For those who have had the pleasure of completing an undergraduate finance program, it is a mild surprise (to say the least) to find that the real world of finance and investing is quite different from the efficiency-laden lessons of academia.
While this is frustrating to those who paid the price in time an tuition, it should be encouraging to the average investor who has no formal education in the subject. The truth is, right now, retail stock pickers have the same tools and tricks available to them as the world's most successful investors.
So, in the spirit of summertime leisure, here is a hot list of books for investors that will get you on par with the very best.
The Classic Text
To recommend "The Intelligent Investor" is by no means a novel idea (pun absolutely intended), but it is, by far, the greatest quick read on the subject of stock picking. Written by Warren Buffett's mentor, Benjamin Graham, "The Intelligent Investor" provides the mental lattice all investors would do well to cling to.
Sure, the book champions value investing, which is not the only way to invest, but it can help investors of all kinds -- even those interested in the next big technology winner.
Graham spells out the difference between speculation and investing -- a concept that is often cited but which few seem to truly espouse. The Columbia professor and investing guru uses the allegory of Mr. Market to describe the battiness of the public markets, and how you can use that to your advantage.
While academic finance touts Efficient Market Theory -- the idea that securities are priced with near perfection at all times -- Graham posits nearly the opposite: Stocks can fall out of favor for reasons that do little to reflect the intrinsic value of a company -- creating a price rift. Graham, Buffett, and the majority of the world's greatest stock pickers believe that stocks drift toward that intrinsic number over time. Their track records support the claim.
With clear explanations of concepts such as margin of safety and defensive investing, "The Intelligent Investor" should be No. 1 on every investor's reading list.
The Everyman Investor's Bible
Peter Lynch, vice chairman of Fidelity's investment advisory and former manager of the Fidelity Magellan Fund -- the strongest performer of its (and his) kind from 1977 to 1990 -- is great at writing simple, actionable investment lessons.
"One Up on Wall Street" is the shining example on the subject of DIY investing.
Though "The Intelligent Investor" is itself a very readable, simple book, Lynch's classic explains in plain language strategies you may already employ. For example, Lynch loves "buy what you know," the art of walking down the street and observing which brands are moving fast and which stores have lines out the door -- and basing your investments on that acquired knowledge.
Lynch doesn't focus on bargain-hunting for stocks, but instead the search for no-brainer ideas. This book is great for the average investor who doesn't necessarily want to spend every off hour reading SEC filings. Instead, Lynch might point you toward the mall -- or today, perhaps Amazon.com (AMZN) -- for a nice, informative stroll; or instead, advise you to just keep an eye out around the office. Any new machines in the copy room that people seem to like?
"One Up on Wall Street" presents a very, very simple methodology for investing -- and keep that in mind. Without doing any further due diligence, investors might have found that airlines, for example, might have fit the description, but those have been far from "10-bagger" investments.
Rough Name, Good Game
The third and final recommendation for your summer investing reading list has a title that's a bit cheesy, but is rich in valuable content. "You Can Be a Stock Market Genius," authored by special situations genius and fund manager Joel Greenblatt, is a slightly more in-depth book of investing strategies than the two books above, and that centers around, unsurprisingly, special situations.
Greenblatt used his own formula (now known as the Magic Formula) for finding hidden investments that were neglected by the market. In doing so, he achieved one of the best records in history -- an average of 50 percent annual gains for a decade.
Readers will learn the art of hunting down spinoffs, restructurings, merger securities, rights offerings, bankruptcies, and risk arbitrage -- all in a way that requires, at most, only high school-level math knowledge and an interest in beating the stock market.
It's not as simple as Lynch's book, or as defensive as Graham's bible, but Greenblatt's is a book I still refer to today for help in generating investment ideas.
Too Good to Be True?
By reading these three books, are you guaranteed to start beating the market and holding the most enviable portfolio on your street? Not necessarily. Investing is far more an art than a science -- one cannot achieve perfection, and it is a constantly evolving practice.
What these books can do is give you one of the best foundations possible for building long-term investing success. And, as icing on the cake, you don't have to spend $200,000 for a diploma to achieve it.
9 Financial Documentaries That Will Change the Way You Think About Money and Investing
3 Beach Reads That Will Make You a Way Better Investor
This film shows a wizard of a trader at his best, on good days and bad. The movie contains plenty of advice for individual investors and traders. Watching Jones' prediction of the 1987 downturn, based largely on intuition and Elliott Wave graphs, is especially fascinating in hindsight. Jones is extremely intelligent, but also superstitious. (About half an hour into the film, you see him put on his lucky sneakers that were once owned by Bruce Willis.) As erudite (and often right) as Tudor's analysis is, he says that he would rather have an emotionally invested money manager rather than a cerebrally detached one.
