Back to School
Adam M. Grossman | Aug 29, 2021
A WHILE BACK, I assembled two personal finance reading lists—what I called 101 and 201 level titles. But time doesn’t stand still. Below is a list of newer books, along with a few classics that didn’t fit on the earlier lists. They’re organized into three categories: retirement planning, investing and behavioral finance.
Retirement Planning
- Can I Retire? by Mike Piper. There’s no shortage of retirement books. But if you want a straightforward guide that covers the most critical topics in an easy-to-read format, there’s no better starting point than this. The author is a well-known CPA, writer and speaker. While the book is short—just 100 pages—it isn’t short on valuable strategies for retirees. It includes, for example, sections on Roth conversions, Social Security and even annuities—“the good kind,” in Piper’s words.
- The New Retirement Savings Time Bomb by Ed Slott. If Can I Retire is like a field guide to retirement, this book is more like an encyclopedia. Will you read it cover to cover? It’s unlikely. But if your financial situation involves even the least bit of complexity, this is a book you’ll definitely want on your shelf.
Investing
- The Innovator’s Dilemma by Clayton Christensen. Why do I recommend index funds over individual stocks? There are many reasons, but this book addresses the one that’s maybe the most counterintuitive: It explains how companies that look unstoppable—like Kodak and Sears—can descend into bankruptcy after years of industry dominance. But this isn’t a history book. It’s a framework for understanding the lifecycle of businesses. For investors, that’s a critical idea to grasp, especially if you own shares in any of today’s seemingly unstoppable companies.
- How a Second Grader Beats Wall Street by Allan Roth. As its title suggests, the premise of this book is that you don’t need an advanced degree to be a successful investor. To prove his point, investment advisor Allan Roth worked with his eight-year-old son, Kevin, to build a portfolio. It wasn’t complicated—just three funds. But lo and behold, it did admirably well. That was precisely Roth’s point. His view, which I share, is that Wall Street tends to overcomplicate investments. And yet, if you take the opposite approach and favor simplicity, you’ll often end up with better results.
- The Automatic Millionaire by David Bach. If you’ve heard the term “the latte factor,” this is where it comes from. But because of it, the author has received his fair share of criticism. If you aren’t familiar with it, the latte factor suggests that all you need to do to become a millionaire is to cut out trips to Starbucks and instead save an extra $5 a day. This idea has been criticized because it sounds too simple. The reality, though, is that Bach’s math is correct. Sure, he does assume 10% annual returns—consistent with an all-stock portfolio. Maybe that’s an aggressive assumption. But his overall point is valid: No matter what stage you’re at in your financial life—even if money is tight—you can afford to save at least a few dollars. If you do that for enough years, you’ll make more progress than you might have guessed.
- America’s Bank by Roger Lowenstein. During the Great Depression, stocks fell about 90%. In the years since, we haven’t seen a drop nearly that bad. But it’s fair to ask whether it could happen again. Some commentators argue that it’s possible. Or rather, they see no reason it couldn’t happen. But others point to the Federal Reserve and argue that today our central bank would step in—much like it did last year—so things couldn’t get as bad as they did during the Depression. No one can say for sure, but it’s a good question to consider. To better understand the Fed and its origins, this book is an excellent starting point.
- My final entry in this category is a group of four titles. What do they have in common? All chronicle instances of outstanding investment success by active managers. The Greatest Trade Ever by Gregory Zuckerman tells the story of John Paulson, the hedge fund manager who successfully shorted subprime mortgage bonds in the 2000s. The Man Who Solved the Market, also by Zuckerman, traces the history of James Simons and his quantitative hedge fund firm, Renaissance Technologies. You Can Be a Stock Market Genius by Joel Greenblatt describes the off-the-beaten-path techniques this hedge fund manager used to generate outsized returns at his firm, Gotham Capital. And in Margin of Safety, hedge fund manager Seth Klarman describes his approach to value investing. (Margin of Safety is out of print and often sold for absurd prices, but can be found online as a free PDF.)
Why am I recommending these books about hedge funds, when they’re precisely the kind of high-cost, actively managed investments I advise against? These stories are important to read, in my opinion, because they illustrate just how hard it is to find extraordinary active managers. I don’t doubt that you can make a fortune in an actively managed fund, but such skill is exceedingly rare. That makes it awfully difficult for individual investors to identify these funds. That’s why I recommend the alternative, which is to avoid active management altogether.
Behavioral Finance
- Noise by Daniel Kahneman, Olivier Sibony and Cass Sunstein. Thanks in large part to Kahneman’s work, most investors are familiar with the idea of behavioral biases and how they can affect investment decisions. This book breaks new ground, describing another type of flaw in human judgment: The authors call it noise. The difference between a bias and noise is that biases cause us to make the same error consistently. For example, recency bias causes investors to consistently put more weight on events that have occurred most recently.
Meanwhile, noise causes us to make errors randomly. The authors found noise among experts in a variety of professions, ranging from loan officers to insurance adjusters to cardiac surgeons. In all these cases, experts who should have reached the same conclusion on seemingly objective questions ended up frequently disagreeing with each other. On top of that, the authors found that people’s judgments are often inconsistent with their own earlier judgments. As with other decision-making pitfalls, there’s no simple fix, though the authors do offer some suggestions. But simply being aware of this category of error can help you avoid it.
- Narrative Economics by Robert Shiller. Investing, as the saying goes, is simple but not easy. One reason: It’s highly susceptible to storytelling. This applies both when the market is riding high and when it’s doing poorly. Veteran investment manager Jeremy Grantham put it well: In March 2009, when everything looked bleak, he urged investors to avoid doomsayers, who “will start to predict the end of the world, armed with plenty of terrifying and accurate data….” That’s precisely the challenge for investors: With so much data available, any informed person could construct virtually any argument—either for or against—virtually any investment. This book is somewhat academic and not an easy read, but it’s an important idea.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.
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I am somewhat surprised that the book “A Random Walk Down Wall Street” by Burton Malkiel did not make any of your lists. I consider this to be one of the best best books I ever read. I did not read it until I was in my 40s; I sure wish I had read it when I was in my 20s. I have been giving a copy to my kids as a graduation present — they have no excuse! (I have read several of the books on your list — a really good compilation.) I was happy to see “Against the Gods” made the cut; that is an excellent book that does not get mentioned often.
Thanks for the suggestions.
Great list Adam. I just started Noise, and thinking America’s Bank is next. Thanks
Have to say, linking The Innovator’s Dilemma to the concept of buying individual stocks is a smart and profound take.
Thank you. In a lot of ways, I felt that was the most important book I read in business school.
I grew up in Boston. In the 70s and 80s, the dominant companies were companies like Wang and Prime and Lotus. I was always amazed at how companies like that could just disappear. More recently, we saw it with BlackBerry. The Innovator’s Dilemma does the best job, in my opinion, explaining how that can happen.