My Favorite Books on Financial Planning and Investing

Financial topics have been hot since before the Great Crash of '29.  They're hot, usually due to greed, durinig bull markets; and they tend to be hot, out of fear, during the bear markets. 

The markets keep repeating their cycles; but, the 'recency bias' that afflicts investors convinces them that the most recent events have more relevance than events that happened more than a year ago simply because they are, well, recent!

In other articles I've talked about the 'order of returns' and how they affect outcomes; the same is true for the order of events.  The trouble is, too many investors react to the order of the events as much as they do to the events themselves.

Many left the market in 2008 because of what just happened (recency bias) and failed to be invested during the subsequent rebounds.  Now, because they've seen both in just the last three or four years, they're confused.  Never mind that this has been going on since colonists first traded securities under a buttonwood tree on a lower Manhattan street.

Too often, however, what passes for education is simply information.  But, to understand information fully, it must be passed through a `knowledge filter'.  It's all about knowing what questions to ask.

As someone once said, information isn't knowledge and knowledge isn't wisdom.

For those interested in investing, you might like these books:

(1)  The Intelligent Investor - Benjamin Graham.  This is the man who taught Warren Buffett about value investing.  This book gets pretty `deep in the weeds' on securities analysis - something you'd expect to find in a graduate-level class on the subject and not right for everyone.

(2)  The Essays of Warren Buffett - Lawrence A Cunningham.  There are two editions.  Easy to spot on Amazon: One has a blue cover and one has a green cover; both very plain.  His philosophy:  He's not a stock investor, and no individual should be, either.   You are purchasing (shares in) a company and you need to do business acquisition due diligence. 

(3)  One Up on Wall Street - Peter Lynch.  A disciple of Warren Buffett in the value investing lineage.  Entertaining easy read with some good philosophical ideas.

But, in my humble opinion, THE TWO most important books to read and understand are all about the prudent process of investment and risk management - a topic rarely alluded to, and usually competely overlooked, by virtually all gurus.  Here's a book that will truly enhance your education: 

• The Management of Investment Decisions - Trone, Albright, and Taylor. 
   
• Asset Allocation - Roger C. Gibson
  
  I warn you, these are about education, not information, and have precious little, if anything, to do with stock-picking because, as professionals know, this has precious little to do with planning your financial future.  After all, what could today's events possibly have to do with your future twenty years from now?  Answer:  About as much as the Cuban Missle Crisis, the oil embargo of the '70s, or the Crash of '87 has impacted you today.

My central question to most individual investors is this:  If you were charged with the responsibility of managing the assets of a large, well-known foundation or university endowment, i.e., for Harvard, Yale, or Johns Hopkins, how would you manage those assets as a fiduciary charged with that responsibility?  Would you:

• read newspapers (yesterday's news), watch television (something millions of others are watching and doing), or buy tapes, cds, and books from the tv gurus?
  
  or,
   
• manage those assets following a procedurally prudent process to create an optimized asset allocation, the development of an investment policy statement, the selection of appropriate institutional money managers, and have a documented process for the monitoring of service providers?

If the obvious choice is good enough for endowments and foundations to manage assets, it should be the obvious choice for investors managing their capital.  It does help to have a process.

While reading the papers and picking stocks may be a passion, it's seldom a recipe for long-term success.  After all, everyone is generally swimming in the same waters; and individuals generally do not have the access available institutional investors.  I think Warren Buffett and Donald Trone would both be in agreement on that, and you can add me to the list.

Enjoy the books!

Jim