Best Books on Investing: My Favorite Investing Authors

Best Books on Investing: My Favorite Investing Authors

This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.

A few weeks back, J.D. listed his favorite finance books (and encouraged readers to suggest their own). It’s a fine list, full of money-saving, debt-defying, financial-liberating manuals. But there was just one investing book, and since J.D. asked me to join his merry band of bloggers to add more investing posts to GRS, I thought I’d provide my own reading list. But rather than list books, I’m going to focus on authors, since most have several books, and any one of them will expand your knowledge on how to grow the money you’ve saved.

While this is a lengthy list, you’ll find most recommend the same things: index funds. These are mutual funds or exchange-traded funds that own all the investments in a certain index (such as the Standard & Poor’s 500) rather than trying to pick which investments will do better than others. That may surprise some of you, given that I work for The Motley Fool, a company perhaps best known writing about individual stocks. However, we’ve long been fans of index funds. In our Rule Your Retirement service, we cover six model portfolios, three made completely of index funds. I’m on the 401(k) committee here at the Fool; we have the Vanguard 500 among our choices, and I suspect a lot of employee money goes into the fund.

Why index funds? This brings us to my first favorite author: Princeton professor Burton Malkiel, author of the classic A Random Walk Down Wall Street, which was first published in 1973; the 10th edition will be available this November. In a recent interview on Fool.com, Malkiel was asked whether his advocacy of index funds has held up over the past 37 years. His response:

I believe that even more strongly than I did when I first wrote the book in 1973, when there were no index funds. What I have done with every subsequent edition is ask the question, was the advice right? Is it in fact the case that investors have done better with index funds? And every time I do it, including the data that I put together earlier this year, I find that two-thirds of active managers are beaten by a passive index and the one-third who beat the index in one year, are not the one-third who beat them in the next year.

In other words, there is very little persistence in terms of excess performance. Sure, in any period there will be people who have beaten the market, but it is not the same people from period to period. So I would say to you that I feel even more strongly today in that thesis than I did when I first wrote it almost 40 years ago.

Now, unlike many proponents of index investing, I don’t see stock-picking as evil. I own several individual stocks myself, and I know some of the authors you’ll meet in this post do as well. However, I agree with Dr. Malkiel when he told us:

[A]t least the core of every portfolio ought to be indexed. Now, fully understand that telling an investor that you can’t beat the market is like telling a 6-year-old that Santa Claus doesn’t exist. And anyone with a speculative temperament is going to say, “Look, I want to go and pick some of my own stocks.” And I think that is fine, and you can do it with much less risk if the core of your portfolio is indexed.

With all that said, and your belief in Santa Claus shaken, here are my recommendations for people you should read if you want to learn about asset allocation and portfolio construction.

John Bogle
Like Malkiel, Bogle advocated indexing before indexing was cool. He founded the Vanguard Group of mutual funds in 1974 (after getting fired from another job — talk about making the most of adversity!), and created the first index fund available to individual investors in 1975 (institutional index funds had been tried a few years earlier). We at The Motley Fool like Bogle so much, we named a room after him. After he gave a speech to our company a year or so ago, he received a standing ovation. To learn about investing from one of the smartest and most ethical people around, read Common Sense on Mutual Funds or The Little Book of Common Sense Investing. To learn a bit about Bogle’s life, his life lessons, and why he thinks today’s financial-services industry fails investors, read Enough.

Eric Tyson
Tyson pens many of the financial books in the For Dummies series. All of them are good. If you’re new to financial stuff in general, start with Personal Finance for Dummies. Also, I love the Guru Watch area of his website, which digs deep into the track records of financial pundits.

J.D.’s note: Oooh. I like that Guru Watch section of Tyson’s site. I just lost myself in there for twenty minutes when I should have been packing for Italy. If you buy into the advice from Howard Ruff or Glenn Beck or Peter Schiff, go read this.

William Bernstein
Bernstein’s The Four Pillars of Investing made J.D.’s list, and I’ll second the recommendation. If you’re looking for an investing expert who also holds a Ph.D. in chemistry and an M.D. and practiced neurology, Bernstein’s your man. The Investor’s Manifesto might be more accessible for those newer to investing. He’s also written excellent books on economic history. Plus, I have to say as a former English teacher and editor, Bernstein is an exquisite writer.

