UN REGALO PER I NOSTRI AMICI NON ITALIANI... by Finanza World : The Best Books on Learning How to Invest di Francesco Carla finanzaworld.it/…/the-best-books-on-learning-how… I have realised that one of the most frequent questions sent to me at [email protected] throughout my years at FinanzaWorld has been: What are the best books on intelligent investing? Before anything else, I need to say one thing: there is no such thing as a perfect book, even in this field. But there are many books covering the fundamental concepts and intuitions that need to be patiently gathered and assembled, in order to develop a sound understanding of good investment practices. This is the exact criterion I’ll be using. I will describe the fundamental concepts that I have found in each of my favourite books, which use different methods for teaching intelligent investment. The Intelligent Investor My first stop is the mother of all investment books: The Intelligent Investor by Ben Graham (first edition: 1949). Ben Graham taught Warren Buffett and many other investors active after the Second World War. There are three key ideas in this book: two correct and one mistaken. The two correct ideas are revolutionary and absolutely crucial: They are: 1) Always think about the business that a security represents; never think about how it’s moving on the market (Mr Market). Mr Market just represents the place where stocks are technically exchanged; it cannot really judge what a business is worth. Actually, Mr Market suffers from bipolar disorder - sometimes it’s euphoric and sometimes it’s depressed, for no apparent reason. 2) Price is what you pay, value is what you get: in other words, the price of an investment is what you pay for it, while value is what you get from it. This means that the ability to make an accurate valuation of an investment is the key to intelligent investment. In fact, this is what we do at FinanzaWorld with my screening and analysis method, known by all as the Frullatore” [Blender]. The mistaken idea is: 3) Buy only with a margin of safety: that is, only invest by buying a security or a business at a price discounted from the value of its assets. It would be very risky to follow this hint, as you almost always end up investing in second- or third-level companies. In fact Charlie Munger, Warren Buffett’s famous partner, was someone who understood very early on that you should instead buy a good company at a fair price. This is the right concept. Graham deserves a lot of credit in the history of investment. His books (another important one is Security Analysis, written together with Dodd in 1934) are packed with humour and intelligence, and you can clearly sense the thoroughness of his preparation and his intellectual curiosity. It was he who first understood that the best investors are not mathematicians but true philosophers, deeply learned men, enthusiastic and with an insatiable curiosity for life and the world. They are quite literally (human) learning machines. Thales had already proved this to the ancient Greeks, in his famous story of the olive presses of Miletus: en.wikipedia.org/wiki/Thales#Business Common Stocks and Uncommon Profits Its no coincidence that another correct concept, contained in another fundamental book on good investing methods, is based on the third, mistaken concept in Graham’s The Intelligent Investor. The title of the book, published in 1958 and written by Philip Fisher - Common Stocks and Uncommon Profits - is self explanatory and very apt. There are at least three correct concepts that you can get from this book: 1. If managers are not honest (or smart), do not invest; 2. Don’t diversify too little, but not too much either; 3. Don’t focus on quarterly and short-term earnings. Finally: in investments, never follow the crowd. Fisher lived for nearly a century (1907-2004) and his book has been constantly in print for more than 50 years. It doesnt have Grahams humour, but in some ways the practical suggestions it contains are even more useful. Where Are the Customers Yachts? Another very interesting book is Where Are the Customers Yachts? by Fred Schwed, Jr. The first edition dates from 1940, the second from 1955. This book contains two important concepts: First: nobody ever gets rich by gambling on the stock exchange; Second: the results of 90% of traders and stock brokers are worse than the market indices. As Buffett was to say some years later: Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. Here is another example of hard-hitting humour against technical analysis and the like: There have always been a considerable number of pathetic people who busy themselves examining the last thousand numbers which have appeared on a roulette wheel, in search of some repeating pattern. Sadly enough, they have usually found it. Reminiscences of a Stock Operator Another classic book is the semi-fictional Reminiscences of a Stock Operator (1923) by Edwin Lefèvre, a sort of fictional biography of Jesse Lauriston Livermore, a Wall Street trader who worked before the 1929 crisis. Livermore had direct experience of many of the financial market traps and the hard lesson he learned is summarised in the following sentence, often wrongly ascribed to Buffett: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! This is our concept of the “marathon” in embryonic form. Another sentence in this book should be written in stone: A stock operator has to fight a lot expensive enemies within himself. This book is just as fresh and amusing a century after it was first published and it is still in print. -One up on Wall Street/Beating the Street There are two more recent books containing