During the last 2.5 years, I’ve read a whole bunch of books on investing and personal finance, which I’ve summarized here on this website. And many of you have been asking: Therefore, in this post I’m going to present the books about investing that I think will benefit your stock market journey the most. Moreover, I will rank them from simple to understand to more difficult to understand, so that you’ll know in which order you should read them if you are quite new to the world of investing. Here are the books that will be covered. Without further ado, let’s dive deeper into each one of them.
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Number 1 on the list, and the first book that I think a new investor should read, is a book called The Little Book that Beats the Market. It was first released in 2006 and the author of the book is Joel Greenblatt, the manager of Gotham Funds, a hedge fund with $5.6b in assets under management. At 112 pages, the book definitely deserves its name, but don’t let that fool you! The Little Book That Beats the Market reveals what is probably my favourite stock screening strategy – the Magic Formula.
The Magic Formula finds stock picks by looking at two important performance indicators – returns on assets (or capital) and the price/earnings ratio(or earnings yield). Joel Greenblatt discusses why these two key performance indicators are essential for successful stock market investing and he does so in a really neat and humoristic way. The book is so over the top and blunt at times that I’ve been laughing out loud while reading it. And I tell you – that’s quite uncommon for a book about investments. Just take this quote from the book which I’ve presented on the website before. Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot. This book is like 60% education, 40% humor, which makes it a really enjoyable read. As an extra resource, I should add that the Magic Formula screener can be found and used for free at magicformulainvesting.com.
Number 2 on the list is also a more easy-going book and it’s called One up on Wall Street, and is written by Peter Lynch. It was originally published in 1989. Peter Lynch is a legendary investor from Fidelity Investments, and he was the manager of the Magellan Fund there during 1977-1990. During this period he averaged a 29.2% annual return and grew the fund from $18m to $14b. That is quite insane so its no wonder that the book has sold in more than 1 million copies worldwide. At 334 pages, the book is more extensive than the Little Book that Beats the Market for sure, but it’s still quite an easy read.
The book preaches that you should use what you already know to make money in the stock market and for me, this excerption from the book was something of a wakeup call: “In general, if you polled all the doctors, I’d bet only a small percentage would turn out to be invested in medical stocks, and more would be invested in oil; and if you polled the shoe-store owners, more would be invested in aerospace than in shoes, while the aerospace engineers are more likely to dabble in shoe stocks. Why it is that stock certificates, like grasses, are always greener in somebody else’s pasture, I’m not sure.” The highlights of the book are chapters 8 & 9. In chapter 8, Peter Lynch discusses the 13 traits of a “ten bagger”, referring to stocks that have a chance to increase tenfold. In chapter 9, he discusses 6 traits of the reversed ten bagger, referring to stocks which are heading straight for the dumpster. Some of the characteristics of a ten bagger which he lists in chapter 8 are quite funny and a bit counter-intuitive, such as: - The institutions don’t own it, and the analysts don’t follow it - It’s in a no-growth industry And best of all … - There’s something depressing about it.
After you’ve read and understood The Little Book that Beats the Market and One up on Wall Street you’re probably ready for Number 3 on this list – The University of Berkshire Hathaway. Berkshire Hathaway is of course Warren Buffett’s firm, and it’s one of the largest public companies existing. This book has a very appropriate title, because the author Daniel Pecaut been attending the annual shareholder meetings of Berkshire Hathaway, where Warren Buffett and his right-hand man Charlie Munger perches about investing, for about 30 years. These 30 years are summed up in the book. The length of the book is 338 pages, so almost exactly the same length as One up on Wall Street, and it is just a bit more advanced. It’s also quite new as it was first published in 2017. Warren Buffett and Charlie Munger are two great minds, truly. And they aren’t just smart, they are witty too. Just consider what they have to say when they hear rich people in western countries complain about high taxes. The University of Berkshire Hathaway includes notes from the highlights of the annual shareholder meetings of the years 1986-2017. If you wish to see the meetings between 1994-2020 yourself you can head over to CNBC’s Warren Buffett Archive. This is a great resource, but the meetings are approximately 5 hours each, so that’s about 135 hours of watch-time in total. This book sums up the same information in about 10.
Number 4 book that I would recommend anyone to read is Philip Fisher’s book Common Stocks and Uncommon Profits. Warren Buffett is often said to have been 85% Benjamin Graham and 15% Philip Fisher, and Buffett was inspired especially by this book, which originally is from 1958. The book is quite short at about 200 pages, but it has a few more difficult learnings. Not that they are technically or mathematically more difficult than anything you’ll find in the previous three books, but to apply them in practice is quite hard. It’s been good for you. Phil Fisher introduced Warren Buffett to the idea to of buying great companies and holding on to them for forever. And Fisher practiced what he preached. His and his clients’ investment in Motorola allegedly became a 2000-bagger after he had held on to it for many decades. With a 2000-bagger you only need $500 invested to become a millionaire.