Richard Ferri
Ferri defends index investing like the Marine fighter pilot he once was. His All About Asset Allocation is an excellent primer on the pros and cons of various types of investments and how to put them all together. If you want to learn more about exchange-traded funds, check out The ETF Book. Also, Ferri’s firm, Portfolio Solutions, charges just about the lowest management fees (0.25% a year) you’ll find, though there is a $500-per-quarter minimum charge.

Larry Swedroe
Perhaps the only person who can match Rick Ferri’s zealotry about indexing is Larry Swedroe. He’s written or co-written a series of “The Only Guide…” books, the most recent being The Only Guide You’ll Ever Need for the Right Financial Plan. All the “Only Guide” books are worth reading (as are Swedroe’s other books), but the one that deserves special highlighting is The Only Guide to a Winning Bond Strategy You’ll Ever Need because there are so few good books out there about bonds. Swedroe also has an excellent blog on MoneyWatch.com.

Bill Schultheis
If you’re looking for simplicity in investing and a little more personality in the writing, Bill Schultheis is the author for you. The New Coffeehouse Investor is about as readable, entertaining, and inspiring as an investment book gets. [Last year, Schultheis shared a guest post at Get Rich Slowly: "How to build wealth, ignore Wall Street, and get on with your life".]

David Swensen
In the world of institutional investing, David Swensen is a rock star. He has managed Yale’s endowment for 25 years, with spectacular results. He’s written just one book for individual investors, Unconventional Success. The interesting thing about this book is, Swenson set out hoping to highlight the best mutual funds and fund families for the average schmo. However, the more research he did, the more he realized that almost all fund families suffer from an insurmountable conflict of interest: Their drive for profits encourages them to keep expenses high, which in the end hurts investor returns. Swensen concludes that he can only recommend two companies: Vanguard and TIAA-CREF.

J.D.’s note: Swensen’s Unconventional Success is one of the books I loaded on my iPad/Kindle for my trip to Europe. I hope to have a review for you when I return.

Roger Gibson
For a more technical book written for financial professionals, check out Roger Gibson’s Asset Allocation: Balancing Financial Risk. To get a taste of the subject matter, read “The Rewards of Multiple-Asset-Class Investing” [PDF] from the Journal of Financial Planning. While I have this book at the end of this list, Gibson’s work has probably had the biggest influence on me as a financial writer. Plus, he’s a really nice guy.

That’s it from me. Have a favorite I missed? Let us hear about it. Just don’t tell me that there’s no Santa Claus. I can take only so much.

This article is about Books, Investing  Wednesday, 6th October 2010 (by J.D. Roth)  

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Dinner with the Diehards: A Chat About Investing

It’s been a long time since I wrote about investing at Get Rich Slowly. I haven’t abandoned the subject, but my mind has been on other things. Besides, I’ve been practicing what I preach. I’ve invested my money in low-cost index funds (and some bonds), and I never make a trade. Because I know it pays to ignore financial news, I have. Earlier this week, I peeked at my portfolio for the first time since May. You know what? It’s doing just fine — even without me checking the balance every day.

Although I haven’t been writing about investing, I’ve continued to further my personal education on the subject. Whenever the mail brings the latest issue of the AAII Journal — the publication of the American Association of Individual Investors — I read it. (The latest issue just arrived today!) I’ve also been reading books about investing. In fact, I’ve just begun David Swensen’s highly-regarded Unconventional Success: A Fundamental Approach to Personal Investment; so far, it’s fantastic. Look for a review when I return from Europe.

And the other night, I had dinner with the Diehards.

Note: For those of you who aren’t familiar, Diehards (also called Bogleheads) are fans of indexed mutual funds — funds that track the movement of stock market indexes — as popularized by John Bogle, the founder and retired CEO of The Vanguard Group. These Diehards discuss investing in the Bogleheads investment forum. From my experience, they’re friendly, smart, and knowledgeable people.

I attended the first meeting of the Portland Diehards two years ago, but I’ve only managed to make it to one quarterly meeting since then. On Tuesday, I made it a priority to meet the group to talk about investing over Chinese food. There were six of us: J.D., Loren, Kris (not my Kris), Ron, Van, and Gary. We each brought different experience and perspectives to the table, which made for an interesting couple of hours talking about investing.

Spouses with different investment goals
As we ate snow-pea chicken and hot-and-sour soup, we asked questions and shared advice.

For example, I asked how you should invest when you have a different risk profile from your partner. I, for example, am fairly risk tolerant; I’m willing to take chances in expectation of higher returns in the future. My wife, on the other hand, is not. She’d rather sock money into low-risk investments that also produce low yields.