The film also shows the hedge fund manager donating his time and money to help New York City children graduate from high school and attend college on his dime. Jones wrote about the mission of his charity, the Robin Hood Foundation, in Hedge Fund Intelligence last year.
Poverty is an enemy that comes in many forms. But the worst form of poverty facing America today is the poverty of opportunity. Ironically, it was this poverty of opportunity that drove so many of our ancestors to flee their homelands for America. The promise of opportunity was so important that it became the first founding principle in the Declaration of Independence — “All men are created equal” and implicit in that is a promise of equal opportunity. But go tell that to the 20,000 New York City children -- children, mind you -- who will sleep in a homeless shelter tonight in this fair city. Where is their opportunity?
Watch this one now. Jones apparently requested that the film go out of circulation — possibly because of the embarrassing technology and fashion statements that were in vogue on Wall Street in the 1980s.
This is the true story of Nick Leeson, a British trader that went from a Morgan Stanley (MS) clerk, to a rogue trader that brought down Barings, a smug old bank that even held the Queen's money. This story inspired the film Rogue Trader in which Ewan McGregor starred as Leeson. Through interviews with Leeson, this documentary from the early nineties helps us understand the psychology behind dishonest traders like Kweku Adoboli, who managed to relieve UBS (UBS) of $2 billion. Or impulsive gamblers.
Psychology also applies to CEOs and corporations. Are you still wondering why Bank of America (BAC) made those disastrous acquisitions of Merrill Lynch and Countrywide? Taking a look at the bank's history and Ken Lewis's Napoleonic drive to build the biggest bank in the nation in the South to get some light shed on this.
This Oscar-winning documentary is perfect if you are want to explain the financial crisis to an English-speaking extraterrestrial that hasn't read any of our newspapers for the last six years. Even savvy investors can benefit from this concise, cogent, well-executed documentary. A-list sources like Christine Lagard, Barney Frank, George Soros, Dominique Strauss-Kahn (pre-disgrace), and Eliot Spitzer (post-disgrace) give you a front-row seat to the central story of this generation.
Most documentaries that explain the origins of the financial crisis go back all the way to the mid '90s. Or maybe Regan's first few years in office. This is all well and good, but Professor Niall Ferguson takes you all the way back to ancient Babylonian futures contracts etched onto clay tablets and Fracisco Pizzaro's exploitation of the Cerro Rico at Potosí, which is the mine that flooded Europe with silver. Ferguson's exploration of human history shows the enormous influence that money has on the rise and fall of empires, all the way up to today.
Though dated, this five-hour exploration of economic globalization's origins in the fall of the Iron Curtain is still very informative. This was made in the dusk of the 20th century, when deregulation was gospel.
One of the issues explored in Commanding Heights was the IMF and World Bank's response to crises like the 1997 Asian Financial Crisis. Though the lenders have since corrected their ways to some extent, Life and Debt is food for thought for Europe's rescuee countries like Greece and Portugal. This film looks at the effects of national indebtedness and IMF policy prescriptions on ordinary citizens and local businesses in Jamaica.
If you want to dig deeper than Inside Job, these two PBS documentaries are just the ticket. Though there is some information overlap between the two, they are both worth a look. See them on a rainy day.
Did the meltdown of the entire financial system truly blindside us all? Brooksley Born, the head of the Commodity Futures Trading Commission, wasn't surprised at all. She urged tighter regulation of over-the-counter derivatives in the 1990s, but was unheeded. A Washington Post profile compared Born to Cassandra, the mythical character that was blessed with the gift of prophesy, but cursed by Apollo so that no one would believe her.
"I was very concerned about the dark nature of these markets," Born said in the profile. "I didn't think we knew enough about them. I was concerned about the lack of transparency and the lack of any tools for enforcement and the lack of prohibitions against fraud and manipulation."
Eventually, despite pooh-poohing from Alan Greenspan and Larry Summers, Born presented her concept paper on regulating derivatives such as credit default swaps. She was swiftly decried. The Wall Street Journal claimed that "the nation's top financial regulators wish Brooksley Born would just shut up." And just a few months later, Long Term Capital Management found itself sunk by those very derivatives.