I have read a lot of books about the corporate world (Blue Ocean Strategy, Execution, Seven Habits, etc.) and personal investment (too many to list) and, to be honest, have walked away unimpressed. It seems like every few months some new, faddish “flavor of the week” pops up and somebody writes a book about it. However, most of the time what you get is re-hashed fundamentals with new examples or laughable “insights” that are not that insightful (example: Apple is good at design so your company should be good at design, too). Wow. Thanks.
When it comes to investing, I can promise you there are only three books you need to read. That’s it. No strings attached. Each offers incredible insight and value and, if you read and apply the principles, I can guarantee you will be better off because of it. By “better off” I mean happier, wealthier, and more successful. So, without further ado, the only three books you ever need to read on personal finance:
1. The Intelligent Investor by Benjamin Graham
This is the grand daddy of all investment books. Benjamin Graham (literally) wrote the book on how to invest in the stock market. A young Warren Buffett was so impressed that he enrolled at Columbia University (after being turned down by Harvard Business School) just so he could take classes taught by Benjamin Graham. Buffett applied Graham’s principles, and is currently the world’s second wealthiest man. Even though this book was written decades ago, the insights and advice are still relevant today. I recommend you read the latest edition edited by Jason Zwieg who does a great job of testing Benjamin Graham’s theories using real life data from the bear (down) markets of 1999-2000 and 2007 to today.
Although this book is a bit of a slog (it was written as a textbook) the overall takeaways should serve as the foundation of your investment strategy:
- Investing vs. Speculating. Very early on, Graham makes clear the difference between investing (deploying your money with minimal risk to create a safe, stable return) and speculating (that is, gambling–high risk, minimal reward). INVESTING IS THE KEY TO WEALTH.
This concept is so important, I will restate it again so that it sinks in: INVESTING is the key to WEALTH. Speculating (making a quick buck) is GAMBLING and DOESN’T WORK. Graham is smart enough to realize that the allure of gambling (ie. Making a quick buck) is endemic to human nature, so he offers great advice: If you MUST speculate, limit you speculation to NO MORE than 1% of your portfolio. Invest the other 99%.
- Intrinsic Value and Margin of Safety. Graham firmly believed that you could calculate the “true” value of an investment (the net present value of the future cash flows) and that over time, the “true” value will be reflected in the price. What does this mean? In my mind, it means “buy low, sell high” but do so as safely as possible. Graham even provides some helpful rules on what to look for:
- Only invest in companies who pay a dividend. A dividend is a payment of cash to shareholders. Companies tend to pay dividends only when a stable cash flow is available. Stocks go up in value and stocks go down in value…dividends pay you to wait. If you invest in stocks with a healthy dividend and low P/E (price to earnings ratio), you “get paid to wait” until the market recognizes the value of the stock (more on this below).
- Value companies on TRAILING earnings. A lot of people invest based on “future cash flows” where “future” is based on Wall Street analyst predictions. Guess what? Nobody can tell the future–not even (overpaid) Wall Street analysts.
- Invest in Stable Companies with a (trailing) Price to Earnings Ratio of 10 or less. If you are new to investing, the Price to Earnings Ratio (or P/E ratio) compares the price of a stock to the earnings per share. Graham, as the ultimate value investor, believed you should ONLY invest in strong companies when their P/E ratio was 10 or less. In the age of Amazon (current P/E of 186) and other high flying stocks, this seems crazy. It is NOT, I can assure you. Apple shares were trading at a P/E of 10 about 6 months ago. I should know–I bought a lot of them and made a lot of money. In fact, my investing approach (heavily influenced by Graham) led me to buy Microsoft (up 45+%), Cisco (up 35+%) and American Express (up 46+%) in the last 12 months.
- Margin of Safety. Graham is credited as the inventor of the concept “Margin of Safety” that is, an understanding that your analysis may be wrong, so you want to purchase investments that are so cheap (but of a high quality) that even if you are wrong you will still make money.
- Balance between Stocks and Bonds. This one is key. Stocks and bonds tend to move opposite of each other: That is, when the economy is strong, people pile into stocks (bull market) and stocks go up, but bonds go down. In down (bear) markets, people do the opposite, they flee from stocks and pile into bonds. What is an intelligent investor to do? A couple of things:
- Always have a reasonable split between stocks and bonds. Never be 100% stocks or 100% bonds. When times are good, it seems like they will never end. When times are bad, its seems like they will never end. Yet change happens, often very abruptly. As such, minimize your personal risk by always investing a little bit in both stocks and bonds.
