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Fancy Your Chances?

Adam M. Grossman  |  April 12, 2018

ANYONE WHO FOLLOWS my work knows I am a staunch advocate of index funds and believe that stock-picking is a difficult road. That said, there are three undeniable facts about picking stocks:

  • All of the great fortunes—Rockefeller, Carnegie, Gates, Buffett—were built by owning one stock: a very good one but, nonetheless, just one.
  • There are rare investors who are able to outperform the market averages by picking the right stocks. It’s hard, but it can be done.
  • Stock-picking can be fun.

While I don’t recommend stock-picking to anyone—since the data clearly show the odds are against you—I do recognize the appeal. If you want to go down that road, preferably with a small portion of your portfolio, here are five books I would recommend as a curriculum of sorts:

The Intelligent Investor by Ben Graham. This book was written in the 1940s by Ben Graham, who was Warren Buffett’s teacher, employer and mentor. Buffett often cites this book as the one that got him really interested in investing. It can be dense, but I’d recommend starting with two chapters: “The Investor and Market Fluctuations” and “Margin of Safety as the Central Concept of Investment.”

Common Stocks and Uncommon Profits by Phil Fisher. Most people don’t know much about Fisher, but he was a giant in his time. Some of his examples are dated—for example, he talks about color TV as a new technology—but the principles still apply. Unlike Ben Graham, Fisher was a growth investor, so I would read this together with The Intelligent Investor to clearly understand the difference between growth and value investing.

One Up on Wall Street by Peter Lynch. As most people know, Lynch had an outstanding track record running a fund at Fidelity Investments from 1977 to 1990. This book is both entertaining and incredibly informative. Like Fisher, Lynch was a growth investor and coined the term “ten bagger.” He didn’t get bogged down in Graham’s valuation discipline. Instead, he hunted for good companies that looked like they were going to get much bigger. And it worked very well.

The Little Book That Beats the Market by Joel Greenblatt. The author ran a hedge fund that for years racked up staggering returns, easily offsetting his fees. He was in the tradition of Graham, and he provides in this book a simple formula for identifying value stocks.

The Most Important Thing by Howard Marks. The author is chairman of an investment firm on the West Coast, but his commentaries have a wide audience. He writes excellent periodic memos, which you can subscribe to through his website. This book is a compilation of some of his best pieces. Marks focuses a lot on the emotional side of investing and really makes you think.

Arguably, the real father of investment analysis—and specifically, the notion of intrinsic value—was not Ben Graham, but a fellow named John Burr Williams. His book is 600 pages and dense, so I don’t recommend it. But I quote from it and cite the central ideas in this article I wrote on the importance of intrinsic value.

Finally, if you like podcasts, I would recommend “Invest Like the Best,” hosted by Patrick O’Shaughnessy. He interviews investors of all stripes. In college, he was a philosophy major and it shows: The discussions are always thoughtful and informative.

I feel obliged to repeat that, if you choose to pick stocks, the data and the odds are against you. Feeling good about your chances? As a reality check, see the work of University of California finance professors Brad Barber and Terrance Odean, who for years have studied the results of individual investors.

Full disclosure: If you purchase the above books by clicking through to Amazon using the embedded links, HumbleDollar will earn a small fee. 

Adam M. Grossman’s previous blogs include Plan, Prioritize, ProceedFree Lunch and Face Plant. 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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