Excluding all the required reading material I studied in order to gain my CFA Charter (which I wouldn’t recommend unless you are just starting a career in investment management or research), I would describe the following books as the most important in helping me develop as an investor. I list the books in no particular order, although the first two are perhaps the most suitable introduction to the subject for those just starting-out.
- The Intelligent Investor by Benjamin Graham
Graham was instrumental in developing the intellectual underpinnings of value investing and The Intelligent Investor provides an excellent and very readable introduction to his theories and includes many worked examples of his various strategies. Warren Buffett describes The Intelligent Investor as “the best book about investing ever written”. Strong praise indeed.
- Common Stocks and Uncommon Profits by Philip Fisher
In my view, this book is the bible of growth investing in the same way that The Intelligent Investor (along with its more academic cousin, Security Analysis) is seen as the bible of value investing. Fisher was the first investor to articulate the strategy of growth investing – ie. that of selecting for investment those companies that have the ability to grow their earnings for many years into the future. The book is relatively non-technical in nature and full of (now-dated) examples of how Fisher put his strategy into practice.
- Competitive Advantage by Michael Porter
Investing is not simply the process of executing a mechanical formula in order to determine the value of a company’s shares, but being able to consider in a qualitative manner the degree of long-term sustainability of the company’s cash flows. In Competitive Advantage, Harvard Business School Professor Michael Porter sets out his theories on generic competitive strategies, analysing the value-chain, product differentiation, the impact of technology, industry segmentation and offensive and defensive strategies. All these concepts are important inputs into determining the long-term sustainability of a company’s business and the strength of its “moat” protecting it from the competitors.
- Financial Warnings by Charles Mulford & Eugene Comiskey
Most finance and investment guidebooks focus on teaching the reader how to pick winners, and in particular, how to pick big winners such as “the next Microsoft or Apple”. What I feel that books such as these usually neglect is the exact opposite – how to avoid bad investments. In my view, avoiding losers is perhaps more important than picking winners. This is a heavy academic textbook and quite expensive at £100, however, I feel the book has many excellent insights on how to review financial statements in detail and provides the reader with a wealth of knowledge on potential warning signs that may indicate the company in question is heading for trouble.
- Investment Valuation by Aswath Damodaran
Damodaran’s Investment Valuation is perhaps the most comprehensive single-volume publication to cover the correct theory and practice behind all the major absolute valuation models and relative value metrics. Attempting to value businesses using such metrics is arguably essential in order to move beyond a reliance on tips from brokers, journalists and internet message board participants for investment ideas. Academic in detail, the book also contains chapters for more specialist issues such as valuing start-ups, financial services firms, companies with negative earnings, distressed equity, real estate and real options.
- Financial Modelling in Practice by Michael Rees
To make the move from enthusiastic amateur to successful investor, it is likely at some point that you will need to use a spreadsheet package such as Microsoft Excel in order to review in detail historical financial results, estimate future cash flows, perform scenario analysis, and estimate asset valuations. This is particularly the case if you are seeking to implement the lessons learned from Investment Valuation by Aswath Damodaran. This book introduces all the key Excel financial functions, runs through the important principles regarding building a financial model, walks-through the modelling of company financial statements, and also provides an overview of risk modelling, real options and VBA coding.
- The Great Crash by John Kenneth Galbraith
While every bubble is different, many of the symptoms are the same: increased use of leverage; shorter holding periods; financial innovations (many of which will be failures and/or frauds); claims from leading commentators of “this time it’s different” – or words to that effect; mass retail participation; and finance becoming a key part of the zeitgeist. Understanding the dynamics and characteristics of a bubble should help the reader to identify them in the future. Galbraith’s work captures all the key events in the run-up to the Wall Street Crash of 1929, along with the effects of it’s aftermath.
- Greed and Corporate Failure: The Lessons from Recent Disasters by Stewart Hamilton & Alicia Micklethwait
By learning from some of the great strategic mistakes and frauds of the pasts, investors may be better equipped to identify similar events before they occur again in the future (as they surely will). Hamilton & Micklethwait review the events at companies including Barings, Enron, Tyco, Worldcom, Swissair, Marconi and Ahold. Because many of these situations involve either outright fraud or errors which leave the financial statements partially or wholly inadequate, the book identifies common traits such as over-expansion, dominant CEOs, ineffective boards and general management hubris.