Top 5 books to develop your own investment philosophy
Keen to firm up your personal investment philosophy to guide yourself in times of doubt? Before doing so, it is good to read up on various investment philosophies to better determine where your allegiance lies. Through the books below, you get to peep into the minds of great investment authorities while striving to become one yourself.
1. The 3 Simple Rules of Investing: Why Everything You’ve Heard About Investing Is Wrong – And What To Do Instead by Michael Edesess, Kwok Tsui, Carol Fabbri, and George Peacock
If your current investment mix seems unnecessarily complex, and is giving you sleepless nights and anxiety, perhaps the much needed simplicity in this book will be enlightening.
The 3 Simple Rules of Investing delves deep into misinterpretations, while featuring academic finance articles. It asserts the need to filter options and build a diversified portfolio of index funds, and to be forward looking in an attempt to avoid being trapped by historical performance. Focused on the long-term outlook, the book encourages readers to intentionally leave investments untouched and to not be swayed by the ups and downs of the market. In fact, the book contains a set of useful financial products for you to pick and choose. As a whole, the investment strategies are less stressful and inexpensive. While it is not designed to beat the market, it can likely beat the other possible portfolios after considering costs. Look forward to busting investing’s Seven Deadly Temptations, and embrace common sense solutions.
2. The Essays of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham
Probably the most widely read and popular investment staple, this book is packed to the brim with wisdom, delivered through selected letters from Buffett to his partnership and to Berkshire shareholders. The book talks about the importance of honesty, accounting integrity, transparency and clarity in business dealings. When thinking about the market, we often forget that regular humans who are the driving forces of it. Whether you are a budding or seasoned investor, this book will shower you with insights upon every read.
If you are hooked on Buffett’s insights, give The Super-Investors of Graham-and-Doddsville by Warren Buffett a try as well.
3. Business Adventures by John Brooks
Rumoured to be Buffett’s favourite book, Business Adventures contains 12 engaging stories on how management is crucial to businesses. The book imparts several key lessons to the reader. For instance, it encourages the reader to not trust rapid successes, and be wary of emotional players, understand the volatility in markets, and more. Look forward to reading about scandals in large corporations. The book can be seen as a cautionary tale that is filled with facts as opposed to theories.
If you are interested, you can read Bill Gates’ personal review of this book here.
4. Unconventional Success: A Fundamental Approach to Personal Investment by David Swensen
The author argues that excessive management fees in the for-profit mutual-fund industry harms clients. To worsen the situation, there can be hidden schemes to reduce investors’ returns. There is also a chance that investors will sell losers and buy winners which can damage portfolio returns. All these may be relatable to regular investors with underperforming fund managers. Swensen suggests having a diversified, equity-oriented portfolio that requires minimal tracking. If you enjoyed his writing style, feel free to check out his other bestseller, Pioneering Portfolio Management, which talks about institutional fund management.
For another perspective, give Mebane Faber and Eric Richardson’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets a read. Simply put, it is a DIY guide to tracking and mimicking investing strategies of the renowned Harvard and Yale endowments. Interestingly, it also reveals novel methods for investors to reduce risk through tactical asset allocation strategy to defend against bear markets.
5. The Dhando Investor by Mohnish Pabrai
This book explores principles guiding businesses as well as the value investing framework. Readers can learn more about important concepts such as the “Abhimanyu’s dilemma”, “Heads, I win! Tails, I don’t lost that much!” and more. The author suggests investors to stick to opportunities with a huge return potential that is less risky. Without going through unnecessarily lengthy details, The Dhando Investor allows you to chart your own investment journey instead of directing you to do a list of actions in a pre-set way. It allows investors to have the freedom to act according to their own personality and risk profile based on a few guiding principles.
6. (BONUS!)The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, Enlightenment by Guy Spier
Spier reveals his personal investment transformation from a short-sighted and brash wannabe, to an investment banker. In the book, the author highlighted how a change in your own mentality can trigger remarkable events in your surrounding environment. There are insights on why having the right mentors and role models can help you grow as a investor, why investing in self-knowledge is important, and eve how a top-notch education can possible hinder you. You can also find out what a USD$650, 100 meal with Warren Buffett taught Spier. If you are looking to become a better you, give this book a read.
If this book sparked your interest on value investing, John Heins and Whitney Tilson’s The Art of Value Investing: How the World’s Best Investors Beat the Market can be the next read.
After gaining knowledge and insights from the books above, you will be better able to determine your own school of thought. You may prefer a value-based technique and aim for gains by purchasing shares at a discount compared to their intrinsic value. On the other hand, you may want to buy strong blue chip stocks that are likely to be stronger over time. You may want to actively manage funds, or adopt a more passive approach. Ultimately, with time and experience, you can develop your own set of portfolio mix guided by your own investment philosophy.