Investing by the Book - the 10 Best Books Ever Written on Investment
by Richard Lambert, former editor of the FT
by Richard Lambert, former editor of the FT
First, a note of warning. Some of these books are hard to get hold of: one or two are very obscure indeed (my copy of the first on the list was photo-copied illicitly 25 years ago). But stay calm. These are the 10 best investment books ever written and they are worth taking a little trouble to find - especially when you consider the time saved by being able to ignore (nearly) all the thousands of other mostly tiresome volumes written on the subject.
In chronological order, the first on the list is Confusions and Delusions, written by Joseph de la Vega in 1688. Taking the form of a dialogue between a philosopher and a shareholder, it describes the workings of the Amsterdam stock exchange in a way that is startlingly familiar.
It is full of sound advice, too. For instance: 'The first principle in speculation is never give anyone the advice to buy or sell shares because, where perspicacity is weakened, the most benevolent piece of advice can turn out badly.
'The second principle: take every gain without showing remorse about missed profits, because an eel may escape sooner than you think. It is wise to enjoy that which is possible without hoping for the continuance of a favourable conjuncture and the persistence of good luck.
'The third principle: profits on the exchange are the treasures of goblins. At one time, they may be carbuncle stones, then coals, then diamonds, then flint stones, then morning dew, then tears.
'The fourth principle: whoever wishes to win in this game must have patience and money.'
Next comes Extraordinary Popular Delusions and the Madness of Crowds, written in London by Charles Mackay in 1841. It is the classic account of money manias - the Mississippi scheme, the South Sea Bubble, and so on - and is rich in memorable anecdotes. My favourite is about the sailor who was delivering a message to a rich Dutch merchant at the height of the tulipomania in the mid-1630s. Asked to wait in the hall, he spotted what he thought was a tasty onion, which would go well with the herring he was planning to have for his lunch. As the plundered merchant put it in the subsequent court case, the price of his meal 'might have sumptuously feasted the Prince of Orange and the whole court of the Stadtholder.'
By the start of this century, stock exchange investment was becoming a more scientific affair. Perhaps the first person to take equity indices seriously was Charles Dow, and his ideas were written up in 1922 by WP Hamilton, Dow's successor as editor of the Wall Street Journal.
Dow's theories were based on the idea that the market represents everything everybody knows, hopes, believes and anticipates; and, in The Stock Market Barometer, Hamilton tried to demonstrate how the Dow Jones averages had, among other things, discounted accurately the first world war.
The following year brought a much more racy and entertaining book, The Intelligent Investor, by Edwin Lefevre. My copy is black with pencil marks: just a few quotes will help to give the flavour.
Benjamin Graham was a much more sober character. He practically invented investment analysis - Graham and Dodd's remains a classic, in its umpteenth edition - but his indispensable guide to the average citizen is The Intelligent Investor, published in 1949. His approach was to seek out sound values wherever they could be found.
As Graham wrote: 'Experience has taught us that, while there are many good growth companies worth several times net assets, the buyer of such shares will be too dependent on the vagaries and fluctuations of the stock market. By contrast, the investor in shares, say, of public utility companies at about their net asset value can always consider himself the owner of an interest in sound and expanding businesses, acquired at a rational price - regardless of what the stock market might say to the contrary.'
My edition of this marvellous book (the fifth) acknowledges the contribution of Graham's pupil and collaborator, Warren Buffett, the sage of Omaha.
Now one of the world's most successful investors - and among America's richest men - his contribution to investment literature comes not as a book but in the annual letter to shareholders of his main company, The Essays of Warren Buffett. These have been collected and bound by the company, so qualify - just - for this list. And they are full of wisdom, on the Graham lines.
Try this, from 1977: 'Our experience has been that pro rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership.' This approach has led Buffett to make huge profits in companies such as Walt Disney, Capital Cities and the Washington Post. And he is still very much in the game.
Any serious investor needs an understanding of history, and of the way rational people can behave irrationally when swept along in a crowd. A classic of this genre is The Great Crash, 1929, by JK Galbraith. Its analysis of embezzlement is worth the price of the book by itself. In good times, people are relaxed and trusting, money is plentiful. 'In depression,' writes Galbraith, 'all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved.' Shades of Maxwell.
The Money Game, by 'Adam Smith', captured marvellously the go-go years of Wall Street in the 1960s. 'The strongest emotions in the marketplace are greed and fear. In rising markets, you can almost feel the greed tide begin.'
'Usually, it takes from six months to a year after the last market bottom even to get started.
'The greed itch begins when you see stocks move that you don't own. Then, friends of yours have a stock that has doubled; or, if you have one that has doubled, they have one that has trebled. This is what produces bull market tops.'
If I include on my list Manias, Panics, and Crashes, by Professor Charles Kindleberger, you might begin to suspect that I have a thing about financial bubbles. You would be right. But in it goes, anyway, for its scholarly account of the way that mismanagement of money and credit has led to financial explosions over the centuries.
Finally, I feel the need to include a recently published book in the list: Money of the Mind, by James Grant (who also wrote an excellent investment biography of Bernard Baruch some years ago). The book explains this phenomenon: at the beginning of the century, it was almost impossible for the ordinary working person to get a loan; by the 1980s, it was almost impossible to refuse one.
One feels that Grant would have been happier if he had been able to end his book with an account of the collapse of the entire international banking system.
Still, it provides essential background to why the financial markets are as insecure as they are today.
So, there are my 10. I would enjoy hearing from anyone with other candidates to consider.