One of the highlights from the book is when Phil Fisher presents how individual investors can use main street resources to beat Wall Street. He advises serious investors to investigate companies by talking to their suppliers, customers, employees, ex-employees, and best of all – competitors. He says that if you were to talk to the top 05 companies within a specific industry and ask each company about the other 4,you’d have a really good picture afterwards on who the strongest player in the business is.
Number 5 on this list is The Intelligent Investor by Benjamin Graham. I know, you know, everyone knows- this list could never have been without it. After all, I’m not exactly unbiased. Benjamin Graham is “the father of value investing” and was the teacher of Warren Buffett. The Intelligent Investor is his most famous work, even though I would argue that it’s not the most complete one. The book is more technical than the previous books on this list, but it has definitely stood the test of time, considering that it was first published in 1949. You’ll probably not get the most out of it if you aren’t at least a bit experienced within the field of investing though. It’s also 640 pages long. The book has three core messages: -
Intrinsic value: A stock is a piece of a business, which means that it has an intrinsic (or real) value
Mr Market: The stock market swings from too pessimistic to too optimistic. A true investor is not swayed by Mr Market’ sun predictable moods and merely sees rising and falling prices as an opportunity, not as a conveyor of information.
Margin of Safety: Decisions in the stock market must always be made with a built-in margin of safety. This means that you should insist on buying stocks with a large discount to their intrinsic (or real)business value.
So those are the key takeaways. And I wouldn’t want to argue with Warren Buffett about which chapters that are the most important from the book: Well Chapters 8 and Chapters 20 are really all you need to do to get rich in this world. If you could say that Warren Buffett has written any of the books on this list himself, it would be this one.
Number 6 is “The Essays of Warren Buffett”, which is a book where Lawrence Cunningham has rearranged and structured the most important takeaways from all of Berkshire Hathaway’s annual shareholder letters into a book. Buffett has written these letters himself and the book was published in 1997. The book is 328 pages long, but there’s soooo much meat in here. Buffett covers everything from the activity required to become a great investor, to mergers & acquisitions, to what a shitty place Wall Street is, to the evolution of the newspaper business to human psychology, to the failure of academics in finance, to the importance of contrarianism, and back to what a shitty place Wall Street is again.
Buffett is an exceptional writer, teacher and investor, and it definitely shows in this book. Sometimes, even though he is trying his best to explain his thinking to a lesser experienced audience, it just shows how far ahead his mind is, and it can be quite difficult to grasp some of the concepts. An exceptional book nonetheless. I should add that almost all of the Berkshire Hathaway annual shareholder letters can be found at berkshirehathaway.com/letters for free, but Lawrence Cunningham does a great job of distilling the information.
And for the final pick among my Number 7 favorite books about investing we have Security Analysis, also written by Benjamin Graham. I’d say that Security Analysis is Graham’s magnum opus, even though the Intelligent Investor has gained more popularity. It just covers a lot more information. And at a massive 851 pages divided into 52 chapters, that definitely makes sense. You’ll learn everything from the psychology of investing, to different types of securities, to the financial statements, to portfolio structure to stock market movements. I do recommend that you get the 2ndedition of the book which is from 1940, if you decide to buy it. This edition has a lot of great examples and a few of the later versions of the book have apparently distorted Graham’s words a bit.
Here, I’ll highlight three of my favourite chapters from Security Analysis:
Chapter 2, which covers the importance of studying both qualitative and quantitative data in your search for excellent returns. How these two differ in their value and correctness is discussed.
Chapter 43, which is about the significance of current-asset values in listed market companies. This is the key ingredient for screening for net-net stocks like Benjamin Graham was famous to do.
And Chapter 50, which is about the discrepancies which sometimes occur between price and value of stocks. The chapter is about where you are most likely to find discrepancies, how you can be more certain once you think you’ve found them, and about an alternative approach to stock market investing which I haven’t really investigated too much myself, but which do seem promising from a reversion to the mean standpoint: Don’t buy companies that are likely to fall into financial difficulties – buy those that already have. And there you have it.
1. The Little Book that Beats the Market, 2. One up on Wall Street, 3. The University of Berkshire Hathaway, 4. Common Stocks and Uncommon Profits, 5. The Intelligent Investor, 6. The Essays of Warren Buffett and 7. Security Analysis.
If you’d like to know more about them before perhaps deciding to read them yourself. Check it out! Cheers guys!