10 Books Every Investor Should Read

When it comes to learning about investment, the internet is one of the fastest, most up-to-date ways to make your way through the jungle of information out there. 

But if you're looking for a historical perspective on investing or a more detailed analysis of a certain topic, there are several classic books on investing that make for great reading. 

Here we give you a brief overview of our favorite investing books of all time and set you on the path to investing enlightenment. (To find more recommended books, see Investing Books It Pays To Read.)

Read more here.

Did you read my FREE eBook 'How to Become a Better Investor'? Really?

After emailing several hundred copies of my FREE eBook 'How to become a Better Investor', I was taken aback by a large number of reader responses that went like this:

'I've been too busy at work and haven't found the time to read the eBook yet'; or, 'The eBook got buried in my inbox, can you please forward another copy'; or, 'I've been travelling overseas and will read the eBook once I return to India.'

I had deliberately kept the chapters short and the total number of pages to around 30 so that readers will find it easy to read it through. So what happened? Are readers really too busy to read an eBook of 30 pages? Or, in this age of Internet, smart phones and TV, have investors forgotten their reading habits?

Whatever be the reasons, to become a successful investor, inculcating a regular reading habit is of utmost importance. It doesn't matter whether your portfolio is up by 10% or 200%. Looking at the ticker and counting your profits will not prevent investment mistakes.

By reading and re-reading the better known investment books, good investing tricks and strategies will gradually become ingrained in your brain. But before you can contemplate reading Graham's 600 page tome, 'The Intelligent Investor' (if you haven't read it yet, you really should!), you have to first practice by reading my 30 page eBook!

Even after investing for more than 25 years in the stock market I try to find interesting investment books to read - for new ideas and strategies. Why? Because no plan or strategy seems to work for a prolonged period. Just when you think that you've learned it all, the market surprises you with an unexpected jolt.

Recently, while reading William O'neil's 'How to make money in stocks', I came across a simple idea that I felt like sharing. This idea works better for short-term investing, but can be used for long-term investment with suitable modifications.

It is the 3-to-1 rule for setting stop-losses - some thing that every investor should learn, particularly in the current state of the stock market, which is moving sideways in a broad range. Here is the simple rule:

If you expect the stock to rise by 5%, set the stop-loss at 1.5%. If you are buying for a minimum 25% up move, set the stop-loss at 8%. On no account should the stop-loss be greater than 8%.

If you are buying a Rs 20 stock (which will be a pretty risky thing to do now) and expecting to sell at Rs 22 for a 10% profit, the stop-loss should be at Rs 19.40. If you are expecting to sell at Rs 25, set the stop-loss at Rs 18.40.

The stock should be sold as soon as the stop-loss is hit. What if the stock moves higher than expected? Increase the stop-loss by the same percentage (a trailing stop-loss).

Investors lose more money by sitting on their losses and rationalising the loss by saying that they are long-term investors. A loss is a loss - whether it is booked, or remains in your demat account. By limiting your loss to a maximum of 8%, you will not get swamped by a 2008-like tsunami of selling.

Chapter 2 of the FREE eBook describes how to set trailing stop-losses. Even if you don't read any other chapter, read that one and internalise the idea.

What exactly is the Margin of Safety?

The heading of Chapter 20 of Benjamin Graham's 'The Intelligent Investor' (4th edition) reads: "Margin of Safety" as the Central Concept of Investment.

What is the Margin of Safety as applicable to stock investments? It is the amount by which a stock's price is lower than the intrinsic, or underlying, value of the stock.

There are several methods by which one can arrive at the intrinsic value of a company's stock - and I plan to write a post about it in future. Suffice it to say that none of these methods can give an exact value. At best it will be a reasonably close approximation.

Here is a definition from the master:

'Over a ten-year period the typical excess of stock earning power over bond interest may aggregate 50% of the price paid. The figure is sufficient to provide a very real margin of safety - which, under favorable conditions, will prevent or minimize a loss. If such a margin is present in each of a diversified list of twenty or more stocks, the probability of a favorable result under "fairly normal conditions" becomes very large.'

Some terms may require a bit more explanation. By 'bond interest', Graham means yield from strong corporate bonds. Since the bond market in India is underdeveloped, we will use Fixed Deposit(FD) interest in a public sector bank as an equivalent guideline. 'Stock earning power' is the same as earnings yield, which is the inverse of the P/E ratio.

Enough talk. Time for some concrete examples.

(a) Company XYZ has declared its results and has an EPS (i.e. earnings per share, calculated by dividing the net profit by the number of equity shares) of 10. The recent market rally has taken the stock's price to 150. That gives a P/E ratio of 15.

The earnings yield is E/P= 1/15= 6.7%. This is lower than the current FD interest rate of 8%. The Margin of Safety is a negative 1.3% (=6.7-8). What does it mean? The current yield from the stock is less than that from a risk free FD.

(b) Company PQR also has an EPS of 10. But its price hasn't moved up as much as XYZ, and is currently trading at 100. The P/E is 10 and the earnings yield= E/P= 10%. The Margin of Safety is 2%. That gives an excess of only 20% over the FD interest, which doesn't meet Graham's criterion of 50% excess over a 10 year period.

(c) Company ABC has a lower EPS of 9, and its price is also lower at 63. The P/E is 7; earnings yield= E/P= 14%; Margin of Safety is 6%. This meets Graham's criteria, because the excess of stock earning power over FD yield is 60% over 10 years. The greater risk of owning the stock is adequately covered by the margin of safety.

Does it mean that you rush out to buy Company ABC? Not yet. You still have to perform a detailed fundamental analysis using Graham's criteria mentioned in my earlier blog post about stock picking (link given below).

These examples have been simplified by excluding the effects of inflation and any tax incidence. But the 'Central Concept of Investment' is de-risking your portfolio by maintaining adequate margin of safety for each stock that you select.

Even by using the Margin of Safety method, you may pick a stock or two that go down. That is why Graham has mentioned owning about 20 stocks, so that in aggregate, the portfolio will gain over the long term.

Graham passed away in 1976. How relevant are these figures and methods in today's environment? Apparently, they work just as well, as John Reese has mentioned in his book, The Guru Investor.

Individual investors can tweak the figures to suit their investment style and risk tolerance. Remember that it is just as important to protect the downside of your portfolio while you try to build long term wealth through stock investments.

For those readers, who are beginning to get a little tired of my exhortations towards the slow but steady value investing concept of wealth building, I have some good news.

By keeping a higher margin of safety, even fundamentally weak stocks can be bought when they sink to abysmal depths during bear markets. Just look at the prices of Satyam, Suzlon, Unitech when they hit their recent bottoms, and compare with current prices. But that would be succumbing to the 'greater fool' theory!

Related posts

How to pick Stocks for Investment - Part III

How to build wealth using a buy and hold strategy

Now, become a better investor by reading the ‘scriptures’

If you are a student of the Hindu religion, then the three most important references will probably be the Bhagavad Gita, the Vedas and the Upanishads. But if you are studying Comparative religion, then you may also refer to the Quran, the Bible and the Talmud.

To become a better investor, study the following ‘scriptures’:

1. One Up on Wall Street by Peter Lynch
2. The Intelligent Investor by Benjamin Graham
3. Common Stocks and Uncommon Profits by Philip Fisher
4. The Five Rules for Successful Stock Investing by Pat Dorsey

Lynch’s book is the easiest read but contains all the guidelines for ‘fundamental analysis’ of companies. Graham’s book is an all-time classic, though a tougher read. Fisher’s book was used for the longest time as a text at Stanford University’s Graduate School of Business.

Dorsey has written a very practical book that uses real-life examples to explain fundamental concepts, and emphasizes the importance of the cash-flow statement to study the financial health of companies.

I think it was Lynch who humorously denigrated ‘technical analysis’ as “a science of wiggles”. Some of the books I found useful in understanding technical concepts are:

1. Technical Analysis Explained by Martin Pring
2. Timing the Market by Arnold and Rahfeldt (of Weiss Research)
3. It’s when you Sell that Counts by Donald Cassidy

The saint Sri Ramakrishna Paramhansa had demonstrated that there are many ways and different religious beliefs that can be followed to attain the common goal of Nirvana. In a future post, I will discuss why both fundamental and technical analysis should be followed to attain the common goal of becoming a better investor.