some good concepts, which I read between the late 80s and early 90s. They were written in 1988 and 1992 by one of the most famous fund managers of the time, Peter Lynch. Their titles are One up on Wall Street and Beating the Street. Lynch is a typical representative of the golden age of US managed hedge funds, of which he had an insider’s knowledge, having managed the Fidelity Magellan Fund from 1977 to 1990. He certainly managed it successfully. What is the best concept you can find in his books? You already know it well: Invest in what you know. It’s no accident that this concept appears, in a slightly different form, in the 5 Principles of FinanzaWorlds Finanza Democratica: Invest only in what you know and understand. A Random Walk down Wall Street A book published in 1973 by Burton Malkiel, an economist from Princeton, popularises the theory of efficient markets. I am talking about A Random Walk down Wall Street. There are two main concepts in this book, one correct and one mistaken: The correct one is: It is statistically very unlikely that a managed hedge fund can do better than a passive hedge fund. I completely agree with this concept, especially if we consider the difference in costs between these two kinds of hedge funds. The mistaken one is: Markets are always efficient, so it is impossible to do better than the markets in the long run. Markets are often efficient, but not always. For this reason, they can be beaten by using the right techniques, as we have proved in the course of many years at FinanzaWorld and also, decades on, by the article The Superinvestors of Graham & Doddsville: en.wikipedia.org/…/The_Superinvestors_of_Graham-and-… Can the markets be beaten? Warren Buffett himself clashed directly with Malkiel in a lecture given at Columbia University in 1984, and it was no accident that this took place at that university. For it was there that Graham and Dodds had, for years, taught their famous course on Value Investing, at which the best student turned out to be the “Oracle of Omaha”. Malkiel has never been able to advance empirical arguments capable of rebutting Warren Buffetts more practical ones, which we shall look at shortly. -Warren Buffetts letters to Berkshire shareholders As far as Buffett is concerned, one of the most amusing and informative books for intelligent (and good) investing is actually the whole series of letters to Berkshire Hathaway shareholders, written by Warren Buffet and edited by the Fortune journalist, Carol Loomis: berkshirehathaway/letters/letters.html This incredible treasure trove contains an absolutely huge amount of good ideas on business and investment, and indeed on life. The letters cover thousands of pages, in which Buffett uses humour worthy of Groucho Marx and the precision of Pascal to recount his thoughts on investment, entrepreneurship, money, management, human motivation, investor psychology (right and wrong), the structure of financial statements, business figures, business in general, life, philanthropy, other people... The list goes on. It’s extremely unlikely that any serious investment and business professional has not spent time reading and re-reading these crucial letters thoroughly and comprehensively. That would be like a Christian who’d never read the Gospels and Saint Paul or a communist who hadn’t read Marxs Das Kapital. After all, we are talking here of someone that has made his and other peoples capital grow (since 1965) at an average annual rate close to 20%, although, of course, the real golden years ended in the late 90s because of a series of key factors. The first of these was Berkshires size, but there were other reasons too. Buffett has never written a book on investment techniques and strategies, strictly speaking. However, many others have tried to cover this subject, in more than 50 books, in which they have dissected Warren Buffets activity from many points of view. Just put the word Buffett into Amazon and you will see. Its a jungle, in which you will find a huge number of completely useless and often harmful books. Instead, here are the ones I find interesting: The Essays of Warren Buffett: Lessons for Investors and Managers by L. Cunningham. This is the best book for understanding Buffetts letters to shareholders. Cunningham organises the huge quantity of Buffett material, dividing it into subjects and themes, a very useful endeavour, especially for non-experts. Warren Buffett and the Interpretation of Financial Statements, Buffettology and The Tao of Warren Buffett by Mary Buffett (Warren Buffetts former daughter-in-law) and David Clark. These are three very useful books, by what could be considered insiders, since Mary Buffett was fairly close to the “Oracle” for some years, but they dont add much to what is already in the letters. To get a better understanding of how Warren Buffetts thinking was formed and developed, you can start by reading the two following huge biographies: The Snowball: Warren Buffett and the Business of Life by Alice Schroeder and Buffett: The Biography by Roger Lowenstein. Other guys read Playboy, I read annual reports. In the 70s, Americans used to read Playboy. Warren Buffett used to read annual reports, which are the main source of information on good investing. Annual reports are mainly written in the language of numbers used in financial reports, a language that should be mastered by any serious investment professional wanting to analyse thousands of listed companies, in order to find the gems amid the trash. Reading Financial Reports One of the best books I have ever read on this important subject is, without doubt Reading Financial Reports by Lita