- The Big Picture - http://www.ritholtz.com/blog -

Apprenticed Investor: Reading Is Fundamental

Posted By Barry Ritholtz On February 22, 2010 @ 9:00 am In Books | Comments Disabled

Investing is such a competitive arena that no matter how good you think you are, it is important that you constantly develop new skills and improve your knowledge base. You cannot afford to simply stand still.

How can you do this? By learning as much as possible about how the markets operate, what makes the economy work, about new trading concepts and various schools of investing thought.

Don’t think of this as light reading. While digesting any investing-related material, you must do so actively, with a keenly skeptical eye. At the same time, you need to have an open mind. Doing both at once ain’t easy.

As part of my ongoing education regimen, I try to read 10 to 20 market/economic/trading-related books per year. This is on top of my regular research and media diet. If out of that list, I find three books that are truly worthwhile, it’s been a good year (this year was excellent). After 15 years of this, I’ve found quite a few books that are truly terrific, and should be of interest to any investor thirsty to learn.

Think of what follows as a course offering for those who want to improve their knowledge and skills. These were chosen for their readability, their wisdom, and their timelessness.

If this were graduate school, you would cover this reading in a year or two. But since you probably have a day job, family and other obligations, I suggest reading a book per month. Take notes — I jot down extensive notes in the margins — then a year later, go back and reread your annotations.

This is by no means a complete reading list. Many books were left off — some were simply too advanced, others obscure, rather inaccessible. And that’s not counting the pile of books I have queued up and haven’t yet read. In order to keep any bias out of the list, I purposefully excluded books written by my colleagues [1] at TheStreet.com. The writers here have a broad body of excellent work — and none of it is included. So don’t take this list as the absolute gospel.

With that in mind, here is part one of my planned two-part introductory course in markets and investing — perfect for the Apprenticed Investor:

Introduction to Investing

Any one of these books will give you insight into investing and the markets. All three will make an essential base for future studies:

Stock Market Wizards : Interviews with America’s Top Stock Traders [2] by Jack D. Schwager

Jack D. Schwager: Stock Market Wizards : Interviews with America's Top Stock Traders [2]

Schwager interviewed market legends at the height of their success. What makes the book so worthwhile are the consistent themes that evolve from currency traders, mutual fund managers, commodities traders, hedge fund managers. Regardless of what is being traded, there are related motifs that run throughout.

What results is not a “How to trade” book; instead, it is a book about “How to think about trading.”

This has become a seminal book on trading and investing. I actually re-read Market Wizards every five years — it is that good. Wizards was so well received by the financial community that the same author put out The New Market Wizards [3]. Whether you read one or both of these books, you will have knowledge of the market from both the trader’s and the investor’s perspectives.

The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds [4] by Charles D. Ellis

Charles D.  Ellis: The Investor's Anthology: Original Ideas from the Industry's Greatest Minds [4]

Instead of interviewing famed investors, Ellis gathered their best writings into one collection. He ends up with a series of short chapters by luminaries of days gone by. There is something worthwhile on just about every page. This is another favorite worth rereading every few years.

Bull: A History of the Boom and Bust, 1982-2004 [5],  What drove the Breakneck Market — and What Every Investor Needs to Know About Financial Cycles by Maggie Mahar

Maggie Mahar: Bull: A History of the Boom and Bust, 1982-2004 [5]

The best book about the past 20 years of the market, bar none. Mahar does a terrific job weaving the long tale of how things eventually reached their penultimate top in 2000. She spares no one — the government, the Fed, Wall Street, her colleagues in the financial press — all are subject to a scathing critique for their complicity in inflating the bubble.

Bull! reads like a historical work, despite the recentness of its subject. There are a surprising number of lessons buried in these pages that will reward the careful reader. I found it both fascinating and informative.

Historical Perspectives

It’s astounding how little things have changed over the past century. Yes, information moves more quickly, and computing power has allowed for a more quantitative analysis of stocks — but human nature remains immutable.