Van suggested that we split the difference. That is, we should take half of our investment capital and invest it the way I want, and take half to invest the way my wife wants. So, if I want 80% in stocks and 20% in bonds, but she wants 40% in stocks and 60% in bonds, then we’d average that to a 60-40 split in favor of stocks. (Which, co-incidentally, is how my money is invested right now!)

Valuation, risk, and return
The group spent some time discussing the concept of risk. Loren is near retirement, and seems tempted to chase investments that are currently offering high returns.

Gary — who offered lots of sage wisdom throughout the night — asked Loren, “What rate of return do you need on your investment to fund the rest of your life? That should determine where you put your money. If you need a 10% return on your money to fund your life, then you need to be in stocks. But if you only need 2%, why risk it?”

Gary also noted that it’s important to take valuations into account. That is, you shouldn’t just blindly buy a particular investment vehicle, whether that’s stocks, bonds, or commodities. Obviously, it’s impossible to know whether an investment is going to go up or down in the short term, but you can make a pretty good guess as to whether something is under- or over-valued in the long term.

As a prime example, gold would seem to be over-valued now, just as housing was five years ago. And a little less than two years ago, it was pretty clear that stocks were under-valued. Gary’s not saying you should chase whatever is tanking; he’s just saying that if you’ve been making regular investments in gold, for example, but the market seems high (like now), then maybe it makes sense to suspend your investments — or even to sell.

Tangent: The whole gold craze drives me nuts. Didn’t people learn anything from the housing and stock bubbles? What makes them think this is different? And the commercials on the radio? Puh-lease! Gold is high, so I should buy? Isn’t that the opposite of smart investing?

Do-it-yourself investing
I thought it was fascinating to listen to Van, who is trying to educate herself so that she can direct her own investments. She’s new to this, and trying to learn as much as possible so that she can make her own decisions. “None of the financial advisors I’ve talked to really knows what’s going on either, so I might as well do it myself,” she says. She figures that she’d rather make her own mistakes than pay somebody else to make mistakes for her. So, she’s educating herself by reading books and coming to meetings like this Bogleheads gathering.

All of us agreed with her, I think, which probably isn’t surprising. Loren said, “No matter who you talk to for advice, never forget that you are the boss of your own money.” I agree with this 100%. In fact, in May I published a guest post at Boing Boing about the importance of DIY finance. (No need to look it up; I’ll be posting it here at GRS in a few weeks.)

Picking stocks — or not
Van is especially interested in learning how to pick stocks. Ron, the chief Boglehead in our group, cautioned Van, saying that from his experience, the default position should be to start with (and perhaps stick with) index funds. His argument is that if you’re going to do anything other than:

Invest in the entire marketWith the lowest possible feesWith the most reputable dealer

Then you need to be able to state your reasons for doing so. You might have good reasons for not sticking with this default, but if you don’t, and if you can’t state them, then why take chances.

Note: For the record, the default position would lead you to buying index funds through Vanguard. I vary from the default in that I buy index funds from Fidelity. Why? Because Vanguard doesn’t offer the type of retirement account I need for my business. I started there first, but they sent me to Fidelity.

Once again, Gary shared the wisdom of his experience. “I started investing by picking stocks myself,” he told Van. “When that didn’t work, I went to a full-service broker and paid him $400 a trade to pick stocks for me. That didn’t work either — and it cost more — so I went to a discount broker to get my fees down. But I still couldn’t match index funds. So, I gave up. I’d rather spend my time playing golf than picking stocks. Now I’m in index funds, in ETFs.”

Shared wisdom
We talked about a few other topics, as well, but this post is already running long. I’ll skip the bits about certificates of deposit, investing in gold, and handling a windfall. But I do want to pass along a couple of quotes I liked:

Meetings like this are invaluable. They’re a chance to exchange ideas with fellow investors, and to profit from their success and mistakes. I highly recommend finding a similar group in your area. There’s no need to be intimidated. It’s fine to show up and just listen if you feel like you don’t have anything to contribute. I feel lost a lot of the time, but the more often I do things like this, the less lost I become.

This may be because I take notes. I filled my ever-present notebook with four pages of scribbles, including books to borrow from the library, websites to visit, and concepts to consider. (And, of course, writing this article helps to reinforce much of what I learned.) I already have December’s meeting on my calendar. I’ll be back for more Chinese food and more convesation with the Diehards.

This article is about Interviews, Investing, Real-Life  Friday, 17th September 2010 (by J.D. Roth)  

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