details when the rewards look great. Although regulators can fall asleep at the wheel, fraud is more common in unregulated areas, as the history of cryptocurrencies has shown. The golden rule is to watch out for extremely rapid growth; such examples need to be checked thoroughly. As the saying goes “If it seems too good to be true, it probably is.”
Triumph of the Optimists: 101 Years of Global Investment Returns
by Elroy Dimson, Paul Marsh and Mike Staunton. Princeton University Press, 352 pages;
One of the highlights of the investment year is the annual review of financial markets produced by three academics from London Business School, most recently in association with Credit Suisse (a bank that perhaps could have paid better heed to the advice therein). The trio have assembled a trove of data from around the globe, focusing on the returns from shares, bonds and Treasury bills. They summed up the 20th century in a book, published in 2002, which helped to explain why “the cult of the equity” had developed—namely that shares had consistently outperformed other asset classes. But the book also provides a useful corrective. America’s great success tends to skew investor impressions. Elsewhere, investors have seen their savings wiped out by hyperinflation or revolutionary governments. Just because the optimists were right in the 20th century doesn’t mean they will always be proved right in the 21st. Read our full review of the book.
Investing Amid Low Expected Returns.
By Antti Ilmanen, Wiley; 304 pages;
The last book in the list was written by an academic-turned-investor, and thus has more of a bent towards investment professionals. Nevertheless, small investors will gain a lot from reading this tome, an update on the author’s excellent earlier work “Expected Returns”. The main thesis is that the low yields on bonds and equities that prevailed at the time of publication will reduce the likely returns on investment (making them lower than those described in “Triumph of the Optimists”). The thesis appeared to be borne out by a horrible year for both bonds and equities in 2022, the year it was published. But the book also provides an excellent explanation of many different strategies from momentum investing (buying assets that have risen in price) to private equity. The book was reviewed here by our Buttonwood columnist.
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