- Buy low, sell high. This seems intuitive, but it is not. When it seems like stocks have been on fire and their only direction is up, an intelligent investor will get nervous and buy bonds. The opposite is also true: When stocks are low and bonds are on fire, an intelligent investor will buy stocks. It’s tempting to buy stocks that “can’t lose” (today this means: Amazon, Netflix, Google, Tesla, Facebook) but those stocks are really (REALLY!!!) expensive. You are buying high, hoping they go even higher. This is speculation, not investing.
- Never (EVER!!!) Trust Stock “ratings.” There is a LOT of objective data on this. As stocks go higher, analyst ratings tend to go up. As stocks go lower, analyst ratings follow them down. What does this mean? Analyst ratings are not a LEADING indicator (they don’t tell you what is going to happen- nobody can predict the future) they tell you what has ALREADY HAPPENED. Thus, they are useless.
2. Saving For Retirement by Gail MarksJarvis
This is probably the best “introduction to savings” book I have ever read. Aside from giving tangible, actionable advice on how to save and invest, this book provides a few other important nuggets like the following:
- Invest in What Makes you Happy. This is probably the best piece of savings/life advice I have ever encountered. When Gail says “investing” she doesn’t mean stocks and bonds, she means life experiences. That is, figure out what it is that makes you happy. For some people this is traveling the world. For “car guys” this is having the newest, fastest car. For others, it might mean fashionable clothes or theater tickets. The key is to figure out what makes you happy and spend your money on that. This is far easier said than done and takes a lot of introspection. The (even more) powerful follow up to this concept is don’t waste money on things that do not make you happy. This is an incredibly powerful concept, so I will spell it out: Don’t. Waste. Money. On. Things. That. Don’t. Make. You. Happy.
Here is how I like to think of this concept: If you really (really) like cashmere socks and get a great amount of fulfillment and satisfaction from wearing cashmere socks, by all means buy cashmere socks. However, if you are one of the 99.9% of people who don’t care what kind of socks you wear, then buy the least expensive (but quality) socks you can. There are a million things in your life that provide little-to-no emotional value but cost a lot of money, including name brand trash bags, zip-lock bags, toilet paper, clothing, hotel chains, vehicles, etc. If you are not a “car guy” then why waste loads of money on a fancy car? If you don’t really care about fashion, why pay $200 for a pair of jeans when you can probably get an identical pair from Levi’s for 20% of the price? Think long and hard on this concept–it really can change your perspective on how you spend and can TURBO CHARGE your savings. When I moved to Canada for my current overseas assignment, I got rid of two Mercedes-Benzes (C-300 4-matic and GLA250 4-matic) and now only have ONE car: A Mazda CX SUV. My monthly payment went from $1000 per month to $220. Guess what? I am JUST AS HAPPY and have an extra $780 per month.
3. The Millionaire Mind by Thomas J. Stanley
The Millionaire Mind is an incredible, life changing book. If you know me (and I realize you don’t) you will realize I am not prone to exaggeration so I realize the magnitude of this comment. This book is the sequel to the popular, The Millionaire Next Door which (full disclosure) I have not read. Basically, the author uses real life data (surveys of real millionaires) to gain insights into what they do and how they spend their money. A few takeaways:
- Don’t try to keep up with the Joneses… The Joneses are POOR! The world is full of people who feel a strong need to show off: fancy cars, big houses, and fancy schools for their kids. Guess what? Real wealthy people do NOT act like this! This is a big insight and correlates to my own experience. Really wealthy people buy older, modest homes in established neighborhoods. They buy (often used) cars and drive them until they fall apart. They don’t waste money on frivolous things (fashion, cars, houses, schools) because they understand the value of money and their first priority is adding to their wealth. Also, they don’t feel a need to convince other people they are successful. Why? Because they ARE successful. As such, they have nothing to prove. So much throwing around of money is borne from insecurity–a desperate need to try to prove to others that you are successful, that you belong. However, this “need” destroys people’s financial well-being. It would be sad if it weren’t so tragic.
These are, without a doubt the three best books I have ever read on saving and investing and are likely to be the only three books you will ever need. If you read these books and apply their teachings, I can promise you the following:
- You will invest intelligently and conservatively for the long run and will be immune from “get rich quick” schemes and speculation that destroys wealth.
- You will avoid the urge to project a false sense of wealth and keep up with the Jones’s. Instead, you will save and invest wisely so that you will actually BE wealthy instead of ACTING wealthy.
- You will spend some time to understand what actually makes you happy: Is it time with family, traveling, teaching others, etc? You will invest your time in the things/activities that fulfill you and save money on everything else. Doing so will turbo charge your savings and lead you to a life of not only financial wealth but also personal fulfillment.