A stock market education is expensive, and I’m not talking about the cost of a Harvard or Wharton MBA.
All stock market education is, to some extent, straight from the school of hard knocks. You will make mistakes.
Even legends like Warren Buffett and George Soros made horrendously bad investment moves at various points in their careers. Sure, you can spend money on investing books or even a fancy trading system.
But the real cost of a stock market education is measured in money lost and profits foregone due to investing mistakes. And over a lifetime of investment, that can mean millions — if not tens of millions — of dollars.
But new investors can still give themselves a leg up by studying beforehand. Every serious investor should have a solid library of investing books. Here are my picks.
The Intelligent Investor
I’ll start with Benjamin Graham’s classic The Intelligent Investor.
In my opinion, you simply have no business investing a single red cent until you familiarize yourself with Benjamin Graham. This is the man that invented the investment profession as we know it today. Graham was actively advocating a certification program for analysts in the 1940s, 20 years before the CFA program got off the ground.
And he was Warren Buffett’s professor and mentor at Columbia Business School.
The Intelligent Investor is a solid introduction to value investing. And while many of Graham’s specific tricks of the trade (such as buying stocks that are selling for less than their net current assets) are rarely usable in today’s more efficient market, the basic principles are as relevant as ever.
The Dhandho Investor
In my view, for a more contemporary take on value investing, any newbie to the investment game should read Mohnish Pabrai’s The Dhandho Investor.
Pabrai is a master investor who explains the basics of deep value investing in plain English. He doesn’t delve into arcane accounting terms or geeky finance-speak.
Pabrai’s basic investment philosophy draws heavily from the experience of the Patels — a group of ethnic Indians who immigrated to the United States in the 1970s.
The Patels came to America with virtually no capital and little formal education, yet they managed to build a hotel empire.
Today, a disproportionately high number of roadside motels are owned by the Patels. And they managed this by using a simple “coin toss” rule of thumb:
1. Heads, I win.
2. Tails, I don’t lose much.
In other words, they invested when the risk was low and the upside was high.
Pabrai has no special metric or formula. You’re not going to copy his trading moves and make millions — though his book will absolutely help train your mind to think as a contrarian, which I believe is an absolute necessity for success as a value investor.
The Reminiscences of a Stock Operator
One book that any investor should enjoy is The Reminiscences of a Stock Operator, a fictionalized biography of the legendary trader Jesse Livermore written by Edwin Lefevre.
Livermore was arguably the best trader in history, and no matter what school of investment thinking you follow, you should find his life story insightful.
Apart from its entertainment value (it’s as engaging to read as a novel), Reminiscences is full of practical “street smarts” that are as applicable today as when the book was first written in 1923.
In my view, the best advice in the entire book is: “Don’t argue with the tape.” The market might well be irrational, but it can stay irrational longer than you can stay solvent.
The Art of Asset Allocation
Most of us like to play the stock market. But for long-term wealth building, asset allocation is arguably far more important.
Studies have shown that more than 90% of your portfolio returns are explained by asset allocation. And at any rate, you generally can’t trade individual stocks in your company 401k plan, and this is where most Americans keep the largest chunk of their financial assets.
For a big-picture book on planning and allocation, I recommend David Darst’s The Art of Asset Allocation. This is not a book on stock picking, but rather a guide to constructing a portfolio from the top down.
Darst goes through the essentials for measuring risk tolerance and illustrates how to build a proper retirement portfolio.
For most new investors, I’d recommend reserving stock picking for your “play money,” at least at the beginning, and putting your real nest egg to work along the lines of a Darst portfolio.
A lot of investors still prefer to use a financial planner, and there is nothing wrong with that in my opinion. It can be valuable to have a professional shoulder the responsibility, and it removes your emotions from the equation. But if you are the do-it-yourself sort, I think you can effectively fire your planner and rely on The Art of Asset Allocation instead.
Fooled By Randomness
I’m not sure if it is a blessing or a curse to be the smartest person in the room. If I ever meet Nassim Taleb in person, I’ll be sure to ask him.
Taleb is more of a philosopher than an investor, but I consider his first book, Fooled By Randomness, to be required reading for all new investors. Nothing will lead new investors to ruin faster than an ego, and Fooled By Randomness is the best “keep you humble” book I’ve ever read.
It’s easy to ascribe a winning stock trade to your own skill or to a superior system. But the truth is that it was just as likely to have been luck.
Taleb forces you to take that long look in the mirror and ponder that possibility. Fooled is not technically a book on risk management, as it doesn’t delve into specifics on how to reduce risk in your trading.
But it teaches you how to think about risk, and that is far more valuable.
Taleb popularized the term “black swan” and became something of a celebrity in financial circles when the 2008 meltdown hit. I consider his The Black Swan and Antifragile to both be excellent reads. But it is still Fooled By Randomness that I consider to be the most useful for new investors.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.
This article first appeared on InvestorPlace.