Epstein. Obviously, this refers to the situation in the US, but it is extremely useful in general. After all, as FinanzaWorld readers know well, Wall Street is in the Champions League of investment. Doing well over there is very important for an Intelligent Investor and for anyone serious about investing well. What I Learned Losing a Million Dollars For those of you familiar with my Principles of Investment, who know how important the Carla Method has been for portfolio management over the years, including emotional and behavioural aspects, I would suggest the following book: What I Learned Losing a Million Dollars by Jim Paul and Brendan Moynihan (1994). The main concept in this book is simple: if you are not yet convinced that it is much better to be a marathon investor than a hundred-meter trader, then you must read it and youll definitely agree with me. Forever. Jim Paul, one of the Black Swan’s really unlucky examples, died in the 9/11 Twin Towers incident in 2001. The Black Swan The Black Swan (2007) is a book by the philosopher-trader Nassim Nicholas Taleb. Obviously, this is not specifically about investment, but you can learn a lot about the concept of risk and other matters important to professionals in the field and many others. The most important concept of the book is very simple: be careful not to jump to conclusions when the premises (and myths) may well be uncertain and unproven. The black swan may be lurking and do a lot of damage, like the bursting of the dot-com and real estate bubbles. A typical example is the infamous Modern Portfolio Theory (MPT), which when used for real in financial practice led to the LCTM disaster. The hedge fund Long-Term Capital Management (LCTM) had recruited to its board of directors Merton and Scholes, joint Nobel prize-winners for MPT. But a black swan can come between theory and practice. Finanza Democratica You can find my (anti-Black Swan) Method, the Frullatore [Blender] and the other main principles of FinanzaWorld (FW) in my book titled Finanza Democratica (Democratic Finance) and in the video streaming version, in my three-level course called Investi Personalmente (Invest by Yourself): finanzaworld.it/…/13/master-investi-personalmente (in Italian) Some concepts that I (and everyone at FW) consider essential are: 1. Never spend too much on investments. If you are spending 2% a year on commissions, you’re spending too much. 2. Never invest in things that you dont understand and dont know about without guidance from a really independent adviser. 3. Never invest for just a few months or a few years. You should invest for the long term: 10, 15, 20 or 30 years. You are running a marathon and not a 100-metre race. 4. Never break the first three rules. If you break all three you will be in really serious trouble. If you break two of them you will be in a lot of trouble. And even if you break just one rule, you will still be in trouble. There are many other useful, interesting and important books: biographies of great businessmen and investors such as Gerstner of IBM or Walton of WalMart; books on the psychology of investment and behavioural finance; books on management and the history of the financial markets; books on current, past and maybe future financial tools; books like The (Mis)Behaviour of Markets: A Fractal View of Risk, Ruin, and Reward by Benoit Mandelbroot. But I could end up writing a book about the best books on learning to invest well. And maybe sooner or later... In the meantime, please write to [email protected] and let me know if you read any of these books and what you think about them. And maybe let me know which concepts you liked most. Best regards to all of you, Francesco Carla Who We Are FinanzaWorld is a leading provider of financial consulting services. The company evolved from an idea by Francesco Carla, with the aim of joining finance and the new technologies of interactive communication in order to create a community of financially informed users. Today FinanzaWorld is one of the most important websites of financial information in Italy, with a network of more than 300,000 readers of the daily newsletters, among which the famous newsletter by Francesco Carla, which has more than 250,000 subscribers that include some of the most important thought leaders in the fields of finance and technology. Since 1999, FinanzaWorld has introduced to the Italian public such concepts as democratic finance and intelligent investing. Francesco Carla is an independent economic journalist and financial analyst. He has taught at the Università La Sapienza in Rome from 1996 to 2002, and at the Università IULM in Milan from 2002 to 2009. In 1999 he founded FinanzaWorld, the company committed to global financial education and communication from which he developed the concept of democratic finance. From 2000 to 2004 he wrote and directed the financial TV program Netstocks on Rai 3 and Rai News 24. During his career as a journalist he wrote for many Italian magazines and newspapers, like Panorama, LEspresso, Epoca, La Gazzetta dello Sport, Corriere della Sera and Vanity Fair. He also published a series of books on financial investments: Investire su Internet (with L. de Biase, 1999), Trading online (2000), Simulmondo (2001), Italia-Google (2006), Guida alla grande crisi del 2008 (2008) and Finanza democratica (2009). Prof. Francesco Carla also appears frequently in the media (Radio Capital, Radio Vaticana, Radio Radicale, Class/CNBC, Rai) and has been a featured speaker across Italy and Europe. Francesco Carla serves as president of Finanza World.
Posted on: Tue, 23 Sep 2014 17:49:33 +0000
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