How I Trade and Invest in Stocks and Bonds [6] by Richard Wycoff

Richard D. Wyckoff: How I Trade and Invest in Stocks and Bonds (Contrary Opinion Library) [6]

Quite simply, this is one of my favorite books on the markets and investing. The fact that it is from 1923 is totally irrelevant. If I could reprint the book with each mention of “coal” replaced with “oil,” and if I substituted “Internet” for any time the word “railroads” appeared, you would have no idea when this was written. Indeed, you would think it was a current work.

There is probably more market intelligence and trading wisdom in this book per word than any other I have ever read. I strongly recommend this one.

Reminiscences of a Stock Operator [7] by Edwin Lefevre

Edwin  Lefèvre: Reminiscences of a Stock Operator (A Marketplace Book) [7]

By now, you have probably heard the story of Jesse Livermore. If you have ever said, “The trend is your friend” or “Let your winners run and cut your losses quickly,” then you were quoting Livermore — even if you didn’t know it.

This is an absolutely exhilarating read. In fact, it is so much fun, it shouldn’t count as homework or research.

Coincidentally, this was also published in 1923 — apparently a good year for market-related books.

Psychology

As a species, we are notoriously bad at understanding our own thinking and emotions. We are even worse at predicting our own behavior. Understanding your own mind and those of your fellow investors is crucial to successful investing. These books will go a long way to helping you understand your hardwired weaknesses and blind spots.

Thomas Gilovich: How We Know What Isn’t So [8] by Thomas Gilovich

Thomas Gilovich: How We Know What Isn't So [8]

This is one of the most influential investing books you will ever read. So many of our own foibles are detailed here that it is almost embarrassing. Everything from unsuspected biases to how we engage in critical reasoning comes under scrutiny. What it reveals isn’t pretty. Despite the genius that is human achievement, it turns out that we are all very poor at comprehending complex data and analyzing risk.

This book will help you understand how your brain: processes randomness; overlooks evidence that is inapposite to prior beliefs; selectively perceives and reinterprets data; and engages in selective recall. It’s how we all create an artificial story line to help make sense of otherwise incomprehensible data.

Once you finish this book, you will never look at investing the same way.

Note: This is purely psychology writing; If you prefer a more specific investing-related analysis, consider Why Smart People Make Big Money Mistakes And How To Correct Them: [9] Lessons From The New Science Of Behavioral Economics [9] by the same author (with Gary Belsky).

Gary Belsky: Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics [9]

Hard-core fans of cognitive biases and economic anomalies (and other similar type of analyses) will also appreciate Richard H. Thaler’s The Winner’s Curse [10]. Thaler is one of the most influential researchers in the field of behavioral economics.

Richard H. Thaler: The Winner's Curse [10]

If you want to see how cognitive and reasoning deficits manifest themselves, then the seminal book on the subject is Extraordinary Popular Delusions & the Madness of Crowds [11] by Charles Mackay. There have been a lot more booms and busts then you imagine. This book details how they came about and their impact throughout history. Fascinating and instructive stuff.

Charles Mackay: Extraordinary Popular Delusions & the Madness of Crowds [11]

Once you understand how our brains fool us into occasionally doing idiotic things — funny, but it seemed perfectly reasonable at the time — then you can start looking for ways to avoid making those gaffes. Humphrey Neill’s Art of Contrary Thinking [12] will show you the way. He explains why “When everyone thinks alike, everyone is wrong.” This intriguing thesis applies not only to markets, but to politics, academia, even sports.

Humphrey B. Neill: Art of Contrary Thinking [12]


What if human nature can never learn from its mistakes? What if we are doomed to repeat the aforementioned cognitive, reasoning and behavioral defects over and again? That provocative thesis is put forth by Robert R. Prechter Jr.: Prechter’s Perspective [13]. This is the book that explains why our own nature leads to history repeating so often.

Robert R. Prechter Jr.: Prechter's Perspective [13]

A few caveats: I am not a devotee of Elliot Wave theory (Prechter’s school of choice). Further, I hasten to add that many of Prechter’s market calls have left much to be desired. However, his overarching perspective of human nature, and of history’s cyclical tendencies, makes for utterly fascinating reading. Even though I found myself arguing with many of the premises in the book, I enjoyed this thoroughly. The cycle geeks out there will too.

In part 2 of the series we’ll look at books focused on economics, Wall Street, technical analysis, fundamentals, shorting, and miscellany.

Introduction to Investing

Jack D. Schwager: Stock Market Wizards : Interviews with America's Top Stock Traders [2]
Stock Market Wizards : Interviews with America’s Top Stock Traders [2]


Jack D. Schwager: The New Market Wizards : Conversations with America's Top Traders [3]
The New Market Wizards : Conversations with America’s Top Traders [3]

[2]

Charles D.  Ellis: The Investor's Anthology: Original Ideas from the Industry's Greatest Minds [4]
The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds [4]
Maggie Mahar: Bull: A History of the Boom and Bust, 1982-2004 [5]
Bull: A History of the Boom and Bust, 1982-2004 [5]

Historical Perspectives
Richard D. Wyckoff: How I Trade and Invest in Stocks and Bonds (Contrary Opinion Library) [6]

How I Trade and Invest in Stocks and Bonds [6]
Edwin  Lefèvre: Reminiscences of a Stock Operator (A Marketplace Book) [7]
Reminiscences of a Stock Operator [7]

Investor Psychology

Richard H. Thaler: The Winner's Curse [10]
The Winner’s Curse [10]

Charles Mackay: Extraordinary Popular Delusions & the Madness of Crowds [11]
Extraordinary Popular Delusions & the Madness of Crowds [11]
Humphrey B. Neill: Art of Contrary Thinking
Art of Contrary Thinking [12]
Humphrey B. Neill: Art of Contrary Thinking

Robert R. Prechter Jr.: Prechter's Perspective [13]
Robert R. Prechter Jr.: Prechter’s Perspective [13]

originally published 12/06/05 – 07:32 AM EST   at TheStreet.com [14]


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2010/02/apprenticed-investor-reading-is-fundamental-2/

URLs in this post:

[1] books written by my colleagues: http://www.invest-store.com/thestreet/newbook/

[2] Stock Market Wizards : Interviews with America’s Top Stock Traders: http://www.amazon.com/exec/obidos/ASIN/0066620597/thebigpictu09-20

[3] The New Market Wizards: http://www.amazon.com/exec/obidos/ASIN/0887306675/thebigpictu09-20

[4] The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds: http://www.amazon.com/exec/obidos/ASIN/0471416169/thebigpictu09-20

[5] Bull: A History of the Boom and Bust, 1982-2004: http://www.amazon.com/exec/obidos/ASIN/0060564148/thebigpictu09-20

[6] How I Trade and Invest in Stocks and Bonds: http://www.amazon.com/exec/obidos/ASIN/0870340697/thebigpictu09-20

[7] Reminiscences of a Stock Operator: http://www.amazon.com/exec/obidos/ASIN/0471059706/thebigpictu09-20

[8] Thomas Gilovich: How We Know What Isn’t So: http://www.amazon.com/exec/obidos/ASIN/0029117062/thebigpictu09-20

[9] Why Smart People Make Big Money Mistakes And How To Correct Them:: http://www.amazon.com/exec/obidos/ASIN/0684859386/thebigpictu09-20

[10] The Winner’s Curse: http://www.amazon.com/exec/obidos/ASIN/0691019347/thebigpictu09-20

[11] Extraordinary Popular Delusions & the Madness of Crowds: http://www.amazon.com/exec/obidos/ASIN/051788433X/thebigpictu09-20

[12] Art of Contrary Thinking: http://www.amazon.com/exec/obidos/ASIN/087004110X/thebigpictu09-20

[13] Robert R. Prechter Jr.: Prechter’s Perspective: http://www.amazon.com/exec/obidos/ASIN/0932750400/thebigpictu09-20

[14] TheStreet.com: http://www.thestreet.com/story/10255830/1/apprenticed-investor-reading-is-fundamental.html

Copyright © 2008 The Big Picture. All rights reserved.