Investment book reviews

Investment books can represent a great value on money. A typical book price equals about the cost of stock trade commission which is a great bargain. The biggest problem with investment books is that most of them don’t really contain any useful information beyond the “invest in an index to keep the cost low” mantra. Some books are even worse with a populistic “formula” that is supposed to beat the market. The problem with these books is not the cost of buying them but the time wasted reading through them and not learning anything useful.

Here are a few books that actually teach valuable lessons on investing:

What Works on Wall Street: A Guide to the Best-Performing Investment Strategies of All Time 
by James P. O'Shaughnessy

This book investigates simple investing strategies by back testing them to actual stock market data since 1960’s. The methods in the book are sound. There are several interesting strategies that can be used as a basis for stock selection. Relevant to this web-site, the author finds that by investing in large companies with high dividend yield constantly beats index such as SP500. Other findings: Value (low price to sales or price to earnings) beats growth (high growth with high price to earnings) over long term. Momentum works over intermediate time frame (less that year).

This book is sometimes criticized as a back testing exercise with little value for future investing decisions. The argument goes as follows: The strategy may have worked over the last 50 years but it may not work in the future. This reviewer is willing to invest in dividends stocks even if they won’t outperform the market in the future. But if the history of investing is of any guidance, dividend stocks might just back a positive surprise!


How to Read a Financial Report: Wringing Vital Signs Out of the Numbers
John A. Tracy

This book has the clearest explanation ever written of relationship between income statement, balance sheet, and cash flow statement and the book is worth the read if any of these seem fuzzy.  And unless you have spend tens of hours studying the theory behind these statements, you will learn a great deal from this book. For example, this reviewer finally fully understood the meaning of the “Stockholders' equity” and the relationship (and the difference) between the operating profit and the cash flow from operating activities. The writing is clear and easy to follow. No false advertisement here: it is a book on financial reports so this is not something to read for fun but it is the least painful book on this topic.

The authors comment on whether understanding financial statements makes you a better investor is interesting: He says no, it is hard to beat the market, but at least you know what you get into. This reviewer agrees: I sleep better when I understand what kind of return I can expect from my investment and whether the business is in sound footing or about to bankrupt on excessive dead. Beating the index is only the secondary goal.

Against the Gods: The Remarkable Story of Risk
by Peter L. Bernstein

Against the Gods is not exactly an investing book but a book a book how humanity understands and model risks. The last chapters that summarize the behavioral finance are a must read for an aspiring investor: Investor’s biggest enemy is not the market but the irrational behavior of the investor himself. This book helps the reader avoid common irrationalities in investing. A memorable quote: An investor should take the minimum risk consistent with the desired rate of return. A lot of wisdom in one sentence! First decide the rate of return (discount rate), then find the safest investment that can give this yield.

The Single Best Investment: Creating Wealth with Dividend Growth
by Lowell Miller

This single best investment (SBI) summarizes the KISS investment thesis as

Large dividend yield + Large growth = Large total return

The book argues this point well and the relative importance of large yield over growth is noted. While excellent on narrative, the book lacks rigor in analysis. Instead, SBI presents “investment rules” that are combined with research on the company “story” to make investment decisions.

SBI was published in 2006 and it is now possible to back test the methodology. Below is a table (made using Google portfolio tracking spreadsheet) of the SBI portfolio in 2005. Since the portfolio is heavy on bank stocks at the eve of the sub-prime fiasco, one might expect a bad outcome; however, despite the horrible performance of the banks, the portfolio outperformed SP500 by a significant margin. While this is worth something, the SBI portfolio actually lagged Dow Jones Industrial Average over the same period (DJIA does not include banks!). All in all, the exercise shows the importance of diversification.

SBI portfolio performance compared to SP500