There are a lot of investment book recommendation lists out there.
If you’re just getting started, however, these “best investment book” lists are way, way too long. Getting 10 or more recommendations can be overwhelming when you’re just beginning your journey. Where should you start? Do you need to read all of these before buying your first stock?
The answer is no, you don’t need to read 10,000 pages before you can get your feet wet. But there are some general topic areas you do want to have some familiarty with, which I have listed below.Â
Asset allocation
Before you even get started analyzing a specific company, you should know about the different types of investments there are out there: bonds, stocks, commodities, real estate, private equity and so forth. There are many things that will determine your investment success over time, but the amount of money you put into stocks versus bonds (versus other stuff), international versus domestic, will be one of the biggest determinants.
Financial statement analysis
The typical first step in analyzing a public company is to go to its reported financial statements. As a prospective owner, you need to know how much the company is worth. But before you can figure that out, you need to see how much money it makes and where its money goes. You need to form judgments about the way it does business. Being able to decipher an income statement, balance sheet and cash flow statement is critical. Yes, this means learning some basic accounting but trust me, you don’t need to be a CPA. At the beginning, you’ll need to work your way through these statements, and that is okay. It gets easier with practice.
Valuation
Once you have some stock ideas, you need to figure out if you want to buy. For a valuation-driven investor, which is probably what you want to be if you're here, you’ll want to calculate the “intrinsic value” or “fair value” of the stock to determine if it’s worth its current price or not. There are many ways to do this, and this is where investing can become the most analytical. But getting your head around the basics doesn’t have to be insurmountable.
Strategy and company analysis
Financial statements only tell part of the story. Thinking about a company’s strategy, its industry and its competitive environment will help you develop a perspective on where it will be in 10 years (because you definitely want to buy companies that will be around for the long haul!).
Process
An oft-overlooked part of investing is beginning to have and hone an investment process right from the beginning. Beginners are often most susceptible to reading a piece on an investing website and leaping into a stock. Save yourself from yourself by giving yourself some guardrails, like in the form of a checklist. Know what your biases are, and take steps to account for them.
Beginner investment book recommendations
Without further ado, here are my recommendations.
Asset allocation: "Unconventional Success: A Fundamental Approach to Personal Investment," by David Swensen (Trades, Portfolio). This book is an approachable and easy read, by Yale’s famous endowment manager.
Financial statements and accounting: "Why Stocks Go Up and Down" by William Pike. This is short and sweet but covers a lot of ground.
Valuation:Â "The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit" by Aswath Damodaran. A great place to start.
Strategy: Harvard Business Review’s "On Strategy" must-read is a short, low-commitment way to get into it.
Process: Daniel Crosby’s “Behavioral Investor” is great. It has helpful synopses at the end of each chapter.
Conclusion and postscript
So, there you go. Five books, all quite short, to get you started on your journey.
You may have noticed one glaring absence from this list: anything by Ben Graham.
I find Graham’s books to be dense and dry -- almost like reading a very long whitepaper. They are too much of a slog for beginners, in my experience.
Are they essential reads for more intermediate investors, who have already been bitten by the value bug and are up-leveling themselves? Absolutely. Don’t skip the Graham, just maybe defer it.
Read more here:Â
The Best Value Stock Screening Ratios – As Shown by Machine LearningÂ
2018 Strategy Performance and ReviewÂ
Margin of Safety Saves the Day in a DCF Valuation of Harley-DavidsonÂ
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