Adam M. Grossman | November 28, 2017
I AM AMAZED our schools don’t require kids to learn three important life skills: the basics of nutrition, a thing or two about parenting, and how to handle money. I’m no expert on nutrition and my parenting is a work in progress. But I do have a background in personal finance: When folks ask me what to read to deepen their financial knowledge, I have a ready list of titles.
Recently, however, someone asked me for a more advanced list—a “201” level reading list, so to speak. In response, I drew up this list of 11 favorites:
- If you want your portfolio to grow over time, you need to own stocks. Intuitively, we all know this. But to see the supporting data, read Jeremy Siegel’s Stocks for the Long Run. It’s a long book. But you don’t need to read beyond the chart on page six to appreciate Siegel’s central point: For more than 200 years, stocks have delivered far better returns than any other asset class.
- While most investors accept this fact about stocks, an adjacent debate rages fiercely: Is it possible to do even better than the overall stock market averages? In Winning the Loser’s Game, Charley Ellis argues that, while this used to be possible, it no longer is. The reason: competition. As Ellis puts it, “The problem is not that investment research is not done well. The problem is that research is done very well by many.” Read this book before you invest a dollar in the stock market.
- In Fooled by Randomness, Nassim Nicholas Taleb provides another reason it’s so hard to beat the market: the frustrating unpredictability of the market. Taleb explains that financial markets, unlike the physical sciences, are hardly scientific. First, they are comprised of people, who are by nature emotional. In addition, stocks are influenced by far too many variables to be predictable in any scientific way. Taleb has his critics—but I think that’s because he is so accurate in his observations.
- While it’s hard to pick individual stocks that will reliably beat the market, it turns out that there’s another approach that has indeed worked: In The Little Book That Beats the Market, retired hedge fund manager Joel Greenblatt points out that there are types of stocks that historically have exhibited demonstrable outperformance. His recommendation: Build a diversified portfolio of these kinds of stocks, and you might have a shot at outperformance.
- If you want to understand more of the history behind this debate about beating the market, check out Peter Bernstein’s Capital Ideas, a book that focuses as much on the personalities behind the theories as it does on the theories themselves. Among them: Alfred Cowles, who in the 1930s was arguably the first person to begin systematically studying whether stock-pickers could beat the market. His conclusion formulated more than 80 years ago: “It is doubtful.”
- If you like Capital Ideas, you’ll love David Dreman’s Contrarian Investment Strategies: The Psychological Edge. In a lot of ways, he picks up where Bernstein leaves off, providing a solid introduction to the psychological biases that make investing such a maddening challenge. Dreman has been writing about behavioral finance since the late 1970s and his work is as entertaining as it is informative.
- A close cousin of Dreman’s work is More Than You Know by Michael Mauboussin. One of the most thoughtful people on Wall Street, Mauboussin offers a deep dive into the intersection of markets, history, psychology and statistics. It’s an informative and enjoyable read, incorporating examples ranging from chess to horse racing to cave paintings.
- The debate about beating the market is interesting and important. But it’s equally important to understand the debate that surrounds the subject of risk—including the question of how to define it. To delve into this topic, there is no better guide than another book by the late Peter Bernstein, Against the Gods.
- Wall Street has received quite a bit of criticism since its 2008 meltdown. But it doesn’t seem like a whole lot has changed. In part, that’s because the inner workings of the finance industry are so complicated. Enter John Kay’s Other People’s Money, which does a masterful job helping readers understand how and why the sausage is made, and what we can do about it.
- As a financial planner, I’ve noticed that oftentimes people underestimate the value of Social Security. While the system isn’t perfect, all you need to do is speak with a few retirees to appreciate the peace of mind that comes with a guaranteed monthly check. But to maximize your benefits, you need to understand your options. For that, check out Get What’s Yours by Laurence Kotlikoff, Philip Moeller and Paul Solman.
- The final book on my list is one that has received, in my view, undue criticism: The Millionaire Next Door by Thomas Stanley and William Danko. The basic premise is that ordinary people living on ordinary incomes can become millionaires if they manage their household budgets smartly. In other words, drive a dull car and end up with an exciting bank balance. Critics have attacked the book for its imperfect statistical methods. Still, I think it’s important to grasp the book’s fundamental message: The best investment strategies in the world can’t help you if your expenses are preventing you from saving sufficiently.
Full disclosure: If you purchase any of the above books by clicking on the links provided, HumbleDollar earns a small referral fee from Amazon.
Adam M. Grossman’s previous blogs include Ten Financial Principles and Right but Wrong